As filed with the Securities and Exchange Commission on September 7, 1999
Registration No. 333-69703
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 3 to
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SENIOR HOUSING PROPERTIES TRUST
(Exact name of registrant as specified in its charter)
400 Centre Street
Newton, Massachusetts 02458
(617) 796-8350
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
David J. Hegarty, President
Senior Housing Properties Trust
400 Centre Street
Newton, Massachusetts 02458
(617) 796-8350
(Name, address, including zip code, and telephone number, including a
rea code, of agent for service)
Copies to:
Alexander A. Notopoulos, Jr., Esq.
Sullivan & Worcester LLP
One Post Office Square
Boston, Massachusetts 02109
(617) 338-2800
Approximate date of commencement of proposed sale to the public: The
securities will be distributed as soon as practicable after the effective date
of this Registration Statement.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
-------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to Section 8(a), may determine.
<PAGE>
The information contained in this prospectus is not complete and may be changed.
No one may buy or sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus is not
an offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to Completion
Preliminary prospectus dated September 7, 1999
PROSPECTUS HRPT PROPERTIES TRUST
SPIN-OFF OF SENIOR HOUSING PROPERTIES TRUST
THROUGH DISTRIBUTION OF 13,190,763 COMMON SHARES
To the Shareholders of HRPT Properties Trust:
On or shortly after September ___, 1999, we will distribute to you shares
of our subsidiary, Senior Housing Properties Trust, as a special distribution.
You will receive one share of Senior Housing for every 10 shares of HRPT you own
on September ___, 1999, the record date for the spin-off.
We own a diversified portfolio of 175 office buildings that cost $2.5
billion and 93 senior housing properties that cost $770 million. We believe that
there are attractive investment opportunities available in both office buildings
and senior housing properties. By distributing the Senior Housing shares to our
shareholders we will create two separately focused companies which we believe
can take better advantage of their respective growth opportunities and may be
more attractive to investors than a combined company. Our board of trustees has
unanimously approved the spin-off as being in the best interests of our
shareholders.
Senior Housing's shares will be separately listed on the New York Stock
Exchange under the symbol "SNH." HRPT's shares will continue to trade on the New
York Stock Exchange under the symbol "HRP." The spin-off of Senior Housing's
shares will be the first public distribution of those shares. Accordingly, we
can provide no assurance to you as to what their market price may be.
This prospectus includes a description of the spin-off, as well as
information about HRPT and Senior Housing after the spin-off. You should read it
carefully, especially the section entitled "Risk Factors" that begins on page 13
which describes various risks associated with your ownership of Senior Housing
shares, including:
o There is no established share price for Senior Housing shares and they
may trade for less than fair value.
o Some of Senior Housing's tenants have experienced problems which may
impair their abilities to pay rent.
o Some of Senior Housing's properties are subject to burdensome
regulations.
o Senior Housing's ability to grow will depend upon access to capital
which is not assured.
o Senior Housing's investment advisor may have an incentive to recommend
investments to raise fees.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the Senior Housing common shares or
determined if this prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
We are furnishing this prospectus to provide information to HRPT
shareholders who will receive Senior Housing shares in the spin-off. This
prospectus is not intended as a solicitation to buy or sell any securities of
HRPT or Senior Housing. On behalf of HRPT, we thank you for your continued
support. On behalf of Senior Housing, we welcome you as a new shareholder.
Sincerely,
John A. Mannix David J. Hegarty
President-Elect of HRPT President of Senior Housing
Properties Trust Properties Trust
The date of this prospectus is ___________, 1999
<PAGE>
HRPT Office Buildings After the Spin-Off
[Photograph of Office Buildings] [Photograph of Office Buildings]
Bridgepoint Square (5 Buildings) Cedar-Sinai Medical Office
Austin, TX Towers and Garages (4 buildings)
452,294 Square Feet, Built 1995-1997 Los Angeles, CA
Major Tenants: 330,715 Square Feet, Built 1978-79
Motorola, Inc. Major Tenant:
IBM Corporation Cedars-Sinai Medical Center
Southwestern Bell
[Photograph of Office Building]
Mellon Bank Center
Philadelphia, PA
1,258,560 Square Feet, Built 1990
Major Tenant:
Mellon Bank
[Photograph of Office Building] [Photograph of Office Building]
Herald Square Putnam Place (2 Buildings)
Washington, D.C. Quincy/Braintree, MA
187,832 Square Feet, Built 1991 222,726 Square Feet, Built 1986-88
Major Tenant: InterAmerican Bank Major Tenants:
Putnam Investments, Inc.
GMAC
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE SPIN-OFF
Q: How many shares of Senior Housing will I receive?
A: In the spin-off we will distribute to you one share of Senior Housing for
every 10 shares of HRPT you own.
Q: What is Senior Housing Properties Trust?
A: Senior Housing is currently a wholly owned REIT subsidiary of HRPT. It owns
93 senior housing properties that cost $770 million. Senior Housing's
largest investment is $326 million in 14 senior living communities leased
to Marriott International, Inc. until 2013.
Q: What are Senior Housing shares worth?
A: The value of the Senior Housing shares you receive will be determined by
their trading price after the spin-off. We do not know what the trading
price will be and we can provide no assurances as to value.
Q: What will HRPT do after the spin-off?
A: HRPT currently owns 175 office buildings that cost $2.5 billion. After the
spin-off, HRPT's principal business will be buying, owning and leasing
office buildings.
Q: What will Senior Housing do after the spin-off?
A: Senior Housing will own and lease its portfolio of senior housing
properties. It has arranged a bank credit facility, some of which may be
used to purchase new senior housing properties.
Q: How will distributions change?
A: We do not expect any change in your combined distribution rate. Currently
HRPT's annual distribution is $1.52 per share. After the spin-off HRPT's
annual distribution will be $1.28 per share, and Senior Housing's annual
distribution will be $2.40 per share. Because you will receive one Senior
Housing share for every 10 HRPT shares you own, your total distributions
will be unchanged as a result of the spin-off.
Q: Will my shares continue to be listed on the New York Stock Exchange?
A: HRPT's shares will continue to be listed on the NYSE under the symbol
"HRP." Senior Housing's shares also will be listed on the NYSE under the
symbol "SNH."
Q: What are the tax consequences to me of the spin-off?
A: The Senior Housing shares you receive will be treated for tax purposes like
all other distributions you receive from HRPT. The taxable value of this
distribution will be determined by the trading price of Senior Housing
shares at the time of the spin-off.
Q: What do I have to do to receive my Senior Housing shares?
A: No action by you is required. You do not need to pay any money or surrender
your HRPT shares to receive Senior Housing shares. The number of HRPT
shares you own will not change. If your HRPT shares are held in a brokerage
account, your Senior Housing shares will be credited to that account. If
your HRPT shares are held in certificated form, a certificate representing
your Senior Housing shares will be mailed to you. No cash distributions
will be paid and fractional shares will be issued as necessary.
Q: Where can I get more information?
A: You should read this prospectus carefully. You can also call (877)
ASK-HRPT.
3
<PAGE>
<TABLE>
<CAPTION>
Table of Contents
Page
<S> <C>
SUMMARY..............................................................................................................7
The Companies...................................................................................................7
Risk Factors....................................................................................................8
HRPT Growth Strategy............................................................................................9
Senior Housing Growth Strategy.................................................................................11
Distributions..................................................................................................11
Principal Places of Business...................................................................................11
Summary Pro Forma Consolidated Financial Information...........................................................12
RISK FACTORS........................................................................................................13
There is no established share price for Senior Housing shares and they
may trade for less than fair value.........................................................................13
Some of Senior Housing's tenants have experienced problems which may
impair their abilities to pay rent.........................................................................13
Some of Senior Housing's properties are subject to burdensome regulations......................................13
Senior Housing's ability to grow will depend upon access to capital which is not assured.......................14
Senior Housing's investment advisor may have an incentive to recommend
investments to raise fees and there will be other conflicts of interest....................................14
HRPT may be able to control Senior Housing shareholder decisions...............................................14
The spin-off will result in benefits to HRPT which could adversely affect Senior Housing.......................14
Ownership limitations and anti-takeover provisions affecting Senior Housing
may prevent shareholders from receiving a takeover premium.................................................15
Real estate ownership creates risks and liabilities............................................................15
Changes at Marriott could adversely affect Senior Housing......................................................16
The federal income tax treatment of the spin-off is uncertain..................................................16
THE SPIN-OFF........................................................................................................17
Key Dates......................................................................................................17
Distribution Agent.............................................................................................17
Listing and Trading of Senior Housing Shares.................................................................. 17
Background and Reasons for the Spin-Off....................................................................... 17
Manner of Effecting the Spin-Off.............................................................................. 18
The Transaction Agreement..................................................................................... 18
INFORMATION ABOUT HRPT PROPERTIES TRUST AFTER THE SPIN-OFF......................................................... 20
HRPT Investments.............................................................................................. 20
Commercial Office Buildings............................................................................... 20
Government Office Buildings............................................................................... 20
Medical and Biotechnology Buildings....................................................................... 20
Equity Investment in Hospitality Properties Trust......................................................... 20
Equity Investment in Senior Housing Properties Trust...................................................... 21
Pending Acquisitions...................................................................................... 21
Development Activities.................................................................................... 21
Location of HRPT Office Buildings............................................................................. 22
HRPT Tenants.................................................................................................. 23
HRPT Lease Expirations........................................................................................ 25
HRPT Management............................................................................................... 26
Additional Information About HRPT............................................................................. 27
4
<PAGE>
Page
INFORMATION ABOUT SENIOR HOUSING PROPERTIES TRUST.................................................................. 28
General....................................................................................................... 28
Growth Strategy............................................................................................... 28
History and Management........................................................................................ 28
Senior Housing Real Estate Market............................................................................. 29
Types of Properties........................................................................................... 30
Government Regulations and Rate Setting....................................................................... 31
Competition................................................................................................... 33
SENIOR HOUSING DISTRIBUTION POLICY................................................................................. 35
SENIOR HOUSING PROPERTIES.......................................................................................... 38
SENIOR HOUSING TENANTS............................................................................................. 43
Marriott International, Inc................................................................................... 43
Integrated Health Services, Inc . .............................................................................44
Mariner Post-Acute Network, Inc............................................................................... 44
Brookdale Living Communities, Inc .............................................................................45
Genesis Health Ventures, Inc . ................................................................................45
Privately Owned Tenants....................................................................................... 46
SENIOR HOUSING LEASES.............................................................................................. 47
Lease Terms................................................................................................... 48
SENIOR HOUSING SELECTED HISTORICAL FINANCIAL INFORMATION........................................................... 50
SENIOR HOUSING SELECTED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION............................................... 51
SENIOR HOUSING MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................................................................... 51
Pro Forma Results of Operations............................................................................... 52
Historical Results of Operations.............................................................................. 52
Liquidity and Capital Resources............................................................................... 53
Year 2000..................................................................................................... 54
Quantitative and Qualitative Disclosures About Market Risk.................................................... 55
SENIOR HOUSING MANAGEMENT.......................................................................................... 57
Senior Housing Trustees and Executive Officers................................................................ 57
Committees of the Board of Trustees........................................................................... 58
Compensation of the Trustees and Officers..................................................................... 58
Incentive Share Award Plan.................................................................................... 58
Limitation of Liability and Indemnification................................................................... 59
Reit Management and the Advisory Agreement.................................................................... 59
Related Party Transactions.................................................................................... 61
LEGAL PROCEEDINGS.................................................................................................. 62
SENIOR HOUSING POLICIES............................................................................................ 62
Investment Policies........................................................................................... 62
Disposition Policies.......................................................................................... 63
5
<PAGE>
Page
Financing Policies............................................................................................ 63
Conflict of Interest Policies................................................................................. 64
Policies with Respect to Other Activities..................................................................... 65
MATERIAL PROVISIONS OF MARYLAND LAW AND OF
SENIOR HOUSING'S DECLARATION OF TRUST AND BYLAWS................................................................... 67
Trustees...................................................................................................... 67
Advance Notice of Trustee Nominations and New Business........................................................ 67
Meetings of Shareholders...................................................................................... 68
Liability and Indemnification of Trustees and Officers........................................................ 68
Shareholder Liability......................................................................................... 69
Maryland Asset Requirements................................................................................... 69
Transactions with Affiliates.................................................................................. 69
Voting by Shareholders........................................................................................ 69
Restrictions on Transfer of Shares............................................................................ 69
Business Combinations......................................................................................... 71
Control Share Acquisitions.................................................................................... 72
Amendment to the Declaration of Trust, Dissolution and Mergers................................................ 73
Anti-takeover Effect of Maryland Law and of the Declaration of Trust and Bylaws.............................. 73
DESCRIPTION OF SENIOR HOUSING SECURITIES........................................................................... 74
General....................................................................................................... 74
Common Shares................................................................................................. 74
SENIOR HOUSING PRINCIPAL SHAREHOLDERS.............................................................................. 75
FEDERAL INCOME TAX AND ERISA CONSEQUENCES.......................................................................... 75
General....................................................................................................... 75
Federal Income Tax Consequences of the Spin-Off to Our Shareholders........................................... 77
Federal Income Tax Consequences of the Spin-Off to HRPT....................................................... 80
Federal Income Taxation of Senior Housing and its Shareholders................................................ 84
Backup Withholding and Information Reporting.................................................................. 95
Other Tax Consequences........................................................................................ 96
ERISA Consequences for Senior Housing and its Shareholders.................................................... 97
LEGAL MATTERS..................................................................................................... 99
EXPERTS........................................................................................................... 99
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................................................................... 99
FORWARD LOOKING STATEMENTS........................................................................................ 99
WHERE YOU CAN FIND ADDITIONAL INFORMATION......................................................................... 99
INDEX TO FINANCIAL STATEMENTS..................................................................................... F-1
</TABLE>
6
<PAGE>
SUMMARY
This summary highlights some information contained elsewhere in this
prospectus. This summary may not contain all the information about the spin-off
which may be important to you. To better understand the spin-off you should
carefully review this entire document. References in this prospectus to "we,"
"us," "our" or "HRPT" mean HRPT Properties Trust and its subsidiaries.
References to "Senior Housing" mean Senior Housing Properties Trust and its
subsidiaries. Unless otherwise indicated, the information presented in this
prospectus reflects events which have occurred or will have occurred by the
effective date of the registration statement of which this prospectus is a part
and assumes that none of HRPT's subordinated convertible debentures are
converted into HRPT shares before the spin-off.
THE COMPANIES
We are a real estate investment trust, a REIT, which owns a diversified
portfolio of 175 office buildings costing $2.5 billion and 93 senior housing
properties costing $770 million. We also own four million shares of Hospitality
Properties Trust, another NYSE-listed REIT which invests in hotels, that we
founded in 1995. Our current book capitalization includes $1.8 billion of equity
and $1.2 billion of debt. Our current distribution rate is $1.52 per share per
year, payable $0.38 per share per quarter.
HRPT Before the Spin-Off
[Graphic Omitted - Flow Chart
175 office buildings, $2.5 billion cost
93 senior housing properties, $770 million cost
4 million shares of Hospitality Properties Trust
-- Distributions: $1.52/share per annum
-- 131.9 million shares outstanding
-- $981 million senior debt outstanding plus $205 million
subordinated debt]
Our subsidiary, Senior Housing, owns all of our senior housing properties.
Senior Housing is also a REIT. We own all 26 million Senior Housing shares
outstanding and Senior Housing owes us $200 million. We will distribute 13.2
million of our Senior Housing shares to our shareholders on the basis of one
Senior Housing share for every 10 HRPT shares held. Senior Housing has entered a
new bank credit facility for $350 million; it will borrow $200 million under
this facility and pay its debt to us; and $150 million will be available for new
investments by Senior Housing. After the spin-off we will establish a new annual
distribution rate of $1.28 per HRPT share, payable $0.32 per share per quarter;
and Senior Housing will establish a new annual distribution rate of $2.40 per
share, payable $0.60 per share per quarter.
HRPT After the Spin-Off
[Graphic Omitted - Flow Chart
175 office buildings, $2.5 billion cost
4 million shares of Hospitality Properties Trust
12.8 million shares of Senior Housing
-- Distributions: $1.28/share per annum
-- 131.9 million shares outstanding
-- $781 million senior debt outstanding plus $205 million
subordinated debt]
Senior Housing After the Spin-Off
[Graphic Omitted - Flow Chart
93 senior housing properties, $770 million cost
-- Distributions: $2.40/share per annum
-- 26 million shares outstanding
-- $200 million debt outstanding]
7
<PAGE>
RISK FACTORS
Your ownership of Senior Housing shares will involve risks, including the
following:
o No Established Share Price. There is no established share price for
Senior Housing shares. The Senior Housing shares will be traded on the
NYSE but we do not know the price at which they will trade. Senior
Housing shares may trade for less than their fair value.
o Possible Tenant Defaults. Several of Senior Housing's tenants have
recently reported significant losses, particularly Mariner Post-Acute
Network, Inc., Integrated Health Services, Inc. and Genesis Health
Ventures, Inc. Properties leased to Mariner, Integrated and Genesis
represent 11%, 29% and 2% of Senior Housing's total investments,
respectively. One of our tenants, Frontier Group, Inc., which leases
2% of Senior Housing's total investments, has recently filed for
reorganization under Chapter 11 of the Bankruptcy Code. If these
tenants fail to pay rent, Senior Housing may be unable to pay its cash
distributions to shareholders or to carry out its business plan.
o Properties Subject to Burdensome Regulations. Some of Senior Housing's
properties are highly regulated. Approximately 57% of the tenant
revenues at Senior Housing's properties are paid by Medicare and
Medicaid. Changes in these regulations or in the amounts of payments
available under Medicare and Medicaid programs may restrict Senior
Housing's tenants' ability to pay rent.
o Failure of Growth Strategy. Senior Housing's growth strategy depends
upon its ability to raise additional capital and to invest in new
properties. No assurance can be provided that capital will be
available at reasonable costs or that Senior Housing will be able to
purchase and lease additional properties.
o Conflicts of Interest. Senior Housing's managing trustees, Barry M.
Portnoy and Gerard M. Martin, own its investment advisor, Reit
Management & Research, Inc. Senior Housing pays Reit Management based
in part on the amount of investments. Reit Management and Messrs.
Portnoy and Martin might have an incentive to cause Senior Housing to
acquire assets in order to raise advisory fees.
o Dominant Shareholder. Upon completion of the spin-off, HRPT will own
49% of Senior Housing's outstanding shares. This ownership will enable
HRPT to have a significant influence over Senior Housing shareholder
decisions.
o Benefits to HRPT. The completion of the spin-off will result in
benefits to HRPT. For example, when HRPT's properties were transferred
to Senior Housing, Senior Housing agreed to pay $200 million to HRPT.
After the spin-off Senior Housing will borrow $200 million to pay this
debt.
o Ownership Limitations and Anti-Takeover Provisions. Other than HRPT,
shareholders are prohibited from owning more than 9.8% of Senior
Housing. Senior Housing's declaration of trust and bylaws contain
other provisions that inhibit a change of control. Because of these
limitations Senior Housing shareholders may be unable to realize a
change of control premium for their shares.
o Liabilities of Real Estate Ownership. Senior Housing's business will
be subject to risks associated with real estate ownership, including
the need for regular maintenance and repairs, the need for capital
expenditures and possible environmental hazards.
o Dependence Upon Marriott. Forty-two percent of Senior Housing's
investments are in properties leased to Marriott. An adverse change in
Marriott's financial condition or its operations of the leased
properties would adversely affect Senior Housing's ability to pay
distributions.
o Tax Risks. The federal tax law does not clearly address REIT
spin-offs. If the IRS successfully challenges our reporting of the
spin-off, you may have to pay more taxes.
8
<PAGE>
HRPT GROWTH STRATEGY
After the spin-off, we will be principally focused upon managing and
growing our office building investments. Most of our investments are in
multi-tenant commercial office buildings. We sometimes invest in office
buildings leased to medical providers and government agencies because these
types of tenants often are willing to sign long term leases and have a history
of regular renewals. We prefer to invest in central business districts because
there are usually barriers to new development in those locations. We believe
this strategy adds stability to our portfolio and increases the long term
appreciation potential of our properties.
HRPT Office Investments
Types of Tenants
[Graphic Omitted - Pie Chart
Commercial Office
Tenants $1,589 million 64%
Medical and
Biotechnology
Tenants $445 million 18%
U.S. Government $446 million 18%]
CBD vs. Suburban
[Graphic Omitted - Pie Chart
Central Business
Districts $1,578 million 64%
Suburban Areas $902 million 36%]
Our 175 office buildings are located in 27 states and the District of
Columbia. Five market areas contain about two-thirds of our office portfolio:
<TABLE>
<CAPTION>
HRPT Geographic Diversification
Market Area No. of Buildings Investment Square Feet
- ----------- ---------------- ---------- -----------
(000s)
<S> <C> <C> <C> <C> <C>
Philadelphia, PA 17 $530,288 (21%) 3,541,006 (19%)
Austin, TX 25 301,534 (12%) 2,653,088 (15%)
Washington, DC 16 409,322 (17%) 2,177,901 (12%)
Boston, MA 30 191,946 (8%) 1,603,149 (9%)
Southern CA 17 250,351 (10%) 1,126,171 (6%)
Other markets 70 796,106 (32%) 7,128,393 (39%)
--- ---------- ----- ---------- ----
Total 175 $2,479,547 (100%) 18,229,708 (100%)
=== ========== ===== ========== =====
</TABLE>
9
<PAGE>
Two criteria have historically guided our management and acquisitions of
office buildings and are likely to do so in the future. First, we prefer to
lease to high credit quality tenants. Approximately 52% of our office rents are
paid by tenants who are investment grade rated, including 19% from the U.S.
Government. An additional 10% of our office rents come from publicly owned
companies which are not investment grade rated; and many of our remaining
tenants are large law, accounting and other professional service firms which we
believe have strong credit characteristics. Second, we generally prefer to lease
office buildings for longer rather than shorter terms. Only 20% of our leases
expire in the next three years. Almost half of our leases have remaining terms
of seven or more years.
HRPT Office Tenant Credit Quality
(by percentage of rent)
[Graphic Omitted - Pie Chart
Investment Grade 52%
Private Tenants 38%
Other Public Companies 10%]
HRPT Office Lease Expirations
(by percentage of rent)
[Graphic Omitted - Pie Chart
Over 10 years 27%
7-9 years 22%
4-6 years 31%
3 years or less 20%]
At this time we have no plans to undertake speculative development, but we
are exploring some build-to-suit opportunities on land which we own. Generally,
we have only acquired development sites as ancillary property incident to our
purchases of developed income producing properties. We estimate the total
development potential of land which we own at approximately 2.9 million square
feet of office space.
10
<PAGE>
SENIOR HOUSING GROWTH STRATEGY
Senior Housing's 93 properties are leased to nine tenants. Ninety-seven
percent of Senior Housing's investments are leased to subsidiaries of public
companies which have guaranteed the lease obligations. The leases for 91 of
these properties extend to at least 2005. Senior Housing's largest tenant is
Marriott International, Inc. The following chart shows Senior Housing properties
leased to tenants by historical investment at cost and current lease
expirations.
Senior Housing Investments
o $770 million total assets [Graphic Omitted - Pie Chart
o 42% leased to Marriott Marriott International 42%
14 Properties
o 97% leased to public $326 million
companies Lease expires 2013
o leases for 99% expire Brookdale Living Communities 13%
in 2005 or after 4 Properties
$102 million
Lease expires 2019
Mariner Post-Acute Network 11%
26 Properties
$86 million
Lease expires 2013
Integrated Health Services 9%
Lease No. 1
31 Properties
$66 million
Lease expires 2010
Integrated Health Services 20%
Lease No. 2
11 Properties
$152 million
Lease expires 2006
Genesis Health Ventures 2%
1 Property
$13 million
Lease expires 2005
Other Operators 3%
6 Properties
$25 million
Leases expire 2001-2005]
The aging of the U.S. population, the increasing percentage of women who
work away from home, the high divorce rate and societal mobility are demographic
facts which tend to increase demand for specialized senior housing properties.
Senior Housing hopes to profit from this increasing demand by buying properties
specially designed to meet the needs of aged residents. Senior Housing expects
that its leases will require rents which exceed its cost of capital and which
increase as the properties' gross revenues increase.
A new Medicare rate setting program that is now being implemented has had
negative impacts upon the financial performance of several of Senior Housing's
tenants. Senior Housing believes that these tenants will pay their lease
obligations, or, if they do not do so, that Senior Housing may be able to re-let
most of these properties to new tenants who will pay comparable rents. In the
future, Senior Housing intends to focus new investments in properties which are
not dependent upon government payment programs. At the same time, however,
Senior Housing believes that the new, lower Medicare rates have reduced the
prices of many nursing homes to levels which may present attractive long term
investment opportunities.
DISTRIBUTIONS
After the spin-off, HRPT's new distribution rate will be $1.28 per share
per year, payable $0.32 per share per quarter. Senior Housing's distribution
rate will be $2.40 per share per year, payable $0.60 per share per quarter. Cash
distributions will be payable at these rates effective for the quarter ended
September 30, 1999. We expect that, on an annualized basis, approximately 17% of
HRPT's new distributions and 18% of Senior Housing's distributions will
constitute returns of capital.
PRINCIPAL PLACES OF BUSINESS
HRPT and Senior Housing maintain their principal places of business at 400
Centre Street, Newton, MA 02458. HRPT's phone number is (617) 332-3990. Senior
Housing's phone number is (617) 796-8350.
11
<PAGE>
SUMMARY PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following table presents the pro forma impact of the spin-off on HRPT's
income statement and balance sheet and the pro forma income statement and
balance sheet of Senior Housing as a separate company. The Senior Housing
statements include pro rata allocations of interest and general and
administrative expenses for historical periods. In the opinion of management,
the methods of allocation are reasonable. It is impossible to estimate all
operating costs that Senior Housing would incur as a separate company. For
additional information about the amounts appearing in this table, see the
Unaudited Pro Forma Consolidated Financial Statements and notes thereto on pages
F-2 through F-13.
<TABLE>
<CAPTION>
As of and for the six months ended 1999
(unaudited, amounts in 000s, except per sharedata)
----------------------------------------------------------
HRPT Senior Housing
---------------------------------------- --------------
Spin-Off
Income Statements Historical Adjustments Pro Forma Pro Forma
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Rental income $ 203,335 $ (42,409) $ 160,926 $ 42,409
Interest and other income 7,619 (2,881) 4,738 2,881
----------- ----------- ----------- -----------
Total revenues 210,954 (45,290) 165,664 45,290
----------- ----------- ----------- -----------
Operating expense 50,548 -- 50,548 --
Interest expense 39,525 (5,600) 33,925 7,281
Depreciation and amortization 37,314 (11,207) 26,107 11,207
General and administrative 9,849 (2,259) 7,590 2,259
----------- ----------- ----------- -----------
Total expenses 137,236 (19,066) 118,170 20,747
----------- ----------- ----------- -----------
Income before equity in earnings of
Hospitality Properties and Senior Housing 73,718 (26,224) 47,494 24,543
Equity in earnings of Hospitality Properties 4,029 -- 4,029 --
Equity in earnings of Senior Housing -- 12,100 12,100 --
----------- ----------- ----------- -----------
Net income (1) $ 77,747 $ (14,124) $ 63,623 $ 24,543
=========== =========== =========== ===========
Average basic shares outstanding 131,778 131,778 26,000
=========== =========== ===========
Average diluted shares outstanding 143,159 143,159 26,000
=========== =========== ===========
Per share data:
Basic and diluted income (1) $ 0.59 $ 0.48 $ 0.94
=========== =========== ===========
Distributions $ 0.76 $ 0.64 $ 1.20
=========== =========== ===========
Balance Sheets
Real estate investments $ 3,006,521 $ (732,393) $ 2,274,128 $ 732,393
Accumulated depreciation (184,992) 105,823 (79,169) (105,823)
----------- ----------- ----------- -----------
2,821,529 (626,570) 2,194,959 626,570
Real estate mortgages 60,530 (37,638) 22,892 37,638
Investment in Hospitality Properties 108,242 -- 108,242 --
Investment in Senior Housing -- 220,548 220,548 --
Cash and equivalents 26,984 (26,593) 391 16,593
Other assets 84,869 (9,918) 74,951 9,918
----------- ----------- ----------- -----------
$ 3,102,154 $ (480,171) $ 2,621,983 $ 690,719
=========== =========== =========== ===========
Bank credit facility $- $- $- $ 200,000
Senior notes payable 957,513 (200,000) 757,513 --
Mortgage notes payable 23,985 -- 23,985 --
Convertible subordinated debentures 204,863 -- 204,863 --
Other liabilities 103,093 (43,360) 59,733 43,360
Shareholders' equity 1,812,700 (236,811) 1,575,889 447,359
----------- ----------- ----------- -----------
$ 3,102,154 $ (480,171) $ 2,621,983 $ 690,719
=========== =========== =========== ===========
<FN>
(1) Excludes an HRPT gain on sale of properties of $8.3 million, or $0.06 per share, and loss on
equity transaction of Hospitality Properties of $711,000, or $0.01 per share, for the six
months ended June 30, 1999.
</FN>
</TABLE>
12
<PAGE>
RISK FACTORS
Your ownership of Senior Housing shares will involve various risks. The
following is a listing of the material risks:
There is no established share price for Senior Housing shares and they may trade
for less than fair value.
There is no established share price for Senior Housing shares. The
distribution of Senior Housing shares is not being underwritten by an investment
bank or otherwise. The Senior Housing shares will be traded on the NYSE but we
do not know the price at which they will trade. We do not know if an active
market for Senior Housing shares will develop. Accordingly, Senior Housing
shares' trading price may not reflect their fair value.
Some of Senior Housing's tenants have experienced problems which may impair
their abilities to pay rent.
Some of Senior Housing's tenants have recently reported significant losses.
Mariner Post-Acute Network, Inc. , which leases 11% of Senior Housing's
investments and pays 18% of Senior Housing pro forma rents, reported a loss of
$405.7 million for the quarter ended June 30, 1999. Integrated Health Services,
Inc. , which leases 29% of Senior Housing's investments and pays 30% of Senior
Housing pro forma rents, reported a loss of $4.6 million for the quarter ended
June 30, 1999. Genesis Health Ventures, Inc. , which leases 2% of Senior
Housing's investments and pays 2% of Senior Housing's pro forma rents, reported
a loss of $1.0 million for the quarter ended June 30, 1999. One of Senior
Housing's smaller tenants, The Frontier Group, a privately held company which
leases 2% of Senior Housing's investments and pays 2% of Senior Housing's pro
forma rents, filed on July 14, 1999 for reorganization under Chapter 11 of the
Bankruptcy Code. If these tenants fail to pay rent, Senior Housing may be unable
to pay its cash distributions to shareholders or to carry out its business plan.
Because leases for multiple properties to an affiliated group of tenants are
subject to cross default at the election of Senior Housing, a lease default
affecting one property owned by Senior Housing may result in multiple defaults
for material amounts of rent.
Some of Senior Housing's properties are subject to burdensome regulations.
Forty-five percent of Senior Housing's total investments are in healthcare
facilities . Investing in healthcare facilities involves the following material
risks:
o Complex Regulations. Detailed specifications for the physical
characteristics of healthcare properties are mandated by various
governmental authorities. Changes in these regulations may require major
capital expenditures. Because Senior Housing's healthcare properties are
triple net leased to tenants, Senior Housing has only limited control over
the maintenance of its properties. Senior Housing regularly monitors
compliance by its tenants with applicable healthcare regulations. Although
Senior Housing has in the past periodically become aware that some tenants
may not have been in full compliance with these regulations, Senior Housing
is not aware of any pending regulatory action against any of its properties
which is likely to prevent their continued operations. Senior Housing's
triple net leases require its tenants to comply with applicable regulations
affecting its properties. Nevertheless, if its tenants fail to perform
these obligations, Senior Housing may be required to do so in order to
maintain the value of its investments.
o Dependence on Government Programs. Approximately 57% of the tenant revenues
at Senior Housing's properties are paid by Medicare and Medicaid. The
Medicare program recently implemented a prospective payment system for
skilled nursing facilities, which replaces cost-based reimbursements. The
Medicare prospective payment system is being gradually implemented over a
three-year period which began on July 1, 1998, and has already had a
negative impact upon the income of many nursing homes. Many state Medicaid
programs have implemented similar prospective payment systems. The Balanced
Budget Act of 1997 restricted the right of operators of healthcare
facilities to challenge state Medicaid rates in federal
13
<PAGE>
courts. Whenever Medicare or Medicaid rates are reduced, Senior Housing's
tenants' ability to pay rent could be jeopardized.
o Special Purpose Buildings. Senior Housing's properties were specifically
designed for senior housing. If these properties cannot be operated as
senior housing facilities, finding alternative uses for these properties
may be difficult and costly.
Senior Housing's ability to grow will depend upon access to capital which is not
assured.
As a REIT, Senior Housing is required to distribute 95% of its taxable
income and cannot fund capital needs with income from operations. Senior
Housing's growth strategy requires that it raise additional capital to invest in
new properties. Senior Housing's ability to raise capital in the future will
depend not only upon its performance but also upon capital market conditions
which are beyond its control. Moreover, there are several other REITs and
finance companies that now aggressively compete to purchase and lease senior
housing properties. Accordingly, Senior Housing's growth strategy may not
succeed.
Senior Housing's investment advisor may have an incentive to recommend
investments to raise fees and there will be other conflicts of interest.
Conflicts of interest have arisen and will continue to arise in Senior
Housing's business, including the following:
o Barry M. Portnoy and Gerard M. Martin, who are Senior Housing's managing
trustees, own Reit Management, its investment advisor. Reit Management has
approximately 180 employees and has experience acquiring and managing
properties for two other publicly owned REITs. Senior Housing believes that
the depth of management talent available to it through its advisory
contract with Reit Management will provide Senior Housing with a
competitive advantage and that the fees payable to Reit Management are
commercially reasonable. Nonetheless, Senior Housing did not negotiate its
advisory agreement at arms' length. The advisory fee paid to Reit
Management will be based in part upon the amount of new investments made by
Senior Housing. This fee structure might encourage Reit Management to
advocate acquisitions when doing so is not in the best interests of Senior
Housing.
o In addition to serving as Senior Housing's managing trustees, Messrs.
Portnoy and Martin are managing trustees of HRPT and Hospitality
Properties. They also have business interests separate from these other
REITs. Similarly, Reit Management also acts as the investment advisor to
HRPT and Hospitality Properties and has other business interests. These
various business activities will compete for management time.
HRPT may be able to control Senior Housing shareholder decisions.
Upon completion of the spin-off, HRPT will own 49% of Senior Housing's
outstanding shares. Accordingly, HRPT will have a significant influence over
Senior Housing shareholder decisions. This influence may result in decisions
that may not serve the best interests of Senior Housing's other shareholders.
The spin-off will result in benefits to HRPT which could adversely affect Senior
Housing.
The completion of the spin-off will result in substantial benefits to HRPT,
including the following:
o When HRPT transferred its properties to Senior Housing, Senior Housing
became indebted to HRPT for $200 million. After the spin-off, Senior
Housing will borrow $200 million under its bank credit facility and pay
this debt to HRPT. HRPT will not be liable for any of Senior Housing's
debt.
o Upon completion of the spin-off, Reit Management will become Senior
Housing's investment advisor. Assuming the spin-off is completed on
September 30, 1999, the pro forma advisory fee that Senior Housing will pay
to Reit Management from the completion of the spin-off through December 31,
1999, the initial
14
<PAGE>
term of the agreement, will be approximately $1.0 million, or $3.9 million
on an annualized basis. HRPT's advisory fees to Reit Management will be
reduced by the same amount.
o HRPT currently owns 26 million of Senior Housing's shares. Upon completion
of the spin-off, HRPT will distribute 13.2 million of these shares to its
shareholders and will retain 12.8 million shares. By retaining these
shares, HRPT will be able to participate in Senior Housing's future success
through distributions and any appreciation in Senior Housing's share price.
o HRPT has agreed not to sell any of its Senior Housing shares for one year
after the spin-off. If HRPT decides to sell thereafter, these sales could
depress the market value of Senior Housing shares.
Ownership limitations and anti-takeover provisions affecting Senior Housing may
prevent shareholders from receiving a takeover premium.
Senior Housing's declaration of trust prohibits any shareholder other than
HRPT, Reit Management and their affiliates from owning more than 9.8% of its
outstanding common shares. This provision of the declaration of trust may help
Senior Housing comply with REIT tax requirements. This provision will also
inhibit a change of control of Senior Housing. Its declaration of trust and
bylaws contain other provisions that may increase the difficulty of acquiring
control of Senior Housing by means of a tender offer, open market purchases, a
proxy fight or otherwise, if the acquisition is not approved by Senior Housing's
board of trustees. These other anti-takeover provisions include the following:
o a staggered board of trustees with three separate classes;
o the two-thirds majority shareholder vote required for removal of
trustees;
o the availability of additional shares that the board of trustees may
authorize and issue on terms that it determines;
o advance notice procedures with respect to nominations of trustees and
shareholder proposals; and
o the facts that only the board of trustees may call shareholder
meetings and that shareholders are not entitled to act without a
meeting.
For all of these reasons, Senior Housing's shareholders may be unable to realize
a change of control premium for their shares.
Real estate ownership creates risks and liabilities.
Senior Housing's business will be subject to the following material risks
associated with real estate acquisitions and ownership:
o casualty losses, some of which may be uninsured;
o lease expirations which are not renewed or for properties which can
only be relet at lower rents;
o costs relating to maintenance and repair, and the need to make capital
expenditures due to changes in governmental regulations, including the
Americans with Disabilities Act; and
o environmental hazards created by tenants or abutters for which Senior
Housing may be liable.
15
<PAGE>
Changes at Marriott could adversely affect Senior Housing.
Forty-two percent of Senior Housing's investments are in properties leased
to Marriott. Today we regard Marriott as a strong credit tenant and its leased
properties are performing well. Nonetheless, the Marriott leases extend for a
long period through 2013. Marriott's financial condition and the performance of
its leased properties may change. Because the investment in properties leased to
Marriott represents such a large percentage of Senior Housing's total
investments, any adverse change in Marriott's financial condition or its
operations of the leased properties would adversely affect Senior Housing's
ability to pay distributions to shareholders.
The federal income tax treatment of the spin-off is uncertain.
The Internal Revenue Code does not provide definitive guidance on valuing
Senior Housing shares and on taxing REIT spin-offs. We will perform all our tax
reporting, including statements sent to the IRS and to you, on the basis of our
valuation assumptions and our counsel's opinion on how the spin-off is likely to
be taxed. If the IRS successfully challenges our positions on these issues, we
may be required to amend our reporting and you may have to pay more federal
income taxes.
16
<PAGE>
THE SPIN-OFF
Key Dates
Dates Activity
September __, 1999 Prospectus Mailing Date. The date the registration
statement of which this prospectus is a part is
declared effective by the SEC. We will mail this
prospectus to you on or about this date.
September __, 1999 Record Date. HRPT shareholders of record on this
date will receive one Senior Housing share for
every 10 HRPT shares owned. We expect that a "when
issued" market on the NYSE for Senior Housing
shares may begin two business days before the
record date. If a "when issued" market develops
for Senior Housing shares, HRPT shares will begin
to trade "when issued/ex distribution."
September __, 1999 Distribution Date. We expect to deliver 13.2
million shares of Senior Housing to the
distribution agent on this date, and the spin-off
will be completed. If you hold HRPT shares in a
brokerage account, your Senior Housing shares will
be credited to your account. If you hold HRPT
shares in certificated form, a certificate
representing your Senior Housing shares will be
mailed to you; the mailing process is expected to
take about 30 days. If a "when issued" and "when
issued/ex distribution" market has developed for
Senior Housing and HRPT shares, respectively, it
will cease on this date; and thereafter those
shares will trade in the regular way.
Distribution Agent
The distribution agent for the spin-off is State Street Bank and Trust
Company, c/o Boston EquiServe, P.O. Box 8200, Boston, Massachusetts 02266-8200;
telephone (800) 426-5523.
Listing and Trading of Senior Housing Shares
Senior Housing shares have been approved for listing on the NYSE. We expect
that trading on a "when issued" basis may commence on or about September ___,
1999. A "when-issued" market will permit you and others to trade Senior Housing
shares on the NYSE before the shares are distributed.
There is not currently a public market for Senior Housing shares. Prices at
which the Senior Housing shares may trade cannot be predicted. Until and unless
an orderly market for Senior Housing shares develops, the prices at which
trading in the shares occurs may fluctuate significantly. The prices at which
Senior Housing shares trade may be influenced by many factors, including, among
others, the depth and liquidity of the market which develops, investor
perception of Senior Housing's business and growth prospects, the market for
REIT shares generally, Senior Housing's distribution policy and general market
conditions.
Background and Reasons for the Spin-Off
HRPT was founded in 1986 to invest in senior housing real estate. For the
past few years, however, most of our investments have been in commercial office
buildings. In 1998 we concluded that a renewed emphasis on senior housing
properties was appropriate. We believe there are attractive investment
opportunities now available in both commercial office buildings and senior
housing. Also in 1998, based upon conversations with our shareholders and with
potential investors, we became convinced that many REIT investors prefer to
invest in companies that are focused upon one type of property rather than
diversified companies.
17
<PAGE>
In December 1998, we determined to divide HRPT into two separate public
companies, one focused upon office buildings and one focused upon senior
housing. Our original plan was to distribute one share of Senior Housing to our
shareholders for every 10 shares of HRPT owned and to simultaneously complete an
initial public offering of an additional 11 million shares of Senior Housing.
Recently, we abandoned our plans for an initial public offering of Senior
Housing shares. Nonetheless, we continue to believe that two separate companies,
one focused upon office buildings and one focused upon senior housing
properties, may be able to take better advantage of their respective growth
opportunities. For this reason, in July 1999 we determined to proceed with this
spin-off. Because we are not selling any shares of Senior Housing at this time,
HRPT will retain a larger percentage ownership of Senior Housing than it had
planned to retain in December 1998. Our board of trustees has unanimously
approved the spin-off as being in the best interests of our shareholders.
Manner of Effecting the Spin-Off
In order to effect the spin-off, we and Senior Housing have taken and
expect to take various actions, including the following:
o In December 1998 we organized Senior Housing as a Maryland REIT which
is 100% owned by HRPT. At the time it was organized, Senior Housing had
26.4 million shares outstanding. Since that time some of these shares
have been cancelled and there are now 26 million shares outstanding.
o In June and July 1999 we transferred title to 93 senior housing
investments to other 100% owned REIT subsidiaries of HRPT. These senior
housing subsidiaries were newly created and all their assets and
liabilities relate to these 93 investments.
o In July 1999 Senior Housing accepted a commitment for a new bank credit
facility for up to $350 million. This line of credit will be effective
upon completion of the spin-off.
o On September 1, 1999, HRPT transferred 100% of the ownership of its
senior housing subsidiaries to Senior Housing. In consideration of
these transfers, Senior Housing and one of its subsidiaries agreed to
pay $200 million to HRPT. On the date the spin-off is completed 13.2
million shares of Senior Housing will be distributed to HRPT
shareholders.
o Shortly after completion of the spin-off, Senior Housing will borrow
$200 million under its bank credit facility and pay its formation debt
to HRPT. HRPT intends to use this $200 million to prepay senior debt.
The Transaction Agreement
In order to evidence the actions necessary to effect the spin-off and to
govern their relations after the spin-off, HRPT and Senior Housing entered a
transaction agreement . The form of this transaction agreement has been filed
with the SEC as an exhibit to the registration statement of which this
prospectus is a part. If you want more information about the actions which have
been and will be taken to effect the spin-off or about the agreements between
HRPT and Senior Housing concerning their future relations, you should read the
entire transaction agreement. The provisions of the transaction agreement are
summarized as follows:
o Interest on the $200 million formation debt from Senior Housing and its
subsidiary to HRPT is charged at the same rate as HRPT's weighted
average cost of debt. On September 1, 1999, this interest rate was 7.1%
per annum.
o The formation debt will be due and payable by Senior Housing to HRPT
within 10 days after the spin-off. If the formation debt is not timely
paid Senior Housing will be required to secure this debt.
18
<PAGE>
o On the spin-off date, HRPT will make an additional capital contribution
to Senior Housing, in cash, of $1 million, plus $169,500 times the
number of days from and including July 1, 1999, to and excluding the
spin-off date.
o HRPT will indemnify Senior Housing with respect to any liability
relating to any property transferred to Senior Housing which arises
from litigation pending at the time of the spin-off.
o Senior Housing will indemnify HRPT from any liability relating to any
property transferred by HRPT to Senior Housing which arises after the
spin-off.
o HRPT and Senior Housing have agreed not to compete with each other.
Specifically, so long as: (a) HRPT remains a more than 10% shareholder
of Senior Housing; (b) HRPT and Senior Housing engage the same
investment advisor; or (c) HRPT and Senior Housing have one or more
common managing trustees; then
-- HRPT will not invest in properties involving senior housing without
the prior consent of Senior Housing's independent trustees;
-- Senior Housing will not invest in office buildings, including
medical office buildings or clinical laboratory buildings, without the
prior approval of HRPT's independent trustees; and
-- If a particular investment involves both senior housing and office
components the character of the investment will be determined by
building area, excluding common areas, unless the boards of trustees of
both Senior Housing and HRPT otherwise agree at that time. Also, these
non-competition provisions will not apply to any investments held by
HRPT at the time of the spin-off.
o HRPT and Senior Housing will cooperate to enforce the ownership
limitations in their respective declarations of trust as may be
appropriate to continue their tax status as REITs and otherwise.
o HRPT and Senior Housing will cooperate to file future tax returns
including appropriate allocations of taxable income, expenses and other
tax attributes.
o HRPT will not sell any of its retained 12.8 million Senior Housing
shares for a period of at least one year following the spin-off without
the consent of Senior Housing's independent trustees.
o HRPT will pay all expenses of the spin-off including the costs of
distributing Senior Housing shares to its shareholders, legal and
accounting charges, SEC filing fees, NYSE listing fees and the up-front
costs of establishing Senior Housing's bank credit facility.
19
<PAGE>
INFORMATION ABOUT HRPT PROPERTIES TRUST AFTER THE SPIN-OFF
HRPT is a REIT that acquires, owns and leases office buildings. After the
spin-off we will own 175 office buildings which had an original cost of $2.5
billion. Of these, 89 are commercial office buildings which had an original cost
of almost $1.6 billion, 28 are buildings leased to the U.S. Government which had
an original cost of $446 million and 58 are medical office and biotechnology
buildings which had an original cost of $445 million. We will also own 4 million
shares of Hospitality Properties and 12.8 million shares of Senior Housing.
HRPT Investments
Commercial Office Buildings. Almost $1.6 billion of our total investments
in office buildings are in multi-tenant commercial buildings. We believe that
current business trends have created favorable investment opportunities for
commercial office properties: some institutional investors have begun disposing
of their direct ownership of properties and investing in more liquid real estate
securities; purchasers of distressed properties in the early 1990s are now
divesting their improved assets; and many businesses are selling their owned
real estate to invest proceeds in core activities. Moreover, unlike many REITs
that buy commercial office buildings, our focus is to acquire stabilized office
buildings with long term leases to strong credit tenants rather than buildings
that might afford turnaround potential because of vacancies or short term
leases.
Government Office Buildings. Over $400 million of our investments in office
buildings are in buildings majority leased to the U.S. Government. Most U.S.
Government office space requirements are managed by the General Services
Administration, the GSA. Most large GSA leases are for initial terms of 10 to 20
years plus renewal options for an additional 5 to 20 years. Many GSA leases
permit the Government to terminate by notice given any time after a so-called
"firm term." The weighted average remaining firm term for our Government tenants
is approximately six years. From 1980 to September 1996, the amount of space
leased by the GSA increased from 139 million square feet to 146 million square
feet. We believe that the GSA's demand for leased space will continue to be
strong as a result of federal budget pressure to limit capital expenditures and
the need to use funds available for capital expenditures to modernize GSA-owned
buildings, over half of which exceed 50 years of age. Based upon the
Government's investments in tenant improvements to our properties, the high cost
of relocation and the stability of the missions and space requirements of the
Government agencies that occupy our properties, we believe that there is a high
probability of GSA lease renewals for our properties through their renewal
options, and in many cases beyond those periods. Moreover, because of the
locations of many of these Government leased buildings and the high standards to
which they have been built, we may be able to lease most of these buildings to
commercial users at comparable or higher rents in the event the Government
terminates or fails to renew any of these leases.
Medical and Biotechnology Buildings. Over $400 million of our investments
in office buildings are leased to medical providers and to companies engaged in
biotech research and development. The largest of our multi-tenant medical office
buildings is the Cedars Sinai Medical Towers in Los Angeles, California, which
includes 330,715 square feet leased to 115 separate medical practice groups.
This property includes two garages with parking for over 1,600 cars and is
attached by a footbridge to Cedars Sinai Medical Center, one of the largest
hospitals in the western United States. It is our experience that most medical
tenants regularly renew leases at locations which are convenient for the
physicians and their patients. For example, the Cedars Sinai Medical Towers'
current occupancy is almost 100% and, during the early 1990s when many Southern
California office properties suffered occupancy declines, the occupancy at this
property was never below 91%. Similarly, we currently own several biotech
properties in the areas of San Diego, California and Boston, Massachusetts. The
tenants at these buildings have often invested large amounts in leasehold
improvements which would make their relocation difficult and expensive.
Accordingly, it is our expectation that these tenants will regularly renew
expiring leases.
Equity Investment in Hospitality Properties Trust. We have invested $100
million in 4 million common shares of Hospitality Properties, which constitute
7.1% of the total Hospitality Properties common shares outstanding. Hospitality
Properties is a REIT in the business of owning hotels and leasing them to hotel
operating companies. We organized Hospitality Properties in February 1995 as an
outgrowth of our
20
<PAGE>
relationship with Host Marriott Corporation and Marriott International, Inc.,
which arose from our previous investment in retirement communities leased to
Marriott International. Since August 1995, Hospitality Properties has
successfully completed several public offerings of shares and on September 1,
1999, had a total market capitalization of $1.9 billion. Hospitality Properties
currently owns or has commitments to purchase 210 hotels, which are located in
35 states and contain 28,451 rooms. We receive distributions on our Hospitality
Properties shares at the current annual rate of $2.76 per share. Our financial
reports include our share of Hospitality Properties' operating results using the
equity method of accounting. Hospitality Properties shares are listed on the
NYSE, and on September 1, 1999 the last reported sale price for Hospitality
Properties common shares was $25.50 per share.
Equity Investment in Senior Housing Properties Trust. After the spin-off
HRPT will retain 12.8 million shares of Senior Housing, which will constitute
49% of the total Senior Housing shares outstanding. Senior Housing is expected
to pay distributions at an initial annual rate of $2.40 per share. HRPT's
financial reports will include Senior Housing operating results using the equity
method of accounting. HRPT does not intend to invest additional money in Senior
Housing, and as Senior Housing grows its investments and issues additional
shares to raise capital we expect that HRPT's ownership percentage of Senior
Housing will decline. We have agreed not to sell these shares, without the
consent of Senior Housing's independent trustees, for a period of one year
following the spin-off transaction. Thereafter, depending upon market
conditions, HRPT may sell these shares to raise capital to invest in additional
office buildings.
Pending Acquisitions. As of September 1, 1999 we had entered into purchase
agreements to acquire 13 additional office properties for $81.4 million. We
expect to buy these properties during the remainder of 1999, subject to the
satisfactory completion of our diligence. In the normal course of our business
we regularly evaluate opportunities to acquire properties. We currently have
several investment opportunities under consideration. We may acquire additional
office buildings involving material amounts in the future.
Development Activities. HRPT regularly has several million dollars worth of
construction activity underway. Most of this work is tenant fit out, repairs,
maintenance and redevelopment types of construction activities. We believe that
we have the capacity to develop commercial office buildings, but to date we have
not done any speculative development. We currently own a large tract of land in
Austin, Texas and another tract of land in the area of Pittsburgh,
Pennsylvania's new airport which are appropriate for office building
development. Also, several of the office buildings we own have sufficient
adjacent land for new office development. The two large sites and all of the
development sites we own are ancillary investments to existing, fully developed
office buildings. We are currently exploring the possibility of doing
build-to-suit developments on some of our developable land. We estimate that
land we own can support development of approximately 2.9 million square feet of
new office space.
21
<PAGE>
Location of HRPT Office Buildings
We own 175 office buildings located in 27 states and the District of
Columbia.
[Graphic Omitted - Map of United States showing location of HRPT office
buildings by state]
<TABLE>
<CAPTION>
No. of No. of
State Buildings Investment State Buildings Investment
----- --------- ---------- ----- --------- ----------
(000s) (000s)
<S> <C> <C> <C> <C> <C>
Alaska 1 $1,000 New Hampshire 1 $22,147
Arizona 6 51,475 New Jersey 4 29,947
California 18 254,278 New Mexico 6 30,298
Colorado 2 20,931 New York 9 266,270
Connecticut 2 14,326 Ohio 1 15,275
Delaware 2 58,931 Oklahoma 6 46,262
District of Columbia 5 207,855 Pennsylvania 23 582,548
Florida 4 11,618 Rhode Island 1 8,010
Georgia 1 2,984 Tennessee 1 22,325
Kansas 1 5,949 Texas 28 326,315
Maryland 8 164,013 Virginia 4 54,107
Massachusetts 29 169,799 Washington 2 21,388
Minnesota 7 68,504 West Virginia 1 4,898
Missouri 1 7,776 Wyoming 1 10,318
----------- --------------
Total 175 $2,479,547
=========== ==============
</TABLE>
22
<PAGE>
We intentionally diversify our office investments geographically. At the
same time, we attempt to acquire multiple properties in selected markets to
promote economic efficiencies. We define a market area to include the geographic
area which we believe can be efficiently managed from one central location. The
market areas of the United States which constitute five percent or more of our
total office investments are as follows:
<TABLE>
<CAPTION>
Market Area No. of Buildings Investment Square Feet
- ----------- ---------------- ---------- -----------
(000s)
<S> <C> <C> <C> <C> <C>
Philadelphia, PA 17 $530,288 (21%) 3,541,006 (19%)
Austin, TX 25 301,534 (12%) 2,653,088 (15%)
Washington, DC 16 409,322 (17%) 2,177,901 (12%)
Boston, MA 30 191,946 (8%) 1,603,149 (9%)
Southern CA 17 250,351 (10%) 1,126,171 (6%)
</TABLE>
HRPT Tenants
HRPT prefers to lease its properties to strong credit tenants. Our largest
tenant is the U.S. Government. Fifty- two percent of our office rent is derived
from companies whose senior unsecured obligations are rated investment grade.
Ten percent of our office rent comes from other public companies that are not
rated investment grade but for whom credit evaluation information is readily
available. Approximately 27% of our private company tenants are large law,
accounting and professional service firms which we believe have strong credit
characteristics but which are not investment grade rated.
Percentage of
Tenant Office Rent (1)
- ------ ---------------
U.S. Government........................................ 18.5%
Other investment grade tenants......................... 33.9
Other publicly owned tenants........................... 10.0
Subtotal investment grade and
publicly owned tenants............................. 62.4
Other tenants.......................................... 37.6
-------
Total.................................................. 100.0%
=======
(1) Percentage of office rent is based on leases in effect on July 31,
1999. About 71% of our office rent is gross rent; 10% of our office
rent is net rent; most of our Government leases require modified gross
rent. Accordingly, the data shown in this table is not necessarily
indicative of contributions to our net operating income.
23
<PAGE>
Other than the U.S. Government, no tenant accounts for more than 5% of our
office rents. The following is a list of all our other tenants who are
responsible for 1% or more of our rents:
Percentage of
Tenant Office Rent
------ --------------
SmithKline Beecham plc 4.0%
Health Insurance Plan of New York 2.8%
Solectron Corporation 2.7%
FMC Corporation 2.4%
PNC Bank Corp. 2.2%
Mellon Bank Corporation 2.0%
Motorola, Inc. 1.9%
Ballard Spahr Andrews &
Ingersoll, LLP 1.6%
Chase Corporation 1.6%
Fallon Health Clinics, Inc. 1.4%
Raytheon Company 1.4%
Cedars Sinai Medical Center 1.3%
Marsh & McLennan Companies, Inc. 1.3%
The Limited, Inc. 1.2%
Capital Cities Media, Inc. 1.1%
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<PAGE>
HRPT Lease Expirations
HRPT generally prefers to enter into longer term leases with periodic rent
adjustments rather than short term or fixed rate leases. The following table
sets forth the percentage of our office rent and occupied square feet
represented by leases that expire in the years indicated.
<TABLE>
<CAPTION>
Percentage
Office Rent(1) Percentage of Occupied of Occupied
Year (000s) Office Rent Square Feet(2) Square Feet
---- ---- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1999 $7,194 2.0% 249,433 1.4%
2000 24,095 6.6% 1,008,413 5.7%
2001 43,906 12.0% 1,787,704 10.1%
2002 28,980 7.9% 1,225,962 6.9%
2003 44,470 12.2% 1,819,422 10.2%
2004 40,046 10.9% 1,831,473 10.3%
2005 30,551 8.4% 1,565,720 8.8%
2006 25,732 7.0% 1,247,197 7.0%
2007 22,923 6.3% 1,428,692 8.0%
2008 7,392 2.0% 306,789 1.7%
2009 and thereafter 90,415 24.7% 5,320,862 29.9%
-------- ----- ---------- -----
Totals $365,704 100.0% 17,791,667 100.0%
======== ===== ========== =====
<FN>
(1) Office rent represents rents due under leases that existed as of July 31, 1999. Total rent for
office properties for the year ended December 31, 1998, was $245,955,000, and total rent for
office properties for the six months ended June 30, 1999 was $158,889,000. About 71% of our
office rent is gross rent; 10% of our office rent is net rent; most of our Government leases
require modified gross rent. Accordingly, the rent shown in this table is not necessarily
indicative of contributions to our net operating income.
(2) Represents square feet occupied as of July 31, 1999. This 17.8 million square feet of occupied
space accounts for 98% of our total office space available for rent.
</FN>
</TABLE>
25
<PAGE>
HRPT Management
After the spin-off, the trustees and executive officers of HRPT will be as
follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Barry M. Portnoy................... 54 Managing Trustee (term will expire in 2002)
Gerard M. Martin................... 64 Managing Trustee (term will expire in 2000)
Rev. Justinian Manning, C.P........ 73 Independent Trustee (term will expire in 2000)
Patrick F. Donelan................. 57 Independent Trustee (term will expire in 2001)
Vacancy............................ Independent Trustee (term will expire in 2002)
John A. Mannix..................... 43 President and Chief Operating Officer
John Popeo......................... 39 Treasurer, Chief Financial Officer and Secretary
David M. Lepore.................... 38 Senior Vice President
</TABLE>
Barry M. Portnoy has been a managing trustee of both HRPT and Hospitality
Properties since their organization in 1986 and 1995, respectively. Mr. Portnoy
is also a Director and 50% owner of Reit Management. Mr. Portnoy has been
actively involved in real estate and real estate finance activities as an
attorney, investor and manager for over 20 years. Mr. Portnoy was a partner in
the law firm of Sullivan & Worcester LLP, Boston, Massachusetts from 1978
through March 31, 1997, and he served as Chairman of that firm from 1994 through
March 1997.
Gerard M. Martin has been a managing trustee of both HRPT and Hospitality
Properties since their organization in 1986 and 1995, respectively. Mr. Martin
is also a Director and 50% owner of Reit Management. Mr. Martin has been active
in the real estate and senior housing industries as a developer, owner and
manager for approximately 30 years. During the past five years, Mr. Martin's
principal employment has been as a managing trustee of HRPT and Hospitality
Properties.
The Reverend Justinian Manning, C.P. has been, since September 1990, the
pastor of St. Gabriel's parish in Brighton, Massachusetts. He is also on the
Board of Directors of Charlesview, a low and moderate income housing program. He
is past Treasurer and a former Director of St. Paul's Benevolent, Educational
and Missionary Institute, a New Jersey corporation, which oversees foundations
in various states and the Institute's Overseas Missions. He was formerly on the
Board of Directors of St. Paul's Monastery Manor in Pittsburgh, Pennsylvania, a
congregate housing facility. He belonged to the Provincial Council of the
Passionist Provincialate and is the former Director of Consolidation for the
Community.
Patrick F. Donelan has been since 1998 a Director of Dresdner Kleinwort
Benson, and since 1996 an Executive Vice President of Dresdner Kleinwort Benson
North America LLC, a New York based bank, which is a subsidiary of Dresdner Bank
AG of Germany. Prior to 1996 Mr. Donelan was Chairman of Kleinwort Benson North
America, Inc., a subsidiary of Kleinwort Benson Ltd. of England, which was
acquired by Dresdner Bank AG in 1995.
Vacancy. Currently our third independent trustee is Dr. Bruce Gans. Upon
completion of this spin-off Dr. Gans will resign from HRPT and be elected an
independent trustee of Senior Housing. We intend to elect a third independent
trustee after Dr. Gans resigns, but we have not yet selected anyone to fill this
position.
John A. Mannix will become our President and Chief Operating Officer upon
completion of the spin-off. Mr. Mannix has served as our Executive Vice
President since May 1998. Mr. Mannix has been a Vice President of our investment
advisor, Reit Management, and its affiliates since 1989. Mr. Mannix is a member
of the Urban Land Institute.
John Popeo will become our Treasurer, Chief Financial Officer and Secretary
upon completion of the spin- off. Mr. Popeo has been the Treasurer and Chief
Financial Officer of Reit Management since 1997. Prior to 1997, he was employed
by The Beacon Companies from 1988 through 1992 and as Vice President and
Controller from 1996 through 1997. From 1992 through 1996 he was employed by
First Winthrop Corp. as
26
<PAGE>
Vice President and Controller. Mr. Popeo has held various positions in the real
estate industry from 1985 through 1988, prior to which he was employed by the
public accounting firm of Laventhol and Horwath. Mr. Popeo is a certified public
accountant.
David M. Lepore is our Senior Vice President. Mr. Lepore is responsible for
building operations, leasing and acquisition diligence for our properties. Mr.
Lepore has been employed in various capacities by our investment advisor, Reit
Management, since 1992. Prior to 1992 he was employed by The Beacon Companies.
Mr. Lepore is a member of Building Owners and Managers Association and is a
certified Real Property Administrator.
Additional Information About HRPT
If you would like more information about HRPT than is included in this
prospectus, you should study the public information which we have filed with the
SEC.
27
<PAGE>
INFORMATION ABOUT SENIOR HOUSING PROPERTIES TRUST
General
Senior Housing is a REIT organized under Maryland law to acquire, own and
lease senior apartments, congregate communities, assisted living properties and
nursing homes. Senior Housing owns 93 properties which have 13,571 units and are
leased to nine different tenants.
Growth Strategy
The population of the United States is aging. Senior Housing believes that
this demographic fact will increase the demand for existing senior apartments,
congregate communities, assisted living properties and nursing homes and
encourage development of new properties. Senior Housing's basic business plan is
to profit from the increasing demand in two ways. First, Senior Housing intends
to purchase additional properties and lease them at initial rents that are
greater than its costs of acquisition capital. Second, Senior Housing intends to
structure leases that provide for periodic rental increases based in part upon
gross operating revenue increases at its properties.
A primary purpose of the spin-off is to form a new REIT with a strong core
of senior housing real estate and a management team dedicated to take advantage
of present market conditions. To facilitate these efforts two senior officers of
Senior Housing's investment advisor will devote approximately 75% of their
business time to growing Senior Housing's business. David J. Hegarty is
currently the President and Chief Operating Officer of both Reit Management and
HRPT and a Director of Reit Management. Ajay Saini is currently a Vice President
of Reit Management and Treasurer and Chief Financial Officer of HRPT. Upon
completion of the spin-off, Messrs. Hegarty and Saini will resign their
positions at HRPT and assume similar positions at Senior Housing. Mr. Hegarty
will remain an officer and a Director of Reit Management and Mr. Saini will
remain an officer of Reit Management. Other personnel of Reit Management
including Senior Housing's managing trustees, Messrs. Portnoy and Martin, will
also devote a significant part of their time to assist in Senior Housing's
growth efforts.
Senior Housing believes that current market conditions make a focus on
senior housing investments appropriate at this time for the following reasons:
o A large number of new properties developed by start up assisted living
companies during the past few years have been completed and are now
available for investment with limited start up risks.
o The current shortage of debt and equity capital for real estate
investments associated with healthcare has reduced the financing
options available to all senior housing property owners and limited the
amount of new development activities being undertaken.
o The combination of the foregoing circumstances has made prices of
senior housing properties, especially nursing homes, more attractive
than they have been during the past three years.
Senior Housing will use bank loans initially to fund its acquisitions.
Periodically, Senior Housing will repay the bank loans with long term debt or
equity issuances. For more information about Senior Housing's bank credit
facility, see "Senior Housing Policies--Financing Policies" on page] 63 of this
prospectus.
History and Management
Senior Housing is currently a 100% owned subsidiary of HRPT. There are 26
million shares of Senior Housing outstanding. As part of the spin-off HRPT will
distribute 13.2 million Senior Housing shares to HRPT's shareholders on the
basis of one Senior Housing share for every 10 HRPT shares owned on the record
date of September ___, 1999. After the spin-off Senior Housing will be a
separate public company, 51%
28
<PAGE>
owned by the public and 49% owned by HRPT, and Senior Housing's shares will
trade on the NYSE. For more information about the formation of Senior Housing,
see "The Spin-Off" on page 17 of this prospectus.
Senior Housing's operations will be conducted by its investment advisor.
The investment advisor has approximately 180 full time employees, including a
headquarters management staff, four regional offices and other personnel located
throughout the United States. Based upon 13 years of investing and managing
senior housing real estate through HRPT and four years of operating Hospitality
Properties, Reit Management and its principals have experience in managing REITs
to produce increasing distributions and have extensive contacts in the senior
housing industry. Senior Housing believes that this experience and these
contacts will allow Senior Housing to keep abreast of industry developments and
learn of business opportunities as they occur.
The principals of Reit Management, Barry M. Portnoy and Gerard M. Martin,
founded HRPT in 1986 as a public company with $63 million invested in seven
healthcare properties leased to two tenants. Since 1986, under the direction of
Messrs. Portnoy and Martin and other personnel of Reit Management, HRPT has made
51 consecutive quarterly distributions and has increased its distribution rate
13 times. In 1995 Reit Management organized Hospitality Properties, a REIT that
invests in hotel properties. At its initial public offering in August 1995,
Hospitality Properties had $329 million invested in 37 hotels leased to one
tenant. Since it was founded in 1995, Hospitality Properties has raised
approximately $2 billion of capital, paid 16 consecutive quarterly distributions
and increased its distribution rate 11 times. You should note that the past
success of Reit Management and its affiliate in managing HRPT and Hospitality
Properties is not necessarily indicative of what Senior Housing's performance
will be. In particular, HRPT and Hospitality Properties have operated in market
conditions which are substantially different from the market conditions in which
Senior Housing will operate.
Senior Housing Real Estate Market
Demand Growth. Senior Housing believes that three important demographic
trends will increase demand for senior apartments, congregate communities,
assisted living properties and nursing homes for the foreseeable future:
o First, the U.S. Census Bureau has projected that the U.S. population over
age 85 will increase from 3.1 million in 1990, to 4.3 million in 2000, to
5.7 million in 2010 and to 6.5 million in 2020. As people age they have an
increasing need for the type of assistance with daily living activities
that is provided in senior apartments, congregate communities, assisted
living properties and nursing homes. This is because old age is usually
accompanied by various physical disabilities and because the aging process
sometimes is accompanied by Alzheimer's disease and other forms of dementia
that require specialized, secure housing.
o Second, societal changes during the past 35 years in the U.S. have made
senior housing more often required than in historical periods. The
increasing percentage of women working away from their homes, the high
divorce rate and societal mobility have all combined to make traditional
arrangements of family care for aging relatives less available. These
social trends show no sign of reversal in the foreseeable future.
o Third, economic factors appear to encourage demand for specialized senior
housing properties. Although some people extol the benefits of homemaker
services and home healthcare, it is generally more economically efficient
to congregate the elderly in properties with specialized services than to
bring those services to diverse locations. Similarly, the cost containment
pressure to reduce lengths of stay for the elderly in high cost specialized
properties such as hospitals has increased the need for intermediate care
properties.
Payment Issues. Since the introduction of the Medicare and Medicaid
programs in the late 1960s, governments have become the principal payment source
for senior housing properties in which healthcare services are provided, such as
nursing homes. In the past few years a number of federal and state laws have
been enacted to reduce the growth of Medicare and Medicaid expenditures. These
laws have made it less profitable to own and operate senior housing properties
in which healthcare services are provided.
29
<PAGE>
Senior Housing believes that the net effect of the increasing demand for
senior housing properties and the payment limitations in the Medicare and
Medicaid programs may make it increasingly profitable to own and operate senior
housing properties which are able to attract residents who use private resources
to pay occupancy costs and increasingly less profitable to own and operate
senior housing properties which depend upon the Medicare and Medicaid programs.
Types of Properties
Senior Housing expects to invest in properties which offer four types of
senior housing accommodations, including some properties that combine more than
one type in a single building or campus.
Senior Apartments. Senior apartments are marketed to residents who are
generally capable of caring for themselves. Residence is generally restricted on
the basis of age. Purpose built properties may have special function rooms,
concierge services, high levels of security and centralized call buttons for
emergency use. Tenants at these properties who need healthcare or assistance
with the activities of daily living are expected to contract independently for
those services with homemakers or home healthcare companies.
Congregate Communities. Congregate communities also provide a high level of
privacy to residents and require residents to be capable of relatively high
degrees of independence. Unlike a senior apartment property, a congregate
community usually bundles several services as part of a regular monthly
charge--for example, one or two meals per day in a central dining room, weekly
maid service or a social director. Additional services are generally available
from staff employees on a fee-for-service charge basis. In some congregate
communities, separate parts of the property are dedicated to assisted living or
nursing services.
Assisted Living Properties. Assisted living properties are typically
comprised of one bedroom suites which include private bathrooms and efficiency
kitchens. Services provided usually include three meals per day in a central
dining room, daily housekeeping, laundry, medical reminders and 24 hour
availability of assistance with the activities of daily living such as dressing
and bathing. Professional nursing and healthcare services are usually available
at the facility on call or at regularly scheduled times. Since the early 1990s
there has been an explosive growth in the number of small public companies
developing purpose built assisted living properties. Many of those properties
have recently been completed and are now fully occupied and appropriate
investments for Senior Housing.
Nursing Homes. Nursing homes generally provide extensive nursing and
healthcare services similar to those available in hospitals, without the high
costs associated with operating theaters, emergency rooms or intensive care
units. A typical purpose built nursing home includes mostly two-bed rooms with a
separate toilet in each room and shared dining and bathing facilities. Some
private rooms are often available for those residents who can afford to pay
higher rates or for patients whose medical conditions require segregation.
Nursing homes are generally staffed by licensed nursing professionals 24 hours
per day.
During the past few years nursing home owners and operators have faced two
significant business challenges. First, the rapid expansion of the assisted
living industry which started in the early 1990s has attracted a number of
residents away from nursing homes. This was especially significant because the
residents who elected assisted living facilities had often previously been the
most profitable residents in the nursing homes--residents who required a lesser
amount of care and who were able to pay higher private rates rather than
government rates. According to a 1998 study by SMG Marketing Group, Inc., the
average occupancy of U.S. nursing homes declined from 93% in 1994 to about 88%
in 1997.
The second major challenge arose as a result of Medicare and Medicaid cost
containment laws beginning in 1994, particularly 1997 federal legislation that
required the Medicare program to implement a prospective payment program for
various subacute services provided in skilled nursing homes. Implementation of
this Medicare prospective payment program began on July 1, 1998. Prior to the
prospective payment program Medicare paid nursing home operators based upon
audited costs for services provided. The prospective payment system sets
Medicare rates based upon government estimated costs of treating specified
medical
30
<PAGE>
conditions. Although it is possible that a nursing home may increase its profit
if it is able to provide quality services at below average costs, Senior Housing
believes that the effect of the new Medicare rate setting methodology will be to
reduce the profitability of Medicare services in nursing homes. This belief is
based on similar Medicare changes that were implemented for hospitals during the
1980s. Several of Senior Housing's tenants have recently reported significant
operating losses, particularly Mariner Post-Acute Network, Inc., Integrated
Health Services, Inc. and Genesis Health Ventures, Inc.
Starting in 1995 HRPT formed the opinion that the market value of nursing
home properties did not adequately reflect the negative impact of then current
and emerging market conditions. For this reason beginning in 1996 HRPT began to
limit its nursing home purchases and to dispose of nursing home properties which
were dependent upon subacute services paid by Medicare. Senior Housing now
believes that the market is in the process of taking account of these factors
and adjusting the prices of nursing home properties. Senior Housing also
believes that the demographic factors described above combined with the adjusted
pricing levels may make nursing home properties attractive investments at this
time. Senior Housing expects to focus its future assisted living and nursing
home investments in facilities that have a high percentage of non-government
revenues. When Senior Housing invests in assisted living properties and nursing
homes that are dependent upon government revenues it will attempt to set the
purchase prices and rents at levels which are securely covered by existing and
projected cash flows from its tenants' operations.
Government Regulations and Rate Setting
Senior Apartments. Generally, government programs do not pay for housing in
senior apartments. Rents are paid from the residents' private resources.
Accordingly, the government regulations that apply to these types of properties
are generally limited to zoning, building and fire codes, Americans with
Disabilities Act requirements and other life safety type regulations applicable
to residential real estate. Government rent subsidies and government assisted
development financing for low income senior housing are exceptions to these
general statements. The development and operation of subsidized senior housing
properties are subject to numerous governmental regulations. While it is
possible that Senior Housing may purchase and lease some subsidized senior
apartment properties, it does not expect these investments to be a major part of
its future business, and today it owns no properties where rent subsidies are
applicable.
Congregate Communities. Senior Housing understands that generally
government benefits are not available to congregate communities and the resident
charges in these properties are paid from private resources. However, a number
of Federal Supplemental Security Income program benefits pay housing costs for
elderly or disabled residents to live in these types of residential facilities.
The Social Security Act requires states to certify that they will establish and
enforce standards for any category of group living arrangement in which a
significant number of supplemental security income residents reside or are
likely to reside. Categories of living arrangements which may be subject to
these state standards include congregate facilities and assisted living
properties. Because congregate communities usually offer common dining
facilities, in many locations they are required to obtain licenses applicable to
food service establishments in addition to complying with land use and life
safety requirements. In many states, congregate communities are licensed by
state health departments, social service agencies, or offices on aging with
jurisdiction over group residential facilities for seniors. To the extent that
congregate communities maintain units in which assisted living or nursing
services are provided, these units are subject to applicable state regulations.
In some states, insurance or consumer protection agencies regulate congregate
communities in which residents pay entrance fees or prepay other costs.
Assisted Living. According to the National Academy for State Health Policy,
by early 1999, 32 states provided Medicaid payments for residents in some
assisted living properties under waivers granted by the Health Care Finance
Administration of the U.S. Department of Health and Human Services or under
Medicaid state plans and three other states are planning to do so. Because rates
paid to assisted living property operators are lower than rates paid to nursing
home operators some states use this waiver program as a means of lowering the
cost of services for residents who may not need the higher intensity of medical
care provided in nursing homes. States that administer Medicaid programs for
assisted living facilities are responsible for monitoring
31
<PAGE>
the services at and physical conditions of the participating properties.
Different states apply different standards in these matters, but generally
Senior Housing believes these monitoring processes are similar to the concerned
states' inspection processes for nursing homes.
Because of the large number of states using Medicaid to purchase services
at assisted living properties, it is not surprising that a majority of states
have adopted licensing standards applicable to assisted living facilities.
According to a 1998 study by the National Academy for State Health Policy, 33
states had taken steps to implement assisted living policies as of June 1998,
and 11 others had instituted processes to study the issue. According to the
National Conference of State Legislatures, 32 states planned to consider
legislation related to assisted living during 1999. State regulatory models
vary; there is no national consensus on a definition of assisted living, and no
uniform approach by the states to regulating assisted living facilities. Some
state licensing standards apply to assisted living facilities whether or not
they accept Medicaid funding. Moreover, the 1998 National Academy for State
Health Policy study referenced above found that several states require
certificates of need from state health planning authorities before new assisted
living properties may be developed. Also, the study found that three states have
adopted moratoria on the development of new assisted living facilities. Based on
Senior Housing's analysis of current economic and regulatory trends, it believes
that assisted living properties that become dependent upon Medicaid payments for
a majority of their revenues will decline in value because Medicaid rates will
fail to keep up with increasing costs. For the same reason, Senior Housing also
believes that assisted living properties located in states that adopt
certificate of need requirements or otherwise restrict the development of new
assisted living properties will increase in value because these limitations upon
development will help ensure higher occupancy and higher non-governmental rates.
Accordingly, Senior Housing intends to focus new investments in assisted living
properties that are not overly dependent upon governmental revenues and that are
in areas where there are barriers to competition created by certificate of need
laws or otherwise.
One federal government study was recently completed and another is
currently underway to provide background information and make recommendations
regarding the regulation of, and the possibility of increased governmental
funding for, the assisted living industry. In April 1999, the General Accounting
Office issued a report to the Senate Special Committee on Aging and the
Committee held hearings on consumer protection and quality of care issues in
assisted living facilities. The GAO studied assisted living facilities in four
states and found a variety of residential settings serving a wide range of
resident health and care needs. The GAO found that providers often give
consumers insufficient information to determine whether a particular facility
can meet their needs and that state licensing and oversight approaches vary
widely. The GAO anticipates that as the states increase the use of Medicaid to
pay for assisted living, federal financing will likewise grow, and these trends
will focus more public attention on the place of assisted living in the
continuum of long-term care and upon state standards and compliance approaches.
The second study is being conducted by the Department of Health and Human
Services' Assistant Secretary for Planning and Evaluation and is expected to
touch upon all aspects of the assisted living industry including quality of care
and financing. The 1998 National Academy for State Health Policy study
referenced above and an April 1999 report on a national survey of assisted
living facilities are part of this second study, which is expected to be
completed during 1999. Senior Housing cannot predict whether these studies will
result in governmental policy changes or new legislation, or what impact any
changes may have. Based upon its analysis of current economic and regulatory
trends, Senior Housing does not believe that the federal government is likely to
have a material impact upon the current regulatory environment in which the
assisted living industry operates unless it also undertakes expanded funding
obligations; and Senior Housing does not believe a materially increased
financial commitment from the federal government is presently likely. However,
it does anticipate that assisted living facilities will increasingly be licensed
and regulated by the various states, and that with the absence of federal
standards, the states' policies will continue to vary widely.
Nursing Homes. About 67% of all nursing home revenues in 1997 came from
government Medicare and Medicaid programs. Nursing homes are also among the most
highly regulated businesses in the country. The federal and state governments
regularly monitor the quality of care provided at nursing homes and regularly
inspect the physical condition of nursing home properties. These periodic
inspections and occasional changes in life safety and physical plant
requirements sometimes require nursing home owners to spend money for
32
<PAGE>
capital improvements. These mandated capital improvements have in the past
usually resulted in Medicare and Medicaid rate adjustments, albeit on the basis
of amortization of expenditures over extended useful lives of the improvements.
However, under the new Medicare payment system capital costs are part of the
prospective rate and will not be facility specific. Other recent legislative and
regulatory actions with respect to state Medicaid rates and the Medicare
prospective payment system which began being phased in during 1998 are limiting
the reimbursement levels for some nursing home and other eldercare services. At
the same time federal enforcement and oversight of nursing homes is increasing,
thereby making licensing and certification of these facilities more rigorous.
These actions have adversely affected the revenues and increased the expenses of
many nursing home operators, including several of Senior Housing's tenants.
The federal Health Care Financing Administration, HCFA, has begun to
implement an initiative to increase the effectiveness of Medicare/Medicaid
nursing facility survey and enforcement activities. HCFA's initiative follows
its July 1998 report to Congress on the effectiveness of the survey and
enforcement system, several March 1999 reports by HCFA's Office of Inspector
General concerning quality of care in nursing homes, a July 1998 General
Accounting Office investigation which found inadequate care in a significant
proportion of California nursing homes, a March 1999 GAO report which
recommended that HCFA and the states strengthen their compliance and enforcement
practices to better ensure that nursing homes provide adequate care, and recent
hearings by the Senate Special Committee on Aging on these issues. HCFA plans to
focus survey and enforcement efforts at nursing homes with repeat violations of
Medicare/Medicaid standards, including chain-operated facilities with patterns
of noncompliance. HCFA also plans to require state agencies to use enforcement
sanctions and remedies more promptly and effectively when substandard care is
identified. HCFA is increasing its oversight of state survey agencies. In
addition HCFA has adopted new regulations expanding federal and state authority
to impose civil money penalties in instances of noncompliance. Medicare/Medicaid
survey results for each nursing home are being posted on the internet. Federal
efforts to target fraud and abuse by Medicare and Medicaid providers have also
increased. An adverse determination concerning any tenant's license or
eligibility for Medicare or Medicaid reimbursement could restrict its ability to
pay rent.
Most states also limit the number of nursing homes by requiring developers
to obtain certificates of need before new facilities may be built. Even in those
states such as California and Texas that have eliminated certificate of need
laws, the state health authorities usually have retained other means of limiting
new nursing home development. Examples of these other means are the use of
licensing laws or limitations upon participation in the state Medicaid program.
Senior Housing believes that these governmental limitations generally make
nursing home properties more valuable by extending their useful lives and
limiting competition.
Competition
Several REITs which own apartments have focused some of their investments
on senior apartments. In addition, there are several publicly owned REITs that
today focus upon investing in healthcare real estate. Also, some asset based
finance companies and banks have marketing programs to provide sale leaseback
and mortgage financing for these types of properties. Some of these competitors
have resources that are greater than those which Senior Housing has and some
have a lower cost of capital. For example, Pacific Gulf Properties, Inc. is an
established REIT with $876 million in total assets that develops and owns senior
housing properties. Healthcare Property Investors, Inc., with assets of $1.5
billion, and Nationwide Health Properties, Inc., with assets of $1.4 billion,
both emphasize investments in assisted living properties and both have good
access to debt capital because of their investment grade ratings. Also, GMAC, a
finance affiliate of General Motors Corporation, has a group of personnel that
focus upon making nursing home mortgage loans. Nonetheless, Senior Housing
believes that it will be able to successfully compete for new investments for at
least five reasons:
First, Senior Housing will commence business with a large and diversified
portfolio of properties that are subject to long term leases.
33
<PAGE>
Second, unlike most of its competitors, Senior Housing will be exclusively
focused on senior housing properties. Senior Housing does not intend to invest
in medical office buildings or any properties which do not benefit from the
projected aging of the American population.
Third, current market conditions have created an opportunity for a new
market entrant to invest in senior housing properties. A large number of
recently developed properties are currently available for purchase. Concerns
about the new Medicare prospective payment system have limited capital for new
development and have reduced financing alternatives available to some of Senior
Housing's competitors and prospective tenants. These same concerns have caused
nursing homes to be revalued so that purchase prices and rents can be set at
levels which are well covered by current and projected property operations.
Fourth, Senior Housing's proposed methods of doing business are intended to
be attractive to prospective sellers and tenants. Senior Housing intends to do
business with sellers and tenants who are unaffiliated with it and to retain the
financial flexibility to work with tenants to meet their business requirements.
Some of Senior Housing's REIT competitors are under common control with large
tenants which compete with other prospective tenants. This fact often makes
sellers and tenants reluctant to disclose to their competitors the operating
information necessary for a successful transaction. Some of the finance
companies that target healthcare property investments and some healthcare REITs
that emphasize mortgage lending depend upon the asset backed bond markets for
funding. Asset backed financing has historically afforded borrowers and tenants
limited flexibility to adjust mortgage or lease terms to accommodate changes in
the tenants' businesses during long term leases. Although Senior Housing may
borrow on a secured basis, it expects to retain title to all of its property
investments in order to be able to work with tenants to meet their business
requirements.
Finally, and perhaps most importantly, Senior Housing's investment advisor,
Reit Management, and Messrs. Portnoy, Martin, Hegarty and Saini have experience
and contacts in the senior housing real estate market based upon their history
of acquiring and managing senior housing investments through HRPT.
34
<PAGE>
SENIOR HOUSING DISTRIBUTION POLICY
After completion of the spin-off, Senior Housing intends to make regular
quarterly distributions to shareholders. The initial distribution for the
quarter ended September 30, 1999 will be $0.60 per share. Senior Housing intends
to maintain this rate for one year following the spin-off unless its operating
results differ materially from what it now expects. Senior Housing expects that
this distribution rate will exceed its minimum distribution requirement to
maintain REIT status and will exceed its earnings. Distributions in excess of
earnings represent return of capital for federal income tax purposes. Assuming
that its distribution rate remains unchanged for the next year, and that its
earnings for this period are as estimated in the table below, Senior Housing
estimates that approximately 18% of its annual distributions in its first year
of operations will be a return of capital. The percent of annual distributions
which will be a return of capital for tax purposes will vary from tax year to
tax year. Under current law, distributions in excess of earnings which are a
return of capital are not taxable but these amounts reduce a shareholder's basis
in his shares, and, accordingly, increase taxable gains when shares are sold.
For a more detailed discussion of the tax consequences of Senior Housing's
distributions, see "Federal Income Tax and ERISA Consequences" beginning on page
75 of this prospectus.
The initial distribution rate was set based upon Senior Housing's estimate
of the cash available for distribution and FFO it believes it will realize from
its existing properties during the year following the spin-off. All future
distributions will be set by its board of trustees. When deciding the amount of
future distributions Senior Housing expects its board of trustees will primarily
consider the actual cash available for distribution and FFO realized and
projections of future cash available for distribution and FFO. However, in
making these decisions the board may consider capital requirements, the legal
requirements that REITs distribute at least 95% of net taxable earnings and
other factors the board deems relevant from time to time. The amounts of future
cash available for distribution, FFO and distributions are not now known or
knowable and they cannot be assured.
The following table sets forth Senior Housing's calculation of estimated
earnings, FFO and cash available for distribution for the twelve months
following the spin-off. In making these estimates Senior Housing has started its
calculation with historical audited operating results and made adjustments to
reflect known events which have occurred and events which it expects to occur at
or shortly after the completion of the spin-off. In this calculation no effect
is shown from changes in working capital, i.e., changes in current assets or
current liabilities, because these changes are not expected to be material.
Similarly, except for the $200 million to be borrowed under Senior Housing's
bank credit facility, no effect is shown from possible future financing or
investing activities because these activities cannot now be estimated. In
considering this table you should recognize that FFO and cash available for
distribution may not be as good a measure of operating performance as earnings
determined according to generally accepted accounting principles, or GAAP.
Similarly, FFO and cash available for distribution are not intended to
substitute for cash flow determined according to GAAP. Cash available for
distribution and FFO are presented because Senior Housing believes they will be
a basis used by investors to compare Senior Housing's operating results with
those of other REITs, because they were used to set the initial distribution
rate and because Senior Housing expects they will be important considerations
used by Senior Housing's board of trustees to determine future distributions.
35
<PAGE>
<TABLE>
<CAPTION>
Calculation of Estimated Earnings, FFO and Cash Available
for Distribution for the Twelve Months following the Spin-Off
(000s except per share amounts and percentages)
Pro Forma
---------
<S> <C>
Net income for the year ended December 31, 1998 $52,191
Plus: net income for the six months ended June 30, 1999 24,543
Less: net income for the six months ended June 30, 1998 (25,469)
-------
Net income for the 12 months ended June 30, 1999 51,265
Plus adjusted real estate depreciation for the 12 months following completion of the
spin-off (1) 20,466
-------
FFO for the 12 months following completion of the spin-off (2) 71,731
Net effect of non-cash rents (3) (3,076)
-------
Estimated cash flow from operating activities for the 12 months following completion of
the spin-off (4) $68,655
=======
Estimated cash available for distribution for the 12 months following completion of the spin-off $68,655
=======
Estimated cash distributions for the 12 months following completion of the spin-off (5) $62,400
=======
Initial annual distribution per share (5) $2.40
=======
Estimated percentage of distributions in excess of net income for the 12 months following
completion of the spin-off, i.e., return of capital (6) 17.8%
=======
Distribution payout ratio of estimated cash available for distribution for the 12 months following
completion of the spin-off (7) 90.9%
=======
- ------------------
<FN>
(1) Pro forma real estate depreciation for the year ended December 31, 1998, of $18.5 million plus pro forma
real estate depreciation for the six months ended June 30, 1999, of $11.2 million minus pro forma real
estate depreciation for the six months ended June 30, 1998, of $9.2 million.
(2) Funds from operations or "FFO," as defined in the white paper on funds from operations which was approved
by the Board of Governors of NAREIT in March 1995, is net income computed in accordance with GAAP, before
gains or losses from sales of properties and extraordinary items, plus depreciation and amortization and
after adjustment for unconsolidated partnerships and joint ventures. Senior Housing considers FFO to be an
appropriate measure of performance for an equity REIT, along with cash flow from operating activities,
financing activities and investing activities, because it provides investors with an indication of an
equity REIT's ability to incur and service debt, make capital expenditures, pay distributions and fund
other cash needs. Senior Housing computes FFO in accordance with the standards established by NAREIT which
may not be comparable to FFO reported by other REITs that do not define the term in accordance with the
current NAREIT definition or that interpret the current NAREIT definition differently. FFO does not
represent cash generated by operating activities in accordance with GAAP and should not be considered as an
alternative to net income, determined in accordance with GAAP, as an indication of financial performance or
the cash flow from operating activities, determined in accordance with GAAP, as a measure of liquidity.
(3) Represents the difference between annual rental revenue calculated in accordance with GAAP and cash amounts
currently being paid by tenants.
(4) For purposes of this presentation there are assumed to be no significant sources or uses of cash for
investing and financing activities for the 12 months following completion of the spin-off because Senior
Housing is not now able to estimate these sources and uses.
(5) Based on a total of 26 million shares to be outstanding after the spin-off and assuming no additional
shares are issued and that the distribution rate remains unchanged.
36
<PAGE>
(6) This estimated percentage is calculated as the excess of estimated cash distributions for the 12 months
following the spin-off of $62,400,000 over pro forma net income for the 12 months ended June 30, 1999, of
$51,265,000 divided by estimated cash distributions for the 12 months following the spin-off of
$62,400,000.
(7) The distribution payout ratio of estimated pro forma FFO for the 12 months following completion of the
spin-off will be 87.0%.
</FN>
</TABLE>
37
<PAGE>
SENIOR HOUSING PROPERTIES
Senior Housing has investments totaling $770 million in 93 properties
located in 26 states:
[Graphic Omitted - Map of United States showing location of Senior Housing
properties by state]
<TABLE>
<CAPTION>
No. of No. of
State Properties Investment State Properties Investment
----- ---------- ---------- ----- ---------- ----------
(000s) (000s)
<S> <C> <C> <C> <C> <C>
Arizona 6 $42,861 Missouri 2 $3,788
California 8 53,879 Nebraska 10 10,667
Colorado 8 34,348 New Jersey 1 13,007
Connecticut 6 53,762 New York 1 10,700
Florida 5 131,990 North Carolina 3 6,389
Georgia 4 12,308 Ohio 1 3,445
Illinois 2 98,742 Pennsylvania 1 15,598
Iowa 6 8,207 South Dakota 3 7,589
Kansas 1 1,320 Texas 1 12,410
Louisiana 1 18,887 Virginia 3 57,666
Maryland 1 33,080 Washington 2 19,542
Massachusetts 4 69,562 Wisconsin 8 33,904
Michigan 2 9,135 Wyoming 3 7,245
----- ---------
Total 93 $770,031
===== =========
</TABLE>
38
<PAGE>
The following table presents information about the 93 properties that
Senior Housing owns, grouped by tenant:
<TABLE>
<CAPTION>
Built/ Historical Investment
Location Property Type Renovated(1) Units/Beds(2) at Cost (3)
-------- ------------- ------------ ------------- -----------
(000s)
<S> <C> <C> <C> <C>
Marriott International, Inc.
Scottsdale, AZ Assisted Living 1990 148 $9,926
Sun City, AZ Assisted Living 1990 148 11,916
Laguna Hills, CA Congregate Care 1991 402 31,791
Boca Raton, FL Congregate Care 1999 347 44,836
Deerfield Beach, FL Congregate Care 1986 288 16,935
Fort Myers, FL Congregate Care 1987 463 23,905
Palm Harbor, FL Congregate Care 1992 319 33,863
Port St. Lucie, FL Assisted Living 1993 128 12,451
Arlington Heights, IL Congregate Care 1986 363 36,742
Silver Spring, MD Congregate Care 1992 351 33,080
Bellaire, TX Assisted Living 1991 145 12,410
Arlington, VA Congregate Care 1992 419 18,889
Charlottesville, VA Congregate Care 1991 315 29,829
Virginia Beach, VA Assisted Living 1990 114 8,948
---------------------------------
3,950 325,521
Brookdale Living Communities, Inc.
Mesa, AZ Congregate Care 1985 185 14,800
Chicago, IL Congregate Care 1990 341 62,000
Brighton, NY Congregate Care 1988 103 10,700
Spokane, WA Congregate Care 1993 200 14,350
---------------------------------
829 101,850
Mariner Post-Acute Network, Inc.
Phoenix, AZ Nursing Home 1984 127 3,185
Yuma, AZ Nursing Home 1984 128 2,326
Yuma, AZ Congregate Care 1984 65 708
Fresno, CA Nursing Home 1985 180 3,503
Lancaster, CA Nursing Home 1994 99 3,488
Newport Beach, CA Nursing Home 1994 167 4,128
Stockton, CA Nursing Home 1991 122 3,136
Tarzana, CA Nursing Home 1969 192 3,060
Thousand Oaks, CA Nursing Home 1970 124 3,454
Van Nuys, CA Nursing Home 1984 58 1,319
Lakewood, CO Nursing Home 1985 175 4,721
Littleton, CO Nursing Home 1965 230 5,576
Concord, NC Nursing Home 1990 110 2,216
Wilson, NC Nursing Home 1990 119 2,402
Winston-Salem, NC Nursing Home 1990 80 1,771
Huron, SD Nursing Home 1977 163 3,256
Huron, SD Congregate Care 1968 59 1,014
Sioux Falls, SD Nursing Home 1979 139 3,319
Brookfield, WI Nursing Home 1995 226 12,697
39
<PAGE>
<CAPTION>
Built/ Historical Investment
Location Property Type Renovated(1) Units/Beds(2) at Cost (3)
-------- ------------- ------------ ------------- -----------
(000s)
<S> <C> <C> <C> <C>
Clintonville, WI Nursing Home 1965 78 $1,761
Clintonville, WI Nursing Home 1969 109 1,747
Madison, WI Nursing Home 1987 73 1,887
Milwaukee, WI Nursing Home 1983 215 5,043
Milwaukee, WI Nursing Home 1997 102 1,601
Pewaukee, WI Nursing Home 1969 237 3,416
Waukesha, WI Nursing Home 1995 105 5,752
---------------------------------
3,482 86,486
Integrated Health Services, Inc. (Lease No. 1)
Canon City, CO(4) Nursing Home/ 1984 157 6,520
Senior Apartments
Colorado Springs, CO Nursing Home 1996 132 5,481
Delta, CO Nursing Home 1978 100 3,737
Grand Junction, CO Nursing Home 1986 120 4,408
Grand Junction, CO Nursing Home 1995 82 3,905
College Park, GA Nursing Home 1985 100 3,025
Dublin, GA Nursing Home 1968 130 4,504
Glenwood, GA Nursing Home 1972 62 1,742
Marietta, GA Nursing Home 1973 109 3,037
Clarinda, IA Nursing Home 1968 117 1,823
Council Bluffs, IA Nursing Home 1963 62 1,217
Mediapolis, IA Nursing Home 1973 62 2,121
Pacific Junction, IA Nursing Home 1978 12 343
Winterset, IA (4) Nursing Home/ 1995 118 2,703
Senior Apartments
Ellinwood, KS Nursing Home 1972 59 1,320
Tarkio, MO Nursing Home 1996 95 2,455
Ainsworth, NE (5) Nursing Home 1995 50 447
Ashland, NE (5) Nursing Home 1996 101 1,859
Blue Hill, NE (5) Nursing Home 1996 81 1,125
Edgar, NE (5) Nursing Home 1995 54 139
Grand Island, NE Nursing Home 1996 80 1,934
Gretna, NE (5) Nursing Home 1995 62 944
Lyons, NE (5) Nursing Home 1974 84 814
Milford, NE (5) Nursing Home 1970 66 908
Sutherland, NE (5) Nursing Home 1995 62 1,276
Waverly, NE (5) Nursing Home 1995 50 1,221
Laramie, WY Nursing Home 1986 144 4,022
Worland, WY (4) Nursing Home/ 1996 99 3,223
Senior Apartments
----------------------------------
2,450 66,253
Integrated Health Services, Inc. (Lease No. 2)
Cheshire, CT (6) Nursing Home 1971 210 $9,459
Waterbury, CT (6) Nursing Home 1974 180 10,941
New Haven, CT (6) Nursing Home 1971 195 17,870
Slidell, LA (7) Nursing Home 1989 118 18,887
Middleboro, MA Nursing Home 1987 124 17,523
Worcester, MA Nursing Home 1990 173 18,769
Boston, MA Nursing Home 1985 201 24,978
Hyannis, MA Nursing Home 1982 142 8,292
Howell, MI (7) Nursing Home 1985 189 4,956
40
<PAGE>
<CAPTION>
Built/ Historical Investment
Location Property Type Renovated(1) Units/Beds(2) at Cost (3)
-------- ------------- ------------ ------------- -----------
(000s)
<S> <C> <C> <C> <C>
Farmington, MI (7) Nursing Home 1991 153 4,179
Canonsburg, PA Nursing Home 1990 140 15,598
---------------------------------
1,825 151,452
Genesis Health Ventures, Inc.
Burlington, NJ Nursing Home 1994 150 13,007
---------------------------------
150 13,007
Private Company Tenants
St. Joseph, MO Nursing Home 1976 120 1,333
Seattle, WA Nursing Home 1964 103 5,192
Waterford, CT Nursing Home 1989 148 5,253
Killingly, CT Nursing Home 1989 190 6,060
Willimantic, CT Nursing Home 1989 124 4,179
Grove City, OH Nursing Home 1965 200 3,445
---------------------------------
885 25,462
---------------------------------
Total Portfolio 13,571 $770,031
=================================
- --------------
<FN>
(1) The dates presented are the later of the date of original construction or the date of substantial
renovation as evidenced by capital expenditures in excess of 20% of HRPT's historical investment.
(2) Units/beds are a customary measure of property values used in the senior housing industry.
(3) Represents HRPT's historical costs before depreciation.
(4) Two properties are located at each of these locations.
(5) These properties are mortgage investments. HRPT had nominal price purchase options for all these
mortgaged properties which have been assigned to Senior Housing.
(6) These three properties are managed by Integrated Health. Under this management agreement, Integrated
has guaranteed the rent for these properties and that rent obligation is subject to cross default with
other obligations under Integrated's Lease No. 2.
(7) These properties are mortgage investments. The mortgage collateral secures all Integrated's obligations
under Lease No. 2 and the mortgages are subject to cross default with Integrated's other obligations
under this lease.
</FN>
</TABLE>
41
<PAGE>
The following table presents operating information about the occupancy,
gross revenues and revenue sources of Senior Housing's properties grouped by
leases and the amount of annual rents payable to Senior Housing under these
leases:
<TABLE>
<CAPTION>
Property Level Operating Information(1)
----------------------------------------------------
Percentage of
Facility Revenues
Senior from Sources other
Housing Facility Facility than
Tenant Rents Occupancy Revenues Medicare/Medicaid
- ------ --------- --------- --------- -----------------
(in 000s) (in 000s)
<S> <C> <C> <C> <C>
Marriott International, Inc. $ 30,894 93% $132,802 94%
Brookdale Living Communities, Inc. 11,074 95% 21,226 100%
Mariner Post-Acute Network, Inc. 16,716 84% 142,423 22%
Integrated Health Services, Inc.
(Lease No. 1) 8,826 79% 70,419 33%
Integrated Health Services, Inc.
(Lease No. 2) 18,085 82% 97,294 12%
Genesis Health Ventures, Inc. 1,444 97% 9,141 32%
Private Company Tenants 3,489 81% 44,954 16%
-------- -------- -------- --------
$ 90,528 86% $521,786 43%
======== ======== ======== ========
- ------------------------------------
<FN>
(1) Represents actual data for the one year period ended June 30, 1999, except for Marriott
data, which is for the 36 week period ended September 9, 1998, the most recent data
available to Senior Housing, annualized. Actual Marriott facility revenue for the 36 week
period ended September 9, 1998, was $92.6 million; for the one year period ended December
31, 1997, the most recent full year period for which Marriott data is available to Senior
Housing, facility occupancy was 96%, facility revenue was $128.6 million and the percent
of facility revenue from sources other than Medicare/Medicaid was 93%.
</FN>
</TABLE>
42
<PAGE>
SENIOR HOUSING TENANTS
Senior Housing's financial condition depends, in part, upon the financial
condition of its tenants. Senior Housing's largest tenant is Marriott.
Ninety-six percent of Senior Housing's rent is paid by public companies. If you
want more information about any of Senior Housing's publicly owned tenants you
should study the public information which they have filed with the SEC. The
following charts show Senior Housing's mix of tenants on the basis of annual
current rent:
By Annual Rent
--------------
o $91 million total annual
current rent [Graphic Omitted - Pie Chart
Marriott International 34%
o 96% of rent comes from $30.9 million
public companies
Brookdale Living Communities 12%
o 34% of rent comes from $11.1 million
Marriott
Mariner Post-Acute Network 18%
o leases for 99% expire $16.7 million
in 2005 or after
Integrated Health Services 10%
Lease No. 1
$8.8 million
Integrated Health Services 20%
Lease No. 2
$18.1 million
Genesis Health Ventures 2%
$1.4 million
Other Operators 4%
$3.5 million]
Marriott International, Inc.
Marriott is a NYSE listed company. Marriott's major businesses are
developing, operating and managing hotels, senior housing properties and
time-share resorts. Senior Housing currently owns 14 congregate communities and
assisted living properties with 3,950 units that are leased to subsidiaries of
Marriott. The annual rent under this lease is $30.9 million, which is 34% of
Senior Housing's total annual rent. Marriott International, Inc. has guaranteed
all of these lease obligations to Senior Housing.
The following table presents summary financial information of Marriott from
its Annual Report on Form 10-K for the year ended January 1, 1999, and Quarterly
Report on Form 10-Q for the period ended June 18, 1999.
<TABLE>
<CAPTION>
Summary Financial Information of Marriott International, Inc.
(in millions)
As of or for the
As of or for the year ended 24 weeks ended
------------------------------------------ -----------------------
January 3, January 2, January 1, June 19, June 18,
1997 1998 1999 1998 1999
---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Sales $5,738 $7,236 $7,968 $3,642 $3,937
Net income 270 324 390 190 214
Total assets 5,161 6,233 6,559
Debt 422 1,267 1,178
</TABLE>
43
<PAGE>
Integrated Health Services, Inc.
Integrated is a NYSE listed company. Integrated's major businesses are
operating nursing homes and providing home healthcare services. Senior Housing
currently owns 27 nursing homes and three senior apartments with 3,205 units
that are leased to subsidiaries of Integrated. In addition, Senior Housing has
mortgage investments secured by 12 nursing homes with 1,070 units. Annual rent
of $22.8 million and interest of $4.1 million total to $26.9 million, or 30% of
Senior Housing's total annual revenues. These 42 properties are divided into two
pools, and the obligations under the leases and mortgages within each pool are
subject to cross default and collateralization covenants with all other
properties in the same pool. Integrated has guaranteed all of these lease and
mortgage obligations to Senior Housing.
The following table presents summary financial information of Integrated
from its Annual Report on Form 10-K for the year ended December 31, 1998, and
Quarterly Report on Form 10-Q for the period ended June 30, 1999.
<TABLE>
<CAPTION>
Summary Financial Information of Integrated Health Services, Inc.
(in millions)
As of or for the
As of or for the year ended six months ended
December 31, June 30,
--------------------------------------------- ---------------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total revenue $1,204 $1,403 $2,972 $1,502 $1,244
Earnings (loss) from
continuing operations 48 3 137 83 (11)
Net earnings (loss) 46 (34) (68) 79 (11)
Total assets 5,002 5,393 5,404
Debt 3,219 3,383 3,451
</TABLE>
Mariner Post-Acute Network, Inc.
Mariner is a NYSE listed company. Mariner's principal business is operating
nursing homes. Senior Housing currently owns 24 nursing homes and two congregate
communities with 3,482 units that are leased to subsidiaries of Mariner. The
annual rent under this lease is $16.7 million, which is 18% of Senior Housing's
total annual rent. Mariner has guaranteed all of these lease obligations to
Senior Housing.
The following table presents summary financial information of Mariner from
its Annual Report on Form 10-K for the year ended September 30, 1998, and
Quarterly Report on Form 10-Q for the period ended June 30, 1999.
<TABLE>
<CAPTION>
Summary Financial Information of Mariner Post-Acute Network, Inc.
(in millions)
As of or for the
As of or for the year ended nine months ended
September 30, June 30,
--------------------------------------------- ----------------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenue $1,114 $1,140 $2,036 $1,403 $1,775
Net income (loss) 43 44 (210) (46) (524)
Total assets 874 3,037 2,596
Debt 253 1,978 822
</TABLE>
44
<PAGE>
Brookdale Living Communities, Inc.
Brookdale is a Nasdaq listed company. Brookdale's principal business is
operating senior housing and congregate communities. Senior Housing currently
owns four congregate communities with 829 units that are leased to a subsidiary
of Brookdale. The annual rent under this lease is $11.1 million, which is 12% of
Senior Housing's total annual rent. Brookdale has guaranteed all of these lease
obligations to Senior Housing.
The following table presents summary financial information of Brookdale
from its Annual Report on Form 10-K for the year ended December 31, 1998, and
Quarterly Report on Form 10-Q for the period ended June 30, 1999.
<TABLE>
<CAPTION>
Summary Financial Information of Brookdale Living Communities, Inc.
(in 000s)
As of or for the
As of or for the year ended six months ended
December 31, June 30,
---------------------------- --------------------------
1997(1) 1998 1998 1999
------- ---- ---- ----
<S> <C> <C> <C> <C>
Total revenue $30,237 $77,701 $35,549 $51,634
Net income 445 6,654 2,632 5,397
Total assets 183,169 244,633 339,451
Debt 96,167 106,877 192,729
<FN>
(1) Total revenue and net income are for the period from May 7, 1997 (inception) through December 31, 1997.
</FN>
</TABLE>
Genesis Health Ventures, Inc.
Genesis is a NYSE listed company. Genesis' major businesses are operating
nursing homes, congregate communities and assisted living properties. Senior
Housing currently owns one nursing home with 150 units that is leased to a
subsidiary of Genesis. The annual rent under this lease is $1.4 million, which
is 2% of Senior Housing's total annual rent.
The following table presents summary financial information of Genesis from
its Annual Report on Form 10-K for the year ended September 30, 1998, and
Quarterly Report on Form 10-Q for the period ended June 30, 1999.
<TABLE>
<CAPTION>
Summary Financial Information of Genesis Health Ventures, Inc.
(in millions)
As of or for the
As of or for the year ended nine months ended
September 30, June 30,
--------------------------------------------- --------------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total net revenue $671 $1,100 $1,405 $999 $1,409
Net income (loss) 37 48 (24) 41 2
Total assets 1,434 2,627 2,698
Debt 660 1,408 1,503
</TABLE>
45
<PAGE>
Privately Owned Tenants
In addition to the publicly owned tenants described above, Senior Housing
currently leases six nursing homes with 885 beds to four separate private
company tenants. These leases require total annual rent of $3.5 million. None of
these private companies has significant net worth or significant other business
activities.
Four of Senior Housing's properties leased to two of these private tenants
were originally leased to Sun Healthcare Group, Inc. These properties have been
subleased and the new tenants have assumed direct responsibility for these
leases. Sun has also remained obligated under the leases. The following table
presents summary financial information of Sun from its Annual Report on Form 10
- -K for the year ended December 31, 1998, and Quarterly Report on Form 10-Q for
the period ended June 30, 1999.
<TABLE>
<CAPTION>
Summary Financial Information of Sun Healthcare Group, Inc.
(in millions)
As of or for the
As of or for the year ended six months ended
December 31, June 30,
-------------------------------------------- -------------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total net revenue $1,316 $2,011 $3,088 $1,494 $1,274
Net income (loss) 22 35 (754) 9 (702)
Total assets 2,579 2,468 1,833
Debt 1,546 1,863 1,929
</TABLE>
On July 14, 1999, one of Senior Housing's private company tenants, The
Frontier Group, filed for reorganization under Chapter 11 of the Bankruptcy
Code. Frontier leases three nursing homes from Senior Housing for total rent of
$2.1 million per year. Sun Healthcare is also obligated under this lease. Based
upon the six months ended June 30, 1999 information available to Senior Housing,
one of these nursing homes produced operating income in excess of its allocated
rent, one facility produced operating income equal to 92% of its allocated rent
and one facility with occupancy of only 69% had operating losses. Senior Housing
is preparing to collect its rent, including arrearages of approximately
$534,000, from Frontier or Sun and, if necessary, to operate these properties
for its own account until these properties are leased to a substitute tenant.
46
<PAGE>
SENIOR HOUSING LEASES
The following table presents information about Senior Housing's leases
(dollars in thousands except guarantee information):
<TABLE>
<CAPTION>
Integrated Integrated Private
Marriott Brookdale Mariner Lease No. 1 Lease No. 2 Genesis Companies Total
-------- --------- ------- ----------- ----------- ------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Number of 14 4 26 31 11 1 6 93
properties
Number of 3,950 829 3,482 2,450 1,825 150 885 13,571
beds/units
Located in no. 7 4 6 7 5 1 4 26
of states
Historical $325,521 $101,850 $86,486 $66,253 $151,452 $13,007 $25,462 $770,031
investment
Tenant Subsidiaries Subsidiary of Subsidiaries Subsidiaries Subsidiaries Subsidiary Four private Nine
of Marriott Brookdale of Mariner of Integrated of Integrated of Genesis companies tenants
Current annual $30,894 $11,074 $16,716 $8,826 $18,085 $1,444 $3,489 $90,528
rent
Rent increase 4.5% of 10% of CPI based CPI based 3% of $13 per Various
formula increase in increases increases increases increases in annum
gross in gross gross revenues increase
revenues revenues starting in
starting in 2000
1999
Current lease 2013 2019 2013 2010 2006 2005 2001, 2003, 2001-2019
expiration 2005
Renewal options All or none; All or none; All or none; All or none; All or none; All or none; Various
4 for 5 2 for 25 2 for 10 2 for 13 2 for 10 2 for 10
years each years each years each years each years each years each
and 1 for 5
years
Cross default Yes Yes Yes Yes Yes N/A N/A
provision
Subordinated Yes Yes Yes Yes Yes Yes Yes
management fee
Guarantees Public Public Public Public Public A multi- Various
company company company company company property affiliates of
parent has parent has parent has parent has parent has parent the private
guaranteed guaranteed guaranteed guaranteed guaranteed company of company
the lease. the lease. the lease. the lease. the lease. the tenant tenants have
In addition, has provided
there is a guaranteed guarantees.
$15 million the lease. In addition,
security In addition, Sun
deposit and a there is a Healthcare is
pledge of $235,000 obligated on
other assets. security four of these
deposit. leases.
</TABLE>
47
<PAGE>
Lease Terms
All of Senior Housing's leases are so called "triple net" leases which
require the tenants to maintain Senior Housing's properties during the lease
terms and to indemnify it for liability which may arise by reason of its
ownership of the properties. The following is a summary of material terms of
Senior Housing's leases in addition to the terms set forth in the foregoing
chart. Senior Housing's material leases have been filed with the SEC as exhibits
to its registration statement on Form S-11 of which this prospectus is a part.
If you want more information about these leases you should review these
documents.
Cross Default. Whenever Senior Housing leases more than one property to a
single tenant or a group of affiliated tenants all those leases are cross
defaulted. There are two lease combinations with Integrated. The obligations for
all of the properties under each of the lease combinations are subject to cross
default, but the two lease combinations are themselves not subject to cross
default. Integrated has guaranteed both lease combinations.
All or None Renewal Options. Whenever Senior Housing leases more than one
property to a single tenant or a group of affiliated tenants, lease renewal
options may only be exercised on an all or none basis. This means that a tenant
or group of affiliated tenants cannot decide to exercise renewal options for
strong performing properties unless it also renews the leases for all other
leased properties. The two Integrated lease combinations may be separately
renewed for all properties in each combination of leases.
Maintenance and Alterations. All of Senior Housing's tenants are required
to maintain, at their expense, the leased properties in good order and repair,
including structural and nonstructural maintenance. Except in the case of
properties leased to Marriott, capital alterations and additions to any leased
property which exceed a threshold amount of aggregate cost may only be made with
Senior Housing's prior consent. Any alterations or improvements made to any
leased property during the terms of the leases become Senior Housing's property,
subject to Senior Housing's obligation to pay to the tenants unamortized costs
at lease termination. At the end of the leases, Senior Housing's tenants are
required to surrender their leased properties in substantially the same
condition as existed on the commencement dates of the leases, subject to any
permitted alterations and subject to ordinary wear and tear.
Assignment. Senior Housing's consent is generally required for any
assignment or sublease of its properties. In the event of a subletting, the
initial tenant remains liable under the lease and all guarantees and other
security remain in place.
Environmental Matters. Senior Housing's tenants are required, at their
expense, to remove and dispose of any hazardous substance at the leased
properties in compliance with all applicable environmental laws and regulations
and to pay any costs Senior Housing incurs in connection with removal and
disposal. Each tenant has indemnified Senior Housing for any claims asserted as
a result of the presence of hazardous substances at any property and from a
violation or alleged violation of any applicable environmental law or
regulation.
Indemnification and Insurance. Each tenant has agreed to indemnify Senior
Housing from all claims arising from Senior Housing's ownership or their use of
its properties. Each tenant is required to maintain insurance on Senior
Housing's properties covering:
o comprehensive general liability for damage to property or bodily
injury arising out of the ownership, use, occupancy or maintenance of
the properties;
o commercial property "all risk" liability for damage to improvements,
merchandise, trade fixtures, furnishings, equipment and personal
property;
o workers' compensation liability;
o business interruption loss;
48
<PAGE>
o in some cases, medical malpractice; and
o other losses customarily insured by businesses similar to the business
conducted at Senior Housing's properties.
The leases require that Senior Housing be named as an additional insured under
these policies.
Damage, Destruction or Condemnation. In the event any of Senior Housing's
properties is damaged by fire, or other casualty or is taken for a public use,
Senior Housing receives all insurance or taking proceeds and its tenants are
required to pay any difference between the amount of proceeds and the historical
investment by Senior Housing or HRPT in the affected property. In the event of
material destruction or condemnation, some tenants have a right to purchase the
affected property for amounts at least equal to Senior Housing's or HRPT's
historical investment in the property.
Events of Default. Events of default under Senior Housing's leases include
the following:
o the failure of the tenant to pay rent when due;
o the failure of the tenant to perform key terms, covenants or
conditions of its lease and the continuance thereof for a specified
period after written notice;
o the occurrence of events of insolvency with respect to the tenant;
o the failure of the tenant to maintain required insurance coverages; or
o the revocation of any material license necessary for the tenant's
operation of Senior Housing's property.
Remedies. Upon the occurrence of any event of default, Senior Housing may:
o terminate the affected lease and accelerate the rent;
o terminate the tenant's rights to the affected property, relet the
property and recover from the tenant the difference between the amount
of rent which would have been due under the applicable lease and the
rent received under the reletting; and
o make any payment or perform any act required to be performed by the
tenant under its lease.
The defaulting tenant is obligated to reimburse Senior Housing for all payments
made and all costs and expenses incurred in connection with any exercise of the
foregoing remedies.
Ground Lease Terms. The land underlying two of Senior Housing's properties
is leased. Senior Housing's leases require its tenants to pay and perform all
obligations arising under these ground leases. These ground leases terminate on
2086 and 2079. The annual rents payable under the ground leases in 1998 totaled
$138,100. If Senior Housing's tenants fail to pay the applicable ground rent,
Senior Housing may have to do so in order to protect its investment in these
properties.
49
<PAGE>
SENIOR HOUSING SELECTED HISTORICAL FINANCIAL INFORMATION
The following table presents selected historical financial information and
other data for the properties owned by Senior Housing. This financial data has
been derived from HRPT's historical financial statements for the years ended
December 31, 1994 through 1998, and the unaudited historical financial
statements for the six-month periods ended June 30, 1998 and 1999. Per share
data has not been presented because Senior Housing was not a publicly held
company during the periods presented. Senior Housing is currently a 100% owned
subsidiary of HRPT, and none of its properties are encumbered by debt. The
following table includes pro rata allocations of interest expense and general
and administrative expenses for historical periods. In the opinion of Senior
Housing's management, the methods used for allocating interest and general and
administrative expenses are reasonable. However, it is impossible to estimate
all operating costs that Senior Housing would have incurred as a separate public
company. Accordingly, the net income and funds from operations shown are not
necessarily indicative of results that Senior Housing will realize as a separate
company. Additionally, year to year comparisons are impacted by property
acquisitions during the historical periods. For more information see Senior
Housing Properties Trust's Consolidated Historical Financial Statements and
notes thereto appearing on pages F-14 to F-21.
<TABLE>
<CAPTION>
(000s except property data)
Six Months Ended
Year Ended December 31, June 30,
------------------------------------------------------------------- -------------------------
1994 1995 1996 1997 1998 1998 1999
------ ------ ------ ====== ------ ------ ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental income $ 46,429 $ 62,586 $ 66,202 $ 78,463 $ 82,542 $ 40,324 $ 42,409
Interest and other income 1,554 4,018 4,240 5,708 5,764 2,886 2,881
--------- --------- --------- --------- --------- --------- ---------
Total revenues 47,983 66,604 70,442 84,171 88,306 43,210 45,290
--------- --------- --------- --------- --------- --------- ---------
66,604
Expenses:
Interest 5,430 16,937 14,719 16,958 19,293 9,263 9,992
Depreciation 9,711 14,748 15,383 17,826 18,297 9,102 11,207
General and administrative 2,691 3,857 3,899 4,664 4,480 2,174 2,259
--------- --------- --------- --------- --------- --------- ---------
Total expenses 17,832 35,542 34,001 39,448 42,070 20,539 23,458
--------- --------- --------- --------- --------- --------- ---------
Net income $ 30,151 $ 31,062 $ 36,441 $ 44,723 $ 46,236 $ 22,671 $ 21,832
========= ========= ========= ========= ========= ========= =========
Net income
Other Data:
Number of properties at end of period 68 76 83 88 93 88 93
Cash flows from operating activities $ 44,150 $ 48,331 $ 51,308 $ 91,094 $ 60,236 $ 31,975 $ 32,808
Cash flows from investing activities (319,704) (39,301) (105,566) (19,663) 306 135 188
Cash flows from financing activities 275,554 (9,030) 54,258 (71,431) (60,403) (32,110) (32,967)
Funds from operations 39,862 45,810 51,824 62,549 64,533 31,773 33,039
<CAPTION>
As of December 31, As of June 30,
---------------------------------------------------------------- ------------------------
1994 1995 1996 1997 1998 1998 1999
------ ------ ------ ====== ====== ------ ------
Balance Sheet Data: (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Total real estate investments (before
depreciation) $579,633 $624,738 $730,304 $759,121 $770,219 $758,986 $770,031
Total assets (after depreciation) 556,668 587,701 679,201 692,586 686,296 682,682 674,294
------------
<FN>
(1) Funds from operations or "FFO," as defined in the white paper on funds from operations which was approved by the Board of
Governors of NAREIT in March 1995, is net income computed in accordance with GAAP, before gains or losses from sales of properties
and extraordinary items, plus depreciation and amortization and after adjustment for unconsolidated partnerships and joint ventures.
Senior Housing considers FFO to be an appropriate measure of performance for an equity REIT, along with cash flow from operating
activities, financing activities and investing activities, because it provides investors with an indication of an equity REIT's
ability to incur and service debt, make capital expenditures, pay distributions and fund other cash needs. Senior Housing computes
FFO in accordance with the standards established by NAREIT which may not be comparable to FFO reported by other REITs that do not
define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently. FFO
does not represent cash generated by operating activities in accordance with GAAP and should not be considered as an alternative to
net income, determined in accordance with GAAP, as an indication of financial performance or the cash flow from operating
activities, determined in accordance with GAAP, as a measure of liquidity.
</FN>
</TABLE>
50
<PAGE>
SENIOR HOUSING SELECTED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following table presents selected pro forma financial information for
Senior Housing for the year ended December 31, 1998, and the six months ended
June 30, 1999, to reflect the effects of the spin-off. For more information see
the Unaudited Pro Forma Consolidated Financial Statements appearing on pages F-8
through F-13.
Year Ended Six Months
December 31, Ended June 30,
1998 1999
------------ -------------
(unaudited) (unaudited)
Operating Data: (000s except per share data)
Revenues:
Rental income $84,003 $42,409
Interest and other income 5,764 2,881
------- -------
Total revenues 89,767 45,290
------- -------
Expenses:
Interest 14,563 7,281
Depreciation 18,490 11,207
General and administrative 4,523 2,259
------- -------
Total expenses 37,576 20,747
------- -------
Net income $52,191 $24,543
======= =======
Earnings per share $ 2.01 $ 0.94
======= =======
As of
June 30, 1999
-------------
(unaudited)
(000s)
Balance Sheet Data:
Total real estate investments (before depreciation) $770,031
Total assets (after depreciation) 690,719
Bank credit facility 200,000
SENIOR HOUSING MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion presents an analysis of the results of operations
of the properties owned by Senior Housing for the years ended December 31, 1996,
1997 and 1998, the six month periods ended June 30, 1998 and 1999, and the pro
forma results of operations of Senior Housing for the year ended December 31,
1998, and the six months ended June 30, 1999. This discussion includes
references to funds from operations. Funds from operations, or "FFO," as defined
in the white paper on funds from operations which was approved by the Board of
Governors of NAREIT in March 1995, is net income computed in accordance with
GAAP, before gains or losses from sales of properties and extraordinary items,
plus depreciation and amortization and after adjustment for unconsolidated
partnerships and joint ventures. Senior Housing considers FFO to be an
appropriate measure of performance for an equity REIT, along with cash flow from
operating activities, financing activities and investing activities, because it
provides investors with an indication of an equity REIT's ability to incur and
service debt, make capital expenditures, pay distributions and fund other cash
needs. Senior Housing computes FFO in accordance with the standards established
by NAREIT which may not be comparable to FFO reported by other REITs that do not
define the term in accordance with the current NAREIT definition or that
interpret the current NAREIT definition differently. FFO does not represent cash
generated by operating activities in accordance with GAAP and should not be
considered as an alternative to net income, determined in accordance with GAAP,
as an indication of financial performance or the cash flow from operating
activities, determined in accordance with GAAP, as a measure of liquidity.
51
<PAGE>
Pro Forma Results of Operations
Six Months Ended June 30, 1999. For the pro forma six months ended June 30,
1999, giving effect to the spin-off and the related transactions, revenues would
have been $45.3 million, total expenses would have been $20.7 million and net
income would have been $24.5 million or $0.94 per share. Compared to historical
results total expenses and interest expense decreased by $2.7 million. Interest
expense decreased due to lower interest expense from pro forma borrowings of
$200 million under Senior Housing's bank credit facility compared to the
allocated portion of historical allocated interest expense incurred by HRPT.
On a pro forma basis for the six months ended June 30, 1999, funds from
operations would have been $35.8 million. The pro forma average shares
outstanding would have been 26 million.
Year Ended December 31, 1998. For the pro forma year ended December 31,
1998, giving effect to the spin-off and the related transactions, revenues would
have been $89.8 million, total expenses would have been $37.6 million and net
income would have been $52.2 million or $2.01 per share. Compared to historical
results, total revenue increased by $1.5 million and total expenses decreased by
$4.5 million. Revenue increased due to rent generated from the acquisition of
five properties in 1998. Total expenses decreased primarily because of reduced
interest expense of $4.7 million. Interest expense decreased due to lower
interest expense from pro forma borrowings of $200 million under Senior
Housing's bank credit facility compared to allocated historical interest expense
incurred by HRPT.
On a pro forma basis for the year ended December 31, 1998, funds from
operations would have been $70.7 million. The pro forma average shares
outstanding would have been 26 million.
Historical Results of Operations
Six Months Ended June 30, 1999, compared to 1998. For the six months ended
June 30, 1999, compared to the six months ended June 30, 1998, total revenues
increased by $2.1 million, total expenses increased by $2.9 million and net
income decreased by $839,000. Total revenues increased due to rent generated
from the acquisition of five properties subsequent to June 30, 1998. Total
expenses increased primarily because of higher depreciation of $2.1 million due
to property acquisitions and higher allocated interest expense as a result of
increased borrowings by HRPT. Net income was $21.8 million and $22.7 million for
the six months ended June 30, 1999 and 1998, respectively. There were no shares
outstanding during these periods. On pro forma 26 million average shares
outstanding net income per share would have been $0.84 and $0.87 for the six
months ended June 30, 1999 and 1998, respectively.
Funds from operations increased by $1.3 million for the six months ended
June 30, 1999, compared to the prior period due to income from five properties
acquired subsequent to June 30, 1998.
Year Ended December 31, 1998, compared to 1997. For the year ended December
31, 1998, compared to the year ended December 31, 1997, total revenues increased
by $4.1 million, total expenses increased by $2.6 million and net income
increased by $1.5 million. Total revenues increased due to rent generated from
the acquisition of five properties during 1998 and the full year impact of the
rent generated from five properties acquired during 1997. Total expenses
increased primarily because of higher allocated interest expense of $2.3
million, which resulted from increased borrowings by HRPT. Net income was $46.2
million and $44.7 million for the year ended December 31, 1998 and 1997,
respectively. There were no shares outstanding during these periods. On pro
forma 26 million average shares outstanding net income per share would have been
$1.78 and $1.72 for the year ended December 31, 1998 and 1997, respectively.
Funds from operations increased by $2.0 million for the year ended December
31, 1998, compared to the prior period due to income from five properties
acquired during 1998 and the full year impact of income from five properties
acquired during 1997.
52
<PAGE>
Year Ended December 31, 1997, compared to 1996. For the year ended December
31, 1997, compared to the year ended December 31, 1996, total revenues increased
by $13.7 million, total expenses increased by $5.4 million and net income
increased by $8.3 million. Total revenues increased due to rent generated from
the acquisition of five properties during 1997 and the full year impact of the
rent generated from seven properties acquired during 1996. Total expenses
increased primarily because of higher allocated interest expense of $2.2
million, which resulted from increased borrowings by HRPT, and higher
depreciation expense of $2.4 million due to property acquisitions. Net income
was $44.7 million and $36.4 million for the year ended December 31, 1997 and
1996, respectively. There were no shares outstanding during these periods. On
pro forma 26 million average shares outstanding net income per share would have
been $1.72 and $1.40 for the year ended December 31, 1997 and 1996,
respectively.
Funds from operations increased by $10.7 million for the year ended
December 31, 1997, compared to the prior period due to the income from the
acquisition of five properties during 1997 and the full year impact of income
from seven properties acquired during 1996.
Liquidity and Capital Resources
At June 30, 1999, Senior Housing had cash and cash equivalents of $168,000
and prior to the spin-off Senior Housing will receive $16.4 million from HRPT.
For the six months ended June 30, 1999 and 1998, cash flows from operating
activities were $32.8 million and $32.0 million, respectively, cash flows from
investing activities were $188,000 and $135,000, respectively, and cash used for
financing activities was $33.0 million and $32.1 million, respectively. Senior
Housing expects the cash transferred to it and future cash flow from operating
activities will be sufficient to meet its short term and long term working
capital requirements including its first distribution of $15.6 million or $0.60
per share for the quarter ending on September 30, 1999, which it expects to pay
during the fourth quarter of 1999.
For the twelve months subsequent to the spin-off, Senior Housing expects
that cash flows from operating activities and the availability of amounts under
its bank credit facility will be sufficient to meet its short term and long term
liquidity requirements for operations, working capital and distributions.
Senior Housing has accepted a commitment for a $350 million, three-year,
interest only bank credit facility. This bank credit facility will be secured by
first mortgages on 18 of Senior Housing's properties. The interest rate will be
LIBOR plus 1.75% per annum. The bank credit facility will be available for
acquisitions, working capital and for general business purposes. Senior Housing
will have the ability to repay and redraw amounts under this bank credit
facility until its maturity in 2002. Senior Housing's bank credit facility
documentation will have customary representations, warranties, covenants and
event of default provisions. The material restrictive financial covenants will
require Senior Housing to:
o limit debt to no more than 60% of total capital, as defined;
o maintain a ratio of net income plus interest expense and depreciation
to interest expense of at least 1.5; and
o maintain a tangible net worth, as defined, of $350 million, subject to
increases based on equity issuances.
After the spin-off Senior Housing will borrow $200 million under this bank
credit facility to pay the formation debt to HRPT and will have $150 million
available for acquisitions, working capital and general business purposes.
Total assets decreased by $12.0 million from $686.3 million as of December
31, 1998, to $674.3 million as of June 30, 1999. The decrease is primarily due
to depreciation on real estate properties.
53
<PAGE>
After completion of the spin-off, in both the short term and the long term
Senior Housing intends to acquire additional senior housing properties. These
purchases will be initially funded with excess working capital, if any,
generated by Senior Housing and proceeds of borrowings under the bank credit
facility. After properties are acquired, bank credit facility borrowings may be
repaid with long term debt or equity capital. After completion of the spin-off,
Senior Housing expects to have: $200 million of debt outstanding; book equity of
$447.4 million; and total real estate assets, at historical cost, of $770
million. In these circumstances, Senior Housing believes that it will have
sufficient access to capital markets to meet its growth objectives and refinance
its debt as needed. Of course, however, access to growth capital will depend
upon numerous facts, including some beyond Senior Housing's control; and Senior
Housing can provide no assurance that it will be able to raise additional
capital in sufficient amounts, or at appropriate costs, to fund growth or to
repay debt in both the short term and the long term.
Inflation. Inflation might have both positive and negative impacts upon
Senior Housing's business. Inflation might cause the value of Senior Housing's
real estate investments to increase. Similarly, in an inflationary environment,
the percentage rents which Senior Housing receives based upon CPI increases or
as a percentage of its tenants' revenues should increase and rent yields Senior
Housing could charge for new investments would likely increase. Offsetting these
benefits, inflation might cause the costs Senior Housing pays for equity and
debt capital to increase. To mitigate the adverse impact of increased costs of
debt capital in the event of material inflation Senior Housing may purchase
interest rate cap contracts whenever it has a large amount of floating rate debt
outstanding and it believes material interest rate increases are likely to
occur. On balance, Senior Housing does not believe that the modest inflation
which it expects may occur in the U.S. economy during the next few years will
have any material effect on its business.
Deflation. Deflation would have business consequences to Senior Housing
which are the inverse of the impact of inflation. If new construction costs
decline, the value of Senior Housing's existing real estate investments may
decline. The value of Senior Housing's long term minimum rent leases might
increase but some tenants might have trouble paying Senior Housing's rent in a
deflationary environment, and the amounts of its percentage rent increases might
decline or disappear. Deflation might lower Senior Housing's costs of debt
capital; however, deflation's impact on Senior Housing's cost of equity capital
is uncertain. Senior Housing does not believe that the U.S. economy is likely to
experience serious deflation in the foreseeable future. Senior Housing believes
that modest deflation would have no effect upon its business and serious
deflation would have a negative effect upon its business.
Year 2000
The in-house computer systems are limited to software and hardware
developed by third parties and installed, operated and monitored by Senior
Housing's investment advisor, Reit Management. All of the computer systems,
which are limited to information systems, were installed within the last two
years. All of the critical enterprise wide systems are warrantied in writing to
be year 2000 compliant by the manufacturers and have been tested by Reit
Management. These systems include the network hardware, the network operating
system, the desktop operating system, business application software, financial
accounting software and communication software. Other than those operated by its
tenants, Senior Housing has no critical non information technology systems, and
no such systems are provided to it by Reit Management. All costs associated with
Senior Housing's computer systems are borne by Reit Management.
All of Senior Housing's properties are leased on a triple net basis and are
not managed by Senior Housing. Ninety-seven percent of Senior Housing's tenants
are operated by public companies which have filed reports containing year 2000
preparedness information with the SEC. The leases require the tenants to conduct
the daily operations of the properties and the scope of the tenants'
responsibility includes ensuring preparedness for the year 2000. Because of its
leases, the only actions that Senior Housing can take with respect to its
properties are to inquire of its tenants, monitor its tenants' SEC filings and
evaluate their year 2000 preparedness plans for all systems, including financial
and nonfinancial systems such as elevators, heating and ventilation and life
safety systems. Six of the nine Senior Housing tenants that operate 97% of
Senior Housing's investments have responded in writing to Senior Housing's
inquiries regarding their preparedness for issues related to the year
54
<PAGE>
2000. Based on these responses and tenant public disclosures which Senior
Housing has reviewed, Senior Housing believes that its tenants are in the
process of studying their systems and the systems for their vendors, suppliers
and service providers to ensure preparedness but none of Senior Housing's
tenants has yet reported they are year 2000 compliant. Current levels of
preparedness are varied and include partially completed inventory and assessment
of potential risks, testing, implementation of plans for remediation and
reprogramming. While Senior Housing believes that the efforts of its tenants
described in their responses and in their public filings will be adequate to
address year 2000 concerns, there can be no guarantee that all tenant operations
and those of their vendors and payors, including federal and state Medicare and
Medicaid systems, will be year 2000 compliant on a timely basis and will not
have a material effect on Senior Housing.
If Senior Housing's efforts and the efforts of its vendors, customers and
tenants, and their customers and vendors to prepare for the year 2000 were
ineffective, the operation of Senior Housing's properties could be subject to
significant adverse effects, including, but not limited to, loss of business and
growth opportunities, reduced revenues and increased expenses which might cause
operating losses to its tenants. Continued or severe operating losses may cause
one or more of Senior Housing's tenants to default on their leases. Numerous
lease defaults could jeopardize Senior Housing's ability to maintain its
financial results of operations, meet its financial, operating and capital
obligations and timely pay its distributions to shareholders.
In particular, the worst case scenario which Senior Housing can envision at
this time is that some of its tenants may be unable to pay their rents on a
timely basis because some of their payment sources, such as Medicare or
Medicaid, are delayed. In these circumstances, Senior Housing may be unable to
meet its debt obligations or to timely pay distributions.
Senior Housing does not currently have a contingency plan in place in the
event it, or its tenants, do not successfully remedy year 2000 compliance issues
that are identified in a timely manner or fail to identify any year 2000 issues.
Senior Housing will evaluate the status of its year 2000 compliance plan during
the fourth quarter of 1999 and determine whether a contingency plan is
necessary.
Quantitative and Qualitative Disclosures About Market Risk
Senior Housing is exposed to market changes in interest rates. Because
interest on all its outstanding debt is at a floating rate, changes in interest
rates will not affect the value of outstanding debt instruments. However,
changes in interest rates will affect Senior Housing's operating results. For
example, the interest rate payable on Senior Housing's pro forma outstanding
indebtedness of $200 million at June 30, 1999, would have been 7% per annum. An
immediate 10% change in that interest rate, or 70 basis points, would increase
or decrease Senior Housing's costs by $1.4 million, or over $0.05 per share per
year:
<TABLE>
<CAPTION>
Impact of Changes in Interest Rates
(in 000s)
Interest Rate Per Year Outstanding Debt Total Interest Expense Per Year
---------------------- ---------------- -------------------------------
<S> <C> <C> <C> <C>
At June 30: 7.0% $200,000 $14,000
10% Reduction: 6.3% 200,000 12,600
10% Increase: 7.7% 200,000 15,400
</TABLE>
The foregoing table presents a so called "shock" analysis which assumes that the
interest rate change by 10%, or 70 basis points, is in effect for a whole year.
If interest rates were to change gradually over one year the impact would be
less.
Senior Housing borrows in U.S. dollars and all of its current borrowings
are subject to interest at LIBOR plus a premium. Accordingly, Senior Housing is
vulnerable to changes in U.S. dollar based short term rates, specifically LIBOR.
55
<PAGE>
During the past few months short term U.S. dollar based interest rates have
tended to rise, increasing by about 50 basis points. Senior Housing is unable to
predict the direction or amount of interest rate changes during the next year.
Senior Housing has decided not to purchase an interest rate cap or other hedge
to protect against future rate increases, but it may enter such agreements in
the future. Also, it may incur additional debt at floating or fixed rates, which
would increase its exposure to market changes in interest rates.
Senior Housing currently owns mortgage receivables with a carrying value of
$37.6 million. When comparable term market interest rates decline the value of
these receivables increases; when comparable term market interest rates rise the
value of those receivables declines. Using discounted cash flow analyses at
weighted average estimated per year market rates for December 31, 1998, and June
30, 1999, of 10% and 10.75%, respectively, the estimated fair values of Senior
Housing's pro forma mortgage receivables were as follows:
Carrying Value
of Mortgage Estimated
Valuation Date Receivables Fair Value
-------------- ----------- ----------
(in 000s)
December 31, 1998 $37,826 $40,525
June 30, 1999 37,638 38,522
An immediate 10% change in the market rate of interest, or 108 basis
points, applicable to Senior Housing mortgage receivables at June 30,1999, would
affect the fair value of those receivables as follows:
Carrying Value
Interest Rate of Mortgage Estimated
Per Year Receivables Fair Value
(in 000s)
Estimated 10.75% $37,638 $38,522
market:
10% reduction: 9.67% 37,638 41,123
10% increase: 11.83% 37,638 36,161
If the market rate changes occurred gradually over time, the effect of these
changes would be realized gradually. Because Senior Housing's mortgage
receivables are fixed rate instruments, changes in market interest rates will
have no effect on Senior Housing's operating results unless these receivables
are sold. At this time Senior Housing expects to hold its existing mortgages to
their maturity and not to realize any profit or loss from trading these mortgage
receivables. Also, Senior Housing does not presently expect to expand its
mortgage investments.
The interest rate changes which affect the valuations of Senior Housing's
mortgages are U.S. dollar long term rates for corporate obligations of companies
with ratings similar to Senior Housing's mortgagors.
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SENIOR HOUSING MANAGEMENT
Senior Housing Trustees and Executive Officers
Senior Housing has two categories of trustees: (1) managing trustees who
are employees of Reit Management and involved in Senior Housing's day-to-day
activities; and (2) independent trustees who are not employees of Reit
Management and not involved in Senior Housing's day-to-day activities. Senior
Housing's bylaws require that a majority of its trustees be independent
trustees. Also, although it is not required by Senior Housing's bylaws, it is
Senior Housing's policy that the same person may not simultaneously serve as an
independent trustee of both Senior Housing and HRPT so long as HRPT owns more
than 10% of the shares of Senior Housing. The bylaws and this policy do not
prohibit former trustees, officers, employees or persons otherwise affiliated
with HRPT or Reit Management from serving as independent trustees of Senior
Housing.
After completion of the spin-off, Senior Housing's trustees and executive
officers will be as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Barry M. Portnoy................... 54 Managing Trustee (term will expire in 2000)
Gerard M. Martin................... 64 Managing Trustee (term will expire in 2001)
Bruce M. Gans, M.D. ............... 52 Independent Trustee (term will expire in 2000)
Arthur G. Koumantzelis............. 68 Independent Trustee (term will expire in 2002)
Vacancy............................ Independent Trustee (term will expire in 2001)
David J. Hegarty................... 42 President, Chief Operating Officer and Secretary
Ajay Saini......................... 39 Treasurer and Chief Financial Officer
</TABLE>
Barry M. Portnoy has been a managing trustee of both HRPT and Hospitality
Properties since their organization in 1986 and 1995, respectively. Mr. Portnoy
is also a Director and 50% owner of Reit Management. Mr. Portnoy has been
actively involved in real estate and real estate finance activities as an
attorney, investor and manager for over 20 years. Mr. Portnoy was a partner in
the law firm of Sullivan & Worcester LLP, Boston, Massachusetts from 1978
through March 31, 1997, and he served as Chairman of that firm from 1994 through
March 1997.
Gerard M. Martin has been a managing trustee of both HRPT and Hospitality
Properties since their organization in 1986 and 1995, respectively. Mr. Martin
is also a Director and 50% owner of Reit Management. Mr. Martin has been active
in the real estate and senior housing industries as a developer, owner and
manager for approximately 30 years. During the past five years, Mr. Martin's
principal employment has been as a managing trustee of HRPT and Hospitality
Properties.
Bruce M. Gans, M.D. has been Senior Vice President for Continuing Care,
Chairman of Physical Medicine and Rehabilitation at North Shore Long Island
Jewish Health System and Professor of Physical Medicine and Rehabilitation at
the Albert Einstein College of Medicine since April 1999. Prior to April 1999
Dr. Gans was a Professor and Chairman of the Department of Physical Medicine and
Rehabilitation at Wayne State University and a Senior Vice President of the
Detroit Medical Center since 1989. Dr. Gans has been a trustee of HRPT since
1995. Upon completion of the spin-off, Dr. Gans will resign from HRPT and will
become one of Senior Housing's independent trustees.
Arthur G. Koumantzelis has been President and Chief Executive Officer of
Gainesborough Investments LLC, a private investment company, since June 1998.
From 1990 to 1998, Mr. Koumantzelis was Senior Vice President and Chief
Financial Officer of Cumberland Farms, Inc., a private company engaged in the
convenience store business and in the distribution and retail sale of gasoline.
Mr. Koumantzelis has been a trustee of Hospitality Properties since its initial
public offering in 1995, and was a trustee of HRPT from 1992 through August
1995. Upon completion of the spin-off, Mr. Koumantzelis will become one of
Senior Housing's independent trustees.
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Vacancy. Following the completion of the spin-off, Senior Housing intends
to elect another independent trustee. At this time, no person has been selected
to fill this position.
David J. Hegarty is the President, Chief Operating Officer and Secretary of
Senior Housing. Mr. Hegarty is also, and has been since 1994, the President,
Chief Operating Officer and Secretary of HRPT. Upon completion of the spin-off,
Mr. Hegarty will resign from HRPT. Mr. Hegarty is also a Director and the
President and Secretary of Reit Management and will continue in these positions
after the spin-off. Mr. Hegarty has served HRPT, Reit Management and their
affiliates in various capacities since 1987, prior to which he was an audit
manager with Ernst & Young LLP. Mr. Hegarty is a certified public accountant.
Ajay Saini is the Treasurer and Chief Financial Officer of Senior Housing.
Mr. Saini is also, and has been since 1994, the Treasurer and Chief Financial
Officer of HRPT. Upon completion of the spin-off, Mr. Saini will resign from
HRPT. Mr. Saini is also a Vice President of Reit Management and will continue in
this position after the spin-off. Mr. Saini has served HRPT, Reit Management and
their affiliates in various capacities since June 1990, prior to which he was
employed by Ernst & Young LLP. Mr. Saini is a certified public accountant.
Committees of the Board of Trustees
Promptly following completion of the spin-off, the board of trustees will
establish an audit committee that will consist of independent trustees. The
audit committee will make recommendations concerning the engagement of
independent public accountants, review the plans and results of the audit
engagement, approve professional services provided by the independent public
accountants, consider the appropriateness of audit and nonaudit fees charged by
Senior Housing's accountants and review the adequacy of Senior Housing's
internal accounting controls.
The entire board of trustees will function as a compensation committee to
implement Senior Housing's incentive share award plan described below.
Compensation of the Trustees and Officers
Senior Housing will pay its independent trustees an annual fee of $20,000,
plus a fee of $500 for each meeting attended. Each independent trustee will
automatically receive an annual grant of 500 common shares after the completion
of the spin-off, or upon initial election to fill the current vacant position,
and at the first meeting of the board of trustees following each annual meeting
of shareholders, commencing in 2000. In addition, Senior Housing will pay the
independent trustee serving as chairman of the audit committee $2,000 per year.
This position is expected to rotate annually among the independent trustees.
Senior Housing will also reimburse expenses its trustees incur in attending
meetings. Senior Housing's managing trustees and officers are employees of Reit
Management and they will not receive compensation directly from Senior Housing,
except reimbursement of expenses and under the incentive share award plan.
Incentive Share Award Plan
Senior Housing has adopted an incentive share award plan and has reserved
1.3 million shares to grant to its independent trustees, officers and
consultants, including employees of Reit Management, but not Reit Management
itself which will be paid under its contract described below. Senior Housing has
established the incentive share award plan to ensure that its independent
trustees, officers and others responsible for its operations have similar
interests with shareholders. In addition, the incentive share award plan will
permit Senior Housing to compensate affiliates for the performance of services
and duties in addition to those compensated by Reit Management.
As discussed above, the independent trustees will automatically receive
grants of 500 common shares per year as part of their annual compensation. In
granting other incentive share awards, the board of trustees intends to consider
a range of factors regarding potential grantees, including the complexity and
duration of
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<PAGE>
tasks performed and the amount and terms of common shares previously granted.
The vesting schedule of each incentive share award will be determined at the
time of grant. No awards will be granted under the incentive share award plan
before completion of the spin-off, and no individuals have yet been selected to
receive any awards.
Limitation of Liability and Indemnification
Under Senior Housing's declaration of trust and bylaws, its trustees,
officers and employees are entitled to indemnification. You can find more
information about indemnification of trustees, officers and employees in the
section entitled "Material Provisions of Maryland Law and of Senior Housing's
Declaration of Trust and Bylaws" on page 67 of this prospectus.
Reit Management and the Advisory Agreement
Reit Management. Reit Management is a Delaware corporation owned by Barry
M. Portnoy and Gerard M. Martin. Its principal place of business is 400 Centre
Street, Newton, Massachusetts and its telephone number is (617) 928-1300. Reit
Management has approximately 180 full time employees including a headquarters
staff, four regional offices and other personnel located throughout the United
States. Reit Management also acts as the investment advisor to HRPT and
Hospitality Properties.
The directors of Reit Management are Barry M. Portnoy, Gerard M. Martin and
David J. Hegarty. The officers of Reit Management are David J. Hegarty,
President and Secretary, John G. Murray, Executive Vice President, John A.
Mannix, Vice President, Thomas M. O'Brien, Vice President, Ajay Saini, Vice
President, David M. Lepore, Vice President, Jennifer B. Clark, Vice President,
and John Popeo, Treasurer. A biographical summary of the officers of Reit
Management who are not described above under "--Senior Housing Trustees and
Executive Officers" or under "Information about HRPT After the Spin-off--HRPT
Management" on page 26 of this prospectus follows:
John G. Murray, age 38, is the Executive Vice President of Reit Management.
Mr. Murray also is and has been the President, Chief Operating Officer and
Secretary of Hospitality Properties since 1996. Mr. Murray has served in various
capacities for HRPT, Reit Management and their affiliates since 1993. Prior to
1993, Mr. Murray was Director of Finance, Business Analysis and Planning at
Fidelity Brokerage Services, Inc. from 1992 to 1993 and Director of Acquisitions
from 1990 through 1991. Prior to 1990, Mr. Murray was employed by Ernst & Young
LLP. Mr. Murray is a certified public accountant.
Thomas M. O'Brien, age 33, is and has been a Vice President of Reit
Management since 1996. Mr. O'Brien is and also has been the Treasurer and Chief
Financial Officer of Hospitality Properties since 1996. Prior to 1996, Mr.
O'Brien was employed by Arthur Andersen LLP for eight years. Mr. O'Brien is a
certified public accountant.
Jennifer B. Clark, age 38, is a Vice President of Reit Management. Ms.
Clark joined Reit Management in July 1999 and will be primarily responsible for
leasing HRPT's office buildings. From 1994 to July 1999, Ms. Clark's principal
employment was as a partner specializing in real estate law at the law firm of
Sullivan & Worcester LLP, counsel to Reit Management and its affiliates,
including HRPT, Hospitality Properties and Senior Housing.
The Advisory Agreement. The following is a summary of Senior Housing's
advisory agreement with Reit Management. Although it is a summary of the
material terms, it does not contain all the information that may be important to
you. If you would like more information, you should read the entire agreement,
which has been filed with the SEC as an exhibit to the registration statement of
which this prospectus is a part.
Reit Management is required to use its best efforts to present Senior
Housing with a continuing and suitable investment program consistent with Senior
Housing's investment policies. Subject to its duty of overall management and
supervision, the board of trustees has delegated to Reit Management the power
and duty to:
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<PAGE>
o provide research and economic and statistical data in connection with
Senior Housing's investments and recommend changes in Senior Housing's
investment policies when appropriate;
o investigate and evaluate investment, financing and refinancing
opportunities and make recommendations concerning specific investments
to the trustees;
o manage Senior Housing's short-term investments including the
acquisition and sale of money market instruments;
o administer Senior Housing's day-to-day operations including the
leasing of Senior Housing's properties and relations with Senior
Housing's tenants;
o investigate, negotiate and enter contracts for the purchase, lease or
servicing of real estate and related interests, on Senior Housing's
behalf in furtherance of Senior Housing's investment objectives;
o investigate, negotiate and enter contracts for the financing and
refinancing of investments, on Senior Housing's behalf in furtherance
of the financing objectives of Senior Housing;
o act as attorney-in-fact or agent in acquiring and disposing of Senior
Housing's real estate investments, and in handling, prosecuting and
settling any of Senior Housing's claims;
o monitor Senior Housing's real property and other investments as would
be done by a prudent owner;
o monitor all third-party services provided to Senior Housing as would
be done by a prudent owner;
o administer the day-to-day bookkeeping and accounting functions as are
required for the management of Senior Housing's assets, contract for
audits and prepare or cause to be prepared reports required by any
governmental authority in connection with the conduct of Senior
Housing's business;
o provide office space, office equipment and the use of accounting or
computing equipment when required;
o provide personnel necessary for the performance of the foregoing
services; and
o upon request by the trustees, make reports of its performance of the
foregoing services.
In performing its services under the advisory agreement, Reit Management
may use facilities, personnel and support services of various of its affiliates.
Under the advisory agreement, Reit Management assumes no responsibility
other than to render the services described therein in good faith and is not
responsible for any action of the Senior Housing board of trustees in following
or declining to follow any advice or recommendation of Reit Management. In
addition, Senior Housing has agreed to indemnify Reit Management, its
shareholders, directors, officers, employees and affiliates against liabilities
relating to acts or omissions of Reit Management undertaken on Senior Housing's
behalf in good faith.
The initial term of the advisory agreement expires on December 31, 1999.
Renewals or extensions of the advisory agreement will be subject to the periodic
approval of a majority of the independent trustees. Under the advisory
agreement, Reit Management and Messrs. Portnoy and Martin have agreed not to
provide advisory services to, or serve as a director or officer of, any other
REIT which is principally engaged in the business of owning and leasing senior
apartments, congregate communities, assisted living or nursing home properties
or to make competitive direct investments in these types of properties, in each
case, without the consent of Senior Housing's independent trustees.
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<PAGE>
Compensation to Reit Management. The board of trustees, acting by a
majority vote of the independent trustees, will determine the amount of
compensation paid to Reit Management when it determines whether to renew, extend
or amend the advisory agreement, based on factors it deems appropriate. These
factors are expected to include:
o the size of the advisory fee in relation to the size, composition,
quality and profitability of Senior Housing's investments;
o the success of Reit Management in generating opportunities that meet
Senior Housing's investment objectives;
o the quality and extent of services and advice furnished by Reit
Management;
o the rates charged by others performing comparable services; and
o the costs of similar services incurred by other REITs.
The advisory agreement currently provides for an annual advisory fee and an
annual incentive fee. The advisory fee is payable monthly and reconciled
annually. The advisory fee is equal to the sum of 0.5% of the historical cost of
the assets transferred to Senior Housing by HRPT, plus 0.7% of Senior Housing's
real estate investments up to an additional $250 million made after the
completion of the spin-off, plus 0.5% of Senior Housing's real estate
investments exceeding these amounts. The annual incentive fee is equal to 15% of
the annual increase in Senior Housing's funds from operations per share times
the weighted average number of shares outstanding on a diluted basis in each
year; provided however, the annual incentive fee shall be no more than $0.02
times the weighted average number of shares. The annual incentive fees payable
to Reit Management will be paid in Senior Housing's shares at market value. No
incentive fees will be payable for 1999.
The advisory agreements currently in effect between Reit Management and
HRPT and between Reit Management and Hospitality Properties are substantially
similar to the advisory agreement between Reit Management and Senior Housing.
Upon completion of the spin-off, Reit Management's contract with HRPT will be
amended to make clear that HRPT's historical cost of real estate assets used to
calculate the advisory fees payable by HRPT will exclude HRPT's investment in
Senior Housing. Accordingly, the advisory fees paid by HRPT will decline by an
amount equal to the fees payable by Senior Housing, and the total fees payable
to Reit Management will be unchanged as a result of the spin-off.
Senior Housing is not expected to have any employees or administrative
officers separate from Reit Management. Services which might otherwise be
provided by employees will be provided to Senior Housing by employees of Reit
Management. Similarly, office space will be provided to Senior Housing by Reit
Management. Although Senior Housing does not expect to have significant general
and administrative operating expenses in addition to fees payable to Reit
Management, Senior Housing will be required to pay various other expenses,
including the costs and expenses of acquiring, owning and disposing of Senior
Housing's real estate interests. These costs and expenses include acquisition
and disposition diligence, audit and legal fees, the costs of borrowing money
and the costs of securities listing, transfer, registration, compliance with
public reporting requirements and shareholder communications generally. Also,
Senior Housing will pay the fees of its independent trustees.
Related Party Transactions
Senior Housing is currently a 100% owned subsidiary of HRPT. Senior
Housing's managing trustees, Barry M. Portnoy and Gerard M. Martin, also own
Reit Management, and act as managing trustees of HRPT. As a result of these
relationships, HRPT and Messrs. Portnoy and Martin have material interests in
transactions with Senior Housing, including the following:
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o Senior Housing is indebted to HRPT for $200 million. After the
spin-off Senior Housing will borrow $200 million under its bank credit
facility and pay this $200 million formation debt to HRPT.
o Upon completion of the spin-off, Reit Management will become Senior
Housing's investment advisor. Assuming the spin-off is completed on
September 30, 1999, the pro forma advisory fee that Senior Housing
will pay to Reit Management from the completion of the spin-off
through the initial term of the agreement on December 31, 1999, will
be approximately $1.0 million, or $3.9 million on an annualized basis.
HRPT's advisory fees to Reit Management will be reduced by the same
amount.
o After the spin-off, HRPT will retain 12.8 million of Senior Housing
shares. By retaining these shares, HRPT will be able to participate in
Senior Housing's future success through distributions and
appreciation, if any, in the price of these shares.
o Three of the eleven properties included in the Integrated Health
Services Lease No. 2 are leased by a corporation owned by Messrs.
Portnoy and Martin. Integrated manages these properties under
contracts which expire in 2006 and are renewable thereafter. Under
these management arrangements, Integrated is financially responsible
for the operation of these three properties and has guaranteed the
lease obligations due to Senior Housing. Integrated's obligations for
these leases are subject to cross default and cross collateralization
with other lease and mortgage obligations of Integrated to Senior
Housing included in Integrated's Lease No. 2. Messrs. Portnoy and
Martin have not received, and do not expect to receive, net economic
benefits from their ownership of this tenant entity, and they are not
obligated for these leases to Senior Housing. The arrangement by which
an entity owned by Messrs. Portnoy and Martin became a tenant for
these three properties was established in 1994 in order to facilitate
licensing for a predecessor of Integrated.
LEGAL PROCEEDINGS
Senior Housing has a limited operating history and is not currently a party
to any legal proceedings. Senior Housing is not aware of any material legal
proceeding affecting its properties for which it might become liable. Moreover,
HRPT has agreed to indemnify Senior Housing for any pending litigation affecting
the properties transferred to Senior Housing.
SENIOR HOUSING POLICIES
The following discussion sets forth Senior Housing's policies regarding
investments, dispositions, financings, conflicts of interest and other
activities. The board of trustees has set these policies and although there is
no current intention to do so, the board of trustees may amend or revise these
policies at any time without a vote of shareholders.
Investment Policies
Acquisitions. Senior Housing intends to buy additional senior apartments,
congregate communities, assisted living properties and nursing homes. It is
Senior Housing's policy to acquire assets primarily for income and secondarily
for their appreciation potential. In making future acquisitions, Senior Housing
will consider a range of factors including:
o the acquisition price of the proposed property;
o the estimated replacement cost of the proposed property;
o proposed lease terms;
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o the financial strength and operating reputation of the proposed
tenant;
o historical and projected cash flows of the property to be acquired;
o the location and competitive market environment of the proposed
property;
o the physical condition of the proposed property and its potential for
redevelopment or expansion; and
o the price segment and payment sources in which the proposed property
is operated.
Senior Housing intends to acquire properties which will enhance the
diversity of its portfolio in respect to tenants, types of services provided and
locations. Senior Housing has no policies which specifically limit the
percentage of its assets which may be invested in any individual property, in
any one type of property, in properties leased to any one tenant or in
properties leased to an affiliated group of tenants.
Other Investments in Real Estate. Senior Housing expects to emphasize
direct wholly owned investments in fee interests. However, circumstances may
arise in which Senior Housing may invest in leaseholds, joint ventures,
mortgages and other real estate interests. Senior Housing may invest in real
estate joint ventures if it concludes that by doing so it may benefit from the
participation of co-venturers or that Senior Housing's opportunity to
participate in the investment is contingent on the use of a joint venture
structure. Senior Housing may invest in participating, convertible or other
types of mortgages if it concludes that by doing so it may benefit from the cash
flow or appreciation in the value of a property which is not available for
purchase.
Disposition Policies
From time to time Senior Housing may consider the sale of one or more of
its properties. Future disposition decisions, if any, will be made based on a
number of factors including the following:
o the proposed sale price;
o the strategic fit of the property with the rest of Senior Housing's
portfolio;
o potential opportunities to increase revenues by reinvesting sale
proceeds;
o the potential for, or the existence of, any environmental or
regulatory problems affecting a particular property;
o Senior Housing's alternative capital needs; and
o the maintenance of Senior Housing's qualification as a REIT under the
Internal Revenue Code.
Integrated holds purchase options on four of the nursing homes included in
the Integrated Lease No. 2. Under the options, Integrated has the right to
purchase one of these properties per year commencing in February 2000. The
purchase option prices for these properties are approximately equal to their
historical costs. It is presently unknown if Integrated intends to purchase
these properties.
Financing Policies
Senior Housing has accepted a commitment for a bank credit facility. This
bank credit facility will enable Senior Housing to borrow up to $350 million.
The facility will require payment of interest only at LIBOR plus a premium. The
maturity of this facility will be in three years ending in late 2002. Two
hundred million dollars will be borrowed under this facility shortly after the
spin-off and used to pay Senior Housing formation debt to HRPT. The balance of
$150 million under this facility will be available to Senior Housing after the
spin-off to fund new acquisitions and for general business purposes. This bank
credit facility will be secured
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by first mortgages upon, and a collateral assignment of leases from, 18
properties owned by Senior Housing. This bank credit facility has several
covenants typically found in revolving loan facilities including covenants to
maintain a minimum net worth and minimum collateral value and which prohibit
Senior Housing from incurring debt in excess of 60% of its total capital. This
bank credit facility is expected to be fully documented before the spin-off is
completed. A copy of the commitment letter evidencing the terms of this credit
facility has been filed as an exhibit to the registration statement of which
this prospectus is part. If you want more information concerning this bank
credit facility you should refer to that filing.
Senior Housing intends to use this bank credit facility to fund future
acquisitions and for working capital. Periodically, Senior Housing expects to
repay amounts drawn under the bank credit facility with proceeds of equity and
long term debt offerings. Senior Housing's organizational documents do not limit
the amount of indebtedness it may incur. At present Senior Housing expects to
maintain a capital structure in which Senior Housing's debt will not exceed 60%
of its total capital. Senior Housing will consider future equity offerings when,
in its judgment, doing so will improve its capital structure without materially
adversely affecting the market value of its shares. During the next few years
Senior Housing expects to lower its target maximum debt to capitalization ratio
to 50% and to achieve an investment grade rating for its debt obligations; but
it does not expect this to happen until it has operated as an independent public
company for several years. Until it achieves an investment grade rating, Senior
Housing expects that the least costly debt capital available to it will be
secured debt and that most of its debt will be secured. In the future, Senior
Housing may modify its current financing policies in light of then current
economic conditions, relative costs of debt and equity capital, acquisition
opportunities and other factors; and its intended ratio of debt to total capital
may change.
Conflict of Interest Policies
Senior Housing has adopted several policies to mitigate existing and
potential conflicts of interest, as follows:
<TABLE>
<CAPTION>
Conflict Policy
- -------- ------
<S> <C>
Reit Management is also the investment advisor for Mr. Hegarty, HRPT's current President and Chief
HRPT and Hospitality Properties and has other Operating Officer, and Mr. Saini, HRPT's current
business interests. Messrs. Portnoy and Martin Martin have agreed not to provide advisory
will be managing trustees of Senior Housing, HRPT services Treasurer and Chief Financial Officer
and Hospitality Properties and have other business will resign from HRPT and assume similar positions
interests. Messrs. Hegarty and Saini will be at Senior Housing. They will devote approximately
officers of Senior Housing and Reit Management. 75% of their business time to Senior or serve as
Conflicts arise in the allocation of management Housing. Reit Management and Messrs. Portnoy and
time. trustees or officers of any other REIT which is
principally engaged in owning and leasing senior
apartments, congregate communities, assisted
living properties or nursing homes, or to make
competitive direct investments in these types of
properties, in each case, without the consent of
Senior Housing's independent trustees.
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<CAPTION>
Conflict Policy
- -------- ------
<S> <C>
Messrs. Portnoy and Martin own, and Messrs. The continuation of the advisory agreement and the
Hegarty and Saini are employed by, Reit fees payable to Reit Management will be subject to
Management. The fees paid by Senior Housing to periodic review and approval by Senior Housing's
Reit Management are based in part upon the size of independent trustees. The incentive fees payable
Senior Housing's investment portfolio. These to Reit Management will be based upon increases in
circumstances might provide an economic incentive FFO per share and will be paid in shares of Senior
for Reit Management and Messrs. Portnoy, Martin, Housing.
Hegarty and Saini to encourage Senior Housing's
investments to raise fees.
After the spin-off, HRPT will own 12.8 million HRPT does not intend to purchase additional shares
shares, 49%, of Senior Housing's shares. This will of Senior Housing. Over time, as Senior Housing
afford HRPT considerable influence over Senior issues shares to fund its growth, HRPT's ownership
Housing shareholder actions. Sales of these shares percentage will decline. So long as HRPT owns over
by HRPT could depress the market price of Senior 10% of Senior Housing's shares, no one will serve
Housing's shares. simultaneously as an independent trustee of both
Senior Housing and HRPT. HRPT has agreed to not
sell its Senior Housing shares for one year
following the spin-off without the consent of
Senior Housing's independent trustees.
Mr. Portnoy, one of the Senior Housing's managing Mr. Portnoy will not participate in the review or
trustees, was a partner and chairman of Sullivan & approval of any fees payable by Senior Housing to
Worcester, LLP, Senior Housing's counsel. Mr. Sullivan & Worcester, LLP.
Portnoy retired from that firm in 1997 and will
receive payments from that firm for the next five
years in respect of his retirement.
Other conflicts may develop from time to time. A majority of Senior Housing's board of trustees
will consist of independent trustees who are not
employees of Reit Management and who do not
participate in its day to day activities. No
trustee or officer will participate in decisions
made by Senior Housing in which he or she has a
material adverse interest. It is Senior Housing's
policy that officers and trustees will disclose
their adverse interests to the board of trustees,
and the board of trustees, acting without the
participation of any trustee holding the adverse
interest, will determine whether the adverse
interest is material. Reit Management and all the
trustees and officers of Senior Housing are
required by applicable laws to act in accordance
with their fiduciary responsibilities to Senior
Housing, and it is Senior Housing's policy that
those laws be followed.
</TABLE>
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Policies with Respect to Other Activities
Senior Housing expects to operate in a manner that will not subject it to
regulation under the Investment Company Act of 1940. Except for the possible
acquisition of other REITs which are engaged in similar businesses, Senior
Housing does not currently intend to invest in the securities of other companies
for the purpose of exercising control, to underwrite securities of other
companies or to trade actively in loans or other investments.
Senior Housing may make investments other than as previously described,
although it does not currently intend to do so. Senior Housing has authority to
repurchase or otherwise reacquire its shares or other securities it issues and
may do so in the future. In the future, Senior Housing may issue shares or other
securities in exchange for property. Also, although it has no current intention
to do so, Senior Housing may make loans to third parties, including to Senior
Housing's trustees and officers and to joint ventures in which it participates.
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MATERIAL PROVISIONS OF MARYLAND LAW AND OF
SENIOR HOUSING'S DECLARATION OF TRUST AND BYLAWS
Senior Housing is organized as a perpetual life Maryland real estate
investment trust. The following is a summary of Senior Housing's declaration of
trust and bylaws and several provisions of Maryland law. Because it is a
summary, it does not contain all the information that may be important to you.
If you want more information, you should read Senior Housing's entire
declaration of trust and bylaws, copies of which are exhibits to the
registration statement of which this prospectus is a part or refer to the
provisions of Maryland law.
Trustees
Senior Housing's declaration and bylaws provide that the board of trustees
will establish the number of trustees. There may not be less than three nor more
than seven trustees. In the event of a vacancy, a majority of the remaining
trustees will fill the vacancy, except that a majority of the entire board of
trustees must fill a vacancy resulting from an increase in the number of
trustees. Senior Housing's bylaws require that a majority of its trustees will
be independent trustees except for temporary periods due to vacancies.
Senior Housing's declaration of trust divides the board of trustees into
three classes. The initial term of the first class will expire in 2000; the
initial term of the second class will expire in 2001; and the initial term of
the third class will expire in 2002. Beginning in 2000, shareholders will elect
trustees of each class for three-year terms upon the expiration of their current
terms. Shareholders will elect only one class of trustees each year. Senior
Housing believes that classification of the board will help to assure the
continuity of Senior Housing's business strategies and policies. There will be
no cumulative voting in the election of trustees. Consequently, at each annual
meeting of shareholders, the holders of a majority of Senior Housing's shares
will be able to elect all of the successors of the class of trustees whose terms
expire at that meeting.
The classified board provision could have the effect of making the
replacement of incumbent trustees more time consuming and difficult. At least
two annual meetings of shareholders will generally be required to effect a
change in a majority of the board of trustees.
The declaration of trust provides that a trustee may be removed with or
without cause by the affirmative vote of at least two-thirds of the shares
entitled to be cast in the election of trustees. This provision precludes
shareholders from removing incumbent trustees unless they can obtain a
substantial affirmative vote of shares.
Advance Notice of Trustee Nominations and New Business
Senior Housing's bylaws provide that nominations of persons for election to
the board of trustees and proposals for business to be considered at shareholder
meetings may be made only in Senior Housing's notice of the meeting, by the
board of trustees, or by a shareholder who is entitled to vote at the meeting
and has complied with the advance notice procedures set forth in the bylaws.
Under Senior Housing's bylaws, a shareholder's notice of nominations for
trustee or other matters to be considered at a shareholders meeting must be
delivered to Senior Housing's secretary at Senior Housing's principal office not
later than the close of business on the 90th day and not earlier than the 120th
day prior to the first anniversary of the preceding year's annual meeting. In
the event that the date of the annual meeting is advanced by more than 30 days
or delayed by more than 60 days from the anniversary date, or if Senior Housing
has not previously held an annual meeting, a shareholder's notice must be
delivered not later than the later of 90 days prior to the annual meeting or the
10th day following the day on which Senior Housing first makes a public
announcement of the date of the meeting. Any notice from a shareholder of
nominations for trustee or other matters to be considered at a shareholder
meeting must contain the following:
o as to each person nominated for election as a trustee, all information
relating to the person that is required to be disclosed in
solicitations of proxies for election of trustees or otherwise
required by
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Regulation 14A under the Securities Exchange Act of 1934, together
with the nominee's written consent to being named in the proxy
statement as a nominee and to serving as a trustee if elected;
o as to other business that the shareholder proposes to bring before the
meeting, a brief description of the business, the reasons for
conducting the business and any material interest in the business of
the shareholder and of the beneficial owner, if any, on whose behalf
the proposal is made; and
o as to the shareholder giving the notice and the beneficial owner, if
any, on whose behalf the nomination or proposal is made, the name and
address of the shareholder and beneficial owner and the number of
Senior Housing's shares which (s)he or they own beneficially and of
record.
Meetings of Shareholders
Under Senior Housing's bylaws, Senior Housing's annual meeting of
shareholders will take place on the second Thursday of May of each year, unless
a different date is set by the board of trustees. All meetings of shareholders
may be called only by the board of trustees.
Liability and Indemnification of Trustees and Officers
To the maximum extent permitted by Maryland law, Senior Housing's
declaration of trust and bylaws include provisions limiting the liability of
Senior Housing's present and former trustees, officers and shareholders for
damages and obligating Senior Housing to indemnify them against any claim or
liability to which they may become subject by reason of their status or actions
as present or former Senior Housing trustees, officers or shareholders. Senior
Housing's bylaws also obligate it to pay or reimburse the people described above
for reasonable expenses in advance of final disposition of a proceeding.
Maryland law permits a real estate investment trust to indemnify and
advance expenses to its trustees, officers, employees and agents to the same
extent permitted by the Maryland General Corporation Law for directors and
officers of Maryland corporations. The Maryland corporation statute permits a
corporation to indemnify its present and former directors and officers against
judgments, penalties, fines, settlements and reasonable expenses incurred in
connection with any proceeding to which they may be made a party by reason of
their service in those capacities. However, a Maryland corporation is not
permitted to provide this type of indemnification if the following is
established:
o the act or omission of the director or officer was material to the
matter giving rise to the proceeding and was committed in bad faith or
was the result of active and deliberate dishonesty;
o the director or officer actually received an improper personal benefit
in money, property or services; or
o in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful.
The Maryland corporation statute permits a corporation to advance reasonable
expenses to a director or officer upon the corporation's receipt of the
following:
o a written affirmation by the director or officer of his good faith
belief that he has met the standard of conduct necessary for
indemnification by the corporation; and
o a written undertaking by him or on his behalf to repay the amount paid
or reimbursed by the corporation if it is ultimately determined that
this standard of conduct was not met.
The SEC has expressed the opinion that indemnification of trustees,
officers or persons otherwise controlling a company for liabilities arising
under the Securities Act of 1933 is against public policy and is therefore
unenforceable.
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Shareholder Liability
Under the Maryland REIT statute, a shareholder is not personally liable for
the obligations of a real estate investment trust solely as a result of his
status as a shareholder. Senior Housing's declaration of trust provides that no
shareholder will be liable for any debt, claim, demand, judgment or obligation
of any kind of, against or with respect to, Senior Housing by reason of being a
shareholder. Despite these facts, Senior Housing's legal counsel has advised it
that in some jurisdictions the possibility exists that shareholders of a trust
entity such as Senior Housing may be held liable for acts or obligations of the
trust. While Senior Housing intends to conduct its business in a manner designed
to minimize potential shareholder liability, it can give no assurance that you
can avoid liability in all instances in all jurisdictions. Senior Housing's
trustees do not intend to provide insurance covering these risks to Senior
Housing's shareholders.
Maryland Asset Requirements
To maintain Senior Housing's qualification as a real estate investment
trust, the Maryland REIT statute requires that at least 75% of the value of
Senior Housing's assets be real estate, mortgages or mortgage-related
securities, government securities, cash and cash equivalent items, including
short-term securities and receivables. The Maryland REIT statute also prohibits
Senior Housing from using or applying land for farming, agricultural,
horticultural or similar purposes. These provisions of the Maryland REIT statute
have been repealed effective October 1, 1999.
Transactions with Affiliates
Senior Housing's declaration of trust allows it to enter into contracts and
transactions of any kind with any person, including any of Senior Housing's
trustees, officers, employees or agents or any person affiliated with them.
Other than general legal principles applicable to self-dealing by fiduciaries,
there are no prohibitions in Senior Housing's declaration or bylaws which would
prohibit dealings between Senior Housing and its affiliates.
Voting by Shareholders
Whenever shareholders are required or permitted to take any action by a
vote, the action may only be taken by a vote at a shareholders meeting. Under
Senior Housing's declaration and bylaws shareholders do not have the right to
take any action by written consents instead of a vote.
Restrictions on Transfer of Shares
Senior Housing's declaration of trust restricts the amount of shares that
individual shareholders may own. These restrictions are intended to assist with
REIT compliance under the Internal Revenue Code and otherwise to promote Senior
Housing's orderly governance. These restrictions do not apply to HRPT, Reit
Management or their affiliates. All certificates evidencing Senior Housing
shares will bear a legend referring to these restrictions.
Senior Housing's declaration of trust provides that no person may own, or
be deemed to own by virtue of the attribution provisions of the Internal Revenue
Code, more than 9.8% of the number or value of Senior Housing's outstanding
shares. Senior Housing's declaration also prohibits any person from beneficially
or constructively owning shares if that ownership would result in Senior Housing
being closely held under Section 856(h) of the Internal Revenue Code or would
otherwise cause it to fail to qualify as a REIT.
Senior Housing's board of trustees, in its discretion, may exempt a
proposed transferee from the share ownership limitation. So long as the board of
trustees determines that it is in Senior Housing's best interest to qualify as a
REIT, the board may not grant an exemption if the exemption would result in
Senior Housing failing to qualify as a REIT. In determining whether to grant an
exemption, the board of trustees may consider, among other factors, the
following:
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o the general reputation and moral character of the person requesting an
exemption;
o whether the person's ownership of shares would adversely affect Senior
Housing's ability to acquire additional properties; and
o whether granting an exemption would adversely affect any of Senior
Housing's existing contractual arrangements or business policies.
In addition, the board of trustees may require rulings from the Internal Revenue
Service, opinions of counsel, affidavits, undertakings or agreements it deems
advisable in order to make the foregoing decisions.
If a person attempts a transfer of Senior Housing's shares in violation of
the ownership limitations described above, then that number of shares which
would cause the violation will be automatically transferred to a trust for the
exclusive benefit of one or more charitable beneficiaries designated by Senior
Housing. The prohibited owner will not acquire any rights in these excess
shares, will not benefit economically from ownership of any excess shares, will
have no rights to distributions and will not possess any rights to vote. This
automatic transfer will be deemed to be effective as of the close of business on
the business day prior to the date of the violative transfer.
Within 20 days of receiving notice from Senior Housing that its shares have
been transferred to an excess share trust, the excess share trustee will sell
the shares held in the excess share trust to a person designated by the excess
share trustee whose ownership of the shares will not violate the ownership
limitations set forth in Senior Housing's declaration of trust. Upon this sale,
the interest of the charitable beneficiary in the shares sold will terminate and
the excess share trustee will distribute the net proceeds of the sale to the
prohibited owner and to the charitable beneficiary as follows:
o The prohibited owner will receive the lesser of:
(1) the price paid by the prohibited owner for the shares or, if the
prohibited owner did not give value for the shares in connection
with the event causing the shares to be held in the excess share
trust, e.g., a gift, devise or other similar transaction, the
market price of the shares on the day of the event causing the
shares to be transferred to the excess share trust; and
(2) the net price received by the excess share trustee from the sale
of the shares held in the excess share trust.
o Any net sale proceeds in excess of the amount payable to the
prohibited owner shall be paid to the charitable beneficiary.
If, prior to Senior Housing's discovery that shares of beneficial interest
have been transferred to the excess share trust, a prohibited owner sells those
shares, then:
(1) those shares will be deemed to have been sold on behalf of the
excess share trust; and
(2) to the extent that the prohibited owner received an amount for
those shares that exceeds the amount that the prohibited owner
was entitled to receive from a sale by an excess share trustee,
the prohibited owner must pay the excess to the excess share
trustee upon demand.
Also, shares of beneficial interest held in the excess share trust will be
offered for sale to Senior Housing, or its designee, at a price per share equal
to the lesser of:
(1) the price per share in the transaction that resulted in the
transfer to the excess share trust or, in the case of a devise or
gift, the market price at the time of the devise or gift; and
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(2) the market price on the date Senior Housing or its designee
accepts the offer.
Senior Housing will have the right to accept the offer until the excess share
trustee has sold the shares held in the excess share trust. The net proceeds of
the sale to Senior Housing will be distributed similar to any other sale by an
excess share trustee.
Every owner of more than 5% of all classes or series of Senior Housing's
shares is required to give written notice to Senior Housing within 30 days after
the end of each taxable year stating the name and address of the owner, the
number of shares of each class and series of Senior Housing's shares which the
owner beneficially owns, and a description of the manner in which those shares
are held. If the Internal Revenue Code or applicable tax regulations specify a
threshold below 5%, this notice provision will apply to those persons who own
Senior Housing's shares of beneficial interest at the lower percentage. In
addition, each shareholder is required to provide Senior Housing upon demand
with any additional information that it may request in order to determine Senior
Housing's status as a REIT, to determine Senior Housing's compliance with the
requirements of any taxing authority or government and to determine and ensure
compliance with the foregoing share ownership limitations.
The restrictions described above will not preclude the settlement of any
transaction entered into through the facilities of the NYSE or any other
national securities exchange or automated inter-dealer quotation system. The
declaration of trust provides, however, that the fact that the settlement of any
transaction occurs will not negate the effect of any of the foregoing
limitations and any transferee in this kind of transaction will be subject to
all of the provisions and limitations described above.
Business Combinations
The Maryland corporation statute contains a provision which regulates
business combinations with interested shareholders. This provision applies to
Maryland real estate investment trusts like Senior Housing. Under the Maryland
corporation statute, business combinations such as mergers, consolidations,
share exchanges and the like between a Maryland real estate investment trust and
an interested shareholder are prohibited for five years after the most recent
date on which the shareholder becomes an interested shareholder. Under the
statute the following persons are deemed to be interested shareholders:
o any person who beneficially owns 10% or more of the voting power of
the trust's shares;
o an affiliate or associate of the trust who, at any time within the
two-year period prior to the date in question, was the beneficial
owner of 10% or more of the voting power of the then outstanding
voting shares of the trust; or
o an affiliate of an interested shareholder.
After the five-year prohibition period has ended, a business combination
between a trust and an interested shareholder must be recommended by the board
of trustees of the trust and must receive the following shareholder approvals:
o the affirmative vote of at least 80% of the votes entitled to be cast;
and
o the affirmative vote of at least two-thirds of the votes entitled to
be cast by holders of shares other than shares held by the interested
shareholder with whom or with whose affiliate or associate the
business combination is to be effected.
The second shareholder approval is not required if the trust's shareholders
receive the minimum price set forth in the Maryland corporation statute for
their shares and the consideration is received in cash or in the same form as
previously paid by the interested shareholder for its shares.
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The foregoing provisions of the Maryland corporation statute do not apply,
however, to business combinations that are approved or exempted by the board of
trustees of the trust prior to the time that the interested shareholder becomes
an interested shareholder. Senior Housing's board of trustees has adopted a
resolution that any business combination between Senior Housing and any other
person is exempted from the provisions of the Maryland corporation statute
described in the preceding paragraphs, provided that the business combination is
first approved by the board of trustees, including the approval of a majority of
the members of the board of trustees who are not affiliates or associates of the
acquiring person. This resolution, however, may be altered or repealed in whole
or in part at any time.
Control Share Acquisitions
The Maryland corporation statute contains a provision which regulates
control share acquisitions. This provision also applies to Maryland real estate
investment trusts. The Maryland corporation statute provides that control shares
of a Maryland real estate investment trust acquired in a control share
acquisition have no voting rights except to the extent that the acquisition is
approved by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares of beneficial interest owned by the acquiror, by officers or by
trustees who are employees of the trust. Control shares are voting shares of
beneficial interest which, if aggregated with all other shares of beneficial
interest previously acquired by the acquiror, or in respect of which the
acquiror is able to exercise or direct the exercise of voting power, would
entitle the acquiror to exercise voting power in electing trustees within one of
the following ranges of voting power:
o one-fifth or more but less than one-third,
o one-third or more but less than a majority, or
o a majority or more of all voting power.
An acquiror must obtain the necessary shareholder approval each time he acquires
control shares in an amount sufficient to cross one of the thresholds noted
above.
Control shares do not include shares which the acquiring person is entitled
to vote as a result of having previously obtained shareholder approval by virtue
of a revocable proxy. The Maryland corporation statute provides a list of
exceptions from the definition of control share acquisition.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of the conditions set forth in the statute, including an
undertaking to pay expenses, may compel the board of trustees of the trust to
call a special meeting of shareholders to be held within 50 days of demand to
consider the voting rights of the shares. If no request for a meeting is made,
the trust may itself present the matter at any shareholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then
the trust may redeem any or all of the control shares for fair value determined
as of the date of the last control share acquisition by the acquiror or of any
meeting of shareholders at which the voting rights of those shares are
considered and not approved. The right of the trust to redeem any or all of the
control shares is subject to conditions and limitations listed in the statute.
The trust may not redeem shares for which voting rights have previously been
approved. Fair value is determined without regard to the absence of voting
rights for the control shares. If voting rights for control shares are approved
at a shareholders meeting and the acquiror becomes entitled to vote a majority
of the shares entitled to vote, all other shareholders may exercise appraisal
rights. The fair value of the shares as determined for purposes of these
appraisal rights may not be less than the highest price per share paid by the
acquiror in the control share acquisition.
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The control share acquisition statute does not apply to the following:
o shares acquired in a merger, consolidation or share exchange if the
trust is a party to the transaction; or
o acquisitions approved or exempted by a provision in the declaration of
trust or bylaws of the trust adopted before the acquisition of shares.
Senior Housing's bylaws contain a provision exempting any and all
acquisitions by any person of Senior Housing's shares of beneficial interest
from the control share acquisition statute. This provision may be amended or
eliminated at any time in the future.
Amendment to the Declaration of Trust, Dissolution and Mergers
Under the Maryland REIT statute, a real estate investment trust generally
cannot dissolve, amend its declaration of trust or merge, unless these actions
are approved by at least two-thirds of all shares entitled to be cast on the
matter. The statute allows a trust's declaration of trust to set a lower
percentage, so long as the percentage is not less than a majority. Senior
Housing's declaration of trust provides for approval of any of the foregoing
actions by a majority of shares entitled to vote on these actions provided the
action in question has been approved by the Senior Housing board of trustees.
The declaration of trust further provides that if permitted in the future by
Maryland law, the majority required to approve any of the foregoing actions will
be the majority of shares voted. Under the Maryland REIT statute, a declaration
of trust may permit the trustees by a two-thirds vote to amend the declaration
of trust from time to time to qualify as a real estate investment trust under
the Internal Revenue Code or the Maryland REIT statute without the affirmative
vote or written consent of the shareholders. Senior Housing's declaration of
trust permits this type of action by the board of trustees. The declaration of
trust also permits the board of trustees to effect changes in Senior Housing's
unissued shares, as described more fully below, and to change the company's name
without shareholder approval, and provides that, to the extent permitted in the
future by Maryland law, the board of trustees may amend any other provision of
the declaration of trust without shareholder approval.
Anti-takeover Effect of Maryland Law and of the Declaration of Trust and Bylaws
The following provisions in Senior Housing's declaration and bylaws and in
Maryland law could delay or prevent a change in control of Senior Housing:
o the limitation on ownership and acquisition of more than 9.8% of
Senior Housing shares;
o the classification of the board of trustees into classes and the
election of each class for three-year staggered terms;
o the requirement of a two-thirds majority vote of shareholders for
removal of trustees;
o the facts that the board can increase the size of the board to create
a vacancy and fill it and that shareholders are not entitled to act
without a meeting;
o the provision that only the board of trustees may call meetings of
shareholders;
o the advance notice requirements for shareholder nominations for
trustees and other proposals;
o the control share acquisitions provisions of Maryland law, if the
applicable provisions in Senior Housing's bylaws are rescinded;
o the business combination provisions of Maryland law, if the applicable
resolution of the board of trustees is rescinded or if the board of
trustees' approval of a combination is not obtained; and
o the ability of the board of trustees to authorize and issue additional
shares, including additional classes of shares with rights defined at
the time of issuance, without shareholder approval.
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DESCRIPTION OF SENIOR HOUSING SECURITIES
The following is a summary description of the material terms of Senior
Housing's shares of beneficial interest. Because it is a summary, it does not
contain all of the information that may be important to you. If you want more
information, you should read Senior Housing's declaration of trust and bylaws,
copies of which are exhibits to the registration statement of which this
prospectus is a part.
General
Senior Housing's declaration of trust provides that it may issue up to 50
million shares of beneficial interest, $0.01 par value per share, all of which
have been classified as common shares. Upon completion of the spin-off, 26
million common shares will be issued and outstanding.
As permitted by the Maryland REIT statute, Senior Housing's declaration of
trust also contains a provision permitting the board of trustees, without any
action by Senior Housing's shareholders, to amend the declaration of trust to
increase or decrease the total number of shares of beneficial interest, to issue
new and different classes of shares in any amount or to reclassify any unissued
shares into other classes or series of classes that it chooses. Senior Housing
believes that giving these powers to its board of trustees will provide it with
increased flexibility in structuring possible future financings and acquisitions
and in meeting other business needs which might arise. Although the board of
trustees has no intention at the present time of doing so, it could authorize
Senior Housing to issue a class or series that could, depending upon the terms
of the class or series, delay or prevent a change in control of Senior Housing.
Common Shares
All Senior Housing common shares to be distributed in the spin-off will be
duly authorized, fully paid and nonassessable. Subject to the preferential
rights of any other class or series of shares which may be issued and to the
provisions of the declaration of trust regarding the restriction of the
ownership of shares of beneficial interest, holders of common shares are
entitled to the following:
o to receive distributions on their shares if, as and when authorized
and declared by Senior Housing's board of trustees out of assets
legally available for distribution; and
o to share ratably in Senior Housing's assets legally available for
distribution to its shareholders in the event of its liquidation,
dissolution or winding up after payment of or adequate provision for
all of its known debts and liabilities.
Subject to the provisions of the declaration of trust regarding the
restriction on the transfer of shares of beneficial interest, each outstanding
common share entitles the holder to one vote on all matters submitted to a vote
of shareholders, including the election of trustees.
Holders of common shares have no preference, conversion, exchange, sinking
fund, redemption or appraisal rights.
Shareholders will have no preemptive rights to subscribe for any of Senior
Housing's securities. Subject to the provisions of the declaration of trust
regarding the restriction on ownership of shares of beneficial interest, common
shares will have equal distribution, liquidation and other rights.
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SENIOR HOUSING PRINCIPAL SHAREHOLDERS
The following table displays information regarding the beneficial ownership
of Senior Housing's common shares by each person Senior Housing knows to own
beneficially more than 5% of its outstanding common shares, each of Senior
Housing's trustees and executive officers and all of Senior Housing's trustees
and executive officers as a group. Unless otherwise noted, each person or entity
has sole voting and investment power with respect to all shares shown.
<TABLE>
<CAPTION>
Beneficial Ownership Beneficial Ownership
Before The Spin-Off After The Spin-Off(5)
-------------------------- --------------------------
Number Number
Name and Address(1) of Shares Percent of Shares Percent
- ------------------- ---------- ------- ------------ ---------
<S> <C> <C> <C> <C>
HRPT........................................ 26,000,000 100% 12,809,237 49.3%
Barry M. Portnoy(2)......................... -- -- 12,927,159 49.7%
Gerard M. Martin(2)......................... -- -- 12,927,159 49.7%
Bruce M. Gans, M.D.......................... -- -- 200 *
Arthur G. Koumantzelis...................... -- -- 319 *
David J. Hegarty(3)......................... -- -- 2,670 *
Ajay Saini(4)............................... -- -- 1,352 *
All Trustees and executive officers as a
group (six persons)......................... -- -- 12,936,185 49.8%
- -------------------------
<FN>
* Less than 1%.
(1) The address of HRPT is 400 Centre Street, Newton, Massachusetts 02458. The address of each other named
person or entity is c/o Senior Housing Properties Trust, 400 Centre Street, Newton, Massachusetts 02458.
(2) Messrs. Portnoy and Martin are each managing trustees of HRPT. Accordingly, Messrs. Portnoy and Martin
may be deemed to have beneficial ownership of the shares indicated in the table as owned by HRPT. Messrs.
Portnoy and Martin indirectly will jointly own 113,437 shares. Each of Messrs. Portnoy and Martin
individually own 4,485 shares.
(3) Includes 230 shares held jointly by Mr. Hegarty and his wife.
(4) Includes 50 shares in Mr. Saini's IRA account and two shares as custodian for Mr. Saini's minor daughter.
(5) The number of shares and percentages presented assumes that 131.9 million HRPT shares are outstanding on
the record date. If all of the outstanding HRPT convertible subordinated debentures were converted at $18
per share to HRPT common shares on or prior to the record date, the number of shares and applicable
percentages would be as follows: HRPT, 11.7 million shares (44.9%); Barry M. Portnoy, 11.8 million shares
(45.3%); Gerard M. Martin 11.8 million shares (45.3%); and all trustees and executive officers as a group
(six persons), 11.8 million shares (45.4%).
</FN>
</TABLE>
FEDERAL INCOME TAX AND ERISA CONSEQUENCES
General
The following summary description of federal income tax and ERISA
consequences relating to HRPT, Senior Housing and their respective shareholders
supplements the description of these matters in our annual report on Form 10-K
for the year ended December 31, 1998. Sullivan & Worcester LLP, Boston,
Massachusetts, has rendered a legal opinion that the discussions in this section
are accurate in all material respects and fairly summarize the federal income
tax and ERISA issues of the spin-off, and the opinions of counsel referred to in
this section represent Sullivan & Worcester LLP's opinions on those subjects.
Specifically, subject to the qualifications and assumptions contained in its
opinions and in this prospectus, Sullivan and Worcester LLP has rendered
opinions to the effect that:
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o we have been organized and have qualified as a REIT under the Internal
Revenue Code of 1986, as amended, for our 1987 through 1998 taxable
years, and our current investments and plan of operation will enable
us to continue to meet the requirements for qualification and taxation
as a REIT under the Internal Revenue Code; our actual qualification as
a REIT, however, will depend upon our ability to meet, and our
meeting, through actual annual operating results and distributions,
the various REIT qualification tests imposed under the Internal
Revenue Code;
o under the Department of Labor's ERISA "plan assets" regulations, our
common shares are publicly offered securities and our assets will not
be deemed plan assets under ERISA;
o for its 1999 taxable year that commences on the date of the spin-off,
Senior Housing will be organized as a REIT under the Internal Revenue
Code, and its current investments and plan of operation will enable it
to meet the requirements for qualification and taxation as a REIT
under the Internal Revenue Code; Senior Housing's actual qualification
as a REIT, however, will depend upon its ability to meet, and its
meeting, through actual annual operating results and distributions,
the various REIT qualification tests imposed under the Internal
Revenue Code; and
o under the plan assets regulations, Senior Housing's common shares will
be publicly offered securities and its assets will not be deemed plan
assets under ERISA.
These opinions are conditioned upon the assumption that our and Senior Housing's
leases, our and Senior Housing's declarations of trust and Bylaws, the
transaction agreement, and all other legal documents to which we or Senior
Housing are or have been a party to have been and will be complied with by all
parties to these documents, upon the accuracy and completeness of the factual
matters described in this prospectus, and upon factual representations we and
Senior Housing have made. The opinions of Sullivan & Worcester LLP are based on
the law as it exists today, but the law may change in the future, possibly with
retroactive effect. Also, an opinion of counsel is not binding on the Internal
Revenue Service or the courts, and the IRS or a court could take a position
different from that expressed by counsel.
The following summary of federal income tax and ERISA consequences is based
on existing law, and is limited to investors who own our shares and Senior
Housing shares as investment assets rather than as inventory or as property used
in a trade or business. The summary does not discuss the particular tax
consequences that might be relevant to you if you are subject to special rules
under the federal income tax law, for example if you are:
o a bank, life insurance company, regulated investment company, or other
financial institution,
o a broker or dealer in securities or foreign currency,
o a person who has a functional currency other than the U.S. dollar,
o a person who acquires our shares or Senior Housing shares in
connection with his employment or other performance of services,
o a person subject to alternative minimum tax,
o a person who owns our shares or Senior Housing shares as part of a
straddle, hedging transaction, or conversion transaction, or
o except as specifically described in the following summary, a
tax-exempt entity or a foreign person.
The sections of the Internal Revenue Code that govern the federal income tax
qualification and treatment of a REIT and its shareholders are complex. This
presentation is a summary of applicable Internal Revenue Code provisions,
related rules and regulations and administrative and judicial interpretations,
all of which are subject
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to change, possibly with retroactive effect. Future legislative, judicial, or
administrative actions or decisions could affect the accuracy of statements made
in this summary. Neither we nor Senior Housing has sought a ruling from the IRS
with respect to any matter described in this summary, and neither we nor Senior
Housing can assure you that the IRS or a court will agree with the statements
made in this summary. In addition, the following summary is not exhaustive of
all possible tax consequences, and does not discuss any state, local, or foreign
tax consequences. For all these reasons, we urge you and any prospective
acquiror of Senior Housing shares to consult with a tax advisor about the
federal income tax and other tax consequences of the acquisition, ownership and
disposition of our shares, as well as the acquisition, ownership and disposition
of Senior Housing shares.
Federal income tax consequences may differ depending on whether or not a
person is a "U.S. person." For purposes of this summary, a U.S. person for
federal income tax purposes is:
o a citizen or resident of the United States, including an alien
individual who is a lawful permanent resident of the United States or
meets the substantial presence residency test under the federal income
tax laws,
o a corporation, partnership or other entity treated as a corporation or
partnership for federal income tax purposes, that is created or
organized in or under the laws of the United States, any state thereof
or the District of Columbia, unless otherwise provided by Treasury
regulations,
o an estate the income of which is subject to federal income taxation
regardless of its source, or
o a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or
more United States persons have the authority to control all
substantial decisions of the trust, or electing trusts in existence on
August 20, 1996 to the extent provided in Treasury regulations,
whose status as a U.S. person is not overridden by an applicable tax treaty.
Federal Income Tax Consequences of the Spin-Off to Our Shareholders
In General. Our distribution of Senior Housing shares in the spin-off will
affect us and our shareholders in the same manner as any other distribution of
cash or property we make. These tax consequences are summarized below:
o We generally are not subject to tax on our net income to the extent we
distribute it to our shareholders.
o Distributions to you out of our current or accumulated earnings and
profits that we do not designate as capital gain dividends generally
will be taken into account by you as ordinary income dividends. To the
extent of our net capital gain for the taxable year, we may designate
dividends as capital gain dividends that will be taxable to you as
long-term capital gain.
o Distributions in excess of our current and accumulated earnings and
profits will not be taxable to you to the extent that they do not
exceed your adjusted basis in our shares, but rather will reduce the
adjusted basis in those shares.
o Distributions in excess of our current and accumulated earnings and
profits that exceed your adjusted basis in our shares generally will
be taxable as capital gain from the sale of those shares.
o Our current earnings and profits for a year will be allocated among
each of the distributions for that year, in proportion to the amount
of each distribution.
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o Because we are a REIT, neither our ordinary income dividends nor our
capital gain dividends will qualify for any dividends received
deduction for our corporate shareholders.
Accordingly, the spin-off of Senior Housing shares will be treated as a
distribution by us to our shareholders in the amount of the fair market value of
the Senior Housing shares distributed. We expect that a portion of this
distribution will be taxable to you as a dividend and a portion will be treated
as a tax-free reduction in your adjusted basis in our shares. You will have a
tax basis in the Senior Housing shares you receive equal to their fair market
value at the time of the spin-off, and your holding period in those shares
commences on the day after the spin-off.
We believe that for all federal income tax purposes each Senior Housing
share may be properly valued on the distribution date as the average of the
reported high and low trading prices for Senior Housing shares in the public
market on that date, and we will perform all our tax reporting, including
statements supplied to you and to the IRS, on the basis of this average price,
called the distribution price. However, it is possible that for federal income
tax purposes the fair market value of a Senior Housing share that we distribute
will differ from the fair market value of a Senior Housing share received by you
in the distribution. Because of the factual nature of the value of the Senior
Housing shares distributed by us and the value of the Senior Housing shares
received by each of you, our counsel is unable to render an opinion on these
values.
As described in more detail below, although existing authority does not
provide definitive guidance on valuing Senior Housing shares or on whether
Section 351(a) applies to the spin-off, on the basis of our valuation
assumptions and our counsel's opinion that Section 351(a) likely applies, we
will:
o recognize a significant portion of the gains, but none of the losses,
on Senior Housing's properties and other assets; and
o recognize gains but not losses on our distribution of Senior Housing
shares.
We will perform all our tax reporting, including statements sent to the IRS and
to you, on this basis, but we could in the future be required to amend these tax
reports if the IRS successfully challenges our valuation assumptions or our
counsel's interpretation of the federal income tax laws . Gains that we
recognize in the spin-off will increase our 1999 current earnings and profits,
and this will increase the total amount of our 1999 distributions, including the
distribution of Senior Housing shares, that is taxable as a dividend to you.
Computing the amount of these gains and the additional taxable dividend amount
is a complex calculation which requires information, including the distribution
price for Senior Housing shares at the time of the spin-off and market values
for Senior Housing properties and other assets at the time of the spin-off, that
is not available at this time. Based on our current market value assumptions, on
the total number of our shares presently outstanding, and on an assumed
distribution price for Senior Housing shares of $24 per share, we estimate that
if you own one of our common shares for the entire 1999 calendar year, then as a
result of the Senior Housing spin-off you will have an additional taxable
dividend of approximately $1.20 per share. For higher Senior Housing share
distribution prices, the additional taxable dividend amount would be higher, and
for lower distribution prices the additional taxable dividend amount would be
lower. Based on our current assumptions, we estimate that the additional taxable
dividend may fluctuate by up to $0.20 per HRPT share for each $1 fluctuation in
the distribution price for Senior Housing shares. However, a definitive
additional taxable dividend computation will not be possible until after the
spin-off.
To the extent we can, we intend to designate a portion of any additional
taxable dividend as a capital gain dividend that generally will be subject to
tax at the maximum capital gain rates of 20% and 25% in the case of our
noncorporate shareholders.
Taxation of Tax-Exempt Entities. Tax-exempt entities are generally not
subject to federal income taxation except to the extent of their "unrelated
business taxable income," often referred to as UBTI, as defined in Section
512(a) of the Internal Revenue Code. As with our other distributions, the
distribution of Senior Housing shares to you if you are a tax-exempt entity
should generally not constitute UBTI, provided that you
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have not financed the acquisition of our shares with acquisition indebtedness
within the meaning of Section 514 of the Internal Revenue Code. However, if you
are a tax-exempt pension trust, including a so-called 401(k) plan but excluding
an individual retirement account or government pension plan, that owns more than
10% by value of a pension-held REIT, then you may have to report a portion of
the dividends that you receive from the REIT as UBTI. Although we cannot provide
complete assurance on this matter, we believe that we have not been and will not
become a pension-held REIT.
Taxation of Non-U.S. Persons. If you are a non-U.S. person, the spin-off of
Senior Housing shares will generally be taxable to you in the same manner as any
other distribution of cash or property that we make to you. The rules governing
the federal income taxation of non-U.S. persons are complex, and the following
discussion is intended only as a summary of these rules. If you are a non-U.S.
person, we urge you to consult with your own tax advisor to determine the impact
of federal, state, local, and foreign tax laws, including any tax return filing
and other reporting requirements, with respect to the spin-off of Senior Housing
shares and your investment in our shares.
You will generally be subject to regular federal income tax in the same
manner as a U.S. person with respect to the spin-off of Senior Housing shares
and your investment in our shares, if this investment is effectively connected
with your conduct of a trade or business in the United States. In addition, if
you are a corporate shareholder, your income that is effectively connected with
a trade or business in the United States may also be subject to the 30% branch
profits tax under Section 884 of the Internal Revenue Code, which is payable in
addition to regular federal corporate income tax. The balance of this summary
addresses only those non-U.S. persons whose investment in our common shares is
not effectively connected with the conduct of a trade or business in the United
States.
We are not at this time designating the distribution of Senior Housing
shares as a capital gain dividend that is subject to 35% withholding for
non-U.S. persons, and accordingly the 30% or applicable lower treaty rate
withholding will be imposed upon the fair market value of Senior Housing shares
that we distribute to you. We or other applicable withholding agents will
collect the amount required to be withheld by reducing to cash for remittance to
the IRS a sufficient portion of the Senior Housing shares that you would
otherwise receive, and you will bear the brokerage or other costs for this
withholding procedure. Because we cannot determine our current and accumulated
earnings and profits until the end of our taxable year, withholding at the rate
of 30% or applicable lower treaty rate will be imposed on the gross fair market
value of the Senior Housing shares distributed to you. Notwithstanding this and
other withholding on distributions in excess of our current and accumulated
earnings and profits, these distributions are a nontaxable return of capital to
the extent that they do not exceed your adjusted basis in our shares, and the
nontaxable return of capital will reduce your adjusted basis in these shares. To
the extent that distributions in excess of current and accumulated earnings and
profits exceed your adjusted basis in our shares, the distributions will give
rise to tax liability only if you would otherwise be subject to tax on any gain
from the sale or exchange of our shares. Your gain from the sale or exchange of
our shares will not be taxable if:
o our shares are "regularly traded" within the meaning of Treasury
regulations under Section 897 of the Internal Revenue Code and you
have at all times during the preceding five years owned 5% or less by
value of our outstanding shares, or
o we are a "domestically controlled REIT" within the meaning of Section
897 of the Internal Revenue Code.
Although we cannot provide complete assurance on this matter, we believe that
our shares are regularly traded and that we are a domestically controlled REIT.
You may seek a refund of amounts withheld on distributions to you in excess of
our current and accumulated earnings and profits, provided that you furnish the
required information to the IRS.
We expect that a portion of some or all of our 1999 distributions will be
treated for federal income tax purposes as attributable to our dispositions of
United States real property interests. To the extent that a portion
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of any of our distributions, including the distribution of Senior Housing
shares, is attributable to our disposition of United States real property
interests, you will be subject to tax on this portion as though it were gain
effectively connected with a trade or business in the United States .
Accordingly, you will be taxed on these amounts at the capital gain rates
applicable to a U.S. person, subject to any applicable alternative minimum tax
and to a special alternative minimum tax in the case of nonresident alien
individuals; you will be required to file a United States federal income tax
return reporting these amounts, even if applicable withholding is imposed as
described below; and if you are a corporation, you may owe the 30% branch
profits tax under Section 884 of the Internal Revenue Code in respect of these
amounts.
We and other applicable withholding agents will be required to withhold
from distributions to shareholders that are non-U.S. persons, and to remit to
the IRS, 35% of the maximum amount of any distribution that could be designated
by us as a capital gain dividend. In addition, if we designate prior
distributions as capital gain dividends, then subsequent distributions up to the
amount of the designated prior distributions will be treated as capital gain
dividends for purposes of the 35% withholding rule. After the close of our 1999
taxable year, we expect to designate to the maximum extent possible a portion of
one or more of our 1999 distributions as capital gain dividends, and accordingly
35% withholding will be imposed upon our subsequent distributions to non-U.S.
persons to that extent.
The amount of any tax withheld on distributions to you is creditable
against your United States federal income tax liability, and any amount of tax
withheld in excess of that tax liability may be refunded if you file an
appropriate claim for refund with the IRS. New Treasury regulations will alter
reporting of and withholding on distributions paid to you with respect to our
shares. Under recent administrative guidance, these new Treasury regulations are
to be effective generally for payments made after December 31, 2000. Among other
changes, the new Treasury regulations generally require non-U.S. persons and
withholding agents to use the new IRS Forms W-8 series, rather than the
predecessor IRS Forms W-8, 1001 and 4224.
Federal Income Tax Consequences of the Spin-Off to HRPT
The Internal Revenue Code imposes upon us various REIT qualification tests
comparable to those imposed upon Senior Housing and discussed below. While we
believe that we have operated and will operate in a manner to satisfy the
various REIT qualification tests, counsel has not reviewed and will not review
our compliance with these tests on a continuing basis. The following discussion
summarizes REIT qualification and taxation issues under the Internal Revenue
Code implicated by our spin-off of Senior Housing shares.
In General. So long as Senior Housing and its subsidiaries remain our
wholly owned direct or indirect subsidiaries, they will be qualified REIT
subsidiaries under Section 856(i) of the Internal Revenue Code or, equivalently,
noncorporate entities that are taxed as part of us under regulations issued
under Section 7701 of the Internal Revenue Code. During these periods Senior
Housing and its subsidiaries will not be taxpayers separate from HRPT for
federal income tax purposes. Under the transaction agreement, the federal income
tax liabilities and federal income tax filings for Senior Housing and its
subsidiaries for these periods are the responsibility of HRPT.
When we cease to wholly own Senior Housing and its subsidiaries as a result
of the spin-off of Senior Housing shares, the following will be deemed to have
occurred for federal income tax purposes:
o Immediately preceding the spin-off of Senior Housing shares, we
disposed of the properties and assets of Senior Housing and its
subsidiaries in an exchange, called a deemed exchange, in which our
aggregate amount realized equaled the sum of the fair market value of
the total number of Senior Housing shares owned by us immediately
preceding the spin-off, plus the promissory obligations owing to us
from Senior Housing immediately preceding the spin-off, including the
then outstanding balance of principal and accrued interest on the
formation debt, plus the aggregate amount of liabilities that are
associated with the Senior Housing properties and assets and that
remain the responsibility of Senior Housing and its subsidiaries after
the spin-off.
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o Immediately after the deemed exchange, we distributed to our
shareholders 13.2 million of the Senior Housing shares we were treated
as having received in the deemed exchange.
Valuing Senior Housing Shares. Our aggregate amount realized in the deemed
exchange and our tax consequences upon the distribution of Senior Housing shares
both depend on the fair market value of the Senior Housing shares. Under
applicable judicial precedent, it is possible that for federal income tax
purposes the following three valuations may differ:
o the per share fair market value of the Senior Housing shares we are
treated as receiving in the deemed exchange;
o the per share fair market value of the Senior Housing shares that we
distribute; and
o the average of the reported high and low trading prices for the Senior
Housing shares in the public market on the date of the spin-off,
called the distribution price.
Because of the factual nature of the value of the Senior Housing shares,
Sullivan & Worcester LLP is unable to render an opinion on these values. We
believe that for all federal income tax purposes the per share fair market value
of Senior Housing shares may be properly valued at the distribution price.
Accordingly, the distribution price will be used for all our tax reporting,
including for purposes of computing the aggregate amount realized in the deemed
exchange and for purposes of computing any gain or loss we may have on the
distribution of Senior Housing shares. We may be required to amend these tax
reports, including those sent to our shareholders, if the IRS successfully
challenges our valuation assumptions.
Taxation of the Deemed Exchange. The Internal Revenue Code and applicable
authorities do not provide definitive guidance on whether Section 351(a) applies
to the deemed exchange. Sullivan & Worcester LLP has opined that it is likely
that the deemed exchange is an exchange under Section 351(a) which will be a
partially taxable transaction in which our losses are not recognized, and in
which our gains are recognized only to the extent of the value of property other
than Senior Housing shares, including the outstanding balance of principal and
accrued interest on the formation debt, that we receive in the deemed exchange.
We expect that the then outstanding balance on the formation debt will be
sufficiently large so that we will recognize a significant portion of our gains
realized in the deemed exchange.
However, if the deemed exchange is not an exchange under Section 351(a),
then the deemed exchange will be a fully taxable transaction in which our gains
are recognized in full immediately, and in which our losses are recognized in
full when we own 50% or less of both the voting power and the value of Senior
Housing's outstanding stock. Although the IRS could assert that a control
premium causes us to own more than 50% of the value of Senior Housing even
though we own less than half of its shares, we believe that our ownership of
Senior Housing will be below the 50% voting and valuation thresholds immediately
after the spin-off. Because of the factual nature of valuations, our counsel is
unable to render an opinion on values. Whether or not the deemed exchange is an
exchange under Section 351(a) also will have an impact on our tax basis in the
Senior Housing shares that we distribute and those that we retain, as well as on
Senior Housing's initial tax bases and depreciation schedule in its properties
and assets, all as described below.
Whether the deemed exchange is an exchange under Section 351(a) depends
upon the application of rules that foreclose Section 351(a) treatment for
property transfers to a REIT that accomplish diversification. Thus, under
Section 1.351-1(c) of the Treasury Regulations, if the deemed exchange and our
distribution of Senior Housing shares result, directly or indirectly, in HRPT
diversifying its ownership of the Senior Housing properties and assets, then the
deemed exchange will not be an exchange under Section 351(a). For this purpose,
there is no proscribed diversification if either:
o there is no plan or intention for Senior Housing to issue more than a
de minimis number of shares following the spin-off, or
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o the Senior Housing portfolio of properties and assets is already
sufficiently diversified.
Although it is contemplated that Senior Housing will issue additional shares in
the future to raise capital and grow as an independent REIT, at the time of the
spin-off we expect there to be no specific plan for raising additional capital.
In addition, we believe that the Senior Housing portfolio is diversified for
purposes of these rules, given the properties' diversity in geography, size,
age, operating history and remaining lease terms. While it is true that the
Senior Housing properties are at present leased to only a modest number of
tenants, we believe this does not detract from the diversified nature of the
Senior Housing portfolio because the owner of the portfolio continues to have an
economic stake in each individual property through its residual interest in each
property at the expiration of that property's lease term, and receiving rent, in
respect of a significant number of properties in the portfolio, that is based in
part on the gross revenues which the tenant is able to derive from that
property. Further, we believe that the Senior Housing portfolio's modest number
of tenants is consistent with the business model of several other publicly
traded REITs and with prudent real estate investment practices generally. Based
on these and other representations we made regarding the diversity of the Senior
Housing portfolio, our counsel has opined that it is likely that the deemed
exchange will be an exchange described in Section 351(a), and we will perform
all our tax reporting, including statements supplied to our shareholders and to
the IRS, accordingly. We may be required to amend these tax reports, including
those sent to our shareholders, if the IRS successfully challenges our position
that the deemed exchange is an exchange described in Section 351(a). We expect
to ensure our 1999 and future compliance with the 95% REIT distribution
requirements of the Internal Revenue Code by making distributions to our
shareholders that are sufficient regardless of whether the deemed exchange is an
exchange described under Section 351(a).
Regardless of whether Section 351(a) governs the deemed exchange, the
aggregate amount realized in the deemed exchange, as well as the property other
than Senior Housing shares that we receive in the deemed exchange, will be
allocated among the assets of Senior Housing in proportion to their relative
fair market values. With respect to each Senior Housing asset, we will realize
gain or loss, as the case may be, equal to the difference between the aggregate
amount realized in the deemed exchange allocable to that asset and our adjusted
tax basis in that asset. If Section 351(a) applies to the deemed exchange, then
we will recognize any realized gain in a Senior Housing asset only to the extent
of that asset's allocable share of the property we receive in the deemed
exchange other than Senior Housing shares, and we will not recognize any
realized loss in a Senior Housing asset. We and our wholly owned direct and
indirect subsidiaries have held the Senior Housing assets for investment with a
view to long-term income production and capital appreciation, and the conversion
of Senior Housing into a separate REIT by means of the spin-off of Senior
Housing shares represents a new, unique opportunity to maximize the value of our
investment in the Senior Housing assets. We therefore believe that our gains on
Senior Housing assets in the deemed exchange will be gains from assets held for
investment. Accordingly, our gains on realty or mortgages on real property will
be qualifying gross income under the 75% and 95% gross income tests of Section
856(c)(2)-(3) of the Internal Revenue Code. Although our gains on personalty
other than mortgages will not be qualifying income under either the 75% or the
95% gross income test, we expect to recognize little or no gain of this type.
However, if any of our gains on Senior Housing assets in the deemed exchange
were to be characterized as gains from the disposition of inventory or other
property held primarily for sale to customers, these gains would be subject to
the 100% penalty tax of Section 857(b)(6) of the Internal Revenue Code. In
addition, some of the Senior Housing assets in the deemed exchange were acquired
in carryover basis transactions from C corporations within the last ten years.
Accordingly, we are subject to a REIT-level federal tax on the gains on these
assets, which federal tax we anticipate to be less than $1 million. Our payment
of this REIT-level federal tax will constitute a deduction for us in computing
the amount of our income that we must distribute to our shareholders and in
computing the portion of our distributions to our shareholders that constitutes
taxable income rather than a return of capital.
Taxation of the Distribution. Our distribution of Senior Housing shares in
the spin-off will be treated in the same manner as any other distribution of
cash or property that we may make. Thus, the distribution of Senior Housing
shares together with our other 1999 distributions will entitle us to a dividends
paid deduction to the extent of our earnings and profits for the year, assuming
as expected that these distributions exceed our earnings and profits. In
addition, we will recognize gain from the distribution of these Senior Housing
shares equal to the excess, if any, of the fair market value of the total number
of Senior Housing shares that we
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distribute, over our tax basis in those distributed Senior Housing shares. In
contrast, we will not recognize loss on the distribution even if our tax basis
in the distributed Senior Housing shares exceeds their fair market value.
Under applicable judicial precedent, it is possible that for federal income
tax purposes the per share fair market value of the Senior Housing shares we
distribute will differ from the distribution price. In addition, our counsel is
unable to render an opinion on the fair market value of the total number of
Senior Housing shares that we distribute because of the factual nature of value
determinations. However, on the basis of valuation assumptions described above,
the fair market value of the total number of Senior Housing shares that we
distribute may be computed as the distribution price multiplied by the number of
Senior Housing shares distributed. Our tax basis in the distributed Senior
Housing shares is computed as described below and depends upon whether Section
351(a) governs the deemed exchange.
Any gain that we recognize on our distribution of Senior Housing shares
will be qualifying gross income under the 75% and 95% gross income tests of
Section 856(c)(2)-(3) of the Internal Revenue Code, provided that we are not
treated as holding the distributed Senior Housing shares as inventory or other
property held primarily for sale to customers. If any of this gain were
characterized as the sale of inventory or other property held primarily for sale
to customers, this would not affect our ability to satisfy the 75% and 95% gross
income tests, but the recharacterized gain would be subject to the 100% penalty
tax of Section 857(b)(6) of the Internal Revenue Code. Although we can provide
no assurance on this matter, because we and our wholly owned direct and indirect
subsidiaries have held the Senior Housing properties and assets for investment
with a view to long-term income production and capital appreciation, and because
the conversion of Senior Housing into a separate REIT by means of the
distribution of Senior Housing shares represents a new, unique opportunity to
maximize the value of our investment in the Senior Housing properties and
assets, we do not believe that we have held the Senior Housing shares as
inventory or other property held primarily for sale to customers.
If we are correct that the deemed exchange is governed by Section 351(a),
then our tax basis in the 100% of the Senior Housing shares that we own
immediately prior to the distribution of Senior Housing shares will be equal to,
and our tax basis in each individual Senior Housing share will be its pro rata
share of, the following sum:
(1) our aggregate adjusted tax bases in the Senior Housing properties and
assets immediately prior to the deemed exchange; plus
(2) all gains that we recognize in the deemed exchange; minus
(3) Senior Housing's promissory obligations owing to us immediately
preceding the spin-off, including the then outstanding balance of
principal and accrued interest on the formation debt; minus
(4) the aggregate amount of liabilities that are associated with the
Senior Housing properties and assets and that remain the
responsibility of Senior Housing and its subsidiaries after the
spin-off.
As described above, we believe that each Senior Housing share we receive in the
deemed exchange may be valued at the distribution price, and we expect that a
significant portion of the realized gains, but none of the realized losses, in
the deemed exchange will be recognized. Accordingly, we expect that our tax
basis in each of the Senior Housing shares that we own immediately prior to the
distribution will be, at most, only a few dollars per share below the
distribution price, and may possibly exceed the distribution price. Under these
circumstances, we could recognize gain but no loss on our distribution of Senior
Housing shares.
Alternatively, if the deemed exchange is not governed by Section 351(a),
our tax basis in the 100% of the Senior Housing shares that we own immediately
prior to the spin-off will be their fair market value as determined for purposes
of computing our aggregate amount realized in the deemed exchange. Accordingly,
in the spin-off we would be distributing Senior Housing shares that each have a
fair market value and tax basis equal to the distribution price, and so we would
not recognize any gain or loss in the distribution.
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Our Continued Investments in Senior Housing. After the distribution of
Senior Housing shares, we will continue to own Senior Housing shares, and we
expect Senior Housing to qualify as a REIT under the Internal Revenue Code. For
so long as it qualifies as a REIT, our continued investment in Senior Housing
shares will count favorably toward the 75%, 25%, 10%, and 5% gross assets tests
of Section 856(c)(4) of the Internal Revenue Code; similarly, the dividend
income we receive on Senior Housing shares will count as qualifying income for
us under the 75% and 95% gross income tests of Section 856(c)(2)-(3) of the
Internal Revenue Code.
We expect Senior Housing to pay off the formation debt soon after our
spin-off of Senior Housing shares, but if it does not do so, then we will
exercise our rights to have the formation debt adequately secured, within 20
days of the spin-off, by mortgages on the real property owned by one or more of
Senior Housing's subsidiaries. Accordingly, we expect that if the formation debt
is not paid in full soon after the spin-off, then our investment in the
formation debt, as adequately secured by mortgages on real estate, will also
count favorably toward the 75%, 25%, 10%, and 5% gross assets tests of Section
856(c)(4) of the Internal Revenue Code, and similarly the interest income from
the formation debt will count as qualifying income for us under the 75% and 95%
gross income tests of Section 856(c)(2)-(3) of the Internal Revenue Code.
The transaction agreement contains provisions that require Senior Housing
and HRPT to refrain from taking actions that may jeopardize each other's
qualification as a REIT under the Internal Revenue Code.
Federal Income Taxation of Senior Housing and its Shareholders
In General. Senior Housing will elect to be taxed as a REIT under Sections
856 through 860 of the Internal Revenue Code commencing with its 1999 taxable
year. Senior Housing's 1999 taxable year will begin when it ceases to be wholly
owned by HRPT and will end on December 31, 1999. Senior Housing's REIT election,
assuming continuing compliance with the federal income tax qualification tests
summarized below, continues in effect for subsequent taxable years. Although no
assurance can be given, Senior Housing believes that it will be organized and
will operate in a manner that qualifies it to be taxed under the Internal
Revenue Code as a REIT.
As a REIT, Senior Housing generally will not be subject to federal income
tax on its net income distributed as dividends to its shareholders.
Distributions to Senior Housing shareholders generally will be includable in
their income as dividends to the extent the distributions do not exceed Senior
Housing's current or accumulated earnings and profits. A portion of these
dividends may be treated as capital gain dividends, as explained below. No
portion of any dividends will be eligible for the dividends received deduction
for corporate shareholders. Distributions in excess of current or accumulated
earnings and profits generally will be treated for federal income tax purposes
as a return of capital to the extent of a recipient shareholder's basis in its
shares, and will reduce this basis.
Senior Housing's counsel, Sullivan & Worcester LLP, has opined that Senior
Housing will be organized as a REIT under the Internal Revenue Code for its 1999
taxable year, and that its current investments and plan of operation will enable
it to meet the requirements for qualification and taxation as a REIT under the
Internal Revenue Code. Senior Housing's actual qualification and taxation as a
REIT will depend upon its ability to meet the various REIT qualification tests
imposed under the Internal Revenue Code and summarized below. While Senior
Housing believes that it will operate in a manner to satisfy the various REIT
qualification tests, counsel has not reviewed and will not review compliance
with these tests on a continuing basis. If Senior Housing fails to qualify as a
REIT in any year, it will be subject to federal income taxation as if it were a
domestic corporation, and its shareholders will be taxed like shareholders of
ordinary corporations. In this event, Senior Housing could be subject to
significant tax liabilities, and the amount of cash available for distribution
to its shareholders may be reduced or eliminated.
If Senior Housing qualifies for taxation as a REIT and distributes to its
shareholders at least 95% of its "real estate investment trust taxable income,"
computed by excluding any net capital gain and before taking into account any
dividends paid deduction for which it is eligible, it generally will not be
subject to federal
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corporate income taxes on the amount distributed. However, even if Senior
Housing qualifies for federal income taxation as a REIT, it may be subject to
federal tax in the following circumstances:
o Senior Housing will be taxed at regular corporate rates on any
undistributed "real estate investment trust taxable income," including
its undistributed net capital gains.
o If Senior Housing's alternative minimum taxable income exceeds its
taxable income, it may be subject to the corporate alternative minimum
tax on its items of tax preference.
o If Senior Housing has net income from the sale or other disposition of
"foreclosure property" that is held primarily for sale to customers in
the ordinary course of business or other nonqualifying income from
foreclosure property, it will be subject to tax on this income at the
highest regular corporate rate, which is currently 35%.
o If Senior Housing has net income from prohibited transactions,
including sales or other dispositions of inventory or property held
primarily for sale to customers in the ordinary course of business
other than foreclosure property, it will be subject to tax on this
income at a 100% rate.
o If Senior Housing fails to satisfy the 75% gross income test or the
95% gross income test discussed below, but nonetheless maintains its
qualification as a REIT, it will be subject to tax at a 100% rate on
the greater of the amount by which it fails the 75% or the 95% test,
multiplied by a fraction intended to reflect its profitability.
o If Senior Housing fails to distribute for any calendar year at least
the sum of 85% of its REIT ordinary income for that year, 95% of its
REIT capital gain net income for that year, and any undistributed
taxable income from prior periods, it will be subject to a 4% excise
tax on the excess of the required distribution over the amounts
actually distributed.
o If Senior Housing acquires an asset from a corporation in a
transaction in which its basis in the asset is determined by reference
to the basis of the asset in the hands of a present or former C
corporation, and if it subsequently recognizes gain on the disposition
of this asset during the ten-year period beginning on the date on
which the asset ceased to be owned by the C corporation, then Senior
Housing will pay tax at the highest regular corporate tax rate, which
is currently 35%, on the lesser of the excess of the fair market value
of the asset over the C corporation's basis in the asset on the date
the asset ceased to be owned by the C corporation, or the gain
recognized in the disposition.
If Senior Housing invests in properties in foreign countries, its profits
from these investments will generally be subject to tax in the countries where
those properties are located. The nature and amount of this taxation will depend
on the laws of the countries where the properties are located. If Senior Housing
operates as it currently intends, then it will distribute its taxable income to
its shareholders and it will not pay federal corporate income tax, and thus it
generally cannot recover the cost of foreign taxes imposed on its foreign
investments by claiming foreign tax credits against its federal income tax
liability. Nor can Senior Housing pass through to its shareholders any foreign
tax credits.
If Senior Housing fails to qualify for federal income taxation as a REIT in
any taxable year, then it will be subject to federal taxes in the same manner as
an ordinary corporation. Distributions to its shareholders in any year in which
it fails to qualify as a REIT will not be deductible, nor will these
distributions be required to be made. In that event, to the extent of current
and accumulated earnings and profits, all distributions to Senior Housing
shareholders will be taxable as ordinary dividend income, and subject to
limitations in the Internal Revenue Code, will be eligible for the dividends
received deduction for corporate recipients. Senior Housing would also generally
be disqualified from federal income taxation as a REIT for the four taxable
years following disqualification. Failure to qualify for federal income taxation
as a REIT for even one year could result in Senior Housing incurring substantial
indebtedness or liquidating substantial investments in order to pay the
resulting corporate-level taxes.
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General REIT Qualification Requirements. Section 856(a) of the Internal
Revenue Code defines a REIT as a corporation, trust or association:
(1) that is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable shares
or by transferable certificates of beneficial interest;
(3) that would be taxable, but for Sections 856 through 859 of the
Internal Revenue Code, as an ordinary domestic corporation;
(4) that is neither a financial institution nor an insurance company
subject to special provisions of the Internal Revenue Code;
(5) the beneficial ownership of which is held by 100 or more persons;
(6) that is not "closely held" as defined under the personal holding
company stock ownership test, as described below; and
(7) that meets other tests regarding income, assets and distributions, all
as described below.
Section 856(b) of the Internal Revenue Code provides that conditions (1) to (4),
inclusive, must be met during the entire taxable year and that condition (5)
must be met during at least 335 days of a taxable year of 12 months, or during a
pro rata part of a taxable year of less than 12 months. Section 856(h)(2) of the
Internal Revenue Code provides that conditions (5) and (6) need not be met for
Senior Housing's 1999 taxable year, which taxable year commences on the date of
the spin-off. Senior Housing believes that it will satisfy conditions (1) to
(6), inclusive, for its 1999 taxable year, and that it will continue to satisfy
those conditions in future taxable years. There can, however, be no assurance in
this regard.
By reason of condition (6) above, Senior Housing will fail to qualify as a
REIT for a taxable year if at any time during the last half of the year more
than 50% in value of its outstanding shares is owned directly or indirectly by
five or fewer individuals. To help comply with condition (6), Senior Housing's
declaration of trust contains provisions restricting transfers of its shares.
Similarly, for the purpose of HRPT maintaining its own qualification as a REIT
under the Tax Code, HRPT's declaration of trust contains comparable provisions
that limit concentrated ownership of shares in HRPT. In addition, commencing
with its 1999 taxable year, if Senior Housing complies with applicable Treasury
regulations for ascertaining the ownership of its outstanding shares and does
not know, or exercising reasonable diligence would not have known, that it
failed condition (6), then it will be treated as satisfying condition (6). Also,
Senior Housing's failure to comply with these applicable Treasury regulations
for ascertaining ownership of its outstanding shares may result in a penalty of
$25,000, or $50,000 for intentional violations. Accordingly, Senior Housing
intends to comply with these Treasury regulations, and to request annually from
record holders of significant percentages of its shares information regarding
the ownership of its shares. Under Senior Housing's declaration of trust, its
shareholders are required to respond to these requests for information.
The rule that an entity will fail to qualify as a REIT for a taxable year
if at any time during the last half of the year more than 50% in value of its
outstanding shares is owned directly or indirectly by five or fewer individuals
is relaxed in the case of pension trusts owning shares in a REIT. Shares in a
REIT held by a pension trust are treated as held directly by the pension trust's
beneficiaries in proportion to their actuarial interests in the pension trust.
Consequently, five or fewer pension trusts could own more than 50% of the
interests in an entity without jeopardizing that entity's federal income tax
qualification as a REIT. However, as discussed below, if a REIT is a
"pension-held REIT," each pension trust owning more than 10% of the REIT's
shares by value generally will be taxed on a portion of the dividends received
from the REIT, based on the ratio of
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(1) the REIT's gross income for the year that would be unrelated trade or
business income if the REIT were a qualified pension trust, to
(2) the REIT's total gross income for the year.
Senior Housing's Subsidiaries and Partnerships. Section 856(i) of the
Internal Revenue Code provides that any corporation 100% of whose stock is held
by a REIT is a qualified REIT subsidiary and shall not be treated as a separate
corporation. The assets, liabilities and items of income, deduction and credit
of a qualified REIT subsidiary are treated as the REIT's. Senior Housing
believes that each of its direct and indirect wholly owned subsidiaries will
either be a qualified REIT subsidiary within the meaning of Section 856(i) of
the Internal Revenue Code, or a noncorporate entity that for federal income tax
purposes is not treated as separate from its owner under regulations issued
under Section 7701 of the Internal Revenue Code. Thus, in applying all the
federal income tax REIT qualification requirements described in this summary,
Senior Housing's direct and indirect wholly owned subsidiaries are ignored, and
all assets, liabilities and items of income, deduction and credit of its direct
and indirect wholly owned subsidiaries are treated as Senior Housing's.
Senior Housing may invest in real estate through one or more limited or
general partnerships or limited liability companies that are treated as
partnerships for federal income tax purposes. In the case of a REIT that is a
partner in a partnership, regulations under the Internal Revenue Code provide
that, for purposes of the REIT qualification requirements regarding income and
assets discussed below, the REIT is deemed to own its proportionate share of the
assets of the partnership corresponding to the REIT's proportionate capital
interest in the partnership and is deemed to be entitled to the income of the
partnership attributable to this proportionate share. In addition, for these
purposes, the character of the assets and gross income of the partnership
generally retain the same character in the hands of the REIT. Accordingly,
Senior Housing's proportionate share of the assets, liabilities, and items of
income of each partnership in which it is a partner are treated as Senior
Housing's for purposes of the income tests and asset tests discussed below. In
contrast, for purposes of the distribution requirement discussed below, Senior
Housing must take into account as a partner its distributive share of the
partnership's income as determined under the general federal income tax rules
governing partners and partnerships under Sections 701 through 777 of the
Internal Revenue Code.
Income Tests. There are two gross income requirements for qualification as
a REIT under the Internal Revenue Code:
o First, at least 75% of Senior Housing's gross income, excluding gross
income from sales or other dispositions of property held primarily for
sale, must be derived from investments relating to real property,
including "rents from real property" as defined under Section 856 of
the Internal Revenue Code, mortgages on real property, or shares in
other REITs. When Senior Housing receives new capital in exchange for
its shares or in a public offering of five-year or longer debt
instruments, income attributable to the temporary investment of this
new capital in stock or a debt instrument, if received or accrued
within one year of its receipt of the new capital, is generally also
qualifying income under the 75% test.
o Second, at least 95% of Senior Housing's gross income, excluding gross
income from sales or other dispositions of property held primarily for
sale, must be derived from a combination of items of real property
income that satisfy the 75% test described above, dividends, interest,
payments under interest rate swap or cap agreements, options, futures
contracts, forward rate agreements, or similar financial instruments,
and gains from the sale or disposition of stock, securities, or real
property.
For purposes of these two requirements, income derived from a "shared
appreciation provision" in a mortgage loan is generally treated as gain
recognized on the sale of the property to which it relates. Although Senior
Housing will use its best efforts to ensure that the income generated by its
investments will be of a type which satisfies both the 75% and 95% gross income
tests, there can be no assurance in this regard.
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In order to qualify as "rents from real property" under Section 856 of the
Internal Revenue Code, several requirements must be met:
o First, the amount of rent received generally must not be based on the
income or profits of any person, but may be based on receipts or
sales.
o Second, rents do not qualify if the REIT owns 10% or more of the
tenant, whether directly or after application of attribution rules.
While Senior Housing intends not to lease property to any party if
rents from that property would not qualify as rents from real
property, application of the 10% ownership rule is dependent upon
complex attribution rules and circumstances that may be beyond Senior
Housing's control. For example, an unaffiliated third party's
ownership directly or by attribution of 10% or more of Senior
Housing's shares, or 10% or more of HRPT's shares for so long as HRPT
owns 10% or more of Senior Housing, as well as 10% or more of the
stock of a Senior Housing lessee, would result in that lessee's rents
not qualifying as rents from real property. Senior Housing's
declaration of trust disallows transfers or purported acquisitions,
directly or by attribution, of its shares that could result in
disqualification as a REIT under the Internal Revenue Code and permits
its trustees to repurchase the shares to the extent necessary to
maintain Senior Housing's status as a REIT under the Internal Revenue
Code. Similarly, for the purpose of HRPT maintaining its own
qualification as a REIT under the Internal Revenue Code, HRPT's
declaration of trust contains provisions that generally limit
concentrated ownership of HRPT's shares to 8.5% or below. Furthermore,
the transaction agreement provides that HRPT will not take any actions
that may jeopardize Senior Housing's REIT status under the Internal
Revenue Code. Nevertheless, there can be no assurance that these
provisions in Senior Housing's and HRPT's declarations of trust and
the provisions of the transaction agreement will be effective to
prevent REIT status under the Internal Revenue Code from being
jeopardized under the 10% lessee affiliate rule. Furthermore, there
can be no assurance that Senior Housing will be able to monitor and
enforce these restrictions, nor will Senior Housing's shareholders
necessarily be aware of ownership of shares attributed to them under
the Internal Revenue Code's attribution rules.
o Third, in order for rents to qualify, Senior Housing generally must
not manage the property or furnish or render services to the tenants
of the property, except through an independent contractor from whom
Senior Housing derives no income. There is an exception to this rule
permitting a REIT to perform customary tenant services of the sort
which a tax-exempt organization could perform without being considered
in receipt of "unrelated business taxable income" as defined in
Section 512(b)(3) of the Internal Revenue Code. In addition, a de
minimis amount of noncustomary services will not disqualify income as
"rents from real property" so long as the value of the impermissible
services does not exceed 1% of the gross income from the property.
o Fourth, if rent attributable to personal property leased in connection
with a lease of real property is 15% or less of the total rent
received under the lease, then the rent attributable to personal
property will qualify as rents from real property; if this 15%
threshold is exceeded, the rent attributable to personal property will
not so qualify. The portion of rental income treated as attributable
to personal property is determined according to the ratio of the tax
basis of the personal property to the total tax basis of the real and
personal property which is rented.
Senior Housing believes that all or substantially all its rents will qualify as
rents from real property for purposes of Section 856 of the Internal Revenue
Code.
In order to qualify as mortgage interest on real property for purposes of
the 75% test, interest must derive from a mortgage loan secured by real property
with a fair market value at least equal to the amount of the loan. If the amount
of the loan exceeds the fair market value of the real property, the interest
will be treated as interest on a mortgage loan in a ratio equal to the ratio of
the fair market value of the real property to the total amount of the mortgage
loan.
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Any gain Senior Housing realizes on the sale of property held as inventory
or other property held primarily for sale to customers in the ordinary course of
business will be treated as income from a prohibited transaction that is subject
to a penalty tax at a 100% rate. This prohibited transaction income also may
have an adverse effect upon Senior Housing's ability to satisfy the 75% and 95%
gross income tests for federal income tax qualification as a REIT. Senior
Housing cannot provide assurances as to whether or not the IRS might
successfully assert that one or more of its dispositions is subject to the 100%
penalty tax. However, Senior Housing believes that any occasional disposition of
assets that it might make will not be subject to the 100% penalty tax, because
it intends to:
o own its assets for investment with a view to long-term income
production and capital appreciation;
o engage in the business of developing, owning and operating its
existing properties and acquiring, developing, owning and operating
new properties; and
o make occasional dispositions of its assets consistent with its
long-term investment objectives.
If Senior Housing fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
that year if:
o its failure to meet the test was due to reasonable cause and not due
to willful neglect;
o it reports the nature and amount of each item of its income included
in the 75% or 95% gross income tests for that taxable year on a
schedule attached to its tax return; and
o any incorrect information on the schedule was not due to fraud with
intent to evade tax.
It is impossible to state whether in all circumstances Senior Housing would be
entitled to the benefit of this relief provision for the 75% and 95% gross
income tests. Even if this relief provision did apply, a special tax equal to
100% is imposed upon the greater of the amount by which Senior Housing failed
the 75% test or the 95% test, multiplied by a fraction intended to reflect its
profitability.
Asset Tests. At the close of each quarter of each taxable year, Senior
Housing must also satisfy three percentage tests relating to the nature of its
assets:
o First, at least 75% of the value of Senior Housing's total assets must
consist of real estate assets, cash and cash items, shares in other
REITs, government securities, and stock or debt instruments purchased
with proceeds of a stock offering or an offering of its debt with a
term of at least five years, but only for the one-year period
commencing with its receipt of the offering proceeds.
o Second, not more than 25% of Senior Housing's total assets may be
represented by securities other than those securities that count
favorably toward the preceding 75% asset test.
o Third, of the investments included in the preceding 25% asset class,
the value of any one issuer's securities that Senior Housing owns may
not exceed 5% of the value of its total assets, and Senior Housing may
not own more than 10% of any one issuer's outstanding voting
securities.
When a failure to satisfy the above asset tests results from an acquisition of
securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close of
that quarter. Senior Housing intends to maintain records of the value of its
assets to document its compliance with the above three asset tests, and to take
actions as may be required to cure any failure to satisfy the tests within 30
days after the close of any quarter.
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Annual Distribution Requirements. In order to qualify for taxation as a
REIT under the Internal Revenue Code, Senior Housing is required to make annual
distributions other than capital gain dividends to its shareholders in an amount
at least equal to the excess of:
(A) the sum of 95% of Senior Housing's "real estate investment trust
taxable income," as defined in Section 857 of the Internal Revenue
Code, but computed without regard to the dividends paid deduction and
net capital gain, and 95% of Senior Housing's net income after tax, if
any, from property received in foreclosure, over
(B) the sum of Senior Housing's qualifying noncash income, e.g., imputed
rental income or income from transactions inadvertently failing to
qualify as like-kind exchanges.
These distributions must be paid in the taxable year to which they relate, or in
the following taxable year if declared before Senior Housing timely files its
tax return for the earlier taxable year and if paid on or before the first
regular distribution payment after that declaration. Dividends declared in
October, November, or December and paid during the following January will be
treated as having been both paid and received on December 31 of the prior
taxable year. A distribution which is not pro rata within a class of Senior
Housing's beneficial interests entitled to a distribution, or which is not
consistent with the rights to distributions among Senior Housing's classes of
beneficial interests, is a preferential distribution that is not taken into
consideration for purposes of the distribution requirements, and accordingly the
payment of a preferential distribution could affect Senior Housing's ability to
meet the distribution requirements. Taking into account Senior Housing's
distribution policies, including any dividend reinvestment plan it may adopt,
Senior Housing expects that it will not make any preferential distributions. The
distribution requirements may be waived by the IRS if a REIT establishes that it
failed to meet them by reason of distributions previously made to meet the
requirements of the 4% excise tax discussed below. To the extent that Senior
Housing does not distribute all of its net capital gain and all of its real
estate investment trust taxable income, as adjusted, it will be subject to tax
on undistributed amounts.
In addition, Senior Housing will be subject to a 4% excise tax to the
extent it fails within a calendar year to make required distributions to its
shareholders of 85% of its ordinary income and 95% of its capital gain net
income plus the excess, if any, of the "grossed up required distribution" for
the preceding calendar year over the amount treated as distributed for that
preceding calendar year. For this purpose, the term "grossed up required
distribution" for any calendar year is the sum of Senior Housing's taxable
income for the calendar year without regard to the deduction for dividends paid
and all amounts from earlier years that are not treated as having been
distributed under the provision.
If Senior Housing does not have enough cash or other liquid assets to meet
the 95% distribution requirements, it may find it necessary to arrange for new
debt or equity financing to provide funds for required distributions, or else
its REIT status for federal income tax purposes could be jeopardized. Senior
Housing can provide no assurance that financing would be available for these
purposes on favorable terms.
If Senior Housing fails to distribute sufficient dividends for any year, it
may be able to rectify this failure by paying "deficiency dividends" to
shareholders in a later year. These deficiency dividends may be included in
Senior Housing's deduction for dividends paid for the earlier year, but an
interest charge would be imposed upon it for the delay in distribution. Although
Senior Housing may be able to avoid being taxed on amounts distributed as
deficiency dividends, it will remain liable for the 4% excise tax discussed
above.
Depreciation and Federal Income Tax Treatment of Leases. For properties
purchased after the spin-off, Senior Housing's initial tax basis will generally
be its acquisition cost. Senior Housing will generally depreciate its real
property on a straight-line basis over 40 years and its personal property, if
any, over 12 years. These depreciation schedules may vary for properties that
Senior Housing acquires through tax-free or carryover basis acquisitions.
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Senior Housing's initial tax bases and depreciation schedules for its
assets at the time of the spin-off will depend upon whether the deemed exchange
that results from the spin-off is an exchange under Section 351(a) of the
Internal Revenue Code. Assuming Section 351(a) treatment, Senior Housing will
carry over HRPT's tax basis and depreciation schedule in each Senior Housing
asset, and to the extent that HRPT recognizes gain on a Senior Housing asset in
the deemed exchange, Senior Housing will have additional tax basis in that asset
which it will depreciate as described above for newly purchased assets. In
contrast, if Section 351(a) treatment does not apply to the deemed exchange,
then Senior Housing will be treated as though it acquired all its assets at the
time of the spin-off in a fully taxable acquisition, thereby acquiring aggregate
tax bases in these assets equal to the aggregate amount realized by HRPT in the
deemed exchange, and Senior Housing will depreciate these tax bases as described
above for newly purchased assets. Senior Housing believes, and Sullivan &
Worcester LLP has opined that it is likely that the deemed exchange will be an
exchange under Section 351(a), and Senior Housing will perform all its tax
reporting accordingly. Senior Housing may be required to amend these tax
reports, including those sent to its shareholders, if the IRS successfully
challenges its position that the deemed exchange is an exchange under Section
351(a). Senior Housing intends to comply with the 95% REIT distribution
requirements in 1999 and future years regardless of whether the deemed exchange
is an exchange under Section 351(a).
Senior Housing will be entitled to depreciation deductions from its
facilities only if it is treated for federal income tax purposes as the owner of
the facilities. This means that the leases of the facilities must be classified
for federal income tax purposes as true leases, rather than as sales or
financing arrangements, and Senior Housing believes this to be the case. In
addition, in the case of sale-leaseback arrangements, the IRS could assert that
Senior Housing realized prepaid rental income in the year of purchase to the
extent that the value of a leased property exceeds the purchase price for that
property. Because of the lack of clear precedent, Senior Housing cannot provide
assurances as to whether the IRS might successfully assert the existence of
prepaid rental income in any of its sale-leaseback transactions.
Additionally, Section 467 of the Internal Revenue Code, which concerns
leases with increasing rents, may apply to those of Senior Housing's leases
which provide for rents that increase from one period to the next. Section 467
of the Internal Revenue Code provides that in the case of a so-called
"disqualified leaseback agreement" rental income must be accrued at a constant
rate. Where constant rent accrual is required, Senior Housing could recognize
rental income from a lease in excess of cash rents and, as a result, encounter
difficulty in meeting the 95% distribution requirement. Disqualified leaseback
agreements include leaseback transactions where a principal purpose for
providing increasing rent under the agreement is the avoidance of federal income
tax. Recently issued Treasury regulations provide that rents will not be treated
as increasing for tax avoidance purposes where the increases are based upon a
fixed percentage of lessee receipts. Therefore, the additional rent provisions
in Senior Housing's leases that are based on a fixed percentage of lessee
receipts generally should not cause the leases to be disqualified leaseback
agreements under Section 467.
Taxation of Shareholders. As long as Senior Housing qualifies as a REIT for
federal income tax purposes, a distribution to its shareholders that Senior
Housing does not designate as a capital gain dividend will be treated as an
ordinary income dividend to the extent that it is made out of current or
accumulated earnings and profits. Distributions made out of Senior Housing's
current or accumulated earnings and profits that Senior Housing properly
designates as capital gain dividends will be taxed as long-term capital gains,
as discussed below, to the extent they do not exceed actual net capital gain for
the taxable year. However, corporate shareholders may be required to treat up to
20% of any capital gain dividend as ordinary income under Section 291 of the
Internal Revenue Code. In addition, Senior Housing may elect to retain net
capital gain income and treat it as constructively distributed. In that case,
(1) Senior Housing will be taxed at regular corporate capital gains tax
rates on retained amounts,
(2) each shareholder will be taxed on its designated proportionate share
of Senior Housing's retained net capital gains as though that amount
were distributed and designated a capital gain dividend,
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(3) each shareholder will receive a credit for its designated proportionate
share of the tax that Senior Housing pays,
(4) each shareholder will increase its adjusted basis in its Senior Housing
shares by the excess of the amount of its proportionate share of these
retained net capital gains over its proportionate share of this tax
that Senior Housing pays, and
(5) both Senior Housing and its corporate shareholders will make
commensurate adjustments in their respective earnings and profits for
federal income tax purposes.
If Senior Housing elects to retain its net capital gains in this fashion, it
will notify its shareholders of the relevant tax information within 60 days
after the close of the affected taxable year. For noncorporate shareholders,
long-term capital gains are generally taxed at maximum rates of 20% or 25%,
depending upon the type of property disposed of and the previously claimed
depreciation with respect to this property.
Distributions in excess of current or accumulated earnings and profits will
not be taxable to a shareholder to the extent that they do not exceed the
shareholder's adjusted basis in the shareholder's Senior Housing shares, but
will reduce the shareholder's basis in those shares. To the extent that these
excess distributions exceed the adjusted basis of a shareholder's shares, they
will be included in income as capital gain, with long-term gain generally taxed
to noncorporate shareholders at a maximum rate of 20%. No shareholder may
include on his federal income tax return any of Senior Housing's net operating
losses or any of its capital losses.
Dividends that Senior Housing declares in October, November or December of
a taxable year to shareholders of record on a date in those months will be
deemed to have been received by shareholders on December 31 of that taxable
year, provided Senior Housing actually pays these dividends during the following
January. Also, items that are treated differently for regular and alternative
minimum tax purposes are to be allocated between a REIT and its shareholders
under Treasury regulations which are to be prescribed. It is possible that these
Treasury regulations will require tax preference items to be allocated to Senior
Housing shareholders with respect to any accelerated depreciation or other tax
preference items that Senior Housing claims.
The sale or exchange of Senior Housing shares will result in recognition of
gain or loss in an amount equal to the difference between the amount realized
and the shareholder's adjusted basis in the shares sold or exchanged. This gain
or loss will be capital gain or loss, and will be long-term capital gain or loss
if the shareholder's holding period in the shares exceeds one year. In addition,
any loss upon a sale or exchange of Senior Housing shares held for six months or
less will generally be treated as a long-term capital loss to the extent of
Senior Housing long-term capital gain dividends during the holding period.
Noncorporate shareholders who borrow funds to finance their acquisition of
Senior Housing shares could be limited in the amount of deductions allowed for
the interest paid on the indebtedness incurred. Under Section 163(d) of the
Internal Revenue Code, interest paid or accrued on indebtedness incurred or
continued to purchase or carry property held for investment is generally
deductible only to the extent of the investor's net investment income. A
shareholder's net investment income will include ordinary income dividend
distributions received from Senior Housing and, if an appropriate election is
made by the shareholder, capital gain dividend distributions received from
Senior Housing; however, distributions treated as a nontaxable return of the
shareholder's basis will not enter into the computation of net investment
income.
Taxation of Tax-Exempt Shareholders. In Revenue Ruling 66-106, the IRS
ruled that amounts distributed by a REIT to a tax-exempt employees' pension
trust did not constitute "unrelated business taxable income," even though the
REIT may have financed some its activities with acquisition indebtedness.
Although revenue rulings are interpretive in nature and subject to revocation or
modification by the IRS, based upon the analysis and conclusion of Revenue
Ruling 66-106, Senior Housing's distributions made to shareholders that are
tax-exempt pension plans, individual retirement accounts, or other qualifying
tax-exempt entities should not
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constitute unrelated business taxable income, unless the shareholder has
financed its acquisition of its shares with "acquisition indebtedness" within
the meaning of the Internal Revenue Code.
Special rules apply to tax-exempt pension trusts, including so-called
401(k) plans but excluding individual retirement accounts or government pension
plans, that own more than 10% by value of a "pension-held REIT" at any time
during a taxable year. The pension trust may be required to treat a percentage
of all dividends received from the pension-held REIT during the year as
unrelated business taxable income. This percentage is equal to the ratio of
(1) the pension-held REIT's gross income derived from the conduct of
unrelated trades or businesses, determined as if the pension-held REIT
were a tax-exempt pension fund, less direct expenses related to that
income, to
(2) the pension-held REIT's gross income from all sources, less direct
expenses related to that income,
except that this percentage shall be deemed to be zero unless it would otherwise
equal or exceed 5%. A REIT is a pension-held REIT if:
o the REIT is "predominantly held" by tax-exempt pension trusts, and
o the REIT would otherwise fail to satisfy the "closely held" ownership
requirement discussed above if the stock or beneficial interests in
the REIT held by tax-exempt pension trusts were viewed as held by
tax-exempt pension trusts rather than by their respective
beneficiaries.
A REIT is predominantly held by tax-exempt pension trusts if at least one
tax-exempt pension trust owns more than 25% by value of the REIT's stock or
beneficial interests, or if one or more tax-exempt pension trusts, each owning
more than 10% by value of the REIT's stock or beneficial interests, own in the
aggregate more than 50% by value of the REIT's stock or beneficial interests.
Because of the restrictions in Senior Housing's declaration of trust regarding
the ownership concentration of its shares, and because of the restrictions in
HRPT's declaration of trust regarding the ownership concentration of HRPT's
shares, Senior Housing believes that it will not be a pension-held REIT.
However, because Senior Housing's shares and HRPT's shares will be publicly
traded, Senior Housing cannot completely control whether or not it is or will
become a pension-held REIT.
Taxation of Non-U.S. Persons. The rules governing the federal income
taxation of non-U.S. persons are complex, and the following discussion is
intended only as a summary of these rules. If you are a non-U.S. person, we urge
you to consult with your own tax advisor to determine the impact of federal,
state, local, and foreign tax laws, including any tax return filing and other
reporting requirements, with respect to your investment in Senior Housing
shares.
In general, a non-U.S. person will be subject to regular federal income tax
in the same manner as a U.S. person with respect to its investment in Senior
Housing shares if that investment is effectively connected with the non-U.S.
person's conduct of a trade or business in the United States. In addition, a
corporate non-U.S. person that receives income that is or is deemed effectively
connected with a trade or business in the United States may also be subject to
the 30% branch profits tax under Section 884 of the Internal Revenue Code, which
is payable in addition to regular federal corporate income tax. The balance of
this discussion on the federal income taxation of non-U.S. persons addresses
only those non-U.S. persons whose investment in Senior Housing shares is not
effectively connected with the conduct of a trade or business in the United
States.
A distribution by Senior Housing to a non-U.S. person that is not
attributable to gain from the sale or exchange of a United States real property
interest and that is not designated as a capital gain dividend will be treated
as an ordinary income dividend to the extent that it is made out of current or
accumulated earnings and profits. A distribution of this type will generally be
subject to federal income tax and withholding at the rate of 30%, or the lower
rate that may be specified by a tax treaty if the non-U.S. person has in the
manner prescribed
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by the IRS demonstrated its entitlement to benefits under a tax treaty. Because
Senior Housing cannot determine its current and accumulated earnings and profits
until the end of the taxable year, withholding at the rate of 30% or applicable
lower treaty rate will be imposed on the gross amount of any distribution to a
non-U.S. person that Senior Housing makes and does not designate a capital gain
dividend. Notwithstanding this withholding on distributions in excess of Senior
Housing current and accumulated earnings and profits, these distributions are a
nontaxable return of capital to the extent that they do not exceed the non-U.S.
person's adjusted basis in Senior Housing shares, and the nontaxable return of
capital will reduce the adjusted basis in these shares. To the extent that
distributions in excess of current and accumulated earnings and profits exceed
the non-U.S. person's adjusted basis in Senior Housing shares, the distributions
will give rise to tax liability if the non-U.S. person would otherwise be
subject to tax on any gain from the sale or exchange of these shares, as
discussed below. A non-U.S. person may seek a refund of amounts withheld on
distributions to him in excess of Senior Housing's current and accumulated
earnings and profits, provided that the required information is furnished to the
IRS.
For any year in which Senior Housing qualifies as a REIT, distributions
that are attributable to gain from the sale or exchange of a United States real
property interest are taxed to a non-U.S. person as if these distributions were
gains effectively connected with a trade or business in the United States
conducted by the non-U.S. person. Accordingly, a non-U.S. person will be taxed
on these amounts at the normal capital gain rates applicable to a U.S. person,
subject to any applicable alternative minimum tax and to a special alternative
minimum tax in the case of nonresident alien individuals; the non-U.S. person
will be required to file a United States federal income tax return reporting
these amounts, even if applicable withholding is imposed as described below; and
corporate non-U.S. persons may owe the 30% branch profits tax under Section 884
of the Internal Revenue Code in respect of these amounts. Senior Housing will be
required to withhold from distributions to non-U.S. persons, and remit to the
IRS, 35% of the maximum amount of any distribution that could be designated as a
capital gain dividend. In addition, for purposes of this withholding rule, if
Senior Housing designates prior distributions as capital gain dividends, then
subsequent distributions up to the amount of the designated prior distributions
will be treated as capital gain dividends. The amount of any tax withheld is
creditable against the non-U.S. person's federal income tax liability, and any
amount of tax withheld in excess of that tax liability may be refunded provided
that an appropriate claim for refund is filed with the IRS.
Tax treaties may reduce the withholding obligations on Senior Housing
distributions. Under some treaties, however, rates below 30% generally
applicable to ordinary income dividends from United States corporations may not
apply to ordinary income dividends from a REIT. If the amount of tax withheld by
Senior Housing with respect to a distribution to a non-U.S. person exceeds the
shareholder's federal income tax liability with respect to the distribution, the
non-U.S. person may file for a refund of the excess from the IRS. In this
regard, note that the 35% withholding tax rate on capital gain dividends
corresponds to the maximum income tax rate applicable to corporate non-U.S.
persons but is higher than the 20% and 25% maximum rates on capital gains
generally applicable to noncorporate non-U.S. persons. Generally effective with
respect to distributions paid after December 31, 2000, new Treasury regulations
alter the information reporting and backup withholding rules applicable to
non-U.S. persons and provide presumptions under which a non-U.S. person is
subject to backup withholding and information reporting until Senior Housing or
the applicable withholding agent receives certification from the shareholder of
its non-U.S. person status. In some instances, these certification requirements
are more detailed and more involved than those applicable under current Treasury
regulations. The new Treasury regulations also provide special rules to
determine whether, for purposes of determining the applicability of a tax
treaty, Senior Housing's distributions to a non-U.S. person that is an entity
should be treated as paid to the entity or to those owning an interest in that
entity, and whether the entity or its owners are entitled to benefits under the
tax treaty. The general thrust of the new Treasury regulations and their
proposed effective date is to encourage non-U.S. persons and withholding agents
to use as soon as possible the new IRS Forms W-8 series, rather than the
predecessor IRS Forms W-8, 1001, and 4224, and to require use of the new IRS
Forms W-8 series for payments made after December 31, 2000.
If Senior Housing shares are not "United States real property interests"
within the meaning of Section 897 of the Internal Revenue Code, a non-U.S.
person's gain on sale of these shares generally will not be subject to federal
income taxation, except that a nonresident alien individual who was present in
the United States for 183
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days or more during the taxable year will be subject to a 30% tax on this gain.
Senior Housing shares will not constitute a United States real property interest
if Senior Housing is a "domestically controlled REIT." A domestically controlled
REIT is a REIT in which at all times during the preceding five-year period less
than 50% in value of its shares is held directly or indirectly by foreign
persons. Senior Housing believes that it will be a domestically controlled REIT
and thus a non-U.S. person's gain on sale of its shares will not be subject to
federal income taxation. However, because these shares will be publicly traded,
and because the shares of HRPT are publicly traded, Senior Housing can provide
no assurance that it will be a domestically controlled REIT. If Senior Housing
is not a domestically controlled REIT, a non-U.S. person's gain on sale of
Senior Housing shares will not be subject to federal income taxation as a sale
of a United States real property interest, if that class of shares is "regularly
traded," as defined by applicable Treasury regulations, on an established
securities market like the New York Stock Exchange, and the non-U.S. person has
at all times during the preceding five years owned 5% or less by value of that
class of shares. If the gain on the sale of Senior Housing shares were subject
to federal income taxation, the non-U.S. person will generally be subject to the
same treatment as a U.S. person with respect to its gain, will be required to
file a United States federal income tax return reporting that gain, and in the
case of corporate non-U.S. persons might owe branch profits tax under Section
884 of the Internal Revenue Code. In any event, a purchaser of Senior Housing
shares from a non-U.S. person will not be required to withhold on the purchase
price if the purchased shares are regularly traded on an established securities
market or if Senior Housing is a domestically controlled REIT. Otherwise, the
purchaser of Senior Housing shares may be required to withhold 10% of the
purchase price paid to the non-U.S. person and to remit the withheld amount to
the IRS.
Backup Withholding and Information Reporting
Information reporting and backup withholding may apply to distributions or
proceeds paid to HRPT and Senior Housing shareholders under the circumstances
discussed below. Because the spin-off of Senior Housing shares is an in-kind
distribution on HRPT shares, we or other applicable withholding agents will have
to collect any applicable backup withholding by reducing to cash for remittance
to the IRS a sufficient portion of the Senior Housing shares that the HRPT
shareholder would otherwise receive, and the HRPT shareholder will bear the
brokerage or other costs for this withholding procedure. Amounts withheld under
backup withholding are generally not an additional tax and may be refunded or
credited against the REIT shareholder's federal income tax liability, provided
that it furnishes the required information to the IRS.
A U.S. person will be subject to backup withholding at a 31% rate when it
receives distributions on HRPT or Senior Housing shares or proceeds upon the
sale, exchange, redemption, retirement or other disposition of HRPT or Senior
Housing shares, unless the U.S. person properly executes under penalties of
perjury an IRS Form W-9 or substantially similar form that:
o provides the U.S. person's correct taxpayer identification number; and
o certifies that the U.S. person is exempt from backup withholding
because it is a corporation or come within another exempt category, it
has not been notified by the IRS that it is subject to backup
withholding, or it has been notified by the IRS that it is no longer
subject to backup withholding.
If the U.S. person does not provide its correct taxpayer identification number
on the IRS Form W-9 or substantially similar form, it may be subject to
penalties imposed by the IRS and the REIT may also have to withhold a portion of
any capital gain distributions paid to it. Unless the U.S. person has
established on a properly executed IRS Form W-9 or substantially similar form
that it is a corporation or comes within another exempt category, distributions
on HRPT or Senior Housing shares paid to it during the calendar year, and the
amount of tax withheld if any, will be reported to it and to the IRS.
Distributions on HRPT or Senior Housing shares to a non-U.S. person during
each calendar year, and the amount of tax withheld if any, will generally be
reported to the non-U.S. person and to the IRS. This information reporting
requirement applies regardless of whether the non-U.S. person is subject to
withholding on distributions on HRPT or Senior Housing shares or whether the
withholding was reduced or eliminated by
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an applicable tax treaty. Also, distributions paid to a non-U.S. person on HRPT
or Senior Housing shares may be subject to backup withholding at a 31% rate,
unless the non-U.S. person properly certifies its non-U.S. person status on an
IRS Form W-8 or substantially similar form in the manner described above.
Similarly, information reporting and 31% backup withholding will not apply to
proceeds a non-U.S. person receives upon the sale, exchange, redemption,
retirement or other disposition of HRPT or Senior Housing shares, if the
non-U.S. person properly certifies its non-U.S. person status on an IRS Form W-8
or substantially similar form. Even without having executed an IRS Form W-8 or
substantially similar form, however, in some cases information reporting and 31%
backup withholding will not apply to proceeds that a non-U.S. person receives
upon the sale, exchange, redemption, retirement or other disposition of HRPT or
Senior Housing shares if the non-U.S. person receives those proceeds through a
broker's foreign office. As described above, new Treasury regulations alter the
information reporting and backup withholding rules applicable to non-U.S.
persons for payments made after December 31, 2000, and in general these new
Treasury Regulations replace IRS Forms W-8, 1001, and 4224 with the new IRS
Forms W-8 series. For a non-U.S. person whose income and gain on HRPT or Senior
Housing shares is effectively connected to the conduct of a United States trade
or business, a slightly different rule may apply to proceeds received upon the
sale, exchange, redemption, retirement or other disposition of HRPT or Senior
Housing shares. Until the non-U.S. person complies with the new Treasury
regulations, information reporting and 31% backup withholding may apply in the
same manner as to a U.S. person, and thus the non-U.S. person may have to
execute an IRS Form W-9 or substantially similar form to prevent the backup
withholding.
Other Tax Consequences
HRPT's, Senior Housing's and their respective shareholders' federal income
tax treatment may be modified by legislative, judicial, or administrative
actions at any time, which actions may be retroactive in effect. The rules
dealing with federal income taxation are constantly under review by the
Congress, the IRS and the Treasury Department, and statutory changes as well as
promulgation of new regulations, revisions to existing regulations, and revised
interpretations of established concepts occur frequently. No prediction can be
made as to the likelihood of passage of new tax legislation or other provisions
either directly or indirectly affecting HRPT, Senior Housing or their respective
shareholders. Revisions in federal income tax laws and interpretations of these
laws could adversely affect the tax consequences of an investment in HRPT or
Senior Housing shares. HRPT, Senior Housing and their respective shareholders
may also be subject to state or local taxation in various state or local
jurisdictions, including those in which HRPT, Senior Housing or their respective
shareholders transact business or reside. State and local tax consequences may
not be comparable to the federal income tax consequences discussed above.
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ERISA Consequences for Senior Housing and its Shareholders
Fiduciary Obligations. Fiduciaries of a pension, profit-sharing or other
employee benefit plan subject to Title I of the Employee Retirement Income
Security Act of 1974, ERISA, must consider the following:
o whether their investment in Senior Housing shares satisfies the
diversification requirements of ERISA;
o whether the investment is prudent in light of possible limitations on
the marketability of Senior Housing shares;
o whether they have authority to acquire Senior Housing shares under the
applicable governing instrument and Title I of ERISA; and
o whether the investment is otherwise consistent with their fiduciary
responsibilities.
Trustees and other fiduciaries of an ERISA plan may incur personal
liability for any loss suffered by the plan on account of a violation of their
fiduciary responsibilities. In addition, these fiduciaries may be subject to a
civil penalty of up to 20% of any amount recovered by the plan on account of a
violation. Fiduciaries of any IRA, Roth IRA, Keogh Plan or other qualified
retirement plan not subject to Title I of ERISA, referred to as "non-ERISA
plans," should consider that a plan may only make investments that are
authorized by the appropriate governing instrument. Fiduciary shareholders
should consult their own legal advisors if they have any concern as to whether
the investment is consistent with the foregoing criteria.
Prohibited Transactions. Fiduciaries of ERISA plans and persons making the
investment decision for an IRA or other non-ERISA plan should consider the
application of the prohibited transaction provisions of ERISA and the Internal
Revenue Code in making their investment decision. Sales and other transactions
between an ERISA plan or a non-ERISA plan, and persons related to it are
prohibited transactions. The particular facts concerning the sponsorship,
operations and other investments of an ERISA plan or non-ERISA plan may cause a
wide range of other persons to be treated as disqualified persons or parties in
interest with respect to it. A prohibited transaction, in addition to imposing
potential personal liability upon fiduciaries of ERISA plans, may also result in
the imposition of an excise tax under the Internal Revenue Code or a penalty
under ERISA upon the disqualified person or party in interest with respect to
the plan. If the disqualified person who engages in the transaction is the
individual on behalf of whom an IRA or Roth IRA is maintained or his
beneficiary, the IRA or Roth IRA may lose its tax-exempt status and its assets
may be deemed to have been distributed to the individual in a taxable
distribution on account of the prohibited transaction, but no excise tax will be
imposed. Fiduciary shareholders should consult their own legal advisors if they
have any concern as to whether the ownership of Senior Housing shares involves a
prohibited transaction.
Special Fiduciary and Prohibited Transactions Consequences. The Department
of Labor, which has administrative responsibility over ERISA plans as well as
non-ERISA plans, has issued a regulation defining "plan assets." The regulation
generally provides that when an ERISA or non-ERISA plan acquires a security that
is an equity interest in an entity and that security is neither a "publicly
offered security" nor a security issued by an investment company registered
under the Investment Company Act of 1940, the ERISA plan's or non-ERISA plan's
assets include both the equity interest and an undivided interest in each of the
underlying assets of the entity, unless it is established either that the entity
is an operating company or that equity participation in the entity by benefit
plan investors is not significant.
Each class of Senior Housing shares--that is, its common shares and any
class of preferred shares that it may issue in the future--must be analyzed
separately to ascertain whether it is a publicly offered security. The
regulation defines a publicly offered security as a security that is "widely
held," "freely transferable" and either part of a class of securities registered
under the Securities Exchange Act of 1934, or sold under an effective
registration statement under the Securities Act of 1933, provided the securities
are registered under the Securities Exchange Act of 1934 within 120 days after
the end of the fiscal year of the issuer during which the offering occurred.
Senior Housing shares will be registered under the Securities Exchange Act of
1934.
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The regulation provides that a security is "widely held" only if it is part
of a class of securities that is owned by 100 or more investors independent of
the issuer and of one another. However, a security will not fail to be "widely
held" because the number of independent investors falls below 100 subsequent to
the initial public offering as a result of events beyond the issuer's control.
Senior Housing expects its common shares to be widely held.
The regulation provides that whether a security is "freely transferable" is
a factual question to be determined on the basis of all relevant facts and
circumstances. The regulation further provides that, where a security is part of
an offering in which the minimum investment is $10,000 or less, some
restrictions on transfer ordinarily will not, alone or in combination, affect a
finding that these securities are freely transferable. The restrictions on
transfer enumerated in the regulation as not affecting that finding include:
o any restriction on or prohibition against any transfer or assignment
which would result in a termination or reclassification for federal or
state tax purposes, or would otherwise violate any state or federal
law or court order;
o any requirement that advance notice of a transfer or assignment be
given to the issuer and any requirement that either the transferor or
transferee, or both, execute documentation setting forth
representations as to compliance with any restrictions on transfer
which are among those enumerated in the regulation as not affecting
free transferability, including those described in the preceding
clause of this sentence;
o any administrative procedure which establishes an effective date, or
an event prior to which a transfer or assignment will not be
effective; and
o any limitation or restriction on transfer or assignment which is not
imposed by the issuer or a person acting on behalf of the issuer.
Senior Housing believes that the restrictions imposed under the declaration
of trust on the transfer of shares do not result in the failure of its shares to
be "freely transferable." Furthermore, Senior Housing believes that at present
there exist no other facts or circumstances limiting the transferability of its
shares which are not included among those enumerated as not affecting their free
transferability under the regulation, and Senior Housing does not expect or
intend to impose in the future, or to permit any person to impose on its behalf,
any limitations or restrictions on transfer which would not be among the
enumerated permissible limitations or restrictions.
Assuming that each class of Senior Housing's shares will be "widely held"
and that no other facts and circumstances exist which restrict transferability
of these shares, Senior Housing has received an opinion of counsel that its
shares will not fail to be "freely transferable" for purposes of the regulation
due to the restrictions on transfer of the shares under Senior Housing's
declaration of trust and that under the regulation the shares are publicly
offered securities and Senior Housing's assets will not be deemed to be "plan
assets" of any ERISA plan or non-ERISA plan that invests in Senior Housing
shares.
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LEGAL MATTERS
Sullivan & Worcester LLP, Boston, Massachusetts, the lawyers for Senior
Housing, have issued an opinion about the legality of the shares. Sullivan &
Worcester LLP will rely, as to certain matters of Maryland law, upon an opinion
of Ballard Spahr Andrews & Ingersoll, LLP, Baltimore, Maryland. Barry M. Portnoy
was a partner and chairman of the firm of Sullivan & Worcester LLP until March
31, 1997 and is one of Senior Housing's managing trustees. Mr. Portnoy is also a
managing trustee of HRPT, Hospitality Properties and a director and 50% owner of
Reit Management, the investment advisor to Senior Housing, a director and
significant shareholder of one of Senior Housing's tenants. Jennifer B. Clark, a
vice president at Reit Management, was a partner of Sullivan & Worcester LLP
until July 1, 1999. Sullivan & Worcester LLP represents Senior Housing, HRPT,
Hospitality Properties, Reit Management and their affiliates on various matters.
Ballard Spahr Andrews & Ingersoll LLP is a tenant of HRPT and is counsel to the
agent of Senior Housing's bank credit facility.
EXPERTS
The consolidated financial statements and schedules of Senior Housing
Properties Trust at December 31, 1998 and 1997, and for each of the three years
in the period ended December 31, 1998, appearing in this prospectus and
registration statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given on the authority of such firm as
experts in accounting and auditing.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
FORWARD LOOKING STATEMENTS
This prospectus contains statements which constitute forward looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Those statements appear in a number of places in this prospectus and
include statements regarding the intent, belief or expectations of HRPT, Senior
Housing, their trustees or their officers with respect to the declaration or
payment of dividends, the consummation of additional acquisitions, policies and
plans of HRPT and Senior Housing regarding investments, dispositions,
financings, conflicts of interest or other matters, HRPT's and Senior Housing's
qualification and continued qualification as real estate investment trusts or
trends affecting their businesses, financial condition or results of operations.
HRPT and Senior Housing caution you that these forward looking statements are
not guarantees of future performance and involve risks and uncertainties. Actual
results may differ materially from the forward looking statements as a result of
various factors. These factors include, without limitation, changes in financing
terms, HRPT's or Senior Housing's ability or inability to complete acquisitions
and financing transactions, results of operations of HRPT's and Senior Housing's
properties and general changes in economic conditions not presently
contemplated. The "Risk Factors" and "Senior Housing Management's Discussion and
Analysis of Financial Condition and Results of Operations" sections of this
prospectus identify other important factors that could cause these differences.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
Senior Housing has filed with the SEC a registration statement, of which
this prospectus is a part, on Form S-11 under the Securities Act of 1933. This
prospectus does not contain all the information set forth in the registration
statement. Statements contained in this prospectus as to the content of any
contract or other
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document filed as an exhibit are not necessarily complete, and you should
consult the copy of those contracts or other documents filed as exhibits to the
registration statement. For further information regarding Senior Housing, please
read the registration statement and the exhibits and schedules thereto.
You may read and copy the registration statement and its exhibits and
schedules at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. When the Form S-11 becomes effective, Senior Housing
will be subject to the reporting requirements of the Securities Exchange Act of
1934 and the reports, proxy statements and other information filed by Senior
Housing with the SEC can then be inspected and copied at the SEC's Public
Reference Room. You may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. You may access the
electronic filing of the registration statement and its exhibits and schedules
on the SEC's internet site, http://www.sec.gov.
Senior Housing intends to make available to its shareholders annual reports
containing audited financial statements and quarterly reports containing
unaudited financial information for the first three quarters of each year.
---------------------------
You should rely only on the information contained in this prospectus. We
have not, and the Senior Housing has not, authorized any person to provide you
with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. HRPT and Senior Housing
believe that the information contained in this prospectus is accurate as of the
date on the cover. Changes may occur after that date, and neither HRPT nor
Senior Housing will update the information except as is required in the normal
course of their respective public disclosure practices. You should assume that
HRPT's and Senior Housing's business, financial condition, results of operations
and prospects may have changed since the date appearing on the cover of this
prospectus.
---------------------------
The amended and restated declaration of trust establishing Senior Housing
Properties Trust, dated , 1999, a copy of which, together with all amendments
thereto, is filed in the office of the State Department of Assessments and
Taxation of Maryland, provides that the name "Senior Housing Properties Trust"
refers to the trustees under Senior Housing's declaration as trustees, but not
individually or personally, and that no trustee, officer, shareholder, employee
or agent of Senior Housing shall be held to any personal liability for any
obligation of, or claim against, Senior Housing. All persons dealing with Senior
Housing shall look only to the assets of Senior Housing for the payment of any
sum or the performance of any obligation.
---------------------------
The amended and restated declaration of trust establishing HRPT, dated July
1, 1994, a copy of which, together with all amendments thereto, is filed in the
office of the State Department of Assessments and Taxation of Maryland, provides
that the name "HRPT Properties Trust" refers to the trustees under HRPT's
declaration as trustees, but not individually or personally, and that no
trustee, officer, shareholder, employee or agent of HRPT shall be held to any
personal liability for any obligation of, or claim against, HRPT. All persons
dealing with HRPT shall look only to the assets of HRPT for the payment of any
sum or the performance of any obligation.
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<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<S> <C> <C>
Unaudited Pro Forma Consolidated Financial Statements of HRPT Properties Trust
Introduction to unaudited pro forma consolidated financial statements........................................F-2
Unaudited pro forma consolidated balance sheet as of June 30, 1999...........................................F-3
Unaudited pro forma consolidated statement of income for the six months
ended June 30, 1999......................................................................................F-4
Unaudited pro forma consolidated statement of income for the year ended December 31, 1998....................F-5
Notes to unaudited pro forma consolidated financial statements...............................................F-6
Unaudited Pro Forma Consolidated Financial Statements of Senior Housing Properties Trust
Introduction to unaudited pro forma consolidated financial statements........................................F-8
Unaudited pro forma consolidated balance sheet as of June 30, 1999...........................................F-9
Unaudited pro forma consolidated statement of income for the six months
ended June 30, 1999.....................................................................................F-10
Unaudited pro forma consolidated statement of income for the year ended December 31, 1998...................F-11
Notes to unaudited pro forma consolidated financial statements..............................................F-12
Consolidated Financial Statements of Senior Housing Properties Trust and Financial Statement Schedules
Report of independent auditors..............................................................................F-14
Consolidated balance sheets as of December 31, 1997 and 1998 and June 30, 1999 (unaudited)..................F-15
Consolidated statements of income for each of the three years in the period ended
December 31, 1998 and for the six months ended June 30, 1998 and 1999 (unaudited).......................F-16
Consolidated statements of ownership interest of HRPT Properties Trust for each of the
three years in the period ended December 31, 1998 and for the six months ended
June 30, 1999 (unaudited)...............................................................................F-17
Consolidated statements of cash flows for each of the three years in the period ended
December 31, 1998 and for the six months ended June 30, 1998 and 1999 (unaudited) ......................F-18
Notes to consolidated financial statements..................................................................F-19
Schedule III - Real Estate and Accumulated Depreciation......................................................S-1
Schedule IV - Mortgage Loans on Real Estate..................................................................S-4
</TABLE>
F-1
<PAGE>
HRPT Properties Trust
Introduction to Unaudited Pro Forma Consolidated Financial Statements
The following unaudited pro forma consolidated balance sheet at June
30, 1999 is intended to present the financial position of HRPT Properties Trust
as if the transactions described in the notes had been completed as of June 30,
1999. The following unaudited pro forma consolidated statements of income are
intended to present the results of operations of HRPT as if these transactions
had been completed as of January 1, 1998.
These unaudited pro forma consolidated financial statements are not
necessarily indicative of what the actual consolidated financial position or
results of operations of HRPT would have been as of the date or for the periods
indicated, nor do they represent our expected consolidated financial position or
results of operations for any future period. Differences would result from,
among other considerations, future changes in HRPT's investments, changes in
rent which we receive, changes in interest rates and changes in the capital
structure of HRPT. For more information about the financial condition and
results of operations of HRPT, please refer to the financial statements of HRPT
filed with the SEC, including the audited consolidated financial statements for
the year ended December 31, 1998, included in HRPT's Current Report on Form 8-K
dated March 5, 1999, and the unaudited consolidated financial statements for the
quarter ended June 30, 1999, included in HRPT's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999.
F-2
<PAGE>
<TABLE>
<CAPTION>
HRPT Properties Trust
Unaudited Pro Forma Consolidated Balance Sheet
June 30, 1999
(dollars in thousands, except per share amounts)
Pro Forma
ASSETS Historical (A) Adjustments Pro Forma
-------------- ------------- -----------
<S> <C> <C> <C>
Real estate properties:
Land $378,714 $(69,673) $309,041
Buildings and improvements 2,627,807 (662,720) 1,965,087
---------- --------- ----------
3,006,521 (732,393) 2,274,128
Accumulated depreciation (184,992) 105,823 (79,169)
---------- --------- ----------
2,821,529 (626,570) (B) 2,194,959
Real estate mortgages 60,530 (37,638) (B) 22,892
Investment in Hospitality Properties 108,242 -- 108,242
Investment in Senior Housing -- 220,548 (C) 220,548
Cash and cash equivalents 26,984 (26,593) (D) 391
Other assets, net 84,869 (9,918) (B) 74,951
---------- --------- ----------
$3,102,154 $(480,171) $2,621,983
========== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank credit facility $-- $-- $--
Senior notes payable, net 957,513 (200,000) (E) 757,513
Mortgage notes payable 23,985 -- 23,985
Convertible subordinated debentures 204,863 -- 204,863
Other liabilities 51,252 (756) (B) 50,496
Deferred rents and other deferred revenues 32,509 (27,369) (B) 5,140
Security deposits 19,332 (15,235) (B) 4,097
Shareholders' equity:
Preferred shares of beneficial interest; $0.01 par
value; 50,000,000 shares authorized; none
issued -- -- --
Common shares of beneficial interest; $0.01 par
value; 150,000,000 shares authorized;
131,894,626 shares issued and outstanding 1,319 -- 1,319
Additional paid-in capital 1,971,168 -- 1,971,168
Cumulative net income 643,924 (10,000) (G) 633,924
Cumulative distributions (803,711) (226,811) (F) (1,030,522)
---------- --------- ----------
Total shareholders' equity 1,812,700 (236,811) 1,575,889
---------- --------- ----------
$3,102,154 $(480,171) $2,621,983
========== ========= ==========
</TABLE>
See accompanying notes.
F-3
<PAGE>
<TABLE>
<CAPTION>
HRPT Properties Trust
Unaudited Pro Forma Consolidated Statement of Income
For the Six Months Ended June 30, 1999
(amounts in thousands, except per share data)
Pro Forma
Revenues: Historical (A) Adjustments Pro Forma
-------------- ------------ ----------
<S> <C> <C> <C>
Rental income $ 203,335 $ (42,409) $ 160,926
Interest and other income 7,619 (2,881) 4,738
--------- --------- ---------
Total revenues 210,954 (45,290) (H) 165,664
--------- --------- ---------
Expenses:
Operating expenses 50,548 -- 50,548
Interest 39,525 (5,600) (I) 33,925
Depreciation and amortization 37,314 (11,207) (J) 26,107
General and administrative 9,849 (2,259) (K) 7,590
--------- --------- ---------
Total expenses 137,236 (19,066) 118,170
--------- --------- ---------
Income before equity in earnings of
Hospitality Properties and Senior
Housing, and gain on sale of properties 73,718 (26,224) 47,494
Equity in earnings of Hospitality Properties 4,029 -- 4,029
Equity in earnings of Senior Housing -- 12,100 (L) 12,100
Loss on equity transaction of Hospitality
Properties (711) -- (711)
--------- --------- ---------
Income before gain on sale of properties 77,036 (14,124) 62,912
Gain on sale of properties 8,307 -- 8,307
--------- --------- ---------
Net income $ 85,343 $ (14,124) $ 71,219
========= ========= =========
Weighted average shares outstanding 131,778 -- 131,778
========= ========= =========
Basic and diluted earnings per share:
Income before gain on sale of properties $ 0.58 $ 0.48
========= =========
Net income $ 0.65 $ 0.54
========= =========
</TABLE>
See accompanying notes.
F-4
<PAGE>
<TABLE>
<CAPTION>
HRPT Properties Trust
Unaudited Pro Forma Consolidated Statement of Income
For the Year Ended December 31, 1998
(amounts in thousands, except per share data)
Pro Forma
Revenues: Historical (A) Adjustments Pro Forma
-------------- ------------ ----------
<S> <C> <C> <C>
Rental income $ 340,851 $ (82,542) $ 258,309
Interest and other income 15,703 (5,764) 9,939
--------- --------- ---------
Total revenues 356,554 (88,306) (H) 268,248
--------- --------- ---------
Expenses:
Operating expenses 77,536 -- 77,536
Interest 64,326 (12,400) (I) 51,926
Depreciation and amortization 60,764 (18,297) (J) 42,467
General and administrative 17,172 (4,480) (K) 12,692
--------- --------- ---------
Total expenses 219,798 (35,177) 184,621
--------- --------- ---------
Income before equity in earnings of Hospitality
Properties and Senior Housing, and
extraordinary item 136,756 (53,129) 83,627
Equity in earnings of Hospitality Properties 7,687 -- 7,687
Equity in earnings of Senior Housing -- 25,730 (L) 25,730
Gain on equity transaction of Hospitality
Properties 2,213 -- 2,213
--------- --------- ---------
Income before extraordinary item 146,656 (27,399) 119,257
Extraordinary item - early extinguishment of debt (2,140) -- (2,140)
--------- --------- ---------
Net income $ 144,516 $ (27,399) $ 117,117
========= ========= =========
Weighted average shares outstanding 119,867 -- 119,867
========= ========= =========
Basic and diluted earnings per share:
Income before extraordinary item $ 1.22 $ 0.99
========= =========
Net income $ 1.21 $ 0.98
========= =========
</TABLE>
See accompanying notes.
F-5
<PAGE>
HRPT Properties Trust
Notes to Unaudited Pro Forma Consolidated Financial Statements
(dollars in thousands)
A. Represents the historical consolidated balance sheet and consolidated
statements of income of HRPT Properties Trust ("HRPT") as of the date and
for the periods presented.
Consolidated Balance Sheet Adjustments
B. Represents elimination of HRPT's historical carrying value of 93 senior
housing investments and related assets and liabilities transferred by HRPT
to Senior Housing Properties Trust ("Senior Housing").
<TABLE>
<CAPTION>
C. Represents adjustments to reflect HRPT's investment in Senior Housing after
the spin-off and related transactions using the equity method of
accounting, calculated as follows:
<S> <C>
Net historical carrying value of 93 senior housing investments and related assets and
liabilities transferred to Senior Housing (see note B) $ 630,934
Estimated cash transferred by HRPT to Senior Housing (see note D) 16,425
Cash payment by Senior Housing of the formation debt to HRPT (see note E) (200,000)
Distribution by HRPT of Senior Housing shares to HRPT shareholders (see note F) (226,811)
---------
HRPT's equity investment in Senior Housing $ 220,548
=========
<CAPTION>
D. Represents the net cash effect of the spin-off and related transactions,
calculated as follows:
<S> <C>
Senior Housing cash at June 30, 1999 $ (168)
Estimated cash transferred to Senior Housing from HRPT (16,425)
Estimated transaction costs paid by HRPT (not reimbursed by Senior Housing) (10,000)
Cash received by HRPT from Senior Housing to pay the formation debt (see note E) 200,000
Cash used by HRPT to prepay HRPT senior debt outstanding (see note E) (200,000)
---------
$ (26,593)
=========
</TABLE>
E. After completion of the spin-off, Senior Housing will borrow $200,000 under
its bank credit facility to pay the Senior Housing formation debt due HRPT
of $200,000. This adjustment reflects the application of these proceeds by
HRPT to prepay HRPT senior debt outstanding.
<TABLE>
<CAPTION>
F. Represents the distribution of Senior Housing shares to HRPT shareholders
on the basis of one Senior Housing share for each 10 HRPT shares
outstanding, calculated as follows:
<S> <C>
Net historical carrying value of 93 senior housing investments and related assets and
liabilities transferred to Senior Housing (see note B) $ 630,934
Estimated cash transferred to Senior Housing 16,425
Cash received by HRPT from Senior Housing to pay the formation debt (see note E) (200,000)
---------
447,359
Multiplied by:
Senior Housing shares distributed to HRPT shareholders (13.19 million) as a percentage
of total Senior Housing shares outstanding (26 million) x 50.7%
---------
$ 226,811
=========
</TABLE>
F-6
<PAGE>
HRPT Properties Trust
Notes to Unaudited Pro Forma Consolidated Financial Statements - continued
(dollars in thousands)
G. Represents estimated transaction costs of $10 million to be expensed by
HRPT. These expenses are not reflected in the pro forma statements of
income because they are not recurring.
Consolidated Statements of Income Adjustments
H. Represents historical rent, interest and other income realized by HRPT from
properties transferred to Senior Housing.
I. Represents the reduction in HRPT's interest expense, calculated as follows:
<TABLE>
<CAPTION>
Six Months Year Ended
Ended June 30, December 31,
1999 1998
------------- -------------
<S> <C> <C>
HRPT's senior notes prepaid (see note E) $200,000 $200,000
Multiplied by:
Historical interest rate of debt to be prepaid x 5.6% x 6.2%
----------- ------------
Reduction in HRPT's interest expense $5,600 $12,400
=========== ============
</TABLE>
J. Represents the historical depreciation expense related to the properties
transferred to Senior Housing.
K. Represents the amount of HRPT's general and administrative expense
allocated to the properties transferred to Senior Housing. This allocation
is based upon HRPT's advisory fee formula and other costs allocated pro
rata to the historical cost of the transferred assets compared to HRPT's
historical cost of all its properties. Management believes that this method
of allocating general and administrative expenses is reasonable.
L. Represents HRPT's share of the pro forma consolidated net income of Senior
Housing (presented on pages F-10 and F-11), calculated as follows:
<TABLE>
<CAPTION>
Six Months Year Ended
Ended June 30, December 31,
1999 1998
------------- -------------
<S> <C> <C>
Senior Housing pro forma net income $24,543 $52,191
Multiplied by:
HRPT's ownership of Senior Housing shares (12.81 million)
as a percentage of total Senior Housing shares outstanding
(26 million)
x 49.3% x 49.3%
----------- -----------
Equity in earnings of Senior Housing $12,100 $25,730
=========== ===========
</TABLE>
F-7
<PAGE>
Senior Housing Properties Trust
Introduction to Unaudited Pro Forma Consolidated Financial Statements
The following unaudited pro forma consolidated balance sheet at June
30, 1999, is intended to present the financial position of Senior Housing
Properties Trust as if the transactions described in the notes had been
completed as of June 30, 1999. The following unaudited pro forma consolidated
statements of income are intended to present the results of operations of Senior
Housing as if these transactions had been completed as of January 1, 1998.
These unaudited pro forma consolidated financial statements are not
necessarily indicative of the expected consolidated financial position or
results of operations of Senior Housing for any future period. Differences could
result from many factors, including future changes in Senior Housing's
investments, changes in interest rates and changes in the capital structure of
Senior Housing. This pro forma information should be read in conjunction with
the audited Consolidated Financial Statements of Senior Housing Properties Trust
and notes thereto appearing on pages F-15 through F-21 and with "Senior Housing
Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this prospectus.
F-8
<PAGE>
<TABLE>
<CAPTION>
Senior Housing Properties Trust
Unaudited Pro Forma Consolidated Balance Sheet
June 30, 1999
(dollars in thousands, except per share amounts)
Pro Forma
ASSETS Historical (A) Adjustments Pro Forma
-------------- ----------- ----------
<S> <C> <C> <C>
Real estate properties:
Land $ 69,673 $-- $ 69,673
Buildings and improvements 662,720 -- 662,720
--------- --------- ---------
732,393 -- 732,393
Accumulated depreciation (105,823) -- (105,823)
--------- --------- ---------
626,570 -- 626,570
Real estate mortgages 37,638 -- 37,638
Cash and cash equivalents 168 16,425 (B) 16,593
Other assets 9,918 -- 9,918
--------- --------- ---------
$ 674,294 $ 16,425 $ 690,719
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank credit facility $-- $ 200,000 (C) $ 200,000
Deferred rents and other deferred revenues 27,369 -- 27,369
Security deposits 15,235 -- 15,235
Other liabilities 756 -- 756
Shareholders' equity:
Common shares of beneficial interest; $0.01 par
value; 50,000,000 shares authorized; 26,000,000
pro forma shares issued and outstanding -- 260 (D) 260
Additional paid-in capital -- 447,099 (E) 447,099
Ownership interest of HRPT Properties Trust 630,934 (630,934) (F) --
--------- --------- ---------
Total shareholders' equity 630,934 (183,575) 447,359
--------- --------- ---------
$ 674,294 $ 16,425 $ 690,719
========= ========= =========
</TABLE>
See accompanying notes.
F-9
<PAGE>
<TABLE>
<CAPTION>
Senior Housing Properties Trust
Unaudited Pro Forma Consolidated Statement of Income
For the Six Months Ended June 30, 1999
(amounts in thousands, except per share data)
Pro Forma
Revenues: Historical (A) Adjustments Pro Forma
-------------- ----------- ---------
<S> <C> <C> <C>
Rental income $42,409 $-- $42,409
Interest and other income 2,881 -- 2,881
------- ------ -------
Total revenues 45,290 -- 45,290
------- ------ -------
Expenses:
Interest 9,992 (2,711) (G) 7,281
Depreciation 11,207 -- 11,207
General and administrative 2,259 -- 2,259
------- ------ -------
Total expenses 23,458 (2,711) 20,747
------- ------ -------
Net income $21,832 $2,711 $24,543
======= ====== =======
Weighted average shares outstanding 26,000 (H) 26,000
====== =======
Earnings per share $0.94
=======
</TABLE>
See accompanying notes.
F-10
<PAGE>
<TABLE>
<CAPTION>
Senior Housing Properties Trust
Unaudited Pro Forma Consolidated Statement of Income
For the Year Ended December 31, 1998
(amounts in thousands, except per share data)
Pro Forma
Revenues: Historical (A) Adjustments Pro Forma
-------------- ----------- ---------
<S> <C> <C> <C>
Rental income $82,542 $ 1,461 $84,003
Interest and other income 5,764 -- 5,764
------- ------- -------
Total revenues 88,306 1,461 (I) 89,767
------- ------- -------
Expenses:
Interest 19,293 (4,730) (G) 14,563
Depreciation 18,297 193 (I) 18,490
General and administrative 4,480 43 (I) 4,523
------- ------- -------
Total expenses 42,070 (4,494) 37,576
------- ------- -------
Net income $46,236 $ 5,955 $52,191
======= ======= =======
Weighted average shares outstanding 26,000 (H) 26,000
====== =======
Earnings per share $2.01
=======
</TABLE>
See accompanying notes.
F-11
<PAGE>
Senior Housing Properties Trust
Notes to Unaudited Pro Forma Consolidated Financial Statements
(dollars in thousands, except per share data)
A. Represents the historical consolidated balance sheet and consolidated
statements of income of Senior Housing Properties Trust ("Senior Housing")
as presented on pages F-15 and F-16.
Consolidated Balance Sheet Adjustments
<TABLE>
<CAPTION>
B. Represents the net cash effect of the spin-off and related transactions on
Senior Housing, calculated as follows:
<S> <C>
Estimated cash transferred by HRPT to Senior Housing $ 16,425
Borrowing under Senior Housing's bank credit facility (see note C) 200,000
Payment by Senior Housing of the formation debt due to HRPT (200,000)
---------
$ 16,425
=========
</TABLE>
C. Represents the borrowing of $200,000 under Senior Housing's bank credit
facility. The proceeds from this borrowing will be used to pay Senior
Housing's formation debt due to HRPT.
D. Represents the $0.01 per share par value of the 26 million Senior Housing
shares issued and outstanding as of the spin-off date.
<TABLE>
<CAPTION>
E. Represents the adjustments from the spin-off and related transactions to
Senior Housing's equity, calculated as follows:
<S> <C>
Ownership interest of HRPT Properties Trust $ 630,934
Payment by Senior Housing of the formation debt due to HRPT (see note C) (200,000)
Estimated cash transferred to Senior Housing from HRPT (see note B) 16,425
---------
Senior Housing equity (includes $220,548 of HRPT's equity investment and 447,359
$226,811 distributed in the spin-off)
Par value of Senior Housing shares outstanding (see note D) (260)
---------
Additional paid-in capital $ 447,099
=========
<CAPTION>
F. Represents reclassification of balance of Ownership Interest of HRPT
related to the spin-off, calculated as follows:
<S> <C>
Formation debt due HRPT paid by Senior Housing (see note C) $(200,000)
Estimated cash transferred to Senior Housing from HRPT 16,425
Par value of Senior Housing's 26 million shares outstanding (see note D) (260)
Senior Housing's additional paid-in capital (see note E) (447,099)
---------
$(630,934)
=========
</TABLE>
F-12
<PAGE>
Senior Housing Properties Trust
Notes to Unaudited Pro Forma Consolidated Financial Statements - continued
(dollars in thousands, except per share data)
Consolidated Statements of Income Adjustments
G. Represents adjustments to interest expense from the spin-off and related
transactions, calculated as follows:
<TABLE>
<CAPTION>
Year Ended
Six Months Ended December 31,
June 30, 1999 1998
---------------- -------------
<S> <C> <C>
HRPT interest expense allocated to the Senior Housing
properties $ (9,992) $(19,293)
Interest expense on Senior Housing's $200,000 borrowing
under its bank credit facility (see note C) 7,281 14,563
-------- --------
$ (2,711) $ (4,730)
======== ========
</TABLE>
The HRPT interest expense allocation to Senior Housing is the historical
amount of HRPT's total interest expense times a fraction, the numerator of
which is the historical cost of HRPT's senior housing properties and the
denominator of which is the historical cost of all HRPT's properties, each
calculated on an average basis for the periods presented. Management
believes this method of allocating interest expense is reasonable.
The interest rate payable by Senior Housing is LIBOR plus a premium, or
7.0% as of June 30, 1999. Interest expense also includes a fee on the
unused portion of the bank credit facility of 0.375%, or $281 for the six
months ended June 30, 1999, and $563 for the year ended December 31, 1998.
The effect of a 1/8% change in interest rates, on pro forma borrowings will
change interest expense by $250.
H. As of the date of the spin-off, Senior Housing will have 26 million shares
issued and outstanding.
I. Represents rental income, depreciation and general and administrative
expenses arising from the acquisition of five of the Senior Housing
properties in September 1998, as if the properties had been acquired on
January 1, 1998.
F-13
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholder of Senior Housing Properties Trust:
We have audited the accompanying consolidated balance sheets of Senior Housing
Properties Trust as of December 31, 1998 and 1997, and the related consolidated
statements of income, ownership interest of HRPT Properties Trust and cash flows
for each of the three years in the period ended December 31, 1998. Our audits
also included the financial statement schedules listed in the Index at F-1.
These financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Senior Housing
Properties Trust at December 31, 1998 and 1997, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
July 1, 1999, except for Note 1,
as to which the date is September 1, 1999
F-14
<PAGE>
<TABLE>
<CAPTION>
Senior Housing Properties Trust
Consolidated Balance Sheets
(dollars in thousands)
As of December 31,
---------------------- As of June 30,
1997 1998 1999
--------- --------- --------------
(unaudited)
ASSETS
<S> <C> <C> <C>
Real estate properties:
Land $ 68,265 $ 69,673 $ 69,673
Buildings and improvements 652,722 662,720 662,720
--------- --------- ---------
720,987 732,393 732,393
Accumulated depreciation (74,213) (94,616) (105,823)
--------- --------- ---------
646,774 637,777 626,570
Real estate mortgages 38,134 37,826 37,638
Cash and cash equivalents -- 139 168
Other assets 7,678 10,554 9,918
--------- --------- ---------
$ 692,586 $ 686,296 $ 674,294
========= ========= =========
LIABILITIES AND OWNERSHIP INTEREST
Deferred rents and other deferred revenues $ 29,721 $ 28,266 $ 27,369
Security deposits 15,235 15,235 15,235
Other liabilities 692 726 756
Ownership interest of HRPT Properties Trust 646,938 642,069 630,934
--------- --------- ---------
$ 692,586 $ 686,296 $ 674,294
========= ========= =========
</TABLE>
See accompanying notes.
F-15
<PAGE>
<TABLE>
<CAPTION>
Senior Housing Properties Trust
Consolidated Statements of Income
(dollars in thousands)
Six Months Ended
Year Ended December 31, June 30,
--------------------------- -------------------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income $66,202 $78,463 $82,542 $40,324 $42,409
Interest and other income 4,240 5,708 5,764 2,886 2,881
------- ------- ------- ------- -------
Total revenues 70,442 84,171 88,306 43,210 45,290
------- ------- ------- ------- -------
Expenses:
Interest 14,719 16,958 19,293 9,263 9,992
Depreciation 15,383 17,826 18,297 9,102 11,207
General and administrative 3,899 4,664 4,480 2,174 2,259
------- ------- ------- ------- -------
Total expenses 34,001 39,448 42,070 20,539 23,458
------- ------- ------- ------- -------
Net income $36,441 $44,723 $46,236 $22,671 $21,832
======= ======= ======= ======= =======
</TABLE>
See accompanying notes.
F-16
<PAGE>
Senior Housing Properties Trust
Consolidated Statements of Ownership Interest of
HRPT Properties Trust
(dollars in thousands)
Balance at December 31, 1995 $ 573,793
Net income 36,441
Owner contribution, net 54,258
---------
Balance at December 31, 1996 664,492
Net income 44,723
Owner distribution, net (62,277)
---------
Balance at December 31, 1997 646,938
Net income 46,236
Owner distribution, net (51,105)
---------
Balance at December 31, 1998 642,069
Net income (unaudited) 21,832
Owner distribution, net (unaudited) (32,967)
---------
Balance at June 30, 1999 (unaudited) $ 630,934
=========
See accompanying notes.
F-17
<PAGE>
<TABLE>
<CAPTION>
Senior Housing Properties Trust
Consolidated Statements of Cash Flows
(dollars in thousands)
Year Ended December 31, Six Months Ended June 30,
----------------------------------- -------------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $ 36,441 $ 44,723 $ 46,236 $ 22,671 $ 21,832
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation 15,383 17,826 18,297 9,102 11,207
Changes in assets and liabilities:
Other assets (1,317) (2,394) (2,876) 667 636
Deferred rents and other deferred revenues 723 22,087 (1,455) (496) (897)
Security deposits 34 8,815 -- -- --
Other liabilities 44 37 34 31 30
--------- --------- --------- --------- ---------
Cash provided by operating activities 51,308 91,094 60,236 31,975 32,808
--------- --------- --------- --------- ---------
Cash Flows From Investing Activities:
Real estate acquisitions and improvements (105,094) (19,799) (2) -- --
Investments in mortgage loans (700) (124) -- -- --
Repayments of mortgage loans 228 260 308 135 188
--------- --------- --------- --------- ---------
Cash (used for) provided by investing activities
(105,566) (19,663) 306 135 188
--------- --------- --------- --------- ---------
Cash Flows From Financing Activities:
Owner's net contribution (distribution) 54,258 (71,431) (60,403) (32,110) (32,967)
--------- --------- --------- --------- ---------
Cash provided by (used for) financing
activities 54,258 (71,431) (60,403) (32,110) (32,967)
--------- --------- --------- --------- ---------
Increase in cash and cash equivalents -- -- 139 -- 29
Cash and cash equivalents at beginning of period -- -- -- -- 139
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period $-- $-- $ 139 $-- $ 168
========= ========= ========= ========= =========
Non-Cash Investing Activities:
Real estate acquisitions $-- $ (9,154) $ (9,298) $-- $--
Non-Cash Financing Activities:
Owner's contributions -- 9,154 9,298 -- --
</TABLE>
See accompanying notes.
F-18
<PAGE>
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization
The consolidated financial statements of Senior Housing Properties Trust include
the accounts of 81 properties and 12 mortgage receivables (the "Properties") and
of Senior Housing Properties Trust ("Senior Housing Trust"). The Properties and
Senior Housing Trust are collectively referred to as "Senior Housing". These
consolidated financial statements are presented as if Senior Housing was a legal
entity separate from HRPT Properties Trust ("HRPT"); however, no such entity
exists.
HRPT organized Senior Housing Trust, a 100% owned subsidiary, as a Maryland real
estate investment trust on December 16, 1998. At the time of its organization,
Senior Housing Trust issued 26.4 million shares to HRPT for consideration of
$263,748. Subsequently, 0.4 million shares were cancelled and 26 million shares
are currently issued and outstanding.
As of the dates and for the periods presented, the Properties were owned by
HRPT. On or about June 30, 1999, the Properties were transferred by HRPT to
several of its 100% owned subsidiaries. Effective as of September 1, 1999, HRPT
transferred 100% ownership of the several subsidiaries which own the Properties
to Senior Housing Trust. HRPT is in the process of distributing 13.2 million of
its 26 million Senior Housing Trust shares to HRPT's shareholders (the
"Spin-Off"). Senior Housing Trust has filed a registration statement on Form
S-11 with the Securities and Exchange Commission to effect the Spin-Off.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation. All of Senior Housing is owned by HRPT, and HRPT's
historical basis has been presented. Substantially all of the rental income and
mortgage interest income received by HRPT from the tenants and mortgagors of
Senior Housing is deposited in and commingled with HRPT's general funds. Capital
investments and other cash required by Senior Housing are provided by HRPT.
Interest expense is allocated based on HRPT's historical interest expense as a
percentage of HRPT's average historical costs of real estate investments.
General and administrative costs of HRPT are allocated to Senior Housing based
on HRPT's investment advisory agreement formula and other costs are allocated
based on historical costs as a percentage of HRPT's average historical costs of
real estate investments. In the opinion of management, the methods for
allocating interest and general and administrative expenses are reasonable. It
is not practicable to estimate additional costs that would have been incurred by
Senior Housing as a separate entity.
Real Estate Properties and Mortgage Investments. Depreciation on real estate
properties is expensed on a straight-line basis over estimated useful lives of
up to 40 years for buildings and improvements and up to 12 years for personal
property. Impairment losses on properties are recognized where indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by the properties are less than the carrying amount of concerned properties. The
determination of net realizable value includes consideration of many factors
including income to be earned from the property, holding costs (exclusive of
interest), estimated selling prices, and prevailing economic and market
conditions. Based upon these factors, the accompanying financial statements
include no impairment losses.
Revenue Recognition. Rental income from operating leases is recognized on a
straight-line basis over the life of the lease agreements. Interest income is
recognized as earned over the terms of the real estate mortgages. Percentage
rent and supplemental mortgage interest income is recognized as earned. For
interim periods, percentage rent and supplemental mortgage interest income are
accrued prior to achievement of specified targets when the achievement of the
targets is probable. For the years ended December 31, 1996, 1997 and 1998,
percentage rent and supplemental mortgage interest income aggregated $2.6
million, $2.9 million and $2.9 million, respectively. For the six months ended
June 30, 1998 and 1999, percentage rent and supplemental mortgage interest
income aggregated $1.4 million (unaudited) and $2.0 million (unaudited),
respectively.
F-19
<PAGE>
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates. Preparation of these financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that may affect the amounts reported in these financial
statements and related notes. The actual results could differ from these
estimates.
Income Taxes. Throughout the periods presented herein, Senior Housing's
operations were included in HRPT's income tax returns. HRPT is a real estate
investment trust under the Internal Revenue Code of 1986, as amended.
Accordingly, it is not subject to Federal income taxes provided it distributes
its taxable income and meets other requirements for qualifying as a real estate
investment trust. However, it is subject to state and local taxes on its income
and property. Upon completion of the Spin-Off, Senior Housing intends to qualify
as a real estate investment trust under the Internal Revenue Code of 1986, as
amended.
Note 3. Real Estate Properties
The owned Properties are leased on triple net bases, pursuant to noncancellable,
fixed term operating leases expiring between 2001 to 2019. Generally, the leases
to a single tenant or group of affiliated tenants are cross-defaulted and
cross-guaranteed, and provide for all or none tenant renewal options at existing
rates followed by several market rate renewal terms. These triple net leases
generally require the lessee to pay all property operating costs.
The future minimum lease payments to be received during the current terms of the
leases, as of December 31, 1998, are approximately $79.4 million in 1999, $80.1
million in 2000, $80.1 million in 2001, $81.7 million in 2002, $81.9 million in
2003 and $686.6 million thereafter.
Note 4. Real Estate Mortgages
December 31,
-------------------------
1997 1998
-------------------------
(dollars in thousands)
Mortgage notes receivable due December 2016 $ 8,800 $ 8,769
Mortgage note receivable due January 2013 883 883
Mortgage note receivable due December 2010 19,184 18,992
Mortgage notes receivable due January 2006 9,267 9,182
-------------------------
$38,134 $37,826
=========================
At December 31, 1998, the interest rates on these notes receivable ranged from
10.1% to 13.75% per annum.
Note 5. Commitments and Contingencies
At December 31, 1998 and June 30, 1999, HRPT had total commitments aggregating
$3.7 million to fund or finance improvements to the Properties. Upon completion
of the Spin-Off, Senior Housing Trust will assume these commitments.
Note 6. Transactions with Affiliates
HRPT has entered an investment advisory agreement with Reit Management &
Research, Inc. ("Reit Management"). Reit Management provides investment,
management and administrative services to HRPT, and will provide similar
services to Senior Housing Trust. Reit Management is owned by Gerard M. Martin
and Barry M. Portnoy, who also serve as managing trustees of HRPT and will serve
as managing trustees of Senior Housing Trust. Reit Management is paid by HRPT
based on a formula amount of gross invested assets of HRPT. Investment advisory
fees paid by HRPT to Reit Management during 1996, 1997 and 1998 with respect to
Senior Housing's invested assets were $3.2 million, $3.7 million and $3.8
million, respectively. Reit Management is also entitled to an incentive fee paid
in restricted shares based on a formula. Concurrent with
F-20
<PAGE>
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the Spin-Off, Senior Housing Trust will enter a separate agreement with Reit
Management on substantially similar terms.
Note 7. Fair Value of Financial Instruments and Commitments
The financial statements presented include mortgage investments, rents
receivable, other liabilities and security deposits. Except as follows, the fair
values of the financial instruments and commitments to fund improvements were
not materially different from their carrying values at December 31, 1997 and
1998:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998
--------------------------- ---------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
--------------------------- ---------------------------
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Real estate mortgages $38,134 $40,466 $37,826 $40,525
Commitments to fund improvements -- 6,207 -- 3,707
</TABLE>
The fair values of the real estate mortgages are based on estimates using
discounted cash flow analyses and currently prevailing market rates. The fair
value of the commitments represent the actual amounts committed.
Note 8. Concentration of Credit Risk
The assets included in these financial statements are primarily income producing
senior housing real estate located throughout the United States. The following
is a summary of the significant lessees and mortgagees as of and for the years
ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
Year Ended
December 31, 1997 December 31, 1997
-------------------------------- ------------------------------
Investment % of Total Revenue % of Total
-------------------------------- ------------------------------
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Marriott International, Inc. $325,521 43% $30,365 36%
Integrated Health Services, Inc. 218,201 29 24,962 30
Brookdale Living Communities, Inc. 101,850 13 10,514 13
Mariner Post-Acute Network, Inc. 75,080 10 12,441 15
All others 38,469 5 4,930 6
------------------------------- -----------------------------
$759,121 100% $83,212 100%
=============================== =============================
<CAPTION> Year Ended
December 31, 1998 December 31, 1998
-------------------------------- ------------------------------
Investment % of Total Revenue % of Total
-------------------------------- ------------------------------
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Marriott International, Inc. $325,521 42% $30,270 35%
Integrated Health Services, Inc. 217,893 29 26,841 31
Brookdale Living Communities, Inc. 101,850 13 11,074 13
Mariner Post-Acute Network, Inc. 86,486 11 13,620 15
All others 38,469 5 4,952 6
-------------------------------- ------------------------------
$770,219 100% $86,757 100%
================================ ==============================
</TABLE>
F-21
<PAGE>
<TABLE>
<CAPTION>
Senior Housing Properties Trust
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(Dollars in thousands)
Gross Amount Carried at Close
Initial Cost to Company of Period 12/31/98
----------------------- --------------------------------
Costs Original
Capitalized Accumulated Constr-
Buildings and Subsequent Buildings and Depreciation Date uction
Location State Land Equipment to Acquisition Land Equipment Total (1) (2) Aquired Date
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mesa AZ $1,480 $13,320 $ -- $1,480 $13,320 $14,800 $680 12/27/96 1985
Phoenix AZ 655 2,525 5 655 2,530 3,185 471 6/30/92 1963
Scottsdale AZ 979 8,807 140 990 8,936 9,926 1,033 5/16/94 1990
Sun City AZ 1,174 10,569 173 1,189 10,727 11,916 1,218 6/17/94 1990
Yuma AZ 103 604 1 103 605 708 112 6/30/92 1984
Yuma AZ 223 2,100 3 223 2,103 2,326 386 6/30/92 1984
Fresno CA 738 2,577 188 738 2,765 3,503 646 12/28/90 1963
Laguna Hills CA 3,132 28,184 475 3,172 28,619 31,791 3,072 9/9/94 1975
Lancaster CA 601 1,859 1,028 601 2,887 3,488 610 12/28/90 1969
Newport Beach CA 1,176 1,729 1,223 1,176 2,952 4,128 592 12/28/90 1962
Stockton CA 382 2,750 4 382 2,754 3,136 507 6/30/92 1968
Tarzana CA 1,277 977 806 1,278 1,782 3,060 403 12/28/90 1969
Thousand Oaks CA 622 2,522 310 622 2,832 3,454 639 12/28/90 1965
Van Nuys CA 716 378 225 718 601 1,319 154 12/28/90 1969
Canon City CO 292 6,228 -- 292 6,228 6,520 201 9/26/97 1970
Colorado Springs CO 245 5,236 -- 245 5,236 5,481 169 9/26/97 1972
Delta CO 167 3,570 -- 167 3,570 3,737 115 9/26/97 1963
Grand Junction CO 204 3,875 329 204 4,204 4,408 650 12/30/93 1968
Grand Junction CO 6 2,583 1,316 136 3,769 3,905 513 12/30/93 1978
Lakewood CO 232 3,766 723 232 4,489 4,721 970 12/28/90 1972
Littleton CO 185 5,043 348 185 5,391 5,576 1,224 12/28/90 1965
Cheshire CT 520 7,380 1,559 520 8,939 9,459 2,626 11/1/87 1963
Killingly CT 240 5,360 460 240 5,820 6,060 1,970 5/15/87 1972
New Haven CT 1,681 14,953 1,236 1,681 16,189 17,870 3,423 5/11/92 1971
Waterbury CT 1,003 9,023 915 1,003 9,938 10,941 2,097 5/11/92 1974
Waterford CT 86 4,714 453 86 5,167 5,253 1,814 5/15/87 1965
Willimantic CT 134 3,566 479 166 4,013 4,179 1,307 5/15/87 1965
Boca Raton FL 4,404 39,633 799 4,474 40,362 44,836 4,664 5/20/94 1994
Deerfield Beach FL 1,664 14,972 299 1,690 15,245 16,935 1,762 5/16/94 1986
Fort Myers FL 2,349 21,137 419 2,385 21,520 23,905 2,354 8/16/94 1984
Palm Harbor FL 3,327 29,945 591 3,379 30,484 33,863 3,523 5/16/94 1992
Port St. Lucie FL 1,223 11,009 219 1,242 11,209 12,451 1,295 5/20/94 1993
S-1
<PAGE>
<CAPTION>
Senior Housing Properties Trust
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(Dollars in thousands)
Gross Amount Carried at Close
Initial Cost to Company of Period 12/31/98
----------------------- --------------------------------
Costs Original
Capitalized Accumulated Constr-
Buildings and Subsequent Buildings and Depreciation Date uction
Location State Land Equipment to Acquisition Land Equipment Total (1) (2) Aquired Date
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
College Park GA $300 $2,702 $23 $300 $2,725 $3,025 $220 5/15/96 1985
Dublin GA 442 3,982 80 442 4,062 4,504 312 5/15/96 1968
Glenwood GA 174 1,564 4 174 1,568 1,742 116 5/15/96 1972
Marietta GA 300 2,702 35 300 2,737 3,037 211 5/15/96 1967
Clarinda IA 77 1,453 293 77 1,746 1,823 254 12/30/93 1968
Council Bluffs IA 225 893 99 225 992 1,217 164 4/1/95 1963
Mediapolis IA 94 1,776 251 94 2,027 2,121 303 12/30/93 1973
Pacific Junction IA 32 306 5 32 311 343 32 4/1/95 1978
Winterset IA 111 2,099 493 111 2,592 2,703 375 12/30/93 1973
Arlington Heights IL 3,621 32,587 534 3,665 33,077 36,742 3,550 9/9/94 1986
Chicago IL 6,200 55,800 -- 6,200 55,800 62,000 2,848 12/27/96 1990
Ellinwood KS 130 1,137 53 130 1,190 1,320 126 4/1/95 1972
Boston MA 2,164 20,836 1,978 2,164 22,814 24,978 6,788 5/1/89 1968
Hyannis MA 829 7,463 -- 829 7,463 8,292 1,677 5/11/92 1972
Middleboro MA 1,771 15,752 -- 1,771 15,752 17,523 3,501 5/1/88 1970
Worcester MA 1,829 15,071 1,869 1,829 16,940 18,769 5,522 5/1/88 1970
Silver Spring MD 3,229 29,065 786 3,301 29,779 33,080 3,319 7/25/94 1992
St. Joseph MO 111 1,027 195 111 1,222 1,333 154 6/4/93 1976
Tarkio MO 102 1,938 415 102 2,353 2,455 336 12/30/93 1970
Concord NC 90 2,126 -- 90 2,126 2,216 483 9/10/98 1990
Wilson NC 27 2,375 -- 27 2,375 2,402 538 9/10/98 1990
Winston-Salem NC 75 1,696 -- 75 1,696 1,771 381 9/10/98 1990
Grand Island NE 119 1,446 369 119 1,815 1,934 150 4/1/95 1963
Burlington NJ 1,300 11,700 7 1,300 11,707 13,007 952 9/29/95 1994
Brighton NY 1,070 9,630 -- 1,070 9,630 10,700 492 12/27/96 1988
Grove City OH 332 3,081 32 332 3,113 3,445 430 6/4/93 1965
Canonsburg PA 1,499 13,493 606 1,518 14,080 15,598 3,622 3/1/91 1985
Huron SD 45 968 1 45 969 1,014 177 6/30/92 1968
Huron SD 144 3,108 4 144 3,112 3,256 567 6/30/92 1968
Sioux Falls SD 253 3,062 4 253 3,066 3,319 561 6/30/92 1960
Bellaire TX 1,223 11,010 177 1,238 11,172 12,410 1,291 5/16/94 1991
Arlington VA 1,859 16,734 296 1,885 17,004 18,889 1,895 7/25/94 1992
S-2
<PAGE>
<CAPTION>
Senior Housing Properties Trust
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(Dollars in thousands)
Gross Amount Carried at Close
Initial Cost to Company of Period 12/31/98
----------------------- --------------------------------
Costs Original
Capitalized Accumulated Constr-
Buildings and Subsequent Buildings and Depreciation Date uction
Location State Land Equipment to Acquisition Land Equipment Total (1) (2) Aquired Date
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Charlottesville VA $2,936 $26,422 $471 $2,976 $26,853 $29,829 $3,048 6/17/94 1991
Virginia Beach VA 881 7,926 141 893 8,055 8,948 931 5/16/94 1990
Seattle WA 256 4,869 67 256 4,936 5,192 785 11/1/93 1964
Spokane WA 1,035 13,315 -- 1,035 13,315 14,350 581 5/7/97 1993
Brookfield WI 834 3,849 8,014 834 11,863 12,697 1,928 12/28/90 1964
Clintonville WI 14 1,695 38 14 1,733 1,747 389 12/28/90 1960
Clintonville WI 49 1,625 87 30 1,731 1,761 387 12/28/90 1965
Madison WI 144 1,633 110 144 1,743 1,887 390 12/28/90 1920
Milwaukee WI 232 1,368 1 232 1,369 1,601 281 9/10/98 1970
Milwaukee WI 277 3,883 -- 277 3,883 4,160 769 3/27/92 1969
Pewaukee WI 984 2,432 -- 984 2,432 3,416 518 9/10/98 1963
Waukesha WI 68 3,452 2,232 68 5,684 5,752 1,036 12/28/90 1958
Laramie WY 191 3,632 199 191 3,831 4,022 595 12/30/93 1964
Worland WY 132 2,503 588 132 3,091 3,223 431 12/30/93 1970
--------------------------------------------------------------------------------
Total $69,030 $628,080 $35,283 $69,673 $662,720 $732,393 $94,616
================================================================================
<FN>
(1) Aggregate cost for federal income tax purposes is approximately $706,576.
(2) Depreciation is provided for on buildings and improvements for periods ranging up to 40 years and on equipment up to 12
years.
</FN>
</TABLE>
Reconciliation of the carrying amount of real estate and equipment and
accumulated depreciation at the beginning of the period:
Real Estate and Accumulated
Equipment Depreciation
--------------- --------------
Balance at January 1, 1996 $586,940 $ 41,004
Additions 105,094 15,383
-------- --------
Balance at December 31, 1996 692,034 56,387
Additions 28,953 17,826
-------- --------
Balance at December 31, 1997 720,987 74,213
Additions 11,406 20,403
-------- --------
Balance at December 31, 1998 $732,393 $ 94,616
======== ========
S-3
<PAGE>
<TABLE>
<CAPTION>
Senior Housing Properties Trust
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
December 31, 1998
(Dollars in thousands)
Principal Amount of
Final Face Carrying Loans Subject to
Interest Maturity Value of Value of Delinquent Principal
Location Rate Date Periodic Payment Terms Mortgage Mortgage (1) or Interest
- ----------------- --------- ----------- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Farmington, MI 11.50% 1/1/06 Principal and interest, payable monthly in $4,200 $4,200 $--
arrears. $3.8 million due at maturity.
Howell, MI 11.50% 1/1/06 Principal and interest, payable monthly in 4,982 4,982 --
arrears. $4.5 million due at maturity.
Lyons, NE 10.09% 12/31/16 Principal and interest, payable monthly in 1,563 1,563 --
Milford, NE arrears. $835 due at maturity.
Ainsworth, NE 10.64% 12/31/16 Principal and interest, payable monthly in 5,154 5,154 --
Ashland, NE arrears. $2.8 million due at maturity.
Blue Hill, NE
Gretna, NE
Sutherland, NE
Waverly, NE
Ainsworth, NE 11.00% 12/31/16 Principal and interest, payable monthly in 2,052 2,052 --
Ashland, NE arrears. $1.1 million due at maturity.
Blue Hill, NE
Edgar, NE
Gretna, NE
Sutherland, NE
Waverly, NE
Lyons, NE
Milford, NE
Slidell, LA 11.00% 12/31/10 Principal and interest, payable monthly in 18,992 18,992 --
arrears. $13.9 million due at maturity.
Milwaukee, WI 13.75% 1/31/13 Interest only, payable monthly in arrears. 883 883 --
$883 due at maturity.
---------------------------------
$37,826 $37,826 $--
=================================
<FN>
(1) Also represents cost for federal income tax purposes.
</FN>
</TABLE>
S-4
<PAGE>
Senior Housing Properties Trust
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
December 31, 1998
(dollars in thousands)
Reconciliation of the carrying amount of mortgage loans at the beginning of the
period:
Balance at January 1, 1996 $ 37,798
New mortgage loans 700
Collections of principal (228)
--------
Balance at December 31, 1996 38,270
New mortgage loans 124
Collections of principal (260)
--------
Balance at December 31, 1997 38,134
Collections of principal (308)
--------
Balance at December 31, 1998 $ 37,826
========
- -------------------------------------------------------------------------------
Other Schedules
Other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the combined
financial statements, including notes thereto.
S-5
<PAGE>
Senior Housing Properties After the Spin-Off
[Photograph of Building] [Photograph of Building]
Marriott International, Inc. Brookdale Living Communities, Inc.
Stratford Court of Boca Raton Park Place
Boca Raton, FL Spokane, WA
349 Units, Built 1994 200 Units, Built 1993
[Photograph of Building]
Marriott International, Inc.
Brighton Gardens of Sun City
Sun City, AZ
148 Units, Built 1990
[Photograph of Building]
Brookdale Living Communities, Inc.
The Hallmark
Chicago, IL
341 Units, Built 1990
[Photograph of Building] [Photograph of Building]
Mariner Post-Acute Network, Inc. Integrated Health Services, Inc.
La Mesa Care Center Blue Hill Care Center
Yuma, AZ Blue Hill, NE
128 Units, Built 1984 81 Units, Built 1967
<PAGE>
- ------------------------------------------------------------------------------
HRPT Properties Trust
Spin-Off
of
Senior Housing Properties Trust
Through Distribution
of
13,190,763
Common Shares of Beneficial Interest
------------------------------------
PROSPECTUS
------------------------------------
___________ , 1999
- ------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 31. Other Expenses of Issuance and Section Distribution.
The following table itemizes the expenses incurred in connection with
the distribution of the common shares being registered. All of these expenses
will be paid by HRPT Properties Trust. All the amounts shown are estimates
except the Securities and Exchange Commission registration fee and the New York
Stock Exchange listing fee.
Item Amount
SEC Registration Fee...................................... $78,952
New York Stock Exchange Listing Fee....................... 158,100
Transfer Agent's and Registrar's Fees..................... 30,000
Printing and Engraving Fees............................... 200,000
Legal Fees and Expenses (other than Blue Sky)............. 750,000
Accounting Fees and Expenses.............................. 200,000
Blue Sky Fees and Expenses (including fees of counsel).... 10,000
Miscellaneous Expenses.................................... 50,000
----------
Total.....................................................$1,477,052
==========
Item 32. Sales to Special Parties.
See Item 33.
Item 33. Recent Sales of Unregistered Securities.
On December 16, 1998, Senior Housing was initially capitalized through
the issuance of 26,374,760 shares to HRPT Properties Trust in exchange for
$263,747.60. HRPT is currently the sole shareholder of Senior Housing. The
26,374,760 shares currently outstanding were purchased for investment and for
the purpose of organizing Senior Housing. On July 30, 1999, HRPT surrendered
374,760 Senior Housing shares and they were cancelled and returned to the status
of authorized but unissued. Senior Housing believes that the issuance and sale
of these securities are exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
Item 34. Indemnification of Directors and Officers.
The Maryland REIT law permits a Maryland real estate investment trust
to include in its Declaration of Trust a provision limiting the liability of its
trustees and officers to the trust and its shareholders for money damages except
for liability resulting from (a) actual receipt of an improper benefit or profit
in money, property or services or (b) active and deliberate dishonesty
established by a final judgment as being material to the cause of action. The
Declaration of Trust of Senior Housing contains such a provision which
eliminates such liability to the maximum extent permitted by the Maryland REIT
law.
The Declaration of Trust of Senior Housing requires it, to the maximum
extent permitted by Maryland law, to indemnify, and pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to, (a) any individual
who is a present or former trustee or officer of Senior Housing or (b) any
individual who, while a trustee of Senior Housing and at the request of Senior
Housing, serves or has served as a trustee, director, officer or partner of
another real estate investment trust, corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise from and against any claim or
liability to which such person may become subject or which such person may incur
by reason of his or her status or actions as a present or former trustee or
officer of Senior Housing. The Bylaws of Senior Housing obligate it, to the
maximum extent permitted by Maryland law, to indemnify any present or former
Trustee or officer (including any individual who while a Trustee or officer at
the express request of Senior Housing serves or has served another real estate
investment trust, corporation, partnership, joint venture, trust, employee
benefit plan or any other enterprise as a director, officer, shareholder,
partner or trustee of such real estate investment trust, corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise)
(a) who has been successful, on the merits or otherwise, in the defense of a
proceeding to which he was made a party by reason of such status or service in
such capacity, against reasonable expenses incurred by him in connection with
the proceeding and (b) against any claim or liability to which he may become
subject by reason of such status or actions in such capacity. The Declaration of
Trust and Bylaws also permit Senior Housing to indemnify and advance expenses to
any person who
II-1
<PAGE>
served a predecessor of Senior Housing in any of the capacities described above
and to any employee or agent of Senior Housing or a predecessor of Senior
Housing. The Bylaws require Senior Housing to indemnify a trustee or officer who
has been successful, on the merits or otherwise, in the defense of any
proceeding to which he is made a party by reason of his service in that
capacity.
The Maryland REIT law permits a Maryland real estate investment trust
to indemnify and advance expenses to its trustees, officers, employees and
agents to the same extent as permitted by the Maryland General Corporation Law
(the AMGCL@) for directors and officers of Maryland corporations. The MGCL
permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities unless it is established that (a) the act or omission of the director
or officer was material to the matter giving rise to the proceeding and (i) was
committed in bad faith or (ii) was the result of active and deliberate
dishonesty, (b) the director or officer actually received an improper personal
benefit in money, property or services or (c) in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful. However, under the MGCL, a Maryland corporation may
not indemnify a director for an adverse judgment in a suit by or in the right of
the corporation or for a judgment of liability on the basis that personal
benefit was improperly received, unless in either case a court orders
indemnification and then only for expenses. In addition, the MGCL permits a
corporation to advance reasonable expenses to a director or officer upon the
corporation's receipt of (a) a written affirmation by the director or officer of
his good faith belief that he has met the standard of conduct necessary for
indemnification by the corporation and (b) a written undertaking by him or on
his behalf to repay the amount paid or reimbursed by the corporation if it shall
ultimately be determined that the standard of conduct was not met.
Item 35. Treatment of Proceeds From Shares Being Registered.
Senior Housing will not receive any proceeds from the distribution of
the common shares being registered, because they are being distributed by HRPT
to its shareholders.
Item 36. Financial Statements and Exhibits.
(a) Financial Statements.
Reference is made to Page F-1 of the Prospectus filed as part of this
Registration Statement.
(b) Exhibits.
2.1 Form of Transaction Agreement between Senior Housing Properties Trust
and HRPT Properties Trust. (Previously filed as an exhibit to the
registration statement)
3.1 Declaration of Trust of Senior Housing Properties Trust dated December
16, 1998. (Previously filed as an exhibit to the registration
statement)
3.2 Form of Amended and Restated Declaration of Trust of Senior Housing
Properties Trust. (Previously filed as an exhibit to the registration
statement)
3.3 Bylaws of Senior Housing Properties Trust. (Previously filed as an
exhibit to the registration statement)
3.4 Form of Amended and Restated Bylaws of Senior Housing Properties Trust.
(Previously filed as an exhibit to the registration statement)
4.1 Form of share certificate representing common shares of Senior Housing
Properties Trust. (Previously filed as an exhibit to the registration
statement)
5.1 Opinion of Sullivan & Worcester LLP. (Previously filed as an exhibit to
the registration statement)
5.2 Opinion of Ballard Spahr Andrews & Ingersoll, LLP. (Previously filed as
an exhibit to the registration statement)
8.1 Opinion of Sullivan & Worcester LLP re: tax matters. (Filed herewith)
II-2
<PAGE>
10.1 Form of Advisory Agreement between Senior Housing and Reit Management &
Research, Inc. (Previously filed as an exhibit to the registration
statement)
10.2 Form of Senior Housing Properties Trust 1999 Incentive Share Award
Plan. (Previously filed as an exhibit to the registration statement)
10.3 Form of Promissory Note from SPTMRT Properties Trust, as maker, to HRPT
Properties Trust, as holder. (Contained in Exhibit 2.1)
10.4 Commitment Letter and Summary of Terms and Conditions for $350 million
Secured Credit Facility from Dresdner Bank to Senior Housing Properties
Trust. (Previously filed as an exhibit to the registration statement)
10.5 Master Lease Agreement, dated as of December 27, 1996, between Health
and Retirement Properties Trust and BLC Property, Inc. (Previously
filed as an exhibit to the registration statement)
10.6 Guaranty Agreement, dated as of December 27, 1996, by Brookdale Living
Communities, Inc., Brookdale Living Communities of Illinois, Inc.,
Brookdale Living Communities of New York, Inc., and Brookdale Living
Communities of Arizona, Inc. in favor of Health and Retirement
Properties Trust. (Previously filed as an exhibit to the registration
statement)
10.7 First Amendment to Master Lease Agreement and Incidental Documents,
dated as of May 7, 1997, by and among Health and Retirement Properties
Trust, BLC Property, Inc., Brookdale Living Communities of Washington,
Inc., Brookdale Living Communities of Arizona, Inc., Brookdale Living
Communities of Illinois, Inc., Brookdale Living Communities of New
York, Inc., Brookdale Living Communities, Inc, The Prime Group, Inc.,
Prime International, Inc., PGLP, Inc., Prime Group Limited Partnership,
and Prime Group II, L.P. (Previously filed as an exhibit to the
registration statement)
10.8 Representative Lease for properties leased to subsidiaries of Marriott
International, Inc. (Previously filed as an exhibit to the registration
statement)
10.9 Representative Guaranty of Tenant Obligations, dated as of October 8,
1993, by Marriott International, Inc. in favor of HMC Retirement
Properties, Inc. (Previously filed as an exhibit to the registration
statement)
10.10 Representative First Amendment to Lease for properties leased to
subsidiaries of Marriott International, Inc. (Previously filed as an
exhibit to the registration statement)
10.11 Representative Assignment and Assumption of Leases, Guarantees and
Permits for properties leased to subsidiaries of Marriott
International, Inc. (Previously filed as an exhibit to the registration
statement)
10.12 Representative Second Amendment of Lease for properties leased to
subsidiaries of Marriott International, Inc. (Previously filed as an
exhibit to the registration statement)
10.13 Representative First Amendment of Guaranty by Marriott International,
Inc., dated as of May 16, 1994, in favor of HMC Retirement Properties,
Inc. (Previously filed as an exhibit to the registration statement)
10.14 Assignment of Lease, dated as of June 16, 1994, by HMC Retirement
Properties, Inc. in favor of Health and Rehabilitation Properties
Trust. (Previously filed as an exhibit to the registration statement)
10.15 Third Amendment to Facilities Lease, dated as of June 30, 1994, between
HMC Retirement Properties, Inc. and Marriott Senior Living Services,
Inc. (Previously filed as an exhibit to the registration statement)
10.16 Third Amendment to Facilities Lease, dated as of June 30, 1994, between
HMC Retirement Properties, Inc. and Marriott Senior Living Services,
Inc. (Previously filed as an exhibit to the registration statement)
10.17 Consent and Modification Agreement, dated as of October 10, 1997,
between Marriott International, Inc., Marriott Senior Living Services,
Inc., New Marriott MI, Inc., Health and Retirement Properties Trust,
and Church Creek Corporation. (Previously filed as an exhibit to the
registration statement)
II-3
<PAGE>
10.18 Master Lease Document, General Terms and Conditions dated as of
December 28, 1990, between Health and Rehabilitation Properties Trust
and AMS Properties, Inc. (Previously filed as an exhibit to the
registration statement)
10.19 Representative Lease for properties leased to Mariner Post-Acute
Network, Inc. (Previously filed as an exhibit to the registration
statement)
10.20 Lease dated as of March 27, 1992, between Health and Rehabilitation
Properties Trust and AMS Properties, Inc. (Previously filed as an
exhibit to the registration statement)
10.21 Amendment to Master Lease Document dated as of December 29, 1993
between Health and Rehabilitation Properties Trust and AMS Properties,
Inc. (Previously filed as an exhibit to the registration statement)
10.22 Amendment to AMS Properties, Inc. Facility Leases dated as of October
1, 1994 between Health and Retirement Properties Trust and AMS
Properties, Inc. (Previously filed as an exhibit to the registration
statement)
10.23 Amendment to AMS Properties, Inc. Facility Leases dated October 31,
1997 between Health and Retirement Properties Trust and AMS Properties,
Inc. (Previously filed as an exhibit to the registration statement)
10.24 Representative Lease for properties leased to Mariner Post-Acute
Network, Inc. (Previously filed as an exhibit to the registration
statement)
10.25 Master Lease Agreement dated as of June 30, 1992 by and between Health
and Rehabilitation Properties Trust and GCI Health Care Centers, Inc.
(Previously filed as an exhibit to the registration statement)
10.26 Amended and Restated HRP Shares Pledge Agreement, dated as of June 30,
1992, between Health and Retirement Properties Trust and AMS
Properties, Inc. (Filed herewith)
10.27 Amended and Restated Voting Trust Agreement, dated as of June 30, 1992
from AMS Properties, Inc. to HRPT Advisors, Inc., as voting trustee.
(Filed herewith)
10.28 Representative Lease for properties leased to Mariner Post-Acute
Network, Inc. (Previously filed as an exhibit to the registration
statement)
10.29 Representative Lease for properties leased to Mariner Post-Acute
Network, Inc. (Previously filed as an exhibit to the registration
statement)
10.30 Amendment to Master Lease Document dated as of December 29, 1993
between Health and Rehabilitation Properties Trust and GCI Health Care
Centers, Inc. (Previously filed as an exhibit to the registration
statement)
10.31 Amendment to GCI Health Care Centers, Inc., Master Lease Document and
Facility Leases dated as of October 1, 1994 between Health and
Retirement Properties Trust and GCI Health Care Centers, Inc.
(Previously filed as an exhibit to the registration statement)
10.32 Amendment to GCI Health Care Centers, Inc. Facility Leases dated
October 31, 1997 between Health and Retirement Properties Trust and GCI
Health Care Centers, Inc. (Previously filed as an exhibit to the
registration statement)
10.33 Guaranty, Cross Default and Cross Collateralization Agreement, dated as
of June 30, 1992, by and among AMS Properties, Inc., CGI Health Care
Centers, Inc. and Health and Rehabilitation Properties Trust.
(Previously filed as an exhibit to the registration statement)
10.34 Guaranty, dated as of October 31, 1997, by Grancare Inc. in favor of
Health and Retirement Properties Trust. (Previously filed as an exhibit
to the registration statement)
10.35 Guaranty, dated as of October 31, 1997, by Paragon Health Network, Inc.
in favor of Health and Retirement Properties Trust. (Previously filed
as an exhibit to the registration statement)
II-4
<PAGE>
10.36 Amended, Restated and Consolidated Master Lease Document, dated as of
September 24, 1997, between Health and Retirement Properties Trust and
ECA Holdings, Inc., Marietta/SCC, Inc., Glenwood/SCC, Inc., Dublin/SCC,
Inc., and College Park/SCC, Inc. (Previously filed as an exhibit to the
registration statement)
10.37 Guaranty By Integrated Health Services, Inc., dated as of September 24,
1997, by Integrated Health Services, Inc., in favor of Health and
Retirement Properties Trust. (Previously filed as an exhibit to the
registration statement)
10.38 Representative Lease Agreement for properties leased to Integrated
Health Services, Inc. (Previously filed as an exhibit to the
registration statement)
10.39 Representative Lease Agreement for properties leased to Integrated
Health Services, Inc. (Previously filed as an exhibit to the
registration statement)
10.40 Guaranty, dated as of February 11 1994, by Horizon Healthcare
Corporation in favor of Health and Rehabilitation Properties Trust.
(Previously filed as an exhibit to the registration statement)
10.41 Consent, Assumption and Guaranty Agreement, dated as of December 31,
1997, by and among Integrated Health Services, Inc., IHS Acquisition
No. 108, Inc., IHS Acquisition No. 112, Inc., IHS Acquisition No. 113,
Inc., IHS Acquisition No. 135, Inc., IHS Acquisition No. 148, Inc., IHS
Acquisition No. 152, Inc., IHS Acquisition No. 153, Inc., IHS
Acquisition No. 154, Inc., IHS Acquisition No. 155, Inc., IHS
Acquisition No. 175, Inc., Healthsouth Corporation, Horizon Healthcare
Corporation, Health and Retirement Properties Trust, and Indemnity
Collection Corporation. (Previously filed as an exhibit to the
registration statement)
21.1 List of Subsidiaries. (Previously filed as an exhibit to the
registration statement)
23.1 Consent of Ernst & Young LLP. (Filed herewith)
23.2 Consent of Sullivan & Worcester LLP. (Contained in Exhibits 5.1 and
8.1)
24.1 Power of Attorney. (See signature page to the registration statement)
27.1 Financial Data Schedule. (Previously filed as an exhibit to the
registration statement)
27.2 Financial Data Schedule. (Previously filed as an exhibit to the
registration statement)
27.3 Financial Data Schedule. (Filed herewith)
99.1 Consent of Bruce M. Gans, M.D. to being named as a Trustee nominee.
(Previously filed as an exhibit to the registration statement)
99.2 Consent of Arthur G. Koumantzelis to being named as a Trustee nominee.
(Previously filed as an exhibit to the registration statement)
Item 37. Undertakings.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to trustees, officers and controlling
persons of Senior Housing pursuant to the foregoing provisions, or otherwise,
Senior Housing has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933, as amended, and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by Senior Housing of expenses incurred or paid by a trustee, officer
or controlling persons of Senior Housing in the successful defense of any
action, suit or proceeding) is asserted by such trustee, officer or controlling
person in connection with the securities being registered, Senior Housing will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification is against public policy as expressed in the Securities Act
of 1933, as amended, and will be governed by the final adjudication of such
issue.
II-5
<PAGE>
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, as amended, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933, as amended, shall be deemed to
be part of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, as amended, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Senior Housing certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-11 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Newton, Commonwealth of Massachusetts, on
September 7, 1999.
SENIOR HOUSING PROPERTIES TRUST
By: /s/ David J. Hegarty
David J. Hegarty
President and
Chief Operating Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons on
behalf of Senior Housing and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
* Managing Trustee September 7, 1999
Barry M. Portnoy
* Managing Trustee September 7, 1999
Gerard M. Martin
/s/ David J. Hegarty President and Chief Operating September 7, 1999
David J. Hegarty Officer
* Chief Financial Officer and September 7, 1999
Ajay Saini Treasurer
*By: /s/ David J. Hegarty
David J. Hegarty
as attorney in fact
II-7
Exhibit 8.1
SULLIVAN & WORCESTER LLP
ONE POST OFFICE SQUARE
BOSTON, MASSACHUSETTS 02109
(617) 338-2800
FAX NO. 617-338-2880
IN WASHINGTON, D.C. IN NEW YORK CITY
1025 CONNECTICUT AVENUE, N.W. 767 THIRD AVENUE
WASHINGTON, D.C. 20036 NEW YORK, NEW YORK 10017
(202) 775-8190 (212) 486-8200
FAX NO. 202-293-2275 FAX NO. 212-758-2151
September 7, 1999
Senior Housing Properties Trust
400 Centre Street
Newton, Massachusetts 02458
Ladies and Gentlemen:
In connection with the registration by Senior Housing Properties Trust,
a Maryland real estate investment trust (the "Company"), of its common shares of
beneficial interest proposed to be distributed by HRPT Properties Trust ("HRPT")
to the shareholders of HRPT, the following opinion is furnished to the Company
to be filed with the Securities and Exchange Commission (the "SEC") as Exhibit
8.1 to the Company's Registration Statement on Form S-11, File No. 333- 69703
(the "Registration Statement"), under the Securities Act of 1933, as amended
(the "Act").
We have acted as counsel for the Company in connection with the
Registration Statement. In connection with this opinion, we have examined
originals or copies of the Registration Statement, the respective declarations
of trust and bylaws of the Company and of HRPT, as currently in effect, and such
corporate records, certificates and statements of officers of the Company and
HRPT, accountants for the Company and public officials, and such other documents
as we have considered necessary in order to furnish the opinion hereinafter set
forth. With respect to all questions of fact on which the opinion set forth
below is based, we have assumed the accuracy and completeness of and have relied
on the information set forth in the Registration Statement and in the documents
incorporated therein by reference, and on representations made to us by the
officers of the Company and HRPT. We have not independently verified such
information.
The opinion set forth below is based upon the Internal Revenue Code of
1986, as amended, the Treasury Regulations issued thereunder, published
administrative interpretations thereof, and judicial decisions with respect
thereto, all as of the date hereof (collectively, the "Tax Laws"), and upon the
Employee Retirement Income Security Act of 1974, as amended, the Department of
Labor regulations issued thereunder, published administrative interpretations
thereof, and judicial decisions with respect thereto, all as of the date hereof
(collectively, the "ERISA Laws"). No assurance can be given that the Tax Laws or
the ERISA Laws will not change. In preparing the discussions with respect to Tax
Laws and ERISA Laws matters in the section of the Registration Statement
captioned "Federal Income Tax and ERISA
<PAGE>
Senior Housing Properties Trust
September 7, 1999
Page 2
Consequences," we have made certain assumptions and expressed certain conditions
and qualifications therein, all of which assumptions, conditions and
qualifications are incorporated herein by reference.
Based upon and subject to the foregoing, we are of the opinion that the
discussion with respect to Tax Laws and ERISA Laws matters in the section of the
Registration Statement captioned "Federal Income Tax and ERISA Consequences," in
all material respects is accurate and fairly summarizes the Tax Laws issues and
ERISA Laws issues addressed therein, and hereby confirm that the opinions of
counsel referred to in said sections represent our opinions on the subject
matter thereof.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to our firm in the Registration
Statement. In giving such consent, we do not thereby admit that we come within
the category of persons whose consent is required under Section 7 of the Act or
under the rules and regulations of the SEC promulgated thereunder.
Very truly yours,
/s/ SULLIVAN & WORCESTER LLP
SULLIVAN & WORCESTER LLP
EXHIBIT 10.26
AMENDED AND RESTATED HRP SHARES
PLEDGE AGREEMENT
THIS AMENDED AND RESTATED HRP SHARES PLEDGE AGREEMENT made as of June
30, 1992, (this "Agreement") between AMS PROPERTIES, INC., a Delaware
corporation having its principal place of business at 300 Corporate Pointe,
Suite 300, Culver City, CA 90230 (the, "Pledgor") and HEALTH AND REHABILITATION
PROPERTIES TRUST, a Maryland real estate investment trust having a principal
address at 400 Centre Street, Newton, Massachusetts 02158 ("HRP"), as pledgee
(in such capacity, together with its successors and assigns, the "Pledgee").
WITNESSETH:
WHEREAS, pursuant to an Acquisition Agreement, Agreement to Lease and
Mortgage Loan Agreement dated as of December 28, 1990 (as the same may be
amended, modified or supplemented from time to time, the "AMS Acquisition
Agreement") among American medical Services, Inc. ("AMS'), AMS Holding Co.,
GranCare, Inc. (f/k/a HostMasters, Inc.) ("GranCare"), the Pledgor and the
Pledgee, the Pledgee made a loan to the Pledgor in the sum of Fifteen Million
Dollars ($15,000,000) which loan is evidenced by a promissory note dated as of
December 28, 1990 (as the same may be amended, modified or supplemented from
time to time, the "Note") made by the Pledgor and payable to the order of the
Pledgee;
WHEREAS, pursuant to the AMS Acquisition Agreement, the Pledgee
acquired from AMS certain real and personal property more particularly described
therein (hereinafter, the "AMS Leased Properties") and, pursuant to a master
lease agreement dated as of December 28, 1990 by and between the Pledgor, as
tenant, and the Pledgee, as landlord, and the facility leases thereunder (such
master lease agreement and facility leases, as the same may be amended,
modified, or supplemented from time to time, collectively, the "AMS Lease"), the
Pledgee leased the AMS Leased Properties back to the Pledgor;
WHEREAS, in connection with the execution of the AMS Acquisition
Agreement, the Pledgor pledged One Million (1,000,000) common shares of
beneficial interest, $.0l par value, of HRP registered in the name of the
Pledgor with HRPT Advisors, Inc., a Delaware corporation ("Advisors") in trust
pursuant to the terms and conditions of that certain Voting Trust Agreement
dated as of December 28, 1990, (the "Original Voting Trust Agreement") to the
Pledgee pursuant to that certain HRP Shares Pledge Agreement dated as of
December 28, 1990 (the "Original HRP Shares Pledge Agreement"); and the Pledgor
further agreed, pursuant to the terms and conditions of the Original Voting
Trust Agreement, to deposit with Advisors in trust certain additional shares of
capital stock
<PAGE>
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of HRP, or securities convertible into or exchangeable for capital stock of HRP,
acquired by it after the date thereof as provided therein;
WHEREAS, pursuant to a letter agreement dated April 10, 1992 (the
"Letter Agreement"), between GranCare and the Pledgee, the Pledgee agreed to
enter into a long-term lease with GCI Health Care Centers, Inc. ("GCI"), a
Delaware corporation and wholly owned subsidiary of GranCare, with respect to
certain real property, and the related improvements and personal property,
located in Arizona, California and South Dakota and more particularly described
therein pursuant to leases of even date herewith, each of which incorporates by
reference a master lease document of even date herewith by and between the
Pledgee, as landlord and GCI, as tenant (as such leases may be amended, modified
or supplemented from time to time, the "GCI Lease", and together with the AMS
Lease, the "Leases");
WHEREAS, the Pledgee has agreed to enter into the GCI Lease provided
that the Pledgor, which company is under common control with GCI and has
heretofore entered into sale-leaseback, mortgage financing and/or leasing
transactions with the Pledgee, agrees to guarantee payment and performance of
GCI's obligations to the Pledgee and to certain cross collateralization and
cross default provisions set forth in that certain Guaranty, Cross Default and
Cross Collateralization Agreement of even date herewith (the "Cross Guaranty") ;
WHEREAS, the Pledgor will materially benefit from the consummation of
the transaction described in the Letter Agreement and in furtherance thereof the
Pledgor has determined that it is in its best interests and in pursuant of its
business purposes that it induce HRP to enter into the GCI Lease by executing
and delivering this Agreement;
WHEREAS, GCI has agreed to guarantee payment and performance of the
obligations of the Pledgor to the Pledgee and to the cross collateralization and
cross default provisions of the Cross Guaranty;
WHEREAS, in furtherance of the Cross Guaranty and to induce the Pledgee
to enter into the GCI Lease, the Pledgor has agreed to amend and restate the
Original HRP Shares Pledge Agreement as provided herein to further secure the
obligations of GCI to the Pledgee; and
WHEREAS, in furtherance of the foregoing, the Pledgor and Advisors have
executed and delivered an Amended and Restated Voting Trust Agreement of even
date herewith (the Original Voting Trust Agreement, as so amended and restated,
and as the same may be further amended, modified or supplemented from time to
time,. the "Voting Trust Agreement") to provide for the incorporation by
reference of the terms and provisions of this Agreement;
<PAGE>
-3-
NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the receipt, adequacy and sufficiency of which are
hereby acknowledged, the parties hereto hereby agree that the Original HRP
Shares Pledge Agreement shall be amended and restated as follows:
1. Defined Terms. (a) Unless otherwise defined herein, for all purposes
of this Agreement the terms defined in this section shall have the following
meanings:
"AMS Transaction Documents" shall mean the "Transaction
Documents" as such term is defined in the AMS Acquisition Agreement.
"Collateral" shall mean, at any time, all of the Pledged
Shares, and all proceeds, income, profits, dividends, interest and
other payments or distributions now or hereafter made upon or with
respect thereto, including without limitation, all securities and
properties that are required to be pledged to the Pledgee pursuant to
Sections 6 and 14 hereof.
"Default" means any Event of Default and any condition or
event that with the giving of notice or lapse of time or both would
become an Event of Default.
"Event of Default" shall mean the occurrence of any one of the
following events:
(a) the Pledgor shall fail to make any payment of any
amount payable hereunder for more than ten (10) days after the
date when due; or
(b) any material representation or warranty made by
the Pledgor herein, or in any document or instrument delivered
pursuant hereto, shall prove to have been false or misleading
in any material respect when made; or
(c) the Pledgor shall default in the due observance
or performance of any of the terms, covenants or agreements
contained in Sections 4, 5, and 6 hereof; or
(d) the Pledgor shall default in the due observance
or performance of any of the terms, covenants or agreements
contained herein to be performed or observed by it relating to
other than the payment of money and not otherwise referred to
in this definition, and such default shall remain unremedied
for ten (10) days after written notice thereof from the
Pledgee; provided, however, that if such default is
susceptible of cure, but such cure cannot be accomplished with
due diligence within such period of time, and if in addition
the Pledgor commences to cure such default within ten (10)
<PAGE>
-4-
days after written notice thereof from the Pledgee, and
thereafter prosecutes the curing of such default with all due
diligence, such period of time shall be extended to such
period of time (not to exceed an additional fifty (50) days as
may be necessary to cure such default with all due diligence;
or
(e) the Pledgor shall have failed to extend the term
of the Voting Trust Agreement in accordance with Section 12
thereof prior to two years before the end of the then term of
such Voting Trust Agreement; or
(f) any Event of Default, as defined in any
Transaction Document, shall have occurred.
"GCI Transaction Documents" shall mean the "Transaction
Documents" as such term is defined in the GCI Acquisition Agreement.
"Lien" shall mean, with respect to any asset, any mortgage,
lien, pledge, charge, security interest or encumbrance of any kind in
respect of such asset.
"Net Income" shall mean, for any period during which the
amount thereof is to be determined for a specified Person, the net
income (or net deficit, if a negative figure) of such Person for such
period (taken as a cumulative whole, if such period shall include more
than one fiscal period, with deficits netted against net income)
determined in accordance with generally accepted accounting principles
consistently applied, exclusive of the write-up of any assets.
"Obligations" shall mean the payment and performance of each
and every obligation, joint or several, now existing or hereafter
incurred, and whether contingent, non-contingent, liquidated,
unliquidated, matured or unmatured, or otherwise, of each of the
Pledgor and GCI to the Pledgee, under any and all documents, agreements
and instruments by, between or among any such entity with, to or for
the benefit of the Pledgee, whether now existing or hereafter arising,
and, including, without limitation, (a) payment and performance of the
Original Obligations, (b) payment and performance of each and every
obligation and liability of the Pledgor to the Pledgee under this
Agreement, (c) payment and performance of each and every obligation and
liability of GCI to the Pledgee under the GCI Lease, including, without
limitation, the payment of Minimum Rent, Additional Rent and Additional
Charges (as such terms are defined in the GCI Lease), (d) payment and
performance of each and every obligation and liability of GranCare in
respect of the Leases and under each and every other Transaction
Document to which it is a party or by which it is bound, and (d)
payment and performance of each and every other obligation of the
Pledgor or GCI to the Pledgee under any Transaction Document.
<PAGE>
-5-
"Original Obligations" shall mean the payment and performance
of each and every obligation and liability (i) of the Pledgor to the
Pledgee under this Agreement, (ii) of the Pledgor to the Pledgee, under
the AMS Note, the AMS Lease or under any of the other AMS Transaction
Documents, including, without limitation, payment of the principal of
the AMS Note, the Prepayment Fee (as defined in the AMS Note) and all
interest (including Minimum Interest and Additional Interest, as such
terms are defined in the AMS Note) under the AMS Note, and the payment
of Minimum Rent, Additional Rent and Additional Charges (as such terms
are defined in the AMS Lease) under the Lease, and (iii) of all other
obligations of the Pledgor, GCI or GranCare to the Pledgee, whether now
existing or hereafter arising, whether direct or indirect, absolute or
contingent, due or to become due.
"Operating Cash Flow" shall mean, for any period during which
the amount thereof is to be determined for a specified Person, the Net
Income of such Person for such period, plus, to the extent deducted in
determining Net Income for such fiscal period, the sum of (a)
depreciation and amortization, (b) all interest on Indebtedness of the
Pledgor (including, for AMS, all amounts payable as Minimum Interest
and Additional Interest under the AMS Note) and all rent payable under
any leases of real or personal property (including all amounts payable
as Minimum Rent and Additional Rent under the applicable Leases) and
(c) provisions for taxes based upon or measured by income.
"Person" shall mean an individual, a corporation, a general or
limited partnership, a stock company or association, a joint venture,
an unincorporated association, a company, a trust, a bank, a trust
company, a land trust, a business trust, or any other entity, and any
government, agency, or political subdivision thereof.
"Pledged Shares" shall mean the One Million (1,000,000) common
shares of beneficial interest, $.0l par value, of HRP registered in the
name of the Pledgor, and any other evidence of ownership thereof,
including, without limitation, any and all Voting Trust Certificates
issued to the Pledgor under the Voting Trust Agreement and representing
the beneficial interest in such shares.
"Transaction Documents" shall mean, collectively, the AMS
Transaction Documuments.
"UCC" shall mean the Uniform Commercial Code as from time to
time in effect in The Commonwealth of Massachusetts; provided, that if
by reason of mandatory provisions of law, the perfection or the effect
of perfection or nonperfection of any security interest created
hereunder is governed by the Uniform Commercial Code as in effect in a
jurisdiction other
<PAGE>
-6-
than The Commonwealth of Massachusetts, "UCC" shall mean the Uniform
Commercial Code as in effect in such other jurisdiction for purposes of
the provisions hereof relating to such perfection or effect of
perfection or nonperfection.
(b) References in this Agreement to "herein," "hereof" and "hereunder"
shall be deemed to refer to this Agreement and shall not be limited to the
particular text or Section in which such words appear. References in this
Agreement to the Pledgee's attorneys shall be deemed to include, without
limitation, special counsel and local counsel for the Pledgee. The use of any
gender shall include all genders and the singular number shall include the
plural and vice versa as the context may require.
2. Voting Trust Agreement. The Pledgor and the Pledgee hereby
acknowledge that the Pledged Shares have heretofore been deposited by the
Pledgor, in trust, with Advisors pursuant to the terms and conditions of the
Voting Trust Agreement; that the Pledged Shares have been registered in the name
of Advisors, as Trustee under the Voting Trust Agreement; that Advisors, as
Trustee, has issued Voting Trust Certificates to the Pledgor representing the
beneficial interest in the Pledged Shares; and that upon the occurrence or an
Event of Default the Pledgee has the right to deliver to Advisors, as Trustee
under the Voting Trust Agreement, any and all Voting Trust Certificates held by
it in pledge hereunder and to receive from Advisors stock certificates for
shares held by Advisors in an amount equal to the number of shares the
beneficial interest in which is represented by the Voting Trust Certificates
surrendered.
3. Pledge. The Pledgor hereby reaffirms and renews its pledge, grant of
a security interest in, assignment, transfer, delivery, set over and
confirmation unto the Pledgee of all of the Pledgor's right, title and interest
in and to the Collateral, together with the certificates representing or
evidencing the Pledged Shares, with stock powers attached duly endorsed in
blank, as security for the full and prompt payment and performance of the
Obligations.
4. Representations and Warranties. The Pledgor represents and warrants
(a) that there are no contractual restrictions upon the transfer of the
Collateral and that the Pledgor has good and valid title to the Pledged Shares
owned by such Pledgor free and clear of any Liens; (b) that this Agreement and
the delivery of the Pledged Shares to the Pledgee creates a valid and perfected
security interest in the Collateral, subject to no prior Lien; and (c) that no
consents or approvals of, or filings with any governmental body, agency or
official are required for the validity or enforceability of this Agreement
(except as may be required in connection with any disposition of the Collateral
by the Pledgee under laws affecting the offer and sale of securities generally)
or for the perfection of the security interests created under this Agreement in
the Collateral.
<PAGE>
-7-
5. Covenants. The Pledgor covenants and agrees that the Pledgor (i)
shall not, other than as contemplated under the Amended and Restated Voting
Trust Agreement, sell, assign, exchange, or otherwise transfer or grant any
option with respect to any of the Pledgor's rights to the Collateral, (ii) shall
not create or suffer to exist any Lien against, in or with respect to any of the
Collateral and the security interest thereon conveyed to the Pledgee by this
Agreement, and shall defend the Pledgee's interest in the collateral against the
claims of all Persons and (iii) shall not either knowingly or negligently (with
or without knowledge) take any action which would in any manner impair. the
value of the Collateral.
6. Stock Dividends; Reorqanizations. In the event of any one or more
reclassifications, changes, exchanges stock splits, stock dividends, stock
consolidations, or other subdivisions or combinations of the shares of any class
of HRP's capital stock or of any immediate or remote successor to substantially
all of HRP's business or assets pursuant to any one or more of the events
described in this sentence, or the consolidation of HRP or any such successor
with, or merger of HRP or any such successor into, other corporations, or other
recapitalizations or reorganizations affecting HRP or any such successor, or any
one or more sales or conveyances to another corporation of HRP's or any such
successor's property as an entirety or substantially as an entirety (a
"Reorqanization"), the Pledgor shall pledge as collateral hereunder all
securities and property which come to the Pledgor as a result of that and
subsequent Reorganizations, except for securities and property surrendered or
canceled pursuant to any of same, along with appropriate stock transfer powers
duly endorsed in blank, and all other instruments the Pledgee may deem necessary
or desirable to vest or confirm title to same or facilitate foreclosure,
assignment, sale or other transfer thereof. Such securities and property shall
stand pledged and assigned in the same manner as the property described in
Section 2 hereof and the term "Collateral" shall include such securities and
property.
7. Voting Power, Dividends, Etc. The Pledgor agrees that for so long as
this Agreement remains in effect (i) the Pledgee may, at any time in its
discretion, register the Pledged Shares in its own name or in the name of its
nominee; (ii) the Pledgee or its nominee shall have the right to vote and
exercise all consensual and other powers of ownership pertaining to the
Collateral in such manner as the Pledgee in its sole and absolute discretion may
deem necessary, appropriate or advisable, and, if the Pledgee so requests in
writing, the Pledgor shall execute and deliver to the Pledgee or its nominee
such additional authorizations, proxies, dividends and such other documents as
the Pledgee may reasonably request to secure to the Pledgee or its nominee the
rights, powers and authorities intended to be conferred upon Pledgee or such
nominee by this Section; and (iii) all dividends and other distributions on the
Collateral shall be paid directly to the Pledgee or its nominee and shall be
applied
<PAGE>
-8-
by the Pledgee, or such nominee following receipt thereof, to the payment of the
Obligations in such order as the Pledgee may, in its discretion, select.
8. Sale of Collateral After an Event of Default. Upon the occurrence of
any Event of Default, then, at the Pledgee's option, the Pledgee may apply the
cash, if any, then held by it as collateral hereunder, for the purposes and in
the manner provided in Section 9 hereof, or if there shall be no such cash or
the cash so applied shall be insufficient to make in full all payments provided
in subsections (a) and (b) of Section 9 hereof, the Pledgee may, in addition to
any rights and remedies the Pledgee may otherwise have as a secured party under
the UCC or otherwise, and without further demand, advertisement or notice
(except as expressly provided for in subsection (a) of this Section 8), and in
any manner necessary to comply with the applicable requirements of the Internal
Revenue Code concerning real estate investment trusts:
(a) elect to sell the Collateral, or any part thereof, in one
or more sales, at public or private sale, conducted by any officer or
agent of, or auctioneer or attorney for, the Pledgee, at the Pledgee's
place of business or elsewhere, for cash or on credit, and at such
reasonable price or prices as the Pledgee shall determine, and the
Pledgee may be the purchaser of any or all of the Collateral so sold.
The Pledgee may, in its reasonable discretion, at any such sale
restrict the prospective bidders or purchasers as to their number,
nature of business and investment intention, including, without
limitation, a requirement that the Persons making such purchases
represent and agree to the satisfaction of the Pledgee that they are
purchasing the Collateral for their account, for investment, and not
with a view to the distribution or resale of any thereof. Upon any such
sale the Pledgee shall have the right to deliver, assign and transfer
the Collateral so sold directly to the purchaser thereof. Each
purchaser (including the Pledgee) at any such sale shall hold the
Collateral so sold, absolutely free from any claim or right of whatever
kind, including, without limitation, any equity or right of redemption,
of the Pledgor, which the Pledgor hereby specifically waives, to the
extent the Pledgor may lawfully do so, and all rights of redemption,
stay or appraisal which the Pledgor has or may have under any rule of
law or statute now existing or hereafter adopted. The Pledgee shall
give the Pledgor at least ten (10) days' written notice (which shall
constitute reasonable notice) of any public or private sale and shall
state the time and place fixed for such sale. Any such public sale
shall be held at such time or times within ordinary business hours as
the Pledgee shall fix in the notice of such sale. At any such sale the
Collateral may-be sold in one lot as an entirety or in separate lots.
The Pledgee shall not be obligated to make any sale pursuant to any
such notice. The Pledgee, without notice or publication,
<PAGE>
-9-
may adjourn any public or private sale from time to time by
announcement at the time and place fixed for such sale, or any
adjournment thereof, and any such sale may be made at any time or place
to which the same may be so adjourned without further notice or
publication. In case of any sale of all or any part of the Collateral
on credit, the Collateral so sold may be retained by the Pledgee until
the selling price is paid by the purchaser thereof, but the Pledgee
shall not incur any liability in case of the failure of such purchaser
to take up and pay for the Collateral so sold, and in case of any such
failure, such Collateral may again be sold under and pursuant to the
provisions hereof; or
(b) proceed by a suit or suits at law or in equity to
foreclose upon the pledge created under this Agreement and sell the
Collateral, or any portion thereof, under a judgment or decree of a
court or courts of competent jurisdiction.
The Pledgee, as attorney in fact pursuant to Section 11 hereof may, in
the name and stead of the Pledgor, make and execute all conveyances, assignments
and transfers of the Collateral sold pursuant to subsection (a) or (b) of this
Section 8. If so requested by the Pledgee, the Pledgor shall ratify and confirm
any sale or sales by executing and delivering to the Pledgee or to such
purchaser or purchasers, all such instruments as may, in the judgment of the
Pledgee, be reasonably necessary or appropriate for such purpose.
The receipt of the Pledgee for the purchase money paid at any such sale
made by it shall be a sufficient discharge therefor to any purchaser of the
Collateral, or any portion thereof, sold as aforesaid; and no such purchaser (or
his or its representatives or assigns), after paying such purchase money and
receiving such receipt, shall be bound to see to the application of such
purchase money or any part thereof or in any manner whatsoever be answerable for
any loss, misapplication or nonapplication of any such purchase money, or any
part thereof, or be bound to inquire as to the authorization, necessity,
expediency or regularity of any such sale.
9. Application of Proceeds. The proceeds of any sale, or of collection,
of all or any part of the Collateral shall be applied by the Pledgee, without
any marshaling of assets, towards payment of the items immediately set forth
below in the following order:
(a) all costs and expenses of such sale, including, without
limitation, reason able compe nsation to the Pledge e and its agents,
attorne ys and counse l, and all other reason able expens es, liabiliti
es and advanc es made or incurre d by the Pledge e in connec tion
therewi th; and
(b) the Obligations (in such order as the Pledgee shall
determine); after which, any surplus from such proceeds shall
<PAGE>
be paid to the Pledgor or to whomever may be lawfully entitled to
receive the same or as a court of competent jurisdiction may direct.
10. Obligations with Respect to Collateral. Except as specifically
provided herein in the Amended and Restated Voting Trust Agreement, the Pledgee
shall have no duty as to the collection or protection of the Collateral or any
income thereon, nor as to the preservation of any rights pertaining thereto
beyond the safe custody thereof. The Pledgee may exercise its rights with
respect to the Collateral without resorting or regard to other security or
sources of reimbursement.
11. The Pledgee Appointed Attorney in Fact; Indemnity. The Pledgee is
hereby appointed the attorney-in-fact, with full power of substitution, of the
Pledgor for the purpose of carrying out the provisions of this Agreement (incl
the provisions of Section 8 hereof) and taking any action and executing any
instruments which such attorney-in-fact may deem necessary or advisable to
accomplish the purposes hereof. This power of attorney, being coupled with an
interest, shall be irrevocable until all of the Obligations have been fully paid
and performed. The power of attorney conferred on the Pledgee pursuant to the
provisions of this Section 11 is provided solely to protect the interests of the
Pledgee and shall not impose any duty on the Pledgee to exercise any such power,
and neither the Pledgee nor such attorney-in-fact shall be liable for any act,
omission, error in judgment or mistake of law, except as the same may result
from its gross negligence or willful misconduct. The Pledgor shall and hereby
agrees to indemnify and save harmless Pledgee for, from and against any and all
liability or damage which it may incur, in good faith and without gross
negligence or willful misconduct, in the exercise and performance of any of the
Pledgee's powers and duties specifically set forth herein.
12. No Waiver; Cumulative Remedies. The Pledgee shall not by any act
(except t)y a written instrument in accordance with Section 16 hereof), delay,
indulgence, omission or otherwise be deemed to have waived any right or remedy
hereunder or to have acquiesced in any Default or Event of Default or in any
breach of any of the terms and conditions hereof. No failure to exercise, nor
any delay in exercising, on the part of the Pledgee, any right, power or
privilege hereunder shall operate as a waiver thereof. No single or partial
exercise of any right, power or privilege hereunder shall preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
A waiver by the Pledgee of any right or remedy hereunder on any one occasion
shall not be construed as a bar to any right or remedy which the Pledgee would
otherwise have on any future occasion. The rights and remedies herein provided
are cumulative, may be exercised singly or concurrently and are not exclusive of
any rights or remedies provided by law.
<PAGE>
-11-
13. Termination of Pledge. This Agreement and the pledge made hereby
shall remain in effect until all of the Obligations have been paid and satisfied
in full, and all terms and conditions of the Transaction Documents have been
satisfied in full and shall have expired by their terms. The Pledgee shall
thereupon assign, transfer and deliver to the Pledgor without representation,
warranty or recourse, against appropriate receipts, all the Collateral, if any,
then held by it in pledge hereunder.
14. Partial Release; Re-pledge.
(a) Subject to the provisions of paragraph (b) below, the Pledgee
agrees to release to the Pledgor fifty percent (50%) of the Pledged Shares from
the lien created by this Agreement at the written request (and at the expense)
of the Pledgor, without recourse, representation or warranty of any kind,
following the occurrence of the Release Date (as hereinafter defined). The term
"Release Date" shall mean the date on which all of the following conditions
exist:
(1) for the most recently completed fiscal year of the
Pledgor, the Operating Cash Flow of the Pledgor shall have been greater
than Two Hundred Percent (200%) of the sum of (a) all rent payable
under the AMS Lease (including amounts payable as Minimum Rent and
Additional Rent thereunder) during such fiscal year and (b) all
payments of principal and interest under the AMS Note (including
amounts payable as Minimum Interest and Additional Interest thereunder)
during such fiscal year, as shown in the financial statements and
accompanying certificates of AMS required to be delivered pursuant to
the AMS Acquisition Agreement;
(2) for the most recently completed fiscal year of GCI, GCI
shall have achieved a ratio of Operating Cash Flow to rent payable
under the GCI Lease (including amounts payable as Minimum Rent and
Additional Rent thereunder) of 2 to 1, as shown in the Consolidated
Financials and accompanying certificates of GCI required to be
delivered pursuant to Section 18.2(b) of the GCI Lease;
(3) no Default or Event of Default shall have occurred and be
continuing;
(4) the Pledgee shall have received a certificate signed by a
Responsible Officer of the Pledgor certifying that the conditions
described in clauses (91) and (3) above have been met; and
(5) the Pledgee shall have received a certificate signed by a
Responsible Officer of GCI certifying that the conditions described in
clauses (2) and (3) above have been met.
<PAGE>
-12-
Any Pledged Shares released as provided above shall be subject to
re-pledging upon the terms set forth in paragraph (b) below.
(b) If at any time subsequent to the Release Date,
(i) the Operating Cash Flow of the Pledgor for any fiscal
quarter of the Pledgor ending after the Release Date shall be less than
One Hundred Fifty percent (150%) of the sum of (a) all rent payable
under the AMS Lease (including amounts payable as Minimum Rent and
Additional Rent thereunder but excluding amounts payable as Additional
Charges thereunder) during such fiscal quarter and (b) all payments of
principal and interest under the AMS Note (including amounts payable as
Minimum Interest and Additional Interest thereunder) during such fiscal
quarter;
(ii) the Operating Cash Flow of the Pledgor for any fiscal
year of the Pledgor ending after the Release Date shall be less than
Two Hundred percent (200%) of the sum of (a) all rent payable under the
AMS Lease (including amounts payable as Minimum Rent and Additional
Rent thereunder but excluding amounts payable as Additional Charges
thereunder) during such fiscal year and (b) all payments of principal
and interest under the AMS Note (including amounts payable as Minimum
Interest and Additional Interest thereunder but excluding amounts
payable as Additional Charges thereunder) during such fiscal year;
(iii) the Operating Cash Flow of GCI for any fiscal quarter of
GCI ending after the Release Date shall be less than One Hundred Fifty
percent (150%) of all rent payable under the GCI Lease (including
amounts payable as Minimum Rent and Additional Rent thereunder but
excluding amounts payable as Additional Charges thereunder) during such
fiscal quarter; or
(iv) the Operating Cash Flow of GCI for any fiscal year of GCI
ending after the Release Date shall be less than Two Hundred percent
(200%) of all rent payable under the GCI Lease (including amounts
payable as Minimum Rent and Additional Rent thereunder but excluding
amounts payable as Additional Charges thereunder) during such fiscal
year;
in each case as reflected in the audited financial statements and
accompanying certificates of AMS or GCI, as the case may be, required
to be delivered pursuant to the applicable Transaction Documents,
the Pledgor (or, if the released Pledged Shares shall have been transferred in
accordance with paragraph (b) hereof, the then , owner of such Pledged Shares)
shall, within ten (10) business days following the request of the Pledgee,
either (x) pledge to the Pledgee, as collateral hereunder, free and clear of all
Liens of
<PAGE>
-13-
any kind, the Pledged Shares that were released pursuant to paragraph (b) above,
along with appropriate stock transfer powers duly endorsed in blank and all
other instruments the Pledgee may deem necessary or desirable to effect and
perfect such pledge (which Pledged Shares shall stand pledged and assigned in
the same manner as the property described in Section 2 hereof and the terms
"Collateral" and "Pledged Shares" it shall include such Pledged Shares) or (y)
pay-5-,000,000 to the Pledgee to be held by it as collateral for the Obligations
pursuant to the terms of a cash collateral agreement executed by the Pledgor (or
such then owner of the Pledged Shares) in form and substance acceptable to the
Pledgee.
14. Further Assurances. At any time and from time to time, upon request
by the Pledgee, the Pledgor shall promptly make, execute and deliver, or cause
to be made, executed and delivered, to the Pledgee and, where appropriate, cause
to be recorded and/or filed (and from time to time thereafter to be rerecorded
and/or refiled) at such time and in such offices and places as shall be deemed
necessary or desirable by the Pledgee, in its discretion, any and all such other
and further amendments, assignments, instruments of further assurance,
certificates and other documents as the Pledgee may, in its discretion, deem
necessary or desirable to (i) enable the Pledgee to negotiate the AMS Note and
to assign the AMS Lease, the GCI Lease or the other Transaction Documents,
and/or (ii) effectuate, complete, or perfect, or to continue and preserve the
obligations of the Pledgor under this Agreement.
15. Notices, Etc. Any notice, request, demand, statement or consent
desired or required to be given hereunder shall be in writing and shall be
delivered by hand, sent by certified mail, return receipt requested, sent by a
nationally recognized commercial overnight delivery service with provisions for
a receipt, postage or delivery charges prepaid, or sent by facsimile
transmission, and shall be deemed given (a) when actually delivered, if
delivered by hand, (b) upon receipt, if sent by certified mail, (c) the next
Business Day after being placed in the possession of an overnight delivery
service, if sent by an overnight delivery service or (d) if sent by facsimile
transmission, when electronic indication of receipt is received, and shall be
addressed as follows:
If to the Pledgor: AMS Properties, Inc.
300 Corporate Pointe
Suite 300
Culver City, CA 90230
Attn: General Counsel
With a copy to: Andrews & Kurth, L.L.P.
4200 Texas Commerce Tower
Houston, TX 77002
Attn: John E. Nash, Esq.
<PAGE>
-14-
If to the Pledgee: Health and Rehabilitation Properties Trust
400 Centre Street
Newton, Massachusetts 02158
Attn: President
In each case
with copies to: Sullivan & Worcester
One Post Office Square
Boston, Massachusetts 02109
Attn: Lena G. Goldberg, Esq.
or at such other place as any party hereto may from time to time hereafter
designate to the other in writing. Any notice given to the Pledgor from the
Pledgee shall not imply that such notice or any further or similar notice was or
is required.
16. Amendments and Modifications. This Agreement and the other
Transaction Documents set forth the entire agreement of the parties with respect
to the subject matter hereof and may not be amended, modified, revised or
terminated except by an agreement in writing signed by the party against whom
enforcement is sought. The provisions of this Agreement shall extend and be
applicable to all renewals, replacements, amendments, extensions, substitutions,
revisions, consolidations and modifications of the Transaction Documents, and
any and all references herein to any Transaction Document shall be deemed to
include any such renewals, replacements, amendments, substitutions, revisions,
extensions, consolidations or modifications thereof.
17. Invalidity. If any provision of this Agreement or the application
thereof to any Person or circumstance, for any reason and to any extent, shall
be held to be invalid or unenforceable, neither the remainder of this Agreement
nor the application of such provision to any other Person or circumstance shall
be affected thereby, but rather the same shall be enforced to the greatest
extent permitted by law.
18. Successors and Assigns. The provisions of this Agreement shall be
binding on the Pledgor and its respective heirs, executors, administrators,
legal representatives, successors and assigns and this Agreement and all of the
covenants herein contained shall inure to the benefit of the Pledgee and the
Pledgee's successors and assigns.
19. Captions and Headings. The captions and headings set forth in this
Agreement are included for convenience and reference only and the words
contained therein shall in no way be held or deemed to define, limit, describe,
explain, modify, amplify and/or add to the interpretation, construction or
meaning of, or the scope or intent of, this Agreement or any part hereof.
20. NONLIABILITY OF TRUSTEES. THE DECLARATION OF TRUST ESTABLISHING
PLEDGEE, DATED OCTOBER 9, 1986, A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS
THERETO (THE "DECLARATION"), IS DULY
<PAGE>
-15-
FILED WITH THE DEPARTMENT OF ASSESSMENTS AND TAXATION OF THE STATE OF MARYLAND,
PROVIDES THAT THE NAME "HEALTH AND REHABILITATION PROPERTIES TRUST" REFERS TO
THE TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS TRUSTEES, BUT NOT
INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE
OR AGENT OF PLEDGEE SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR
SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, PLEDGEE. ALL PERSONS DEALING
WITH PLEDGEE, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF PLEDGEE FOR THE
PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.
21. GOVERNING LAW. EXCEPT AS TO MATTERS REGARDING THE INTERNAL AFFAIRS OF HRP
AND ISSUES OF OR LIMITATIONS ON ANY PERSONAL LIABILITY OF THE SHAREHOLDERS AND
TRUSTEES OF HRP FOR OBLIGATIONS OF HRP, AS TO WHICH THE LAWS OF THE STATE OF
MARYLAND SHALL GOVERN, THIS AGREEMENT AND ANY OTHER INSTRUMENTS EXECUTED AND
DELIVERED TO EVIDENCE, COMPLETE, OR PERFECT THE TRANSACTIONS CONTEMPLATED HEREBY
WILL BE INTERPRETED, CONSTRUED, APPLIED AND ENFORCED IN ACCORDANCE WITH THE LAWS
(OTHER THAN THE LAWS GOVERNING CONFLICTS OF LAWS) OF THE COMMONWEALTH OF
MASSACHUSETTS.
[Intentionally left blank.]
<PAGE>
-16-
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
under seal on the day and year first above written.
WITNESS: Pledgor: AMS PROPERTIES, INC.,
a Delaware corporation
/s/ By: /s/ Kevin W. Pendergest
Name Name: Kevin W. Pendergest
Title: Executive Vice President
WITNESS: Pledgee: HEALTH AND REHABILITATION
PROPERTIES TRUST,
a Maryland real estate
investment trust
/s/ By: /s/ David Hegarty
Name Name: David Hegarty
Title: Treasurer
Signature page to Amended and Restated HRP Shares Pledge Agreement date as of
June 30, 1992.
EXHIBIT 10.27
AMENDED AND RESTATED VOTING TRUST AGREEMENT
This AMENDED AND RESTATED VOTING TRUST AGREEMENT is made as of
June 30, 1992 by and between AMS Properties, Inc., a Delaware corporation (the
"Beneficiary") and HRPT Advisors, Inc., a Delaware corporation ("Advisors"), as
trustee (in such capacity, together with any successor trustee, the "Trustee").
WITNESSETH THAT:
WHEREAS, pursuant to an Acquisition Agreement, Agreement to Lease and
Mortgage Loan Agreement dated as of December 28, 1990 (as the same may be
amended, modified or supplemented from time to time, the "AMS Acquisition
Agreement") among American Medical Services, Inc. ("AMS"), AMS Holding Co.,
GranCare, Inc. (f/k/a HostMasters, Inc.) ("GranCare"), the Beneficiary and
Health and Rehabilitation Properties Trust, a Maryland real estate investment
trust (the "Company"), the Company made a loan to the Beneficiary the sum of
Fifteen Million Dollars ($15,000,000) which loan is evidenced by a promissory
note dated as of December 28, 1990 (as the same may be amended, modified or
supplemented from time to time, the "Note") made by the Beneficiary and payable
to the order of the Company;
WHEREAS, pursuant to the AMS Acquisition Agreement, the Company
acquired from AMS certain property more particularly described therein
(hereinafter, the "AMS Leased Properties") and, pursuant to a master lease
agreement dated as of December 28, 1990 by and between the Beneficiary, as
tenant, and the Company, as landlord, and the facility leases thereunder (such
master lease agreement and facility leases, as the same may be amended,
modified, or supplemented from time to time, collectively, the "AMS Lease"), the
Company leased the AMS Leased Properties back to the Beneficiary;
WHEREAS, in connection with the execution of the AMS Acquisition
Agreement, the Beneficiary pledged One Million (1,000,000) common shares of
beneficial interest, $.01 par value, of the Company (the "Deposited Shares")
registered in the name of the Beneficiary with Advisors in trust pursuant to the
terms and conditions of that certain Voting Trust Agreement dated as of December
28, 1990, (the "Original Voting Trust Agreement") to the Company pursuant to
that certain HRP Shares Pledge Agreement dated as of December 28, 1990 (the
"Original HRP Shares Pledge Agreement"); and the Beneficiary further agreed,
pursuant to the terms and conditions of the Original Voting Trust Agreement, to
deposit with the Trustee in trust certain additional shares of, capital stock of
the Company ("Capital Stock"), or securities convertible into or exchangeable
for capital stock of HRP, acquired by it after the date thereof as provided
therein;
<PAGE>
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WHEREAS, pursuant to a letter agreement dated April 10, 1992, between
GranCare and the Company, the Company agreed to enter into a long-term lease
with GCI Health Care Centers, Inc. ("GCI"), a Delaware corporation and wholly
owned subsidiary of GranCare, with respect to certain real property, and the
related improvements and personal property, located in Arizona, California and
South Dakota and more particularly described therein pursuant to leases of even
date herewith, each of which incorporates by reference a master lease document
of even date herewith by and between the Company, as landlord and GCI, as tenant
(as such leases may be amended, modified or supplemented from time to time, the
"GCI Lease", and together with the AMS Lease, the "Leases");
WHEREAS, the Company has agreed to enter into the GCI Lease provided
that the Beneficiary, which company is under common control with GCI and has
heretofore entered into sale-leaseback, mortgage financing and/or leasing
transactions with the Company, agrees to guarantee payment and performance of
GCI's obligations to the Company and to certain cross collateralization and
cross default provisions set forth in that certain Guaranty, Cross Default and
Cross Collateralization Agreement of even date herewith (the "Cross Guaranty");
WHEREAS, GCI has agreed to guarantee payment and performance of the
obligations of the Beneficiary to the Company and to the cross collateralization
and cross default provisions of the Cross Guaranty;
WHEREAS, in furtherance of the Cross Guaranty and to induce the Company
to enter into the GCI Lease, the Company and the Beneficiary have executed and
delivered an Amended and Restated HRP Shares Pledge Agreement, of even date
herewith (the "Amended and Restated Shares Pledge Agreement"), which amends and
restates the Original Shares Pledge Agreement so as to provide for the
Beneficiary's further pledge unto the Company of all of its right, title and
interest in and to the Collateral (as defined therein) as security for the
Obligations (as defined therein);
WHEREAS, the Beneficiary agrees that Advisors shall continue to be the
Trustee hereunder and agrees to continue to empower the Trustee to vote the
Deposited Shares and any additional shares of Capital Stock deposited with, or
held by, the Trustee hereunder; and
WHEREAS, the Trustee has consented to continue to act under this
Agreement for the purposes herein provided.
NOW, THEREFORE, in consideration of the foregoing and of the covenants,
premises and agreements herein contained, and in consideration of the deposit in
trust, with the Trustee, of the Deposited Shares, and such other shares of
Capital Stock as may, from time to time, to be deposited hereunder, the parties
hereto
<PAGE>
-3-
hereby agree that the Original Voting Trust Agreement shall be amended and
restated in full as follows:
1. Defined Terms. Unless otherwise defined herein, capitalized terms
used in this Agreement without definition shall have the meaning specified
therefor in the Amended and Restated Shares Pledge Agreement.
2. The Trustee. The Trustee shall be Advisors which, for and during the
term and any continuance of this Agreement, shall be Trustee in respect of all
Deposited Shares and additional shares of Capital Stock of the Company deposited
pursuant to the provisions hereof with all the powers, rights and privileges and
subject to all the conditions and covenants hereinafter set forth.
In the event that Advisors or any successor Trustee shall become
unwilling or unable to serve as Trustee, it may appoint in writing a successor
Trustee, who shall accept this trust upon the same terms as provided by Section
17 hereof by filing its written acceptance in the executive offices of the
Company.
3. Voting Trust Agreement. A copy of this Agreement and of every
amendment or supplement hereto shall be filed in the executive offices of the
Company located in The Commonwealth of Massachusetts, and shall be open to the
inspection of the Beneficiary during normal business hours. All Voting Trust
Certificates issued as hereinafter provided shall be issued, received and held
subject to all the terms of this Agreement.
4. Transfer of Stock to Trustee. (a) The Beneficiary has previously
assigned and transferred to the Trustee the Deposited Shares subject to and upon
the terms and conditions of this Agreement. The Beneficiary hereby reaffirms its
delivery to the Trustee of stock certificates representing the Deposited Shares,
together with stock powers attached endorsed in blank.
(b) In the event the Beneficiary shall, at any time or from time to
time, after having become a party to this Agreement, become the owner or holder
of any additional shares of Capital Stock by virtue of any one or more
reclassifications, changes, exchanges, stock splits, stock dividends, stock
consolidations, or other subdivisions or combinations of the shares of any class
of the Company's Capital Stock or of any immediate or remote successor to
substantially all of the Company's business or assets pursuant to any one or
more of the events described in this sentence, or the consolidation of the
Company or any such successor with, or merger of the Company or any such
successor into, other corporations, or other recapitalizations or
reorganizations affecting the Company or any such successor, or any one or more
sales or conveyances to another corporation of the Company's or any such
successor's property as an entirety or substantially as an entirety, the
Beneficiary shall, within a reasonable period of time (not to exceed ten (10)
days) after such event, assign and transfer to the Trustee such additional
shares
<PAGE>
-4-
of Capital Stock and deliver to the Trustee stock certificates representing such
shares of Capital Stock, together with stock powers attached duly endorsed in
blank.
(c) All of the Deposited Shares, and all additional shares of Capital
Stock deposited hereunder, and all payments made to or property received by the
Trustee as owner of such Capital Stock, shall be received by the Trustee in
trust and be held and/or deposited or otherwise disposed of by the Trustee under
and pursuant to the terms and conditions hereof.
5. Voting Trust Certificates. (a) Upon the receipt of the Deposited
Shares from the Beneficiary, the Trustee issued and delivered to the Beneficiary
a certificate representing the beneficial interest in such Deposited Shares (the
"Original Certificate") which was registered in the name of the Beneficiary on
the So-oks of the Trustee. Upon the execution and delivery of this Agreement,
the Beneficiary shall surrender such Original Certificate to the Trustee and the
Trustee shall cancel such Original Certificate and shall issue and deliver to
the Beneficiary a new certificate representing the beneficial interest in such
Deposited Shares (a "Voting Trust Certificate") which shall be registered in the
name of the Beneficiary on the books of the Trustee. Until and unless changed by
the Trustee, each Voting Trust Certificate issued hereunder in respect of the
Deposited Shares or any Capital Stock shall be substantially in the form of
Exhibit A hereto. No Voting Trust Certificate shall be valid unless and until
signed by the Trustee in office at the date of issue. The Trustee may, at any
time and from time to time, make such changes in the form of Voting Trust
Certificate as it shall deem necessary or advisable.
(b) The Beneficiary and the Trustee acknowledge that Voting Trust
Certificates issued hereunder are subject to the provisions of the Amended and
Restated Shares Pledge Agreement, and that such Voting Trust Certificates shall
be considered the equivalent of Pledged Shares for purposes of the Amended and
Restated Shares Pledge Agreement and shall be subject to all the terms and
conditions of the Amended and Restated Shares Pledge Agreement. To that end, the
Beneficiary hereby agrees to pledge, grant a security interest in, assign,
transfer, set over and confirm unto the Company all of the Beneficiary's right,
title and interest in and to such Voting Trust Certificates, and to deliver such
Voting Trust Certificates (together with stock powers attached duly endorsed in
blank) as security for the full and prompt payment and performance of the
Obligations.
6. Issuance of Stock Certificates to Trustee. The shares of Deposited
Shares and all additional shares of Capital Stock deposited with and held by the
Trustee hereunder shall be registered in the name of the Trustee and any
certificates for Deposited Shares or additional shares of Capital Stock
transferred to the Trustee shall be surrendered and cancelled and new
certificates therefor shall be issued in the name of the Trustee.
<PAGE>
-5-
All certificates issued to the Trustee shall state that the certificates are
issued pursuant to this Agreement. The stock record books of the Company shall
also note the fact that the shares recorded under the name of the Trustee
hereunder are subject to this Agreement.
7. Dividends and Other Distributions. Cash dividends, if any, declared
by the Company on or in respect or the Deposited Shares or any additional shares
of Capital Stock deposited with, or held by, the Trustee under this Agreement,
shall be paid over by the Trustee to the Company and applied by the Company to
the payment of the Obligations in such order as the Company may, in its sole
discretion, determine. If any dividend in respect of the Deposited Shares or any
additional shares of Capital Stock deposited hereunder with the Trustee is paid,
in whole or in part, in Capital Stock of the Company, or in other securities
convertible into or exchangeable for capital stock of the Company, the Trustee
shall likewise hold, subject to the terms of this Agreement, the certificates
for Capital Stock or such securities which are issued on account of such
dividend and the holder of each Voting Trust Certificate representing Capital
Stock or such securities on which such dividend has been paid shall be entitled
to receive a Voting Trust Certificate for the number of shares and class of
capital stock or securities received as such dividend with respect to the shares
represented by such Voting Trust Certificate. Any such additional Voting Trust
Certificates issued pursuant to this Section 7 shall be deemed pledged to the
Company pursuant to Section 5(b) hereof.
8. Dissolution of the Company. This Agreement, and the Trust created
hereby, shall terminate within thirty (30) days of the dissolution or total or
partial liquidation of the Company, whether voluntary or involuntary, pursuant
to the provisions of Section 12 hereof.
9. Reorganization of the Company. In the event that during the term of
this Agreement the Company is merged into or consolidated with another
corporation, or all or substantially all of the assets of the Company are
transferred to another corporation, this Agreement, and the Trust created
hereby, shall terminate within thirty (30) days of such merger, consolidation or
transfer, pursuant to the provisions of Section 12 hereof.
10. Rights of Trustee. The Trustee shall in its sole and absolute
discretion exercise, in person or by its nominee or proxy, all stockholders'
rights and powers in respect of all Deposited Shares, and all additional shares
of Capital Stock deposited hereunder, including the right to vote and act
thereon for every purpose at all meetings of the security holders of the
Company, in the election of trustees, and upon any and all matters and questions
which may be brought before such meetings and to consent to any corporate act of
the Company.
<PAGE>
-6-
The interpretation by the Trustee of the terms, provisions and
conditions of this Agreement and any Voting Trust Certificates issued hereunder
shall be conclusive and binding upon the Beneficiary and on all other interested
parties. The Trustee is hereby expressly authorized to do any and all acts which
it deems necessary or advisable in connection with the carrying out of the
terms, provisions and conditions of this Agreement. The Trustee may exercise any
power or perform any act under this Agreement by an agent or attorney, appointed
in writing, and may employ counsel and agents whose reasonable expenses and
compensation shall be paid by the Trustee and shall be chargeable as a proper
expense to the Beneficiary, as provided in Section 11 hereof.
If there shall, at any time, be more than one Trustee serving
hereunder, all actions and decisions of the Trustees shall be determined by a
unanimous vote of the Trustees, and if the Trustees shall be unable to agree
with respect to any matter or group of matters, any Trustee may appeal to an
appropriate court located in The Commonwealth of Massachusetts, for an order
appointing an additional Trustee to act with respect to such matter or matters,
whose vote with respect to such matter or matters shall be final.
The Trustee (if an individual) may be a trustee or officer of the
Company, or both, and may, as Trustee, vote for himself as such, and may receive
compensation therefor from the Company for his individual use and benefit. A
Trustee may, individually, serve the Company in any other capacity and in such
capacity receive from the Company compensation for his individual use and
benefit, and may, individually, enter into any contract with the Company.
The rights, powers and privileges of the Trustee named hereunder shall
be possessed by any successor Trustee, with the same effect as though such
successor had originally been party to this Agreement. The word "Trustee", as
used in this Agreement, means the Trustee or any successor trustee or trustees
acting hereunder, and shall include both the single and plural number. The
office of the Trustee is currently located at 400 Centre Street, Newton,
Massachusetts 02158.
11. Compensation and Reimbursement of Trustee. The Trustee shall not be
entitled to compensation for services rendered and duties performed hereunder.
The Trustee shall be entitled to be reimbursed and indemnified for and saved
harmless from any and all reasonable expenses, charges, costs, damages and other
liabilities arising out of its acceptance of this trust and the issuance of
Voting Trust Certificates hereunder, or incurred by it in connection with the
performance and discharge of its duties and services as Trustee, except in case
of its own gross negligence or willful misconduct. Such expenses, charges,
costs, damages and other liabilities shall be assumed, borne and paid by the
Beneficiary.
<PAGE>
-7-
No Trustee shall incur or be subject to any liability or responsibility
as shareholder, trustee or otherwise by reason of any act, failure to act, error
of judgment, error of law or other error committed in performing its functions
hereunder, except for its own gross negligence or willful misconduct. The
Trustee shall not be required to give any bond for the faithful performance and
discharge of its duties hereunder.
12. Term of Agreement; Termination. This Agreement shall continue in
effect earlier of December 28, 2000 or such time as all of the Obligations shall
have been paid and satisfied in full and the Amended and Restated Shares Pledge
Agreement shall have been terminated, unless sooner terminated by a writing
executed by the Beneficiary and the Trustee; provided, however that within two
(2) years prior to the termination of the initial term or any extension term
hereof, the Beneficiary may agree to extend the duration of this Agreement for
an additional period, not to exceed ten (10) years in any one case.
Notwithstanding the foregoing, at such time, if ever, as fifty percent (50%) of
the Pledged Shares are released from the lien created by the Pledge Agreement
pursuant to the terms thereof, a like number of shares of Capital Stock shall be
released from the Voting Trust created hereby. The Beneficiary acknowledges,
however, that any Pledged Shares released from the Amended and Restated Shares
Pledge Agreement are subject to re-pledging as provided therein and hereby
agrees, in the event that any Pledged Shares previously released are re-pledged
under the Amended and Restated Shares Pledge Agreement, that such re-pledged
shares shall likewise become subject to the terms and conditions of this
Agreement and stock certificates representing such re-pledged shares, together
with stock powers duly endorsed in blank, shall be deposited with the Trustee at
such time as the shares are re-pledged.
Upon termination of this Agreement, the Trustee, in exchange for and
upon the surrender of any Voting Trust Certificate then outstanding by the
registered holder thereof, shall, in accordance with the terms thereof, transfer
a certificate or certificates of shares of Capital Stock held by the Trustee
hereunder to the registered holder of such Voting Trust Certificate, in an
amount equal to the number of shares of Capital Stock the beneficial interest in
which is represented by such surrendered Voting Trust Certificates. Thereupon,
all liability of the Trustee for delivery of such certificates of shares of
Capital Stock shall terminate, and the Voting Trust Certificates so surrendered
shall be null and void. The Trustee acknowledges that the transfer of shares of
Stock deposited hereunder is restricted by the provisions of the Amended and
Restated Shares Pledge Agreement and agrees that it shall not deliver any
certificates for shares of Capital Stock, and the holders of Voting Trust
Certificates shall, by accepting the same, be conclusively deemed to have agreed
that the Trustee shall not be required to deliver any certificates for such
shares of Capital Stock, to any person whose acquisition of the same would be in
violation of the Amended and Restated Shares Pledge Agreement.
<PAGE>
-8-
13. Event of Default under the Pledge Agreement. The Beneficiary
acknowledges that upon the occurrence of an Event of Default under the Amended
and Restated Shares Pledge Agreement the Company may elect to sell the
Collateral (including any additional shares of Capital Stock deposited
hereunder), or any part thereof, in one or more sales pursuant to the terms of
the Amended and Restated Shares Pledge Agreement. Accordingly, the Beneficiary
and the Trustee agree that upon notification by the Company to the Trustee that
an Event of Default has occurred, and delivery by the Company to the Trustee of
the Voting Trust Certificate(s) held by the Company in pledge pursuant to the
terms and conditions of the Amended and Restated Shares Pledge Agreement, the
Trustee shall forthwith transfer to the Company a certificate or certificates
for shares of Capital Stock held by the Trustee hereunder in an amount equal to
the number of shares of Capital Stock the beneficial interest in which is
represented by such surrendered Voting Trust Certificate(s). Thereupon, all
liability of the Trustee for delivery of stock certificates representing such
shares of Capital Stock shall terminate and the Voting Trust Certificate(s) so
surrendered shall be null and void.
14. Amendments. This Agreement may be amended at any time by a written
instrument executed by the Trustee and assented to in writing by the
Beneficiary.
15. Notices and Distributions. Unless otherwise specifically provided
in this Agreement, any notice to or communication with the holders of Voting
Trust Certificates hereunder shall be in writing and shall be sufficient when
sent by registered or certified mail addressed to such holders at their
respective addresses appearing on the transfer books of the Trustee. The
addresses of the holders of Voting Trust Certificates, as shown on the transfer
books of the Trustee, shall in all cases be deemed to be the addresses of Voting
Trust Certificate holders for all purposes under this Agreement. Every notice so
given shall be effective, whether or not received, and the date of mailing shall
be the date such notice is deemed given for all purposes.
Any notice to the Trustee hereunder shall be in writing and shall be
sufficient if sent by registered or certified mail to the Trustee, addressed to
it at such address or addresses as may from time to time be furnished in writing
to the holders of Voting Trust Certificates, and if no such address has been so
furnished by the Trustee, then addressed to the Trustee in care of the Company.
All distributions of cash, securities or other property hereunder, if
any, in respect of the Voting Trust Certificates may be made, in the discretion
of the Trustee, by registered or certified mail in the same manner as
hereinabove provided for the giving of notice to the holders of Voting Trust
Certificates.
<PAGE>
-9-
16. Severability. If, for any reason, any provision hereof or of any
Voting Trust Certificate shall be invalid or inoperative, the validity and
effect of the other provisions hereof or thereof shall not be affected thereby.
17. Acceptance of Trust. The Trustee hereby reaffirms its acceptance of
the trust hereunder, subject to all of the terms, provisions and conditions set
forth herein, and agrees that it will continue to exercise the powers and
perform the duties of Trustee as set forth herein; provided, however that
nothing contained herein shall be construed to prevent the Trustee from
resigning and discharging itself from the trust established by this Agreement.
18. NONLIABILITY OF TRUSTEES. THE DECLARATION OF TRUST ESTABLISHING THE
COMPANY, DATED OCTOBER 9, 1986, A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS
THERETO (THE "DECLARATION"), IS DULY FILED WITH THE DEPARTMENT OF ASSESSMENTS
AND TAXATION OF THE STATE OF MARYLAND, PROVIDES THAT THE NAME "HEALTH AND
REHABILITATION PROPERTIES TRUST" REFERS TO THE TRUSTEES UNDER THE DECLARATION
COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO
TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF THE COMPANY SHALL BE HELD TO
ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM
AGAINST, THE COMPANY. ALL PERSONS DEALING WITH THE COMPANY, IN ANY WAY, SHALL
LOOK ONLY TO THE ASSETS OF THE COMPANY FOR THE PAYMENT OF ANY SUM OR THE
PERFORMANCE OF ANY OBLIGATION.
19. GOVERNING LAW. EXCEPT AS TO MATTERS REGARDING THE INTERNAL AFFAIRS
OF HRP AND ISSUES OF OR LIMITATIONS ON ANY PERSONAL LIABILITY OF THE
SHAREHOLDERS AND TRUSTEES OF HRP FOR OBLIGATIONS OF HRP, AS TO WHICH THE LAWS OF
THE STATE OF MARYLAND SHALL GOVERN, THIS AGREEMENT AND ANY VOTING TRUST
CERTIFICATE ISSUED HEREUNDER SHALL BE INTERPRETED, CONSTRUED, APPLIED AND
ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS (OTHER THAN THE LAWS
GOVERNING CONFLICTS OF LAWS) OF THE COMMONWEALTH OF MASSACHUSETTS.
(Intentionally left blank.]
<PAGE>
-10-
IN WITNESS WHEREOF, the Beneficiary and the Trustee have hereunto set
their hands as an instrument under seal, as of the date first above written.
TRUSTEE:
HRPT ADVISORS, INC.
By /s/ David J. Hegarty
Name: David J. Hegarty
Title:
BENEFICIARY:
AMS PROPERTIES, INC.
By /s/ Kevin W. Pendergest
Name: Kevin W. Pendergest
Title: Executive Vice President
Signature page for Amended and Restated Voting Trust Agreement, dated
as of June 30, 1992, by and between AMS Properties, Inc. as Beneficiary and HRPT
Advisors, Inc., as Trustees.
<PAGE>
EXHIBIT A to
VOTING TRUST AGREEMENT
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR REGISTERED OR QUALIFIED UNDER ANY STATE SECURITIES
LAWS, AND SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT AND
REGISTRATION AND QUALIFICATION UNDER ALL APPLICABLE STATE SECURITIES LAWS OR
PURSUANT TO EXEMPTIONS THEREFROM. THIS CERTIFICATE MAY NOT BE SOLD OR OTHERWISE
TRANSFERRED EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF THE VOTING TRUST
AGREEMENT REFERRED TO HEREIN. THIS CERTIFICATE IS FURTHER SUBJECT TO, AND NO
TRANSFERS OF THE SECURITIES REPRESENTED HEREBY SHALL BE VALID OR EFFECTIVE UNTIL
COMPLIANCE WITH THE CONDITIONS SPECIFIED IN, THE AMENDED AND RESTATED HRP SHARES
PLEDGE AGREEMENT, DATED AS OF JUNE 30, 1992 AMONG THE BENEFICIARY AND THE
COMPANY, AS SUCH AGREEMENT MAY BE FURTHER AMENDED OR SUPPLEMENTED. EACH HOLDER
OF THIS CERTIFICATE AGREES TO BE BOUND BY THE PROVISIONS OF SAID AGREEMENTS,
COPIES OF WHICH ARE AVAILABLE WITHOUT CHARGE UPON WRITTEN REQUEST FROM THE
PRINCIPAL OFFICE OF THE COMPANY.
HEALTH AND REHABILITATION PROPERTIES TRUST
a Maryland real estate investment trust
Voting Trust Certificate for Common Shares of Beneficial Interest
No._________ Shares__________
THIS IS TO CERTIFY THAT ____________, a _____________ corporation,
(the"Holder") is the beneficial owner of ________________ Common Shares of
Beneficial Interest, $.0l par value, (the "Shares") of Health and Rehabilitation
Properties Trust, a Maryland real estate investment trust (the "Company"), and
that said Shares are held subject to all of the terms and conditions of a
certain Amended and Restated Voting Trust Agreement dated as of June 30, 1992
(as the same may be amended, modified or supplemented from time to time, the
"Agreement") by and among the Holder and HRPT Advisors, Inc., a Delaware
corporation, as Trustee (the "Trustee"), which Agreement is expressly made a
part hereof and incorporated herein by reference. A counterpart of the Agreement
is on file and available for inspection by the registered holder hereof or his
delegate at the Company's principal place of business at 400 Centre Street,
Newton, Massachusetts 02158, at any time during normal business hours without
charge.
The above-named Holder accepts this Certificate subject to all of the
terms and conditions of the Agreement and by such acceptance such Holder shall
become a party to the Agreement and shall be entitled to all the rights,
privileges and interests of such a party and shall
be bound by all of the terms of and subject to all of the duties and obligations
set forth in the Agreement, all as more fully provided therein, it being
expressly stipulated, however, that no voting right passes to the Holder hereof
by or
<PAGE>
-2-
under this Certificate or by or under the Agreement or any other agreement,
express or implied.
This Certificate is transferable only on the books of the Trustee, upon
presentation and surrender of this Certificate, properly assigned and endorsed,
by the registered holder hereof, either in person or by attorney duly
authorized, in the manner prescribed in the Agreement and according to any and
all rules that may be established by the Trustee for transfers of Certificates,
and is subject to restrictions on transfer, resale obligations and compliance
with the Securities Act of 1933, as amended, and a certain Amended and Restated
HRP Shares Pledge Agreement dated as of June 30, 1992, as the same may be
amended, modified or supplemented from time to time between the Holder and the
Company, all as referred to above. Until this Certificate has been so
transferred in accordance with any such rules, the Trustee may treat the
registered holder as the owner hereof for all purposes whatsoever.
Upon the termination of the Agreement, the above-named Holder or his
personal representative will be entitled, upon surrender hereof as provided
above and in the Agreement, and upon payment to the Trustee of a sum sufficient
to reimburse the Trustee for any tax or government charge, if any, imposed in
connection with any transfer of shares of Stock represented hereby, to receive
certificates for the above-written number of fully paid and non-assessable
shares of Stock deposited with and held by the Trustee pursuant to the terms of
the Agreement.
Until the actual delivery of such certificates of shares of Stock by
the Trustee as provided above and in the Agreement, the Trustee shall, in
respect of any and all such shares of Stock held by it under the Agreement,
possess and be entitled to exercise all Shareholders' rights of every kind,
including the right to vote on, to take part in, or to consent to any corporate
action, as provided for in the Agreement.
This Certificate shall not be valid unless and until signed by all the
Trustees in office at the date of issue.
IN WITNESS WHEREOF, the undersigned Trustee has caused this Certificate
to be executed this 30th day of June, 1992.
HRPT ADVISORS, INC., as Trustee
By:_________________________________
Its________________________
<PAGE>
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
to _______________________ the within Certificate and all rights and interests
represented thereby, and does hereby irrevocably constitute and appoint
___________________ attorney to transfer the said Certificate on the register of
Certificate holders maintained by the Trustee, with full power of substitution
in the premises.
IN WITNESS WHEREOF, the undersigned has caused these presents to be
executed this _______________ day of _______________________, 1992.
In the presence of: AMS PROPERTIES, INC.
______________________________ By_______________________________
Its
NOTICE
The signature on this assignment must correspond with the above-written
name of the Holder of this Certificate in every particular, without alteration
or any change whatever.
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated July 1, 1999, except for Note 1, as to which the date is
September 1, 1999, with respect to the consolidated financial statements and
schedules of Senior Housing Properties Trust included in pre-effective amendment
No. 3 to the Registration Statement (Form S-11) and related prospectus of Senior
Housing Properties Trust.
/s/ERNST & YOUNG LLP
Boston, Massachusetts
September 1, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 168
<SECURITIES> 0
<RECEIVABLES> 37,638
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 732,393
<DEPRECIATION> 105,823
<TOTAL-ASSETS> 674,294
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 630,934
<TOTAL-LIABILITY-AND-EQUITY> 674,294
<SALES> 0
<TOTAL-REVENUES> 45,290
<CGS> 0
<TOTAL-COSTS> 23,458
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,992
<INCOME-PRETAX> 21,832
<INCOME-TAX> 0
<INCOME-CONTINUING> 21,832
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,832
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
