Registration No. 333-69703
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1
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
Senior Housing Properties Trust
400 Centre Street
Newton, Massachusetts 02458
(617) 796-8350
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Alexander A. Notopoulos, Jr., Esq. Howard G. Godwin, Jr., Esq.
Sullivan & Worcester LLP Brown & Wood LLP
One Post Office Square One World Trade Center
Boston, Massachusetts 02109 New York, New York 10048-0557
(617) 338-2800 (212) 839-5300
Approximate date of commencement of proposed sale to the public: 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.
We may not 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 January 7, 1999
PROSPECTUS
11,000,000 Shares
Senior Housing Properties Trust
Common Shares of Beneficial Interest
---------------------------
Senior Housing Properties Trust is a real estate investment trust. Upon
completion of this offering, we will own or have commitments to buy 98 senior
housing, congregate communities, assisted living properties and nursing homes,
with 13,750 units/beds that are leased to nine unaffiliated tenants.
This is Senior Housing Properties Trust's initial public offering of common
shares. Prior to this offering no public market for the common shares has
existed. We intend to make regular quarterly distributions initially at the rate
of $.40 per share ($1.60 per share on an annual basis) commencing with the
quarter ending March 31, 1999. We expect the public offering price to be between
$18.00 and $20.00 per common share. After pricing of the offering, we expect
that the common shares will trade on the New York Stock Exchange under the
symbol "__."
We are simultaneously offering 350,000 common shares in a separate offering
to our Managing Trustees. The Managing Trustees will pay the public offering
price per share set forth below. No underwriting discount will be paid with
respect to these shares, and we will receive 100% of the proceeds.
Investing in the common shares involves risks which are described in the
"Risk Factors" section beginning on page 12 of this prospectus, including:
o A majority of our income will come from one tenant, Marriott
International, Inc.
o Some of our tenants may experience problems beyond our control which
impair their abilities to pay rent and our ability to make
distributions.
o Some of our properties are subject to burdensome regulations.
o Some of the properties we expect to buy from Marriott are not yet
fully built.
o Our ability to grow will depend upon our future access to capital and
future efforts by our investment advisor, Managing Trustees and
officers.
o Affiliates will own 36% of our shares, their interests may not
coincide with the interest of other shareholders, and these affiliates
will receive substantial benefits from this offering.
<TABLE>
<CAPTION>
Per Share Total
<S> <C> <C>
Public Offering Price...................................................
Underwriting Discount...................................................
Proceeds, before expenses, to Senior Housing Properties Trust...........
</TABLE>
The underwriters may also purchase up to an additional 1,650,000 shares at
the public offering price, less the underwriting discount, within 30 days from
the date of this prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the common shares or determined if
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
We expect that the common shares will be ready for delivery in New York,
New York on or about ___________, 1999.
---------------------------
Merrill Lynch & Co.
---------------------------
The date of this prospectus is , 1999.
<PAGE>
The information contained in this prospectus is not complete and may be changed.
We may not 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.
[ALTERNATE PAGE]
Subject to Completion
Preliminary prospectus dated January 7, 1999
PROSPECTUS
350,000 Shares
Senior Housing Properties Trust
Common Shares of Beneficial Interest
---------------------------
Senior Housing Properties Trust is a real estate investment trust. Upon
completion of this offering, we will own or have commitments to buy 98 senior
housing, congregate communities, assisted living properties and nursing homes,
with 13,750 units/beds that are leased to nine unaffiliated tenants.
This is Senior Housing Properties Trust's initial public offering of common
shares. Prior to this offering no public market for the common shares has
existed. We intend to make regular quarterly distributions initially at the rate
of $.40 per share ($1.60 per share on an annual basis) commencing with the
quarter ending March 31, 1999. We expect the public offering price to be between
$18.00 and $20.00 per common share. After pricing of the offering, we expect
that the common shares will trade on the New York Stock Exchange under the
symbol "__."
We are simultaneously offering 11,000,000 common shares in a separate
underwritten offering to the public at the same public offering price as set
forth below. In connection with that offering, we have granted the underwriters
an option to purchase up to an additional 1,650,000 shares within 30 days from
the date of this prospectus to cover over-allotments. The underwriters are not
associated with, or underwriters with respect to, the 350,000 shares to which
this prospectus relates.
Investing in the common shares involves risks which are described in the
"Risk Factors" section beginning on page 12 of this prospectus, including:
o A majority of our income will come from one tenant, Marriott
International, Inc.
o Some of our tenants may experience problems beyond our control which
impair their abilities to pay rent and our ability to make
distributions.
o Some of our properties are subject to burdensome regulations.
o Some of the properties we expect to buy from Marriott are not yet
fully built.
o Our ability to grow will depend upon our future access to capital and
future efforts by our investment advisor, Managing Trustees and
officers.
o Affiliates will own 36% of our shares, their interests may not
coincide with the interest of other shareholders, and these affiliates
will receive substantial benefits from this offering.
<TABLE>
<CAPTION>
Per Share Total
<S> <C> <C>
Public Offering Price...................................................
Proceeds, before expenses, to Senior Housing Properties Trust ..........
</TABLE>
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the common shares or determined if
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
We expect that the common shares will be ready for delivery in New York,
New York on or about ___________, 1999.
The date of this prospectus is , 1999.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
Summary..........................................................................................................5
Risk Factors....................................................................................................12
Dependence Upon Marriott...................................................................................12
Dependence Upon Tenants....................................................................................12
Real Estate Risks..........................................................................................12
Healthcare Properties Risks................................................................................13
Completion of New Marriott Properties......................................................................13
Possible Failure of Growth Strategy........................................................................13
Limited Operating History and Dependence Upon Key Personnel................................................14
Concentration of Ownership.................................................................................14
Conflicts of Interest......................................................................................14
Benefits to Related Parties................................................................................15
Lack of Prior Market for the Common Shares.................................................................15
Possible Future Sales of Common Shares.....................................................................15
Tax Risks..................................................................................................16
Risks of Debt Leverage.....................................................................................16
Ownership Limitations and Anti-Takeover Provisions.........................................................16
Policy Changes.............................................................................................16
Properties Subject to Ground Leases........................................................................16
Dilution...................................................................................................17
Distributions ..................................................................................................18
Dilution........................................................................................................21
Use of Proceeds.................................................................................................22
Capitalization..................................................................................................22
The Company.....................................................................................................23
Formation..................................................................................................23
History and Management.....................................................................................24
Growth Strategy............................................................................................25
Senior Living Real Estate Market...........................................................................25
Government Regulations and Rate Setting....................................................................27
Competition................................................................................................29
Initial Properties..............................................................................................31
Initial Tenants.................................................................................................35
Marriott International, Inc................................................................................36
Brookdale Living Communities, Inc..........................................................................37
Mariner Post-Acute Network, Inc............................................................................37
Integrated Health Services, Inc............................................................................37
Sun Healthcare Group, Inc..................................................................................37
Genesis Health Ventures, Inc...............................................................................38
Privately Owned Tenants....................................................................................38
Initial Leases..................................................................................................39
Lease Terms................................................................................................41
Selected Historical and Adjusted Pro Forma Financial Information................................................43
Management's Discussion and Analysis of Financial Condition and Results of Operations...........................44
Overview...................................................................................................44
Adjusted Pro Forma Results of Operations...................................................................44
Historical Results of Operations...........................................................................45
Liquidity and Capital Resources............................................................................45
Management......................................................................................................48
Trustees and Executive Officers............................................................................48
Committees of the Board of Trustees........................................................................49
Compensation of the Trustees and Officers..................................................................49
2
<PAGE>
Incentive Share Award Plan.................................................................................49
Limitation of Liability and Indemnification................................................................49
The Investment Advisor and the Advisory Agreement..........................................................50
Legal Proceedings..........................................................................................52
Certain Transactions.......................................................................................53
Policies with Respect to Certain Activities.....................................................................53
Investment Policies........................................................................................54
Disposition Policies.......................................................................................54
Financing Policies.........................................................................................54
Conflict of Interest Policies..............................................................................55
Policies with Respect to Other Activities..................................................................55
Summary of the Transaction Agreement............................................................................56
Certain Provisions of Maryland Law and of the Company's
Declaration of Trust and By-laws...........................................................................58
Trustees...................................................................................................58
Advance Notice of Trustee Nominations and New Business.....................................................59
Liability and Indemnification of Trustees and Officers.....................................................60
Shareholder Liability......................................................................................61
Maryland Asset Requirements................................................................................61
Transactions with Affiliates, Trustees, Employees, Officers or Agents......................................61
Voting by Shareholders.....................................................................................62
Restrictions on Transfer of Shares.........................................................................62
Business Combinations......................................................................................65
Control Share Acquisitions.................................................................................65
Amendment to the Declaration of Trust......................................................................66
Dissolution of the Company.................................................................................66
Anti-takeover Effect of Certain Provisions of Maryland Law and of the Declaration of Trust and
By-laws................................................................................................67
Description of the Securities...................................................................................67
General....................................................................................................67
Common Shares..............................................................................................67
Power to Issue Additional Common Shares....................................................................68
Restrictions on Transfer of Shares.........................................................................68
Transfer Agent and Registrar...............................................................................68
Principal Shareholders..........................................................................................69
Federal Income Tax Considerations...............................................................................70
Taxation as a REIT.........................................................................................70
REIT Qualification Requirements............................................................................72
Federal Income Tax Treatment of Leases.....................................................................77
Depreciation of Properties.................................................................................78
Taxation of U.S. Shareholders..............................................................................79
Taxation of Certain Tax-Exempt U.S. Shareholders...........................................................81
Taxation of Non-U.S. Shareholders..........................................................................81
Backup Withholding and Information Reporting Requirements..................................................84
Other Tax Considerations...................................................................................85
ERISA Plans, Keogh Plans and Individual Retirement Accounts.....................................................85
General Fiduciary Obligations..............................................................................85
Prohibited Transactions....................................................................................85
Special Fiduciary and Prohibited Transactions Considerations...............................................86
Underwriting....................................................................................................88
Experts.........................................................................................................90
Legal Matters...................................................................................................90
Where You Can Find Additional Information.......................................................................91
Index to Financial Statements..................................................................................F-1
</TABLE>
3
<PAGE>
---------------------------
FORWARD LOOKING STATEMENTS
This prospectus contains forward looking statements. We have based these
statements on our current expectations about future events and on assumptions we
have made. These forward looking statements are subject to risks and
uncertainties which could cause actual results or events to differ materially
from those we project. Prospective purchasers should not place undue reliance on
these forward looking statements. We undertake no obligation to update or revise
any forward looking statements as a result of new information, future events or
otherwise.
---------------------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have 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. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
our business, financial condition, results of operations and prospects may have
changed since the date appearing on the cover of this prospectus.
---------------------------
The Declaration of Trust establishing Senior Housing Properties Trust,
dated December 16, 1998, a copy of which, together with all amendments thereto,
is filed in the office of the Department of Assessments and Taxation of the
State of Maryland, provides that the name "Senior Housing Properties Trust"
refers to the trustees under the Declaration of Trust as trustees, but not
individually or personally. The Declaration of Trust also provides that no
trustee, officer, shareholder, employee or agent of Senior Housing Properties
Trust shall be held to any personal liability for any obligation of, or claim
against, Senior Housing Properties Trust. All persons dealing with Senior
Housing Properties Trust shall look only to the assets of Senior Housing
Properties Trust for the payment of any sum or the performance of any
obligation.
---------------------------
In this prospectus we assume that the 84 properties currently owned by HRP
have been transferred to us and that a binding agreement has been signed with
respect to the 14 new Marriott properties to be acquired that is consistent with
the letter of intent presently in effect. These events are expected to occur
before this offering commences. Similarly, the descriptions of the Declaration
of Trust, By-laws, management and common shares contained in this prospectus are
presented giving effect to various changes that will occur before the sale of
our common shares. All references to owned properties include investments in
mortgages on properties for which we have nominal price purchase options.
4
<PAGE>
SUMMARY
This summary highlights some information contained elsewhere in this
prospectus. This summary may not contain all of the information that you should
consider before investing in the common shares. You should read the entire
prospectus carefully. Unless otherwise stated, references to Senior Housing
Properties Trust or the Company include its consolidated subsidiaries and the
information contained in this prospectus assumes the underwriters do not
exercise their over-allotment option.
THE COMPANY
Senior Housing Properties Trust (the "Company") is a real estate investment
trust ("REIT") formed to acquire and own senior living properties that are
leased to unaffiliated tenants, including senior housing, congregate
communities, assisted living properties and nursing homes. We currently own 84
properties including 14 leased to Marriott International, Inc. (including its
subsidiaries, "Marriott"). We will use the proceeds from this offering to
purchase 14 additional assisted living properties which we will lease to
subsidiaries of Marriott. If we do not acquire all of these Marriott properties,
we intend to use the proceeds for working capital and other general business
purposes including other acquisitions. This offering is not conditioned upon the
acquisition of any particular properties.
The following chart shows the composition of our portfolio at historical
costs after the purchase of the 14 new Marriott properties.
o $819 million total assets
o 100% invested in senior housing
o 99% leased to 6 public companies
o 63% leased to Marriott
o 94% of rents from leases with
at least 12 years remaining
[chart showing composition of portfolio]
<TABLE>
<CAPTION>
No. of
Tenant Properties Historical Cost Percentage
- ------ ---------- --------------- ----------
<S> <C> <C> <C>
Marriott International 28 $519 million 63%
Brookdale Living 4 $102 million 12%
Communities
Mariner Post-Acute 26 $87 million 11%
Network
Integrated Health 32 $66 million 8%
Services
Sun Healtcare Group 4 $21 million 3%
Genesis Health 1 $13 million 2%
Ventures
Other Operators 3 $11 million 1%
</TABLE>
Growth Strategy
The population of the United States is aging. During the past 35 years, 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. Although there are benefits to
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 hospitals has increased the need for
intermediate care properties. We believe this combination of demographic, social
and economic factors will increase the demand for specialized senior housing
properties and nursing homes for the foreseeable future.
Our business plan is to profit from this increasing demand in two ways.
First, we intend to purchase additional properties and lease them at rents that
are greater than our costs of acquisition capital. Second, we intend to
structure leases that have periodic rental increases. We expect that our future
investments will focus upon properties similar to the new Marriott properties.
We expect these newer properties to attract residents who use private resources,
rather than government programs, to pay for rent and services.
5
<PAGE>
History and Management
We are presently a 100% owned subsidiary of HRPT Properties Trust, a NYSE
listed REIT ("HRP"). All 84 properties that we own were acquired by HRP since
1987. Our operations will be conducted by our investment advisor, REIT
Management & Research, Inc. ("RMR"). RMR is owned by our Managing Trustees,
Barry M. Portnoy and Gerard M. Martin. RMR has approximately 180 full time
employees, and its principals and other personnel have experience in managing
REITs to produce increasing distributions and have extensive contacts in the
senior housing and healthcare industries.
Our management team founded HRP in 1986 with $63 million invested in seven
healthcare properties leased to two tenants. Today, HRP has approximately $3
billion invested in 255 properties leased to over 500 tenants. As HRP grew, it
diversified its investments to include hotels, office buildings and senior
housing properties in addition to its original healthcare facilities. During its
12 years in business, HRP has made 48 consecutive quarterly distributions and
raised its distribution rate 13 times.
In 1995 our management team founded a new REIT, Hospitality Properties
Trust ("HPT"), to capitalize separately and grow HRP's hotel investments. At its
initial public offering in 1995 HPT had $329 million invested in 37 hotels
leased to one tenant. Today, HPT has almost $1.8 billion invested in 167 hotels
leased to nine tenants. During its three and one half years in business, HPT has
made 14 consecutive quarterly distributions and raised its distribution rate
nine times.
A primary purpose of this offering is to capitalize separately our Company
as a new REIT with a strong core of senior housing real estate and industry
contacts to take advantage of favorable market conditions. To facilitate these
efforts two senior officers of RMR will be assigned to devote substantially all
of their business time to our Company. David J. Hegarty is currently the
President and Chief Operating Officer of both RMR and HRP. Ajay Saini is
currently a Vice President of RMR and Treasurer and Chief Financial Officer of
HRP. Upon completion of this offering, Messrs. Hegarty and Saini will resign
their positions at HRP and assume similar positions at our Company. All other
RMR personnel including our Managing Trustees, Messrs. Portnoy and Martin, will
devote a significant part of their time to assist in this effort.
Upon the completion of this offering, HRP will distribute 13,187,380 of our
common shares to its shareholders on the basis of one common share for every 10
HRP shares owned on _______, 1999. HRP will retain 13,187,380 common shares
after this distribution. Simultaneously with this offering, our Managing
Trustees will purchase 350,000 common shares at the same price paid by public
investors. After completion of this offering, our Managing Trustees will own 1%,
HRP will own 35% and the public generally (including public shareholders of HRP)
will own 64% of our Company.
Competition
There are several publicly owned REITs that today invest in senior housing
and 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 we will have and some have a cost of capital that may be less than
we will have. Nonetheless, we believe that we will be able to successfully
compete for new investments for at least five reasons:
First, our initial senior living properties have solid records of
performance. We will commence business with a large and diversified portfolio of
properties which have strong prospects based on demographic trends and which are
subject to long term leases.
Second, we will be the only REIT exclusively focused on senior living
properties. We do not intend to invest in medical office buildings, hospitals or
any properties which do not benefit from the projected aging of the American
population.
6
<PAGE>
Third, current market conditions have created an opportunity for a new
market entrant to purchase and lease senior living properties. A large number of
recently developed properties are currently available. The current turmoil in
the mortgage markets has limited capital for new development and has reduced the
financing available to several of our competitors. A new Medicare prospective
payment program has 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, our proposed methods of doing business are intended to be
attractive to a diversified group of prospective sellers and tenants of senior
living properties. We intend to do business only with unaffiliated sellers and
tenants and to retain the financial flexibility to work with our tenants to meet
their business requirements.
Finally, and perhaps most importantly, our management team has extensive
experience and contacts in the senior housing and healthcare real estate
markets.
Properties
After completion of our purchase and lease of the 14 new assisted living
properties from Marriott, 56% of our rent will come from properties leased to
Marriott and 94% of our rent will come from property leases which are committed
until December 31, 2010. The following table summarizes the tenants, types of
properties and important lease terms for our properties:
<TABLE>
<CAPTION>
Lease Annual Percentage
Tenant Properties Term Rent of Total Rent
- ------ ---------- ---- ---- -------------
($ in 000s)
<S> <C> <C> <C> <C>
Marriott (current 14 congregate 2013 $29,539 33.3%
properties) communities/assisted living
properties (3,932 units)
Marriott (new 14 assisted living properties 2014 and 2016 20,349 22.9
properties) (1,803 units)
Mariner Post-Acute 26 nursing homes (3,497 beds) 2013 15,180 17.1
Network, Inc.
Brookdale Living 4 congregate communities 2019 10,186 11.5
Communities, Inc. (829 units)
Integrated Health 32 nursing homes (2,454 beds) 2010 7,684 8.7
Services, Inc.
Sun Healthcare 4 nursing homes (565 beds) 2005 2,732 3.1
Group, Inc.
Genesis Health 1 nursing home (150 beds) 2005 1,440 1.6
Ventures, Inc.
Private Companies 3 nursing homes (520 beds) 2001 to 2007 1,638 1.8
-------------------------- ------- ----
Totals: 98 properties $88,748 100%
(13,750 units/beds) ------- ----
</TABLE>
7
<PAGE>
Distributions
We intend to make distributions on a quarterly basis. We expect the initial
quarterly distribution rate to be $.40 per share ($1.60 per share on an annual
basis). We will make our initial distribution shortly after the quarter ending
March 31, 1999 in the anticipated amount of $__ per share (the pro rata amount
from the date of the offering through March 31, 1999). We intend to periodically
increase our distributions as our cash flow increases. Of course, we cannot
guarantee that our cash flow will always permit us to make or increase
distributions.
Company's Address
Our principal place of business is located at 400 Centre Street, Newton,
Massachusetts 02458, and our telephone number is (617) 796-8350.
RISK FACTORS
An investment in our common shares involves various risks. You should
carefully consider the information contained in "Risk Factors" beginning on page
12 prior to investing. The following discussion summarizes some of these risks.
o Dependence Upon Marriott. Marriott is our largest tenant. After we
purchase and lease the 14 new Marriott properties, Marriott will be
the source of 56% of our rents. Changes could occur at Marriott that
are beyond our control and may jeopardize Marriott's ability to pay
our rent.
o Dependence Upon Tenants. Some or all of our tenants could incur
operating or financial problems that jeopardize their ability to pay
rents. If we cannot collect our rents, we may be unable to pay
distributions.
o Real Estate Risks. The real estate business is generally considered to
be cyclical and subject to periodic oversupply. Our business will be
subject to various risks customarily associated with real estate
ownership and acquisitions, including environmental risks.
o Healthcare Properties Risks. Certain healthcare properties are highly
regulated. A large percentage of the revenues at certain healthcare
properties are paid by government programs such as Medicare and
Medicaid. Changes in these regulations or in the amounts of payments
available under Medicare and Medicaid programs may restrict our
tenants' abilities to pay rent.
o Completion of New Marriott Properties. Construction of ___ of the 14
properties to be acquired from Marriott with the proceeds of this
offering has not been completed. Because Marriott is responsible for
this construction, we can provide no assurances that this construction
will be completed in a timely manner or at all.
o Possible Failure of Growth Strategy. Our growth strategy depends, in
part, upon our ability to raise additional capital and to invest in
new properties which will produce rents in excess of our costs of
capital. We can provide no assurance that capital will be available at
reasonable costs or that we will be able to purchase and lease
additional properties.
o Limited Operating History and Dependence Upon Key Personnel. We have
not previously operated independently. Our success depends upon the
efforts of our investment advisor, Managing Trustees and officers.
8
<PAGE>
o Concentration of Ownership. Upon completion of this offering HRP will
own 35% of our outstanding common shares. This ownership will enable
HRP to have a significant influence over shareholder decisions.
o Conflicts of Interest. Barry M. Portnoy and Gerard M. Martin are the
Managing Trustees of our Company and HRP and also own the investment
advisor to our Company and HRP. The interests of HRP, of Messrs.
Portnoy and Martin and of our investment advisor may, in certain
circumstances, conflict with the best interests of our other
shareholders.
o Benefits to Related Parties. The completion of this offering will
result in substantial benefits to related parties. For example, 14 of
our properties will be mortgaged for $250 million, and we will use the
proceeds to repay a loan from HRP.
o Lack of Prior Market for the Common Shares. The market value of our
common shares may decline if an active market does not develop after
this offering.
o Possible Future Sales of Common Shares. We may authorize and issue
additional common shares without shareholder approval. In addition,
the HRP shareholders receiving our common shares as a distribution
from HRP will be free to sell their shares. An oversupply of shares
available for sale could adversely affect the market price of our
common shares.
o Tax Risks. If we fail to meet complex REIT qualification requirements,
we will be subject to corporate taxes and the money available to make
distributions will be reduced.
o Risks of Debt Leverage. If we incur excessive debt or are unable to
refinance debt before its maturity, our ability to make distributions
may be jeopardized. A default on secured debt may result in
foreclosure on our mortgaged properties.
o Ownership Limitations and Anti-Takeover Provisions. Shareholders are
prohibited from owning more than 9.8% of our Company. Our Declaration
of Trust and our By-laws contain other provisions that may inhibit a
change of control. Because of these limitations our shareholders may
be unable to realize a change of control premium for their common
shares.
o Policy Changes. Our Board of Trustees may change our investment and
business policies without shareholder approval.
o Properties Subject to Ground Leases. Two of our properties are on land
that is leased rather than owned. Our tenants must pay rents under
these ground leases as well as our rent. If a tenant fails to pay
ground rent, we may have to do so to protect our investment in these
properties.
o Dilution. The book value per common share of our net assets is less
than the expected sale price of our common shares. Accordingly, you
will experience immediate dilution in the book value per common share.
9
<PAGE>
<TABLE>
<CAPTION>
The Offering
<S> <C>
Common shares offered............................................. 11,000,000
Common shares to be outstanding after this offering
and the concurrent sale to our Managing Trustees............... 37,724,760
Use of proceeds................................................... To purchase 14 assisted living
properties from Marriott and for
general business purposes
Proposed NYSE symbol.............................................. ___
</TABLE>
10
<PAGE>
SUMMARY HISTORICAL AND ADJUSTED PRO FORMA FINANCIAL INFORMATION
The following table presents historical and adjusted pro forma financial
information and other data for our properties. We are currently a 100% owned
subsidiary of HRP, and none of our properties are encumbered by debt. It is
impossible to estimate all operating expenses we would have incurred as a
separate public company. The following table includes pro rata allocations of
interest expense and certain general and administrative expenses for historical
periods. However, the net income and funds from operations shown are not
necessarily indicative of results that we will realize as a separate company.
The adjusted pro forma information assumes that this offering is completed at a
public offering price of $19 per common share and that net proceeds are used to
purchase and lease 14 new Marriott properties and includes adjustments for
certain properties under development. For additional information about the
calculation of amounts appearing in this table see the Unaudited Pro Forma
Financial Statements and notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Adjusted pro
Nine months forma nine
Year ended December 31, ended months ended
-------------------------------------- September 30, September 30,
1994 1995 1996 1997 1998 1998
------ ----- ------ ------ -------------- --------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental income ................. $ 32,488 $ 49,545 $ 52,511 $ 64,515 $ 50,142 $ 66,865
Interest and other income ..... 599 792 1,024 2,515 1,953 1,953
-------- -------- -------- -------- -------- --------
Total revenues .............. 33,087 50,337 53,535 67,030 52,095 68,818
-------- -------- -------- -------- -------- --------
Expenses:
Interest ...................... 3,912 13,206 11,590 13,643 11,505 13,125
Depreciation and
amortization ................ 6,860 10,943 11,524 13,906 10,744 14,771
General and administrative .... 2,614 3,499 3,764 4,289 3,088 3,858
-------- -------- -------- -------- -------- --------
Total expenses .............. 13,386 27,648 26,878 31,838 25,337 31,754
-------- -------- -------- -------- -------- --------
Net income .................. $ 19,701 $ 22,689 $ 26,657 $ 35,192 $ 26,758 $ 37,064
======== ======== ======== ======== ======== ========
Per Common Share:
Shares outstanding .............. -- -- -- -- -- 37,725
Net income per share ............ -- -- -- -- -- $ .98
Other Data:
Number of properties at
end of period ................. 60 67 74 79 84 98
Funds from operations
("FFO") (1) ................... $ 26,561 $ 33,632 $ 38,181 $ 49,098 $ 37,502 $ 51,272
FFO per share ................... -- -- -- -- -- $ 1.36
<CAPTION>
Adjusted
December 31, pro forma
-------------------------------------- September 30, September 30,
1994 1995 1996 1997 1998 1998
------ ------ ------ ------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total real estate investments
(before depreciation) ......... $456,734 $482,339 $584,601 $613,666 $625,058 $818,858
Total assets (after depreciation) 445,039 460,401 552,458 570,023 568,664 768,993
Total debt ...................... -- -- -- -- -- 250,000
<FN>
- --------
(1) Funds from operations or "FFO" means net income (computed in accordance with generally accepted accounting
principles ("GAAP")), before gain or loss on sale of properties and extraordinary items, plus depreciation and
other non-cash items. We consider FFO to be a measure of the financial performance of an equity REIT that
provides a relevant basis for comparison among REITs. FFO does not represent cash flow from operating
activities (as determined in accordance with GAAP) and should not be considered as an alternative to net
income as an indicator of our financial performance or to cash flow as a measure of liquidity.
</FN>
</TABLE>
11
<PAGE>
RISK FACTORS
Before deciding to purchase common shares, you should consider all the
information contained in this prospectus, including the following risk factors:
Dependence Upon Marriott
Marriott is our largest tenant and will be the source of 56% of our rents.
Marriott has unconditionally guaranteed the lease obligations with regard to the
14 properties that we now own. With regard to the 14 new properties to be
purchased and leased, Marriott's guaranty will expire at year-end 2006 or sooner
if certain financial performance thresholds at these properties are achieved.
Today Marriott appears to be financially able to meet all of its rent and
guaranty obligations. However, changes could occur at Marriott that are beyond
our control and may jeopardize Marriott's ability to pay our rent.
Dependence Upon Tenants
Our success depends upon our ability to collect rent. If we cannot collect
our rents, we may be unable to make distributions or to meet our expenses. We
lease most of our current properties to affiliates of publicly owned companies
that appear to be well capitalized. However, some or all of these tenants could
incur operating or financial problems that may jeopardize their ability to pay
rent. Also, we may make future investments in properties that are leased to less
creditworthy tenants.
Real Estate Risks
The real estate business is generally considered to be cyclical and subject
to periodic oversupply. In some states, regulations that limit new construction
of certain healthcare properties protect those properties from some of this
cyclicality. However, the financial performance of senior living properties is
generally subject to real estate business cycles.
Our business will be subject to all of the risks customarily associated
with real estate acquisitions and ownership, including casualty loss risks, the
risks of lease renewals, the risks of lease defaults and the risk that we will
not have capital available to fund regular capital expenditures, among others.
Various environmental laws impose liability on current or previous owners
or operators of real property for the costs of investigation and clean-up of
hazardous or toxic substances on or migrating from their properties. These laws
often impose liability regardless of the knowledge or fault of the owner or
operator if a hazardous or toxic substance is found on a property. This
liability may also be joint and several, meaning that one party may be liable
for the entire cost of clean-up even though other parties may also be liable.
Persons who arrange for the disposal or treatment of hazardous substances may
also be liable for the costs of clean-up of contamination at a disposal or
treatment facility. Also, environmental laws impose responsibility for
properties with asbestos containing materials which are in poor condition or
when the properties are undergoing renovation. Owners of contaminated properties
may be liable for damages or injuries caused by the contamination. A property
owner may be responsible for the costs of removing underground storage tanks
found on its property. Besides these potential liabilities, the presence of
hazardous substances may adversely affect the market value of the property, as
well as the owner's ability to sell, lease or finance the property.
HRP owned all of our current properties before their transfer to us. HRP
has represented to us that it does not know of any material environmental
problems that exist on these properties. Also, under each of our current leases,
the tenants are responsible for any environmental clean-up that may be necessary
and must indemnify us for any costs or liability we incur with respect to
environmental matters.
12
<PAGE>
Accordingly, we do not intend to obtain new environmental site assessment
reports for our initial properties. We do intend to obtain Phase I environmental
site assessment reports on the new Marriott properties. The state of
environmental laws is such that we can provide no assurance that any of the
environmental indemnification provisions in the existing leases are enforceable
or that we will have no liability even if we are entitled to some
indemnification. Also, if any of our tenants has responsibility for an
environmental clean-up, that liability could adversely affect the tenant's
ability to pay our rent.
Healthcare Properties Risks
Our investing in healthcare properties involves certain risks:
o Various governmental authorities regulate healthcare properties. These
regulations can change. Sometimes these changes require major capital
expenditures. We believe that our current properties substantially
comply with all applicable regulations. However, our properties must be
regularly maintained to remain in regulatory compliance. Because our
properties are triple net leased to tenants we have only limited
control over the maintenance of our properties.
o Governmental programs such as Medicare and Medicaid pay a large
percentage of the charges for occupancy and services at certain
healthcare properties. We believe the current rates received by our
tenants at our properties are adequate to permit our tenants to pay our
rent. However, there are various legislative proposals to limit the
growth of government expenditures for healthcare; if enacted, these
proposals may impair our tenants' abilities to pay rent.
o Certain of our properties were specifically designed for healthcare
operations. If these properties cannot be operated as healthcare
facilities, finding an alternative use for these properties may be
difficult and costly.
Completion of New Marriott Properties
Marriott has not yet completed construction of of the 14 assisted living
properties to be acquired with the proceeds of this offering. Because Marriott
is responsible for this construction, we can provide no assurances that this
construction will be completed in a timely manner or at all. If some or all of
these properties are not completed, we will have a smaller portfolio of
properties than anticipated, and our initial cash flow may be less than
expected. This offering is not conditioned upon the acquisition of any
particular properties. If we do not use some or all of the proceeds from this
offering to acquire these Marriott properties, we will use the proceeds for
general business purposes, including future acquisitions. However, we can
provide no assurance that we will be able to purchase and lease substitute
properties.
Possible Failure of Growth Strategy
Our growth strategy requires that we raise additional capital and then
invest in new properties that will produce rents in excess of our costs of
capital. Our ability to raise debt and equity capital in the future will depend
not only upon our performance but also upon capital market conditions which are
beyond our control. Our management has extensive experience in raising capital
and in purchasing and leasing real estate. However, there are several other
REITs as well as other finance companies that now aggressively compete to
purchase and lease senior living properties. Accordingly, we can provide no
assurance that our growth strategy will succeed.
13
<PAGE>
Limited Operating History and Dependence Upon Key Personnel
We are currently a 100% owned subsidiary of HRP and have not previously
operated independently. Our success depends upon the efforts of our investment
advisor, Managing Trustees and officers who have all previously operated
publicly owned REITs and managed entities investing in senior housing,
congregate communities, assisted living properties and nursing homes.
Nonetheless, every new venture carries with it certain risks. For example, our
company will be smaller than other REITs operated by our investment advisor and
smaller than some of our competitors. Similarly, the lack of a track record as a
separate company may restrict our ability to raise capital. Our business will be
subject to these and all other risks generally associated with the formation and
conduct of a new business.
Concentration of Ownership
Upon completion of this offering HRP will own 35% of our outstanding common
shares. Accordingly, HRP will have a significant influence over shareholder
decisions. Such influence may result in decisions that may not serve the best
interests of our other shareholders.
Conflicts of Interest
Conflicts of interest may arise in our business, including the following:
o Barry M. Portnoy and Gerard M. Martin, who are our Managing Trustees,
also own our investment advisor, RMR. RMR has approximately 180
employees and has extensive experience acquiring and managing
properties for publicly owned REITs. We believe that the depth of
management talent available to us through our advisory contract with
RMR will provide us a competitive advantage and that the fees payable
to RMR are commercially reasonable. Nonetheless, we did not negotiate
the advisory agreement at arms' length with RMR and the advisory fee
will increase by investments we make.
o In addition to serving as our Managing Trustees, Messrs. Portnoy and
Martin are managing trustees of HRP and HPT. They also have business
interests separate from these other REITs. Similarly, RMR acts as the
investment advisor to HRP and HPT and has other business interests.
These various business activities will compete for management time.
o Upon completion of this offering, HRP will own approximately 35% of our
outstanding common shares and have considerable influence over
shareholder actions. Messrs. Portnoy and Martin are our Managing
Trustees and the managing trustees of HRP. Because of these
relationships, the interests of HRP and Messrs. Portnoy and Martin may,
in certain circumstances, conflict with our best interests.
To address the foregoing and other potential conflicts of interest, our
Declaration of Trust provides that Independent Trustees who have no affiliation
with the Managing Trustees, RMR or HRP (so long as HRP remains a shareholder of
ours) must constitute a majority of the Board of Trustees at all times. To
address the competing time demands, RMR intends that Mr. David Hegarty, our
President and Chief Operating Officer, and Mr. Ajay Saini, our Treasurer and
Chief Financial Officer, will devote substantial amounts of their business time
to our Company. In addition, pursuant to the advisory agreement, RMR and Messrs.
Portnoy and Martin have agreed not to provide advisory services to, or serve as
directors or officers of, any other REIT that invests principally in senior
housing, congregate communities, assisted living properties or nursing homes or
to make competitive direct investments in similar properties without, in each
case, the consent of the Independent Trustees. To promote an identity of
economic interest between management and shareholders, our Managing Trustees
will purchase 350,000 shares at
14
<PAGE>
the same price paid by public investors in this offering and the advisory fee
will be paid in part in our common shares. Moreover, the continuation of the
Advisory Agreement and the fees payable to RMR will be subject to periodic
review by our Independent Trustees.
Benefits to Related Parties
The completion of this offering will result in substantial benefits to
related parties, including the following:
o The 14 Marriott properties that we currently own will be mortgaged for
$250 million immediately after we complete this initial public
offering. The mortgage proceeds will be paid to HRP to satisfy the
intercompany debt created as part of our formation transaction. HRP
will not be liable for this mortgage debt. Instead, we will be
responsible to repay this debt.
o HRP is currently contractually bound to purchase the 14 new Marriott
properties for $193.8 million. Upon completion of this offering we will
assume this HRP obligation.
o Upon completion of this offering RMR will become our investment
advisor. Assuming that we had owned all 98 properties to be initially
owned (including the 14 properties to be purchased with proceeds of
this offering) for a full year, the annual advisory fee payable to RMR
would have been $4.6 million. HRP's annual advisory fees to RMR will be
reduced by approximately the same amount.
o Our Managing Trustees will purchase 350,000 of our common shares
simultaneously with the completion of this offering. They will pay the
same price per share as public investors pay in this offering. Our
Managing Trustees have agreed not to sell these shares for at least one
year. By purchasing a large block of shares directly from the Company,
our Managing Trustees are able to avoid the risk that this purchase
might affect the market price of our common shares.
o Upon completion of this offering, 13.2 million of our common shares
will be distributed to HRP shareholders. We will receive no
consideration for this distribution.
o After this offering HRP will retain 13.2 million of our common shares.
By retaining these shares, HRP will be able to participate in our
future success through distributions and appreciation, if any, in our
share price. HRP has agreed not to sell these shares for at least one
year; thereafter HRP may realize value from its ownership of our shares
by selling these shares.
Lack of Prior Market for the Common Shares
Prior to this offering no public market for our common shares has existed.
The market value of the common shares may decline if no active market for the
common shares develops. After the completion of this offering, we expect that
the common shares will trade on the NYSE, but we can provide no assurance that
an active trading market will develop.
Possible Future Sales of Common Shares
Our Board of Trustees has the ability to authorize and issue additional
common shares in the future without shareholder approval. If we issue additional
common shares, the market value of our common shares may decline. In addition,
the HRP shareholders receiving our common shares as an HRP distribution will be
free to sell them. HRP and Messrs. Portnoy and Martin have agreed not to sell
the common shares they will own for at least one year after this offering;
thereafter they may sell their
15
<PAGE>
common shares. An oversupply of shares offered for sale could adversely affect
the market price of our common shares.
Tax Risks
We intend to qualify as a REIT under the Internal Revenue Code of 1986, as
amended (the "Tax Code"). The requirements for this qualification are complex.
If we fail to satisfy these requirements, we may have to pay corporate taxes and
we will have less money available for distributions.
Risks of Debt Leverage
Our Declaration of Trust, By-laws, investment policies or other
organizational documents do not restrict our ability to borrow money. As a REIT,
we will use most of our available cash flow to make distributions. Accordingly,
our ability to repay debt will generally depend upon our ability to refinance.
If we incur excessive debt or are unable to refinance debt before its maturity,
either because of market conditions or for other reasons, we may be unable to
make distributions or to remain in business. We expect to incur secured debt. A
default on secured debt may result in foreclosure on our mortgaged properties.
Ownership Limitations and Anti-Takeover Provisions
Our Declaration of Trust prohibits any shareholder other than HRP, RMR and
their affiliates from owning more than 9.8% of our outstanding common shares.
This provision of the Declaration of Trust will assist us to comply with certain
REIT tax requirements. This provision will also inhibit a change of control of
our Company. Our Declaration of Trust and By-laws contain other provisions that
may increase the difficulty of acquiring control of our Company by means of a
tender offer, open market purchases, a proxy fight or otherwise, if such
acquisition is not approved by our Board of Trustees. These anti-takeover
provisions include the following: (1) a staggered Board of Trustees with three
separate classes; (2) the availability of additional shares that the Board of
Trustees may authorize and issue on terms that it determines; (3) the inability
of the shareholders to act by written consent; and (4) advance notice procedures
with respect to nominations of trustees and shareholder proposals. For all of
these reasons, our shareholders may be unable to realize a change of control
premium for their shares.
Policy Changes
The Board of Trustees has the power to change our investment and business
policies without shareholder approval. This means the Board of Trustees could
change the type of properties in which we invest, the type of tenants with whom
we do business, the amount of debt we assume or otherwise increase the types and
levels of risks we assume.
Properties Subject to Ground Leases
We lease the land underlying two of our properties under long term ground
leases. The tenants of our properties located on ground leased land must pay the
ground rents and comply with the ground leases. If our tenants fail to perform
these obligations, we may have to perform the ground lease obligations to
protect our investment in these properties. The total amount of ground rent
required during the year ended September 30, 1998 was $138,100.
16
<PAGE>
Dilution
HRP has owned and depreciated our initial properties for several years.
Because HRP will own 35% of our Company, GAAP requires that we report these
assets at their historical cost to HRP net of depreciation previously expensed
by HRP. As a result of this depreciation previously expensed by HRP and other
factors, our net book value per share after completion of this offering will be
$12.56 per share. Since the expected public offering price is approximately $19
per share, you will experience immediate dilution of $6.44 per share, or 33.9%.
17
<PAGE>
DISTRIBUTIONS
After completion of this offering, we intend to make regular quarterly
distributions to shareholders. The initial distribution for the quarter ended ,
1999, is expected to be $0. per share, and represents the pro rata amount of a
quarterly distribution from the completion of this offering through the end of
this quarter. The initial regular quarterly distribution of $0.40 per share (or
$1.60 per share on an annual basis) represents a yield of 8.42% per annum of the
estimated initial offering price of $19.00 per share. We intend to maintain at
least the initial distribution rate for one year following this offering unless
our operating results differ materially from what we now expect. We do not
intend to reduce the initial distribution rate if the underwriters exercise
their over-allotment option.
We expect that our distributions will exceed our earnings because of
non-cash expenses, primarily depreciation and amortization. Distributions in
excess of earnings represent return of capital for federal income tax purposes.
Assuming that our distribution rate remains unchanged in the year ending
December 31, 1999, and that our earnings for this period are as estimated in the
table below (pro rata adjusted for the period from completion of this offering
through December 31, 1999), we estimate that % of our distributions in 1999 will
be reportable by shareholders as a return of capital for federal income taxes.
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. The
percent of annual distributions which will be a return of capital for tax
purposes will vary from year to year. For a more detailed discussion of the tax
consequences of our distributions, see "Federal Income Tax Considerations."
The initial distribution rate was set based upon our estimate of the
minimum FFO we believe we will realize during the year following this offering.
All future distributions will be set by our Board of Trustees. When deciding the
amount of future distributions we expect the Board of Trustees will primarily
consider the actual FFO realized and projections of future FFO. However, in
making these decisions the Board may consider other factors such as cash
available for distribution, capital requirements, the legal requirements that
REITs distribute at least 95% of net taxable earnings and such other factors as
the Board deems relevant from time to time. The amount of future FFO and future
distributions is not now known or knowable and they can not be assured.
The following table sets forth our calculation of estimated earnings, FFO
and cash available for distribution for the year following this offering. In
making these estimates we have started our calculation with historical audited
operating results and made adjustments to reflect known events which have
occurred and events which we expect to occur at or shortly after the completion
of this offering. 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, other than completion of
this offering at $19.00 per share and the use of proceeds from this offering, no
effect is shown from possible future financings or investing activities because
these activities can not 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 GAAP.
Similarly, FFO and cash available for distribution are not intended to
substitute for cash flow determined according to GAAP. Cash available for
distribution is presented because it may be a relevant basis for you to compare
our operations with those of other REITs and because it may be considered by our
Board of Trustees in setting distributions. FFO is presented because we believe
it will be a basis used by analysts to compare our operating results with those
of other REITs, because we used it to set the initial distribution rate, and
because we expect it will be an important consideration used by our Board of
Trustees to determine future distributions.
18
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Pro forma net income for the year ended December 31, 1997 $33,781
Plus: pro forma net income for the nine months ended September 30, 1998 27,096
Less: pro forma net income for the nine months ended September 30, 1997 (25,153)
-------
Pro forma net income for the 12 months ended September 30, 1998 35,724
Adjustments for the 12 months following completion of this offering:
Increase in net income (1) 13,301
------
Estimated adjusted pro forma net income for the 12 months following completion of this offering 49,025
Plus adjusted pro forma real estate depreciation for the 12 months following completion of this
offering (2) 18,843
------
Estimated adjusted pro forma FFO for the 12 months following completion of this offering (3) 67,868
Net effect of non-cash rents (4) (3,041)
Pro forma amortization of financing costs (5) 750
------
Estimated pro forma cash flow from operating activities for the 12 months following completion of
this offering 65,577
Estimated cash available for distribution for the 12 months following completion of this offering $65,577
=======
Estimated cash distributions for the 12 months following completion of this offering $60,360
=======
Initial annual distribution per share (6) $1.60
=====
Percentage of distributions in excess of estimated adjusted pro forma net income for the 12 months
following the completion of this offering (return of capital) 18.8%
Distribution payout ratio of estimated cash available for distribution for the 12 months following
completion of this offering 92.0%
Distribution payout ratio of estimated adjusted pro forma FFO for the 12 months following the
completion of this offering 88.9%
19
<PAGE>
<FN>
- ------------------
(1) Includes rental income, depreciation and general and administrative expenses of $18.0 million, $3.8 million
and $.9 million, respectively, from the 14 properties under construction during the pro forma periods which is
not recognized until these properties are placed in service.
(2) Pro forma real estate depreciation for the year ended December 31, 1997, of $14.6 million plus pro forma real
estate depreciation for the nine months ended September 30, 1998, of $11.3 million minus pro forma real estate
depreciation for the nine months ended September 30, 1997, of $10.9 million plus $3.8 million of depreciation
for the construction properties for the year following this offering.
(3) FFO means net income (computed in accordance with GAAP) before gain or loss on sale of properties and
extraordinary items, plus depreciation and non-cash items. We consider FFO to be a measure of the financial
performance of an equity REIT that provides a relevant basis for comparison among REIT's. FFO does not
represent cash flow from operating activities (as determined in accordance with GAAP) and should not be
considered as an alternative to net income as an indicator of our financial performance or to cash flow as a
measure of liquidity.
(4) Represents the difference between annual rental revenue calculated in accordance with GAAP and cash amounts
currently being paid by tenants.
(5) Represents amortization of estimated financing costs associated with the proposed $250 million secured
mortgage loan.
(6) Based on a total of 37,724,760 common shares to be outstanding after this offering (and assuming no exercise
of the Underwriters' overallotment option).
</FN>
</TABLE>
20
<PAGE>
DILUTION
Our current properties have been owned and depreciated by HRP for several
years. In accordance with GAAP we will record HRP's historical cost net of
previously claimed depreciation on our balance sheet. The following table shows
the dilution (before underwriting discount and expenses) that you will
experience by buying common shares in this offering based upon HRP's net book
value of assets that are to be transferred to us. The table assumes that the
public offering price will be $19 per share, the mid-point of the expected range
for the public offering price of our common shares.
No. of shares Cost and Net Book Value
Shareholder (% of total) (% of total)
----------- ----------------------- ------------------------
(amounts in thousands)
HRP 13,187 (35.0%) $ 136,964 (28.0%)
HRP shareholders 13,188 (35.0%) 136,965 (28.0%)
Managing Trustees 350 (0.9%) 6,650 (1.4%)
Purchasers in offering 11,000 (29.1%) 209,000 (42.6%)
--------- ------ --------- ------
37,725 (100%) $ 489,579 (100%)
========= ====== ========= ======
<TABLE>
<CAPTION>
The following table shows dilution per share (after underwriting discount and
expenses):
<S> <C> <C>
Assumed initial public offering price per share........................................... $19.00
Net tangible book value per share prior to the offering................................... $10.39
Increase in net tangible book value per share attributed to the offering.................. 2.17
-------
As adjusted pro forma net tangible book value after the offering.......................... 12.56
------
Dilution in as adjusted pro forma net tangible book value per common share to
purchasers in the offering........................................................... $6.44
=====
</TABLE>
21
<PAGE>
USE OF PROCEEDS
The net proceeds from this offering are expected to be approximately
$195.4 million (or $224.7 million if the underwriters' over-allotment option is
exercised in full). In addition, we expect to receive approximately $6.7 million
in cash proceeds from the sale of 350,000 common shares to Messrs. Portnoy and
Martin. We will use the proceeds of this offering and the simultaneous sale to
our Managing Trustees as follows:
Purchase of 14 new Marriott properties........................$193.8 million
Fees and expenses of the offering............................. 2.0 million
General business purposes (including other acquisitions)...... 6.3 million
--------------
Total $202.1 million
==============
If the new Marriott properties are not completed by the time this offering
is completed, or if for any reason we do not acquire all of the new Marriott
properties, we will use the additional available proceeds for general business
purposes, including new acquisitions. This offering is not conditioned upon the
acquisition of any properties from Marriott. If the underwriters' over-allotment
option to purchase common shares is exercised, we will use the net proceeds
received for general business purposes, including new acquisitions. Until net
proceeds are used as described herein they may be invested in short term
securities, some of which may not be investment grade rated.
CAPITALIZATION
The following table sets forth our capitalization (1) as of December 21,
1998, (2) as adjusted to give effect to the transfer of 84 properties from HRP
to us and the incurrence of $250 million in indebtedness to HRP and (3) pro
forma as adjusted to give effect to the transactions described in (2) and the
completion of this offering, the mortgage financing of 14 properties and the
simultaneous sale of common shares to our Managing Trustees:
<TABLE>
<CAPTION>
Historical at
December 21, As Pro Forma
1998 Adjusted As Adjusted
-------------- -------- -----------
(dollars in thousands except per share amounts)
<S> <C> <C> <C>
Debt:
Revolving credit facility (up to $100,000) .......... $ -- $ -- $ --
Debt due HRP ........................................ -- 250,000 --
Mortgages payable ................................... -- -- 250,000
-------- -------- --------
Total debt ................................... -- 250,000 250,000
Shareholders' equity:
Common shares, par value $.01 per share; 50,000,000
shares authorized; 26,374,760 shares issued and
outstanding historical and as adjusted; 37,724,760
common shares, pro forma as adjusted ................ 264 264 377
Additional paid-in capital .......................... -- 273,665 473,617
-------- -------- --------
Total shareholders' equity ................... 264 273,929 473,994
-------- -------- --------
Total capitalization ..................................... $ 264 $523,929 $723,994
======== ======== ========
</TABLE>
22
<PAGE>
THE COMPANY
Our Company is a REIT organized under Maryland law to acquire and own
senior housing, congregate communities, assisted living properties and nursing
homes that are leased to unaffiliated tenants. We currently own 84 properties
and have entered a commitment to acquire and lease an additional 14 properties.
These 98 properties have 13,750 units/beds and are leased to nine different
groups of affiliated tenants, none of which are affiliated with our Company.
Formation
We were created as a separate subsidiary of HRP on December 16, 1998.
Before the closing of this offering HRP will contribute 84 properties to us. HRP
has entered into an agreement with Marriott to acquire 14 additional properties
which will be leased to two Marriott subsidiaries. This acquisition and lease
agreement will be assigned to us prior to the closing of the offering. The
closing of this acquisition and lease will occur simultaneously with the
completion of this offering.
None of the 84 properties now owned by HRP that will be transferred to us
are presently encumbered by mortgage debt and all were acquired by HRP since
1987. Prior to the closing of the offering, HRP will contribute the 84
properties to its subsidiaries. We will issue a note to HRP for $250 million, as
partial consideration for the contribution of those properties. Shortly before
the closing of the offering, HRP will contribute the capital stock of the
subsidiaries holding the 84 properties to us and we will become a holding
company. Immediately after the closing of this offering, we will borrow $250
million from commercial banks and will use these loan proceeds to repay the loan
from HRP. The new bank loan will be secured by first mortgages on the 14 senior
living properties.
At the time we were organized we had 26,374,760 shares outstanding, all of
which were owned by HRP. Upon the closing of this offering 13,187,380 of our
common shares will be distributed to HRP shareholders on the basis of one of our
shares for each 10 shares of HRP held of record on _____, 1999. No fractional
common shares will be issued. Cash in lieu of fractional shares will be paid
using the public offering price per share as the value for our common shares.
Also, simultaneously with the closing of this offering, Messrs. Portnoy and
Martin will purchase 350,000 of our shares at the same gross price as is paid by
public investors. At the conclusion of these offerings, HRP will own 35% of our
shares, Messrs. Portnoy and Martin will own 1% of our shares (including the
350,000 shares to be purchased and their pro-rata distribution as beneficial
owners of HRP) and the public generally (including former public shareholders of
HRP) will own 64% of our shares.
We are currently negotiating a new $100 million revolving credit facility.
We will use this credit facility for working capital and other general business
purposes, including interim financing for new purchases until these new
acquisitions are financed on a more permanent basis with term debt or equity
capital.
Additional details of our formation are set forth in a transaction
agreement, which is described under "Summary of the Transaction Agreement." A
copy of the 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 our formation you should review that document.
23
<PAGE>
History and Management
Our operations will be conducted by RMR. RMR has approximately 180 full
time employees, including a headquarters management staff, four regional offices
and other personnel located throughout the United States. RMR and its principals
have experience in managing the REITs to produce increasing distributions and
have extensive contacts in the senior housing and healthcare industries.
The principals of RMR, Barry M. Portnoy and Gerard M. Martin, founded HRP
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 RMR personnel, HRP has grown to have over $3
billion invested in 255 properties leased to over 500 tenants. During its 12
years in business, HRP has made 48 consecutive quarterly distributions. HRP has
increased its distribution rate 13 times, and has increased its annual
distribution every year it has been in business.
RMR and its principals have previously successfully organized and operated
another public REIT in addition to HRP. In 1995 RMR and Messrs. Martin and
Portnoy organized HPT, a REIT that invests in hotel properties. At its initial
public offering in August 1995, HPT had $329 million invested in 37 hotels
leased to one tenant (21 hotels were previously owned by HRP). Today HPT has
almost $1.8 billion invested in 167 hotels leased to nine tenants, none of which
are affiliated with RMR. Since it was founded in 1995, HPT has raised
approximately $1.5 billion of capital and made 14 consecutive quarterly
distributions, and increased its distribution rate nine times. In 1998, HPT
became the first and is the only hotel REIT with senior debt that is rated
investment grade by Moody's Investors Service and Standard & Poor's. HRP
continues to own 4 million shares of HPT.
Starting in the early 1990's HRP began to invest in multi-tenant medical
office buildings. In 1997 HRP purchased a large portfolio of office buildings
leased to the U.S. Government. During 1997 and 1998 substantially all of HRP's
new investments have been in commercial office properties, and HRP has made very
few purchases of senior housing properties or healthcare facilities. RMR
believes that current market conditions make a renewed focus on senior property
investments appropriate at this time.
Specifically:
o New properties developed by start up assisted living companies during the
past few years are being completed and a large number of properties that
are operating successfully are now available for investment.
o The current shortage of debt and equity capital for real estate investments
has reduced the financing options available to senior housing property
owners and limited the amount of new development activities being
undertaken.
o New Medicare prospective payment regulations became applicable to nursing
homes on July 1, 1998, and their impact upon the profitability of nursing
home properties can now be reasonably estimated.
o The combination of the foregoing circumstances has made the pricing of
senior housing, congregate community, assisted living property and nursing
home purchases and leases more attractive than they have been during the
past three years.
A primary purpose of this offering is to capitalize separately a new REIT
with a strong core of senior housing real estate, and management has industry
contacts that can take advantage of the market conditions outlined above. To
facilitate these efforts two senior officers of RMR will be assigned to devote
substantially all of their business time to growing our Company. David J.
Hegarty is currently the President and Chief Operating Officer of both RMR and
HRP. Ajay Saini is currently a Vice President
24
<PAGE>
of RMR and Treasurer and Chief Financial Officer of HRP. Upon completion of this
offering, Messrs. Hegarty and Saini will resign their positions at HRP and
assume similar positions at our Company. All other RMR personnel including our
Managing Trustees, Messrs. Portnoy and Martin, will also devote a significant
part of their time to assist in this effort.
Growth Strategy
The population of the United States is aging. According to information from
the U.S. Census Bureau, the segment of the U.S. population age 85 and over is
increasing and is expected to increase sharply through the year 2020. We believe
that this demographic fact will increase the demand for existing senior housing,
congregate communities, assisted living properties and nursing homes and
encourage development of new properties. Certain recent federal and state
legislation seeks to limit the amount of growth in government expenditures for
Medicare and Medicaid. We believe that the net effect of these demographic and
legislative changes will be to make it less profitable to provide services and
facilities for government funded patients and more profitable to provide
services and facilities for non-government funded patients. Our business plan is
to profit from the increasing demand in two ways. First, we intend to purchase
additional properties and lease them at initial rents that are greater than our
costs of acquisition capital. Second, we intend to structure leases that provide
for periodic rental increases. Although we may invest in some older properties
at appropriate purchase and lease price terms, we expect that our future
investments will focus upon properties similar to the new properties to be
acquired from Marriott. We expect these newer properties to attract residents
who use private resources, rather than government programs, to pay for rent and
services.
Senior Living Real Estate Market
Demand Growth. There are several important demographic trends which we
expect will increase demand for senior housing, congregate communities, assisted
living properties and nursing homes for the foreseeable future. These
demographic trends are so powerful that we believe they will continue to
increase this demand with only modest impact from usual business cycle
pressures.
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 housing, 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.
Certain societal changes during the past 35 years in the U.S. have made
senior housing, congregate communities, assisted living properties and nursing
homes 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.
Economic factors appear to encourage demand of 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.
25
<PAGE>
Types of Properties. We expect to invest in four types of properties,
including some properties that combine more than one type of property in a
single building or campus.
Senior housing. Senior housing 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.
According to a 1997 study by PricewaterhouseCoopers LLP, monthly charges paid by
residents in senior apartments typically vary from $600 to $1,200 per month.
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 certain services as part of a regular monthly
charge--for example, one or two meals per day in a central dining room, weekly
maid service, a social director, in addition to concierge services, etc.
Additional services are generally available from staff employees on a
fee-for-service charge basis. According to the 1997 PricewaterhouseCoopers LLP
study, monthly charges at congregate communities typically range from $1,400 to
$2,000 per month. Luxury properties of this type similar to those that we own
and lease to Marriott and Brookdale often charge higher rates up to $5,000 per
month.
Assisted living properties. Assisted living properties are typically
composed of 300 to 750 square feet 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 health related services are
usually available at the facility on call or at regularly scheduled times. Since
the early 1990's 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 our Company. According to the 1997
PricewaterhouseCoopers LLP study, residents in assisted living properties
typically pay $2,400 to $3,000 per month. Luxury properties in this category
similar to the new properties we expect to purchase and lease to Marriott often
charge as much as $3,500 per month.
Nursing homes. Nursing homes generally provide extensive nursing and
health-related services similar to those found 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 but with 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. According
to the 1997 PricewaterhouseCoopers LLP study, monthly charges at nursing homes
typically are $2,800 to $4,000 per month. At the nursing homes that we own and
lease to Mariner Post-Acute Health Network and Integrated Health Services, the
average monthly charge in 1998 are approximately $3,000 to $4,500 per month.
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 1995 has attracted a number of residents away
from nursing homes. This was especially significant because the residents who
elected assisted living facilities had 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.
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<PAGE>
The second major challenge arose as a result of 1997 federal legislation
that required the Medicare program to implement a prospective payment program
for various subacute services provided in skilled nursing homes. This Medicare
prospective payment program began to be implemented 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 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, we
believe 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 charges that were implemented for hospitals during the
1980's.
Starting in 1995 HRP's management believed that the market value of nursing
home properties did not adequately reflect the negative impact of these two
changed market conditions. For this reason beginning in 1996 HRP began to limit
its nursing home purchases and it began to sell its nursing home properties
which were dependent upon subacute services paid by Medicare. We now believe
that the market is in the process of taking account of these factors and
adjusting the prices of nursing home properties. We also believe that the
demographic factors described above combined with these adjusted pricing levels
make nursing home properties attractive investments at this time. We expect to
focus our assisted living and nursing home investments in facilities that have a
high percentage of non-government revenues. When we invest in assisted-living
properties and nursing homes that are dependent upon government revenues we will
attempt to set the purchase prices and rent rates at levels that are securely
covered by existing and projected cash flows from our tenants' operations.
Government Regulations and Rate Setting
We believe the degree of government regulation of the types of properties
in which we intend to invest seems to be proportional to the amount of
government money available to pay for occupancy and services at these
properties.
Senior Housing. 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 limited to zoning, building and fire codes, Americans with Disabilities Act
requirements and other life safety type regulations applicable to real estate
generally. Government rent subsidies for low income senior housing provide an
exception to this general statement. Government rent subsidies are usually
available for properties that also qualify for government assisted development
financing. The development and operation of these subsidized senior housing
properties are subject to numerous governmental regulations. While it is
possible that we may purchase and lease some subsidized senior apartment
properties, we do not expect these investments to be a major part of our future
business, and today we own no properties where rent subsidies are applicable.
Congregate Communities. We understand that generally government payment
programs are not available to congregate communities and the resident charges in
such properties are paid from private resources. However, certain Federal
Supplemental Security Income (SSI) program benefits pay housing costs for
elderly or disabled residents to live in certain residential facilities. The
Social Security Act requires states to certify that they will establish and
enforce standards, such as licensing or certification standards, for any
category of group living arrangement in which a significant number of SSI
residents reside or are likely to reside. Categories of living arrangements
which may be subject to such state standards include congregate facilities or
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
27
<PAGE>
offices on aging, with jurisdiction over group residential facilities for
seniors. To the extent that congregate communities maintain units in which
assisted living services or nursing facility services are provided to residents,
these units will typically also be subject to state regulations applicable to
such facilities. In some states, insurance or consumer protection agencies
regulate congregate communities in which residents pay entrance fees or prepay
other costs.
Assisted Living. A 1998 study by the National Academy for State Health
Policy listed, as of June 1998, 28 states that provide 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 another eight states that planned 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. Each of the states that
administers these Medicaid programs for assisted living facilities is
responsible for monitoring the services at these facilities and monitoring the
physical conditions and maintenance of the participating properties. Different
states apply different standards in these matters, but generally we believe
these monitoring processes are similar to the concerned states' inspection
processes for nursing homes.
Because of the large number of states using Medicaid waivers or state plans
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 the 1998 National Academy for State Health
Policy Report, as of June 1998, 33 states had taken steps to implement assisted
living policies, and 11 others had instituted processes to study the issue.
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 six states
(New York, New Jersey, Illinois, Kentucky, Connecticut and Missouri) that
require certificates of need from state health planning authorities before new
assisted living properties may be developed. Also, the study found three states
(North Carolina, Arkansas and North Dakota) that have adopted moratoria on the
development of new assisted living facilities. It is our belief 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. It is also our belief 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, we intend to focus new
investments in assisted living properties that are not overly dependent upon
governmental revenues and in areas where there are barriers to competition
created by certificate of need laws or otherwise.
Two federal government studies are currently underway to provide background
information and make recommendations regarding the future regulation of and the
possibility of increased governmental funding for the assisted living industry.
One study is being conducted by the General Accounting Office ("GAO") for the
Senate Special Committee on Aging and is focused upon consumer protection and
quality of care issues. The second study, being conducted by the Department of
Health and Human Services' Assistant Secretary for Planning and Evaluation (of
which the 1998 National Academy for State Health Policy study referenced above
is part) is expected to touch upon all aspects of the assisted living industry
including quality of care and financing. These studies are expected to be
completed during 1999. We cannot predict whether these studies will result in
governmental policy changes or new legislation, or what impact any changes may
have. We do 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 we
do not believe a
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<PAGE>
materially increased financial commitment from the federal government is
presently likely. However, we do 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 conditions of nursing home properties. These periodic
inspections and occasional changes in life safety and physical plant
requirements sometimes require nursing home owners to expend money for capital
improvements. Fortunately, however, these mandated capital improvements usually
result in Medicare and Medicaid rate adjustments, albeit on the basis of
amortization of expenditures over extended useful lives of the improvements.
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 that have eliminated certificate of need laws (for example, California
and Texas) the state health authorities usually have retained other means of
limiting new nursing home development, such as the use of licensing laws or
limitations upon participation in the state Medicaid program. We believe that
these governmental limitations generally extend the useful lives of nursing home
properties and make them more valuable as local quasi- monopolies.
Competition
Several REITs which own apartments have focused some of their investments
on senior housing apartment buildings. In addition, there are several publicly
owned REITs that are today focused 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 we will have and
some have a cost of capital that may be less than we will have. Nonetheless, we
believe that we will be able to successfully compete for new investments for at
least five reasons:
First, our initial senior living properties have solid records of
performance. We will commence business with a large and diversified portfolio of
properties which have strong prospects based on demographic trends and are
subject to long term leases.
Second, we will be the only REIT exclusively focused on senior living
properties. We do not intend to invest in medical office buildings, hospitals 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 purchase and lease senior living properties. A large number of
recently developed properties are currently available. The current turmoil in
the mortgage markets has limited capital for new development and has reduced the
financing available to several of our competitors. Also, a new Medicare
prospective payment program has 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, our proposed methods of doing business are intended to be
attractive to a diversified group of prospective sellers and tenants of senior
living properties. We intend to do business only with unaffiliated sellers and
tenants and to retain the financial flexibility to work with our tenants to meet
their business requirements. Some of our REIT competitors are under common
control with large tenants. This fact often makes unaffiliated sellers and
tenants reluctant to disclose the operating
29
<PAGE>
information necessary for a successful transaction. Some of the finance
companies that target healthcare property investments and certain healthcare
REITs that emphasize mortgage lending depend upon the asset backed bond markets
for funding. Asset backed financing has historically afforded borrowers and
tenants very limited flexibility to adjust mortgage or lease terms to
accommodate changes in the tenants' businesses during long term leases. Although
we may borrow on a secured basis, we expect to retain title to all of our
property investments in order to work with tenants to meet their business
requirements.
Finally, and perhaps most importantly, our management team has extensive
experience and contacts in the senior housing and healthcare real estate
markets. Our initial tenants will include affiliates of six public companies and
three private companies. Although we cannot be sure that we will do additional
business with these tenants we believe we have solid relationships with them.
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INITIAL PROPERTIES
We will have investments totaling $819 million in 98 properties in 23
states:
[map of the United States showing
portfolio locations]
<TABLE>
<CAPTION>
State Properties Investment State Properties Investment
($ in 000s) ($ in 000s)
<S> <C> <C> <C> <C> <C>
Arizona 6 $42,862 Nebraska 11 $25,722
California 8 53,879 New Jersey 3 42,607
Colorado 8 34,350 New York 1 10,700
Connecticut 3 15,492 North Carolina 4 16,788
Florida 6 148,288 Ohio 4 32,972
Georgia 5 25,707 South Dakota 3 7,589
Illinois 4 126,543 Texas 1 12,411
Iowa 7 8,204 Virginia 3 57,665
Kansas 2 17,320 Washington 2 19,543
Maryland 3 61,780 Wisconsin 8 33,902
Michigan 1 13,500 Wyoming 3 7,246
Missouri 2 3,788 ------------ --------
Total 98 $818,858
============ ========
</TABLE>
31
<PAGE>
The following table presents certain information about the 98 properties
that we will own upon completion of this offering.
<TABLE>
<CAPTION>
Percent of
revenues from
Units/ Facility sources other than Historical
Location Property Type Beds Occupancy(1) Revenues(1) Medicare/Medicaid Investment (2)
-------- ------------- ---- --------- ----------- ------------------ --------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Marriott International, Inc.
(current properties)
Scottsdale, AZ Assisted Living 148 94% $ 5,135 100% $ 9,926
Sun City, AZ Congregate Care 148 81% 3,697 100% 11,916
Laguna Hills, CA Congregate Care 402 95% 14,334 97% 31,791
Boca Raton, FL Congregate Care 329 84% 16,643 91% 44,835
Deerfield Beach, FL Congregate Care 288 96% 7,371 100% 16,934
Fort Myers, FL Congregate Care 463 96% 12,386 85% 23,905
Palm Harbor, FL Congregate Care 319 95% 10,038 88% 33,863
Port St. Lucie, FL Assisted Living 128 88% 4,758 86% 12,451
Arlington Heights, IL Congregate Care 363 96% 13,491 95% 36,743
Silver Spring, MD Congregate Care 351 92% 12,841 94% 33,080
Bellaire, TX Assisted Living 145 94% 5,711 96% 12,411
Arlington, VA Congregate Care 419 97% 12,353 99% 18,888
Charlottesville, VA Congregate Care 315 94% 10,652 95% 29,830
Virginia Beach, VA Congregate Care 114 100% 3,392 100% 8,947
------ ---- -------- ---- --------
3,932 93% 132,802 94% 325,520
Marriott International, Inc.
(new properties)
Tampa Bay, FL Assisted Living 164 n/a n/a n/a 16,300
Dunwoody, GA Assisted Living 115 n/a n/a n/a 13,400
St. Charles, IL Assisted Living 120 n/a n/a n/a 13,400
Wheaton, IL Assisted Living 123 n/a n/a n/a 14,400
Kansas City, KS Assisted Living 164 n/a n/a n/a 16,000
Bethesda, MD Assisted Living 142 n/a n/a n/a 17,600
Owen Brown, MD Assisted Living 102 n/a n/a n/a 11,100
Northville, MI Assisted Living 120 n/a n/a n/a 13,500
Greensboro, NC Assisted Living 115 n/a n/a n/a 10,400
Omaha, NE Assisted Living 166 n/a n/a n/a 15,000
Florham Park, NJ Assisted Living 116 n/a n/a n/a 14,500
West Orange, NJ Assisted Living 116 n/a n/a n/a 15,100
Dayton, OH Assisted Living 120 n/a n/a n/a 10,800
Westlake, OH Assisted Living 120 n/a n/a n/a 12,300
------ ---- ---- ---- --------
1,803 n/a n/a n/a 193,800
Brookdale Living Communities, Inc.
La Mesa, AZ Congregate Care 185 96% 3,643 100% 14,800
Chicago, IL Congregate Care 341 99% 10,949 100% 62,000
Rochester, NY Congregate Care 103 88% 2,556 100% 10,700
Spokane, WA Congregate Care 200 92% 3,667 100% 14,350
------ ---- -------- ---- --------
829 95% 20,815 100% 101,850
32
<PAGE>
<CAPTION>
Percent of
revenues from
Units/ Facility sources other than Historical
Location Property Type Beds Occupancy(1) Revenues(1) Medicare/Medicaid Investment (2)
-------- ------------- ---- --------- ----------- ------------------ --------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mariner Post-Acute Network, Inc.
Phoenix, AZ Nursing Home 127 89% $5,758 15% $3,185
Yuma, AZ Nursing Home 128 89% 7,934 18% 2,327
Yuma, AZ Nursing Home 65 61% 475 28% 708
Fresno, CA Nursing Home 180 85% 6,957 5% 3,503
Lancaster, CA Nursing Home 99 94% 5,939 48% 3,488
Newport Beach, CA Nursing Home 167 92% 9,796 19% 4,128
Stockton, CA Nursing Home 122 87% 7,713 26% 3,136
Tarzana, CA Nursing Home 192 95% 9,360 25% 3,060
Thousand Oaks, CA Nursing Home 124 87% 6,462 24% 3,454
Van Nuys, CA Nursing Home 58 95% 2,922 23% 1,319
Lakewood, CO Nursing Home 175 81% 7,578 19% 4,722
Littleton, CO Nursing Home 245 85% 10,066 16% 5,576
Concord, NC Nursing Home 110 88% 4,831 19% 2,216
Wilson, NC Nursing Home 119 90% 4,518 27% 2,402
Winston-Salem, NC Nursing Home 80 89% 3,608 51% 1,770
Huron, SD Nursing Home 163 96% 5,938 23% 3,256
Huron, SD Senior Housing 59 100% 667 100% 1,014
Sioux Falls, SD Nursing Home 139 91% 5,071 15% 3,319
Brookfield, WI Nursing Home 226 95% 15,146 16% 12,697
Clintonville, WI Nursing Home 78 76% 3,464 17% 1,762
Clintonville, WI Nursing Home 109 80% 3,332 13% 1,746
Madison, WI Nursing Home 73 73% 4,289 26% 1,886
Milwaukee, WI Nursing Home 215 63% 7,228 3% 5,043
Milwaukee, WI Nursing Home 102 61% 4,348 9% 1,600
Pewaukee, WI Nursing Home 237 83% 10,246 11% 3,416
Waukesha, WI Nursing Home 105 96% 5,594 27% 5,752
------ ---- -------- ---- --------
3,497 86% 159,240 20% 86,485
Integrated Health Services, Inc.
Canon City, CO Nursing Home 157 74% 3,103 42% 6,520
Colorado Springs, CO Nursing Home 132 68% 4,085 32% 5,482
Delta, CO Nursing Home 100 65% 3,245 18% 3,737
Grand Junction, CO Nursing Home 120 59% 3,240 22% 4,408
Grand Junction, CO Nursing Home 82 88% 3,583 37% 3,905
College Park, GA Nursing Home 100 95% 2,710 15% 3,025
Dublin, GA Nursing Home 130 95% 3,792 13% 4,504
Glenwood, GA Nursing Home 62 88% 1,454 16% 1,741
Marietta, GA Nursing Home 109 95% 3,658 13% 3,037
Clarinda, IA Nursing Home 117 71% 2,810 39% 1,822
Council Bluffs, IA Nursing Home 62 96% 2,243 27% 1,217
Mediapolis, IA (3) Nursing Home 66 88% 2,167 39% 2,120
Pacific Junction, IA Nursing Home 12 99% 657 5% 343
Winterset, IA (3) Nursing Home 118 80% 2,760 53% 2,702
Ellinwood, KS Nursing Home 59 89% 1,474 52% 1,320
Tarkio, MO Nursing Home 95 70% 2,205 37% 2,455
Ainsworth, NE (4) Nursing Home 50 96% 1,673 55% 449
Ashland, NE (4) Nursing Home 101 97% 3,623 49% 1,871
Blue Hill, NE (4) Nursing Home 81 42% 1,151 40% 1,132
33
<PAGE>
<CAPTION>
Percent of
revenues from
Units/ Facility sources other than Historical
Location Property Type Beds Occupancy(1) Revenues(1) Medicare/Medicaid Investment (2)
-------- ------------- ---- --------- ----------- ------------------ --------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Edgar, NE (4) Nursing Home 54 89% $1,530 38% $ 140
Grand Island, NE Nursing Home 80 58% 1,683 100% 1,934
Gretna, NE (4) Nursing Home 62 96% 2,148 55% 950
Lyons, NE (4) Nursing Home 84 75% 1,966 43% 819
Milford, NE (4) Nursing Home 66 77% 1,915 40% 914
Sutherland, NE (4) Nursing Home 62 89% 1,909 44% 1,284
Waverly, NE (4) Nursing Home 50 96% 1,911 68% 1,229
Laramie, WY Nursing Home 144 74% 4,714 30% 4,023
Worland, WY Nursing Home 99 86% 3,182 33% 3,224
------ ---- -------- ---- --------
2,454 80% 70,591 36% 66,307
Sun Healthcare Group, Inc.
Killingly, CT Nursing Home 190 96% 11,174 8% 6,060
Waterford, CT Nursing Home 148 81% 7,752 9% 5,253
Willimantic, CT Nursing Home 124 95% 7,706 15% 4,179
Seattle, WA Nursing Home 103 61% 4,728 20% 5,193
------ ---- -------- ---- --------
565 85% 31,360 12% 20,685
Genesis Health Ventures, Inc.
Burlington, NJ Nursing Home 150 96% 10,772 34% 13,007
------ ---- -------- ---- --------
150 96% 10,772 34% 13,007
Private Company Tenants
Akron, OH Nursing Home 200 88% 8,458 11% 6,427
Grove City, OH Nursing Home 200 93% 14,365 34% 3,445
St. Joseph, MO Nursing Home 120 81% 2,645 25% 1,332
------ ---- -------- ---- --------
520 88% 25,468 25% 11,204
------ ---- -------- ---- --------
Total Portfolio 13,750 88% $451,048 48% $818,858
====== ==== ======== ==== ========
- --------------
<FN>
(1) Occupancy and facility revenues are from the most recent available data. Facility revenues refers to total
revenues received by the operator, not rental revenues which we receive. Marriott data is annualized
year-to-date through September 1998. Brookdale data is annualized year to date through October 1998. Sun,
Genesis and Integrated data are annualized year to date through June 1998. Mariner and private company tenant
data are annualized year to date through June 1998.
(2) Represents HRP's historical costs before depreciation.
(3) Two properties are located at each of these locations.
(4) These properties are mortgage investments. HRP has nominal price purchase options on all these mortgaged
properties, which will be assigned to us.
</FN>
</TABLE>
34
<PAGE>
INITIAL TENANTS
Our financial condition depends, in part, upon the financial condition of
our tenants. Our largest tenant is Marriott. The following charts show our mix
of tenants on the basis of the annual rents we receive:
[chart showing mix of tenants based on annual rents]
<TABLE>
<CAPTION>
No. of
Tenant Properties Annual Rent Percentage
- ------ ---------- ----------- ----------
<S> <C> <C> <C>
Marriott International 28 $519 million 56%
Brookdale Living 4 $10 million 11%
Communities
Mariner Post-Acute 26 $15 million 17%
Network
Integrated Health 32 $8 million 9%
Services
Sun Healtcare Group 4 $3 million 4%
Genesis Health 1 $1 million 1%
Ventures
Other Operators 3 $2 million 2%
</TABLE>
35
<PAGE>
Marriott International, Inc.
Marriott is a NYSE listed company. In addition to operating senior living
properties such as those leased and to be leased from us, Marriott's major
businesses are developing, operating and managing hotels and time-share resort
communities. At September 11, 1998, Marriott had a book value of $2.6 billion
and on December 17, 1998 had an equity market capitalization of $6.8 billion.
We currently own 14 congregate communities and assisted living properties
with 3,932 units that are leased to subsidiaries of Marriott. The annual rent
under this lease is $29.5 million. This lease expires in 2013 and Marriott has
renewal options totalling an additional 20 years. Marriott has guaranteed all
obligations due to us under this lease.
The proceeds from this offering will be used to acquire an additional 14
new assisted living properties with 1,803 units from subsidiaries of Marriott
that will be leased back to two Marriott subsidiaries under two leases for seven
properties each. The rent under these leases initially will total $20.3
million/year. These leases will expire in 2014 and 2016, respectively, and
Marriott has renewal options totalling an additional 20 years and 18 years,
respectively. Marriott will guarantee 100% of the obligations due to us under
these leases for the first full year and, thereafter, until the sooner of: (1)
payment by Marriott of 25% of our purchase price for all 14 properties; (2) when
the combined cash flow generated by the tenants' operation of these properties
covers the rent by 1.3 times as determined by an annual audit; or (3) the year
ended 2006.
Marriott will have guaranteed approximately 56% of our annual revenues at
the completion of this offering. The following tables present summary financial
information about Marriott derived from Marriott's Annual Report on Form 10-K
for the year ended January 2, 1998 and Quarterly Report on Form 10-Q for the
quarter ended September 11, 1998. If you want more information about Marriott or
any of our other publicly owned tenants you should study the public information
which they have filed with the SEC.
<TABLE>
<CAPTION>
Fiscal Year Ended 36 Weeks Ended
-------------------------------------- -----------------------------
December 29, January 3, January 2, September 12, September 11,
1995 1997 1998 1997 1998
---- ---- ---- ---- ----
(dollars in millions) (dollars in millions)
<S> <C> <C> <C> <C> <C>
Operating Data:
Sales ..................... $6,255 $7,267 $9,046 $6,177 $6,994
Operating expenses ........ 5,865 6,759 8,437 5,747 6,481
Other expenses ............ 29 73 78 59 64
------ ------ ------ ------ ------
Income before income taxes 361 435 531 371 449
Provisions for income taxes 142 165 207 144 173
------ ------ ------ ------ ------
Net income ................ $ 219 $ 270 $ 324 $ 227 $ 276
====== ====== ====== ====== ======
<CAPTION>
As of
-------------------------------------------------
January 3, January 2, September 11,
1997 1998 1998
------ ------ -----
(dollars in millions)
<S> <C> <C> <C>
Balance Sheet Data:
Total assets ................ $4,198 $5,557 $6,155
Long-term deb................ 681 422 858
Equity ...................... 1,444 2,586 2,556
</TABLE>
36
<PAGE>
Brookdale Living Communities, Inc.
Brookdale is a publicly owned company quoted on the NASDAQ. According to
reported nine months ended September 30, 1998 revenues, Brookdale's annualized
revenues were $75 million. Brookdale's principal business is operating senior
housing and congregate communities. According to a recent company report, at
September 30, 1998, Brookdale operated 16 assisted living properties with 3,470
apartment units. At September 30, 1998, Brookdale had a pro forma book value net
worth of $100 million and on December 17, 1998 had an equity market
capitalization of $175 million.
We lease four congregate communities with 829 apartments to subsidiaries of
Brookdale. The annual rent due under this lease is $10.2 million. This lease
extends until 2019 plus renewal option periods totalling an additional 50 years.
Brookdale has guaranteed all obligations due to us under this lease.
Mariner Post-Acute Network, Inc.
Mariner is a NYSE listed company. According to reported nine months ended
June 30, 1998, revenues, Mariner's annualized revenues were $1.9 billion.
Mariner's principal business is operating of nursing homes. According to a
recent company report, at June 30, 1998, Mariner operated 430 nursing homes with
over 50,000 beds and had a book value net worth of $99 million and at December
17, 1998 had an equity market capitalization of $432 million.
We lease 26 nursing homes with 3,497 beds to subsidiaries of Mariner. The
annual rent paid to us under this lease is $15.2 million. This lease expires in
2013 and Mariner has renewal options totalling an additional 20 years. Mariner
has guaranteed all obligations due to us under this lease.
Integrated Health Services, Inc.
Integrated is a NYSE listed company. According to reported nine months ended
September 30, 1998 revenues, Integrated's annualized revenues were $3 billion.
Integrated's principal businesses are operating nursing homes and providing home
healthcare services. According to a recent company report, at September 30,
1998, Integrated operated 300 nursing homes. At September 30, 1998, Integrated
had a book value net worth of $1.3 billion and at December 17, 1998 an equity
market capitalization of $528 million.
We lease 23 nursing homes with 1,844 beds to subsidiaries of Integrated. In
addition we provide mortgage financing secured by nine Integrated nursing homes
with 610 beds. The obligations under these leases and mortgages are subject to
cross default and cross collateralization covenants. The total annual rent and
interest due to us is $7.7 million. These leases and mortgages expire in 2010
and have renewal options totalling an additional 26 years. Integrated has
guaranteed all obligations due to us under these leases and these mortgages.
Sun Healthcare Group, Inc.
Sun is a NYSE listed company. According to reported nine months ended
September 30, 1998 revenues, Sun's annualized revenues were $3.3 billion. Sun's
principal businesses are operating nursing homes and providing various medical
therapy services to patients and healthcare institutions. According to a recent
company report, at September 30, 1998, Sun operated 421 nursing homes with
48,049 beds. At September 30, 1998, Sun had a book value net worth of $612
million and at December 17, 1998, an equity market capitalization of $336
million.
37
<PAGE>
We lease four nursing homes with 565 beds to subsidiaries of Sun. The annual
rent due under these leases is $2.7 million. These leases expire in 2005 and Sun
has renewal options totalling an additional 20 years. Sun has guaranteed all
obligations due to us under these leases. Sun has subleased all of these
properties, and these subtenants have also guaranteed the lease obligations due
to us.
Genesis Health Ventures, Inc.
Genesis is a NYSE listed company with reported annual revenues of $1.4
billion. Genesis's principal businesses are operating nursing homes, congregate
communities and assisted living properties. At September 30, 1998, Genesis
operated 340 facilities. According to a recent company report, at September 30,
1998, Genesis had a book value net worth of $646 million and at December 17,
1998, an equity market capitalization of $264 million. We lease one nursing home
with 150 beds to a subsidiary of Genesis. The annual rent under this lease is
$1.4 million. The lease extends until 2005 plus renewal options totalling an
additional 25 years.
Privately Owned Tenants
In addition to the publicly owned tenants described above, we currently lease
three nursing homes with 520 beds to three separate private company tenants.
These leases require total annual rents of $1.6 million. These leases expire
between 2001 and 2007 and two of the three include renewal options. None of
these private companies have significant net worth or significant other business
activities. However, each of these private companies or their owners have
guaranteed the lease obligations due to us. Also, the annualized year to date
through June 1998 operating cash flow from these three properties covered the
rents by 4.5, 1.5 and 2.2 times, respectively.
38
<PAGE>
INITIAL LEASES
The following table presents certain information about the leases with the
nine unaffiliated tenants to whom we lease our 98 initial properties (dollars in
thousands except guarantee information):
<TABLE>
<CAPTION>
Mariner Post-
Marriott Marriott Brookdale Living Acute Network,
International, Inc. International, Inc. Communities, Inc. Inc.
------------------- ------------------- ----------------- --------------
(current properties) (new properties)
<S> <C> <C> <C> <C>
No. of properties 14 14 4 26
No. of units/beds 3,932 1,803 829 3,497
Located in 7 states 10 states 4 states 6 states
Tenant (1) Subsidiaries of Two subsidiaries of Subsidiaries of Subsidiaries of
Marriott Marriott (seven Brookdale Mariner
properties in each)
Current rent $29,539 $20,349 $10,186 $15,180
Rent increase formula 4.5% increases in 6% increases in 10% increases in CPI based increases
gross revenue gross revenue gross revenue
starting in 2000
Initial lease expiration 2013 2014 and 2016 2019 2013
Renewal options 4 options for 2 options for 2 options for 2 options for
5 years each 10 years/1 option 25 years 10 years
for 10 years and
1 option for 8 years
Cross default Yes Yes Yes Yes
Subordinated Yes Yes Yes Yes
management fees
Historical rent 2.3x N/A 0.9x 2.0x
coverage (2)
Guarantees Public company Public company Public company Public company
parent has parent will parent has parent has
guaranteed the lease guarantee the lease guaranteed the lease. guaranteed the lease.
until the sooner of: In addition we hold
(1) 25% of our a $15 million
investment is paid security deposit
under the guarantee; throughout the lease
(2) 1.3x rent term. Also, we hold
coverage based on a pledge of 1 million
an annual audit; or HRP common
(3) year end 2006 shares and 100,000
of our common
shares owned by the
tenant as additional
security.
- ---------------------------
<FN>
(1) Leases to affiliated tenants subject to cross default and all or none renewal options are considered as leased to one tenant.
(2) Coverage is based on the most recent data available. Marriott data is year to date through September 1998, Brookdale data is
year to date through October 1998. Sun, Genesis and Integrated data is year to date through June 1998. Mariner and Private
Company Tenant data are generally year to date through June 1998.
</FN>
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
Integrated Sun Private
Health Healthcare Genesis Health Company
Services, Inc. Group, Inc. Ventures, Inc. Tenants Totals
-------------- ----------- -------------- ------- ------
<S> <C> <C> <C> <C> <C>
No. of properties 32 4 1 3 98
No. of beds/units 2,454 565 150 520 13,750
Located in 7 states 2 states 1 state 2 states 23 states
Tenant Subsidiaries of Subsidiaries of Subsidiary of Three private Nine tenants
Integrated Sun Genesis companies
Current rent $7,684 $2,732 $1,440 $1,638 $88,748
Rent increase formula CPI based 2.5% per annum $13 per annum Various Various
increases of prior year's increase
rent
Initial lease expiration 2010 2005 2005 2001/2003/2007 14 years (3)
Renewal options 2 options for 2 options for 2 options for Various Various
13 years 10 years 10 years and 1
option for 5
years
Cross default Yes Yes N/A N/A Yes, where
applicable
Subordinated Yes Yes Yes Yes Yes
management fees
Historical rent 1.3x 1.3x 2.4x 2.3x 1.9x (3)
coverage (2)
Guarantees Public company Public company Tenant's parent Various Various
parent has parent has has guaranteed guarantees from
guaranteed the guaranteed the the lease. In private entities
lease. lease. addition we and individuals
hold a $235,000 and a security
security deposit. deposit.
- ---------------------------
<FN>
(1) Leases to affiliated tenants subject to cross default and all or none renewal options are considered as leased to one tenant.
(2) Coverage is based on the most recent data available. Marriott data is year to date through September 1998, Brookdale data is
year to date through October 1998. Sun, Genesis and Integrated data is year to date through June 1998. Mariner and Private
Company Tenant data are generally year to date through June 1998.
(3) Weighted average by lease revenues.
</FN>
</TABLE>
40
<PAGE>
Lease Terms
All of our leases are so called "triple net" leases which require our
tenants to maintain our properties during the lease terms and to indemnify us by
reason of our ownership of the leased properties. The following is a summary of
certain material terms of our leases in addition to the terms set forth in the
foregoing chart. Our material leases have been filed with the SEC as exhibits to
our registration statement of which this prospectus is a part. If you want more
information about our leases you should review that document.
Cross Default. Whenever we lease more than one property to a single
tenant or a group of affiliated tenants all those leases are cross defaulted. In
the case of our Marriott tenants, however, the leases affecting existing
properties are subject to cross default and the leases affecting new properties
are subject to cross default, but leases for the existing properties and for the
new properties are not subject to cross default with each other.
All or None Renewal Options. Whenever we lease 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 properties
leased from us. In the case of our Marriott tenants, however, the leases
affecting existing properties are subject to all or none renewal options and the
leases affecting new properties are subject to all or none renewal options, but
leases for the existing properties and for the new properties are not subject to
all or none renewal options with each other.
Maintenance and Alterations. Each of our tenants is required to
maintain, at its expense, our leased properties in good order and repair,
including structural and nonstructural maintenance. Except in the case of the
existing Marriott properties, capital alterations and additions to any leased
property, the aggregate cost of which exceeds a threshold amount, may only be
made with our prior consent. Any alterations or improvements made to any leased
property during the term of the leases become our property, subject to our
obligation to pay to the tenants certain unamortized costs at lease termination.
At the end of the leases, our tenants are required to surrender their leased
properties in substantially the same condition as existed on the commencement
date of the leases, subject to any permitted alterations and subject to ordinary
wear and tear.
In the case of the new Marriott properties only, a percentage of total
revenues from these properties (beginning at 1% and increasing to a maximum of
3.5%) is deposited in a reserve to pay for the costs of certain repairs and
replacements. If deposited funds are insufficient to cover repairs and
maintenance costs at these properties, we will fund the amount of the
deficiency, and the rent which we receive will increase by a minimum annual
amount equal to 10% of the amounts funded.
Assignment. Our consent is generally required for any assignment or
sublease of our properties. In the event of a subletting, the initial tenant
remains primarily liable and all guarantees and other security remain in place.
Environmental Matters. Our 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 or to pay any
costs we incur in connection with such removal and disposal. Each tenant
indemnifies us for any claims asserted as a result of the presence of hazardous
substances at any property or from a violation or alleged violation of any
applicable environmental law or regulation.
41
<PAGE>
Indemnification and Insurance. Each tenant has agreed to indemnify us
from all claims arising from our ownership or their use of our properties. Each
tenant is required to maintain insurance on our properties covering: (1)
comprehensive general liability for damage to property or bodily injury arising
out of the ownership, use, occupancy or maintenance of the properties; (2)
commercial property "all risk" liability for damage to improvements,
merchandise, trade fixtures, furnishings, equipment and personal property; (3)
workers' compensation liability; (4) business interruption loss; (5) in some
cases, medical malpractice; and (6) other losses customarily insured by
businesses similar to the business conducted at our properties. The leases
require that we be named as an additional insured under these policies.
Damage, Destruction or Condemnation. In the event any of our properties
is damaged by fire, explosion or other casualty or is taken or condemned for a
public use, we receives all proceeds and the tenants are required to pay us any
difference between the amount of proceeds and our aggregate investment in the
affected property. In certain cases, tenants have a right to purchase the
affected property for amounts at least equal to our historical investment in the
property.
Events of Default. Events of default under our leases include the
following: (1) the failure of the tenant to pay rent when due; (2) the failure
of the tenant to perform certain of the terms, covenants or conditions of its
lease and the continuance thereof for a specified period after written notice;
(3) the occurrence of certain events of insolvency with respect to the tenant;
(4) the failure of the tenant to maintain required insurance coverages; or (5)
the revocation of any material license necessary for the tenant's operation of
our property.
Remedies. Upon the occurrence of any event of default, subject to
applicable law, we may: (1) terminate the affected lease and accelerate the
rent; (2) terminate the tenant's rights to the affected property, relet the
property upon terms satisfactory to us, 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 (3) make any
payment or perform any act required to be performed by the tenant under its
lease. The defaulting tenant is obligated to reimburse us 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 the properties is
subject to ground leases. The leases with respect to the ground leased
properties are subject to early termination if the applicable ground leases are
terminated. Our leases require the tenants to pay and perform all obligations
arising under the applicable ground leases. These ground leases, including
extension options, terminate on 2086 and 2079. The annual rents payable under
the ground leases in 1998 totaled $138,100.
42
<PAGE>
SELECTED HISTORICAL AND ADJUSTED PRO FORMA FINANCIAL INFORMATION
The following table presents historical and adjusted pro forma
financial information and other data for our properties. We are currently a 100%
owned subsidiary of HRP, and none of our properties are encumbered by debt. It
is impossible to estimate all operating expenses we would have incurred as a
separate public company. The following table includes pro rata allocations of
interest expense and certain general and administrative expenses for historical
periods. However, the net income and funds from operations shown are not
necessarily indicative of results that we will realize as a separate company.
The adjusted pro forma information assumes that this offering is completed at a
public offering price of $19 per common share and that net proceeds are used to
purchase and lease 14 new Marriott properties including adjustments for certain
properties under development. For additional information about the calculation
of amounts appearing in this table see the Unaudited Pro Forma Financial
Statements and notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Adjusted pro
Nine months forma nine
Year ended December 31, ended months ended
-------------------------------------- September 30, September 30,
1994 1995 1996 1997 1998 1998
------ ----- ------ ------ -------------- --------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental income ................. $ 32,488 $ 49,545 $ 52,511 $ 64,515 $ 50,142 $ 66,865
Interest and other income ..... 599 792 1,024 2,515 1,953 1,953
-------- -------- -------- -------- -------- --------
Total revenues .............. 33,087 50,337 53,535 67,030 52,095 68,818
-------- -------- -------- -------- -------- --------
Expenses:
Interest ...................... 3,912 13,206 11,590 13,643 11,505 13,125
Depreciation and
amortization ................ 6,860 10,943 11,524 13,906 10,744 14,771
General and administrative .... 2,614 3,499 3,764 4,289 3,088 3,858
-------- -------- -------- -------- -------- --------
Total expenses .............. 13,386 27,648 26,878 31,838 25,337 31,754
-------- -------- -------- -------- -------- --------
Net income .................. $ 19,701 $ 22,689 $ 26,657 $ 35,192 $ 26,758 $ 37,064
======== ======== ======== ======== ======== ========
Per Common Share:
Shares outstanding .............. -- -- -- -- -- 37,725
Net income per share ............ -- -- -- -- -- $ .98
Other Data:
Number of properties at
end of period ................. 60 67 74 79 84 98
Funds from operations
("FFO") (1) ................... $ 26,561 $ 33,632 $ 38,181 $ 49,098 $ 37,502 $ 51,272
FFO per share ................... -- -- -- -- -- $ 1.36
<CAPTION>
Adjusted
December 31, pro forma
-------------------------------------- September 30, September 30,
1994 1995 1996 1997 1998 1998
------ ------ ------ ------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total real estate investments
(before depreciation) ......... $456,734 $482,339 $584,601 $613,666 $625,058 $818,858
Total assets (after depreciation) 445,039 460,401 552,458 570,023 568,664 768,993
Total debt ...................... -- -- -- -- -- 250,000
- ---------------
<FN>
(1) Funds from operations or "FFO" means net income (computed in accordance with GAAP), before gain or loss on sale of properties
and extraordinary items, plus depreciation and other non-cash items. We consider FFO to be a measure of the financial performance of
an equity REIT that provides a relevant basis for comparison among REITs. FFO does not represent cash flow from operating activities
(as determined in accordance with GAAP) and should not be considered as an alternative to net income as an indicator of our
financial performance or to cash flow as a measure of liquidity.
</FN>
</TABLE>
43
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with the "Selected Historical
and Adjusted Pro Forma Financial Information" and the financial statements and
notes thereto included elsewhere in this prospectus. As pointed out elsewhere in
this prospectus, our Company did not exist until December 16, 1998. A majority
of our properties have been historically owned by HRP unencumbered by secured
debt. In these circumstances it is not possible to estimate all operating
expenses which we would have incurred in historical periods as a separate public
company. The financial statements which are analyzed below include pro rata
allocations of interest expense and certain general and administrative expenses
to the historical results realized by HRP from ownership of our properties.
Accordingly, you should understand that the results of operations discussed
below are not necessarily indicative of the operating results which we would
have realized as a separate company during these historical periods.
Overview
We will initially have investments in 98 properties, including 14
properties which will be acquired with the proceeds of this offering and 84
which will be transferred to us by HRP upon completion of this offering. Nine of
these investments will be in properties for which we have provided mortgage
financing and for which we hold nominal price purchase options. Our 98
properties contain 13,750 units or beds and are located in 23 states. During
1998 our properties had an average occupancy rate of 88%.
Our 98 properties are leased to nine different groups of affiliated
tenants. None of these tenants are affiliated with us. Tenants which are
subsidiaries of publicly owned companies account for 98% of our revenues. Our
most important tenant, Marriott, is responsible for 56% of our total revenues.
Ninety-four percent of our revenues arise from leases which expire after
December 31, 2010. The Marriott leases expire after December 31, 2013. Our
tenants have extensive renewal options. Our leases require our tenants' to pay
minimum rents plus additional rents based upon increases in tenants' revenues,
increases in the Consumer Price Index or fixed annual amounts.
Adjusted Pro Forma Results of Operations
Nine Months ended September 30, 1998. Adjusted pro forma results of
operations for the nine months ended September 30, 1998, compared to historical
results for this period include increases in rental income, interest expense,
deprecation and general and administrative expenses of $16.7 million, $1.6
million, $3.5 million and $.8 million, respectively. The effect of these changes
is to increase net income by $10.3 million and to increase funds from operations
by $13.8 million. These increases result from our proposed purchase and lease of
the 14 new Marriott properties and the $250 million mortgage financing of 14
other properties owned during the historical period.
Certain of the results presented in the adjusted pro forma information for
this nine month period include the effects of properties to be acquired which
were under construction during this period. The adjusted pro forma results
reflect revenue and expenses of $13.5 million and $3.5 million, respectively,
related to properties in construction during this period. We believe all or
almost all of these properties will be constructed prior to completion of this
offering or shortly thereafter. Accordingly, we believe that the Adjusted Pro
Forma Financial Information provide certain important information to investors
in this offering.
44
<PAGE>
Historical Results of Operations.
Years 1997 and 1996 compared. In 1997 compared to 1996, rental and interest
income increased by $12.0 million and $1.5 million, respectively. Depreciation
and general and administrative expenses increased by $2.4 million and $.5
million. All of these changes resulted from increased investments in seven
properties during 1996 and in five properties during 1997.
During 1996 and 1997 all of our properties were owned or mortgaged by HRP
and none were encumbered by secured debt. The interest expense shown on the
historical financial statements reflects HRP's total interest expense allocated
to these properties pro rata among HRP's total investments, at cost, during the
respective periods. The increase in interest expense of $2.1 million in 1997
from 1996 represents a larger allocation of interest expense to our properties
due to higher borrowings by HRP in 1997 compared to 1996 which is only partially
off-set by lower interest rates.
As a result of these changes, net income and funds from operations realized
from ownership of our properties in 1997 compared to 1996 increased by $8.5
million and $10.9 million, respectively.
Years 1996 and 1995 compared. In 1996 compared to 1995, rental and interest
income increased by $3.0 million and $.2 million respectively. Depreciation and
general and administrative expenses increased by $.6 million and $.3 million.
All of these changes result from increased investments in seven properties in
1995 and seven more properties in 1996.
During 1996 the HRP interest expense allocable to our properties decreased
by $1.6 million from the allocable interest expense in 1995. This decrease
reflects lower allocations of interest expense to our properties due to lower
borrowing by HRP in 1996 compared to 1995 which is partially off-set by higher
interest rates.
As a result of these changes net income and funds from operations realized
from ownership of our properties in 1996 compared to 1995 increased by $4.0
million and $4.5 million, respectively.
Liquidity and Capital Resources
At the conclusion of this offering we expect to have approximately $2.8
million in cash available for working capital. We expect this cash and rents
which we receive from our tenants on a monthly basis will be sufficient to meet
our working capital needs for operating expenses (including interest on our
debt) and to make regular quarterly distributions.
We are currently negotiating a new $250 million term loan. This loan will
be secured by first mortgages on the 14 Marriott properties we now own. This
loan will close shortly after completion of this offering. The term of this loan
will be five years. Interest only payments will be required until maturity. The
interest rate will be a floating rate equal to LIBOR plus a premium. We expect
that the loan documentation will have customary representations and warranties
from us and our subsidiaries which own the mortgaged properties, customary
covenants and events of default. Among other things, covenants would prohibit or
restrict us from selling the mortgaged properties while the loans remain
outstanding. If an event of default occurs, the loan documents would provide for
acceleration of outstanding loans and an increase in the interest rate
applicable to outstanding amounts. In addition, if an event of default occurs,
the lender would have the right to foreclose on the properties securing the
loan. We will use the proceeds of this loan to satisfy a $250 million obligation
due HRP which we will incur as part of our formation transaction. This line is
expected to be provided by Dresdner Bank A.G.
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We are currently negotiating a new $100 million revolving loan. This loan
will be secured by a pledge of the stock of some of our subsidiaries. This loan
will have a term of two years. Interest only payments will be required until
maturity. The interest rate will be a floating rate equal to LIBOR plus a
premium. We will have the right to repay and redraw amounts under this loan
facility until its maturity. We expect that the line of credit documentation
will have customary representations and warranties from us and our subsidiaries,
customary affirmative and negative covenants and events of default. If an event
of default occurs, the line of credit would likely provide for a termination of
our right to obtain additional advances, acceleration of outstanding loans and
an increase in the interest rate applicable to outstanding amounts. In addition,
if an event of default occurs, the lender would have the right to foreclose on
collateral for the loans, including the stock of our subsidiaries. We expect
this loan to close simultaneously with this offering. This loan will be provided
or arranged by an affiliate of Merrill Lynch & Co., our lead underwriter. We do
not expect this loan facility to continue for periods beyond the maturity of
this loan. After this offering is completed and before this loan facility
matures, we expect to enter negotiations with a syndicate of commercial banks to
provide a substitute revolving loan facility. This substitute revolving loan may
be for a larger amount and a longer maturity.
After completion of this offering, we intend to acquire additional senior
living properties. These purchases will be initially funded with excess working
capital generated by our rents, if any, and proceeds of borrowings under the
above described revolving credit facility. After these properties are acquired,
they may be refinanced with long term debt or equity capital. After completion
of this offering, we expect to have: only $250 million of debt outstanding; book
equity of $474.0 million; total real estate assets, at historical cost, of
$818.9 million; and total market capitalization of approximately $966.8 million
(assuming a market price of $19/share). In these circumstances, we believe that
we will have sufficient access to capital markets to meet our growth objectives
and refinance our debt as needed. Of course, however, our access to growth
capital will depend upon numerous facts, including some beyond our control; and
we can provide no assurance that we will be able to raise additional capital in
sufficient amounts, or at appropriate costs, to fund future growth or repayment
of our debt.
Inflation. Inflation would have both positive and negative impacts upon our
business. Inflation would cause the value of our real estate investments to
increase. Similarly, in an inflationary environment, the additional rents which
we receive based upon CPI increases or as a percentage of our tenant's revenues
should increase and rent yields we could charge for new investments would likely
increase. Offsetting these benefits, inflation might cause the costs we pay for
equity and debt capital to increase. To mitigate the adverse impact of increased
costs of debt capital in the event of material inflation we may purchase
interest rate cap contracts whenever we have a large amount of floating rate
debt outstanding and we believe material interest rate increases are likely to
occur. On balance, we do not believe that the modest inflation which we expect
may occur in the U.S. economy during the next few years will have any material
effect on our business.
Deflation. Deflation would have business consequences to us which are the
inverse of the impact of inflation. If new construction costs decline, the value
of our existing real estate investments may decline. The value of our long term
minimum rent leases might increase but some tenants might have trouble paying
our rent in a deflationary environment, and the amounts of our rent increases
might decline or disappear. Deflation might lower our costs of debt capital;
however, deflation's impact on our cost of equity capital is uncertain.
Generally we do not believe that the U.S. economy is likely to experience
serious deflation in the foreseeable future. We believe that modest deflation
would have no effect upon our business and serious deflation would have a
negative effect upon our business.
Year 2000. The computer systems which we use for accounting and financial
reporting were all updated or installed within the past two years. We believe
these systems are Year 2000 compliant. All costs associated with these computer
systems are paid by RMR.
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During the past year HRP has directed inquiries to all of our tenants
concerning their preparations for Year 2000 computer issues. Based upon our
tenants' responses we believe all of our tenants are aware of possible Year 2000
issues and intend to take steps to avoid material adverse affects to their
businesses. We intend to continue the tenant monitoring process begun by HRP.
Our tenants will be responsible for the cost of their own Year 2000 compliance.
The only material issue which we may face from Year 2000 compliance arises
by reason of possible delays in government Medicare and Medicaid payments to
certain of our tenants. In the past, HRP has on one occasion deferred rent from
a tenant when payments under California's Medicaid system were delayed because
the California legislature failed to pass a timely budget. Based upon news
reports, we understand that the federal and state governments are making
preparations to avoid delays in Medicare and Medicaid payments resulting from
Year 2000 issues. We expect our tenants will make arrangements to pay their rent
obligations in the event of government delays in payments. Moreover, we do not
expect governmental payment delays, if any occur, to extend for prolonged
periods.
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MANAGEMENT
Trustees and Executive Officers
Our Declaration of Trust provides that a majority of our Board of Trustees
will be Independent Trustees. An Independent Trustee is a Trustee who is not an
officer of or otherwise affiliated with HRP (so long as HRP remains a
shareholder of our Company) or RMR.
Immediately after completion of this offering, our Trustees and executive
officers will be as follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Barry M. Portnoy................... 53 Managing Trustee (term will expire in 2000)
Gerard M. Martin................... 64 Managing Trustee (term will expire in 2001)
Bruce M. Gans, M.D. ............... 51 Independent Trustee (term will expire in 2002)
Arthur G. Koumantzelis............. 68 Independent Trustee (term will expire in 2000)
Vacant............................. ___ Independent Trustee (term will expire in 2001)
David J. Hegarty................... 42 President, Chief Operating Officer and Secretary
Ajay Saini......................... 38 Treasurer and Chief Financial Officer
</TABLE>
Barry M. Portnoy has been a Managing Trustee of both HRP and HPT since
their organization in 1986 and 1995, respectively. Mr. Portnoy is also a
Director and 50% owner of RMR. Mr. Portnoy has been actively involved in real
estate and real estate finance activities 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, where he served as Chairman from 1994 through March
1997.
Gerard M. Martin has been a Managing Trustee of both HRP and HPT since
their organization in 1986 and 1995, respectively. Mr. Martin is also a Director
and 50% owner of RMR. Mr. Martin has been active in the real estate and health
care industries for approximately 30 years.
Bruce M. Gans, M.D. has been 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 an
Independent Trustee of HRP since 1995. Upon completion of this offering, Dr.
Gans will resign from HRP and will become one of our 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 an Independent Trustee of HPT since its initial public
offering in 1995, and was an Independent Trustee of HRP from 1992 through August
1995. Upon completion of this offering, Mr. Koumantzelis will become one of our
Independent Trustees.
Vacant. Following the completion of this offering, we intend to elect a
third Independent Trustee.
David J. Hegarty is the President, Chief Operating Officer and Secretary of
HRP. Upon completion of this offering, Mr. Hegarty will resign from HRP and will
become our President, Chief Operating Officer and Secretary. Mr. Hegarty is also
a Director and the President and Secretary of RMR. Mr. Hegarty has served HRP
and RMR in various capacities since 1987, prior to which he was an audit manager
with Ernst & Young LLP. Mr. Hegarty is a certified public accountant.
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Ajay Saini is the Treasurer and Chief Financial Officer of HRP. Upon
completion of this offering, Mr. Saini will resign from HRP and will become our
Treasurer and Chief Financial Officer. Mr. Saini is also a Vice President of
RMR. Mr. Saini has served HRP and RMR 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 this offering, the Board of Trustees will
establish an Audit Committee that will consist of our 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
our accountants and review the adequacy of our internal accounting controls.
The entire Board of Trustees will function as a Compensation Committee to
implement our Incentive Share Award Plan described below.
Compensation of the Trustees and Officers
We will pay our 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 this
offering and at the first meeting of the Board of Trustees following each annual
meeting of shareholders, commencing in 2000. In addition, we 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. We
will also reimburse expenses our Trustees incur in attending meetings. Our
Managing Trustees and officers are employees of RMR and they will not receive
compensation directly from us, except reimbursement of expenses and pursuant to
the Incentive Share Award Plan.
Incentive Share Award Plan
We have adopted an Incentive Share Award Plan and have reserved 1,000,000
common shares to grant to our Independent Trustees, officers and consultants,
including selected employees of RMR, but not RMR itself which will be paid
pursuant to its contract described below. We have established the Incentive
Share Award Plan to ensure that our officers, Independent Trustees and
shareholders continue to have similar interests. In addition, the Incentive
Share Award Plan will permit us to compensate our officers for the performance
of certain services and duties in addition to those compensated by RMR.
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 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 this offering.
Limitation of Liability and Indemnification
Under our Declaration of Trust, our Trustees, officers and employees are
entitled to indemnification. See "Certain Provisions of Maryland Law and Summary
of the Company's Declaration of Trust and Bylaws" for more information.
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The Investment Advisor and the Advisory Agreement
The Investment Advisor. RMR, our investment advisor, is a Delaware
corporation owned by Barry M. Portnoy and Gerard M. Martin. RMR's principal
place of business is 400 Centre Street, Newton, Massachusetts and its telephone
number is (617) 332-3990. RMR has approximately 180 full time employees
including a management staff, four regional offices and other personnel located
throughout the United States. RMR also acts as the investment advisor to HRP and
HPT.
The Directors of RMR are Barry M. Portnoy, Gerard M. Martin and David J.
Hegarty. The officers of RMR 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, and John Popeo, Treasurer. A biographical summary of the Directors
and officers of RMR who are not described above under "--Trustees and Executive
Officers" follows:
John G. Murray, age 38, is the Executive Vice President of RMR. Mr. Murray
is also the President, Chief Operating Officer and Secretary of HPT. Mr. Murray
served in various capacities for HRP and its investment advisor from 1993
through 1995. 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.
John A. Mannix, age 42, is a Vice President of RMR and Executive Vice
President of HRP. Upon the resignation of Mr. Hegarty from HRP, Mr. Mannix will
become President and Chief Operating Officer of HRP. Mr. Mannix has served in
various capacities with RMR and its affiliates since 1989. Prior to 1989, Mr.
Mannix was employed by Grubb & Ellis. Mr. Mannix is a member of the Urban Land
Institute and the Greater Boston Real Estate Board's Real Estate Finance
Association.
Thomas M. O'Brien, age 32, is a Vice President of RMR. Mr. O'Brien is also
the Treasurer and Chief Financial Officer of HPT. Prior to 1996, Mr. O'Brien was
employed by Arthur Andersen LLP for eight years. Mr. O'Brien is a certified
public accountant.
David M. Lepore, age 38, is a Vice President of RMR. Mr. Lepore is also the
Senior Vice President of HRP responsible for building operations, leasing and
acquisition diligence. Mr. Lepore has been employed in various capacities by RMR
and its affiliates since 1992. Prior to 1992, he was employed by The Beacon
Companies. Mr. Lepore is a member of the Greater Boston Building Owners and
Managers Association and is a certified Real Property Administrator.
John Popeo, age 38, has been the Treasurer and Chief Financial Officer of
RMR and certain of its affiliates since 1997. Upon the resignation of Messrs.
Hegarty and Saini from HRP, Mr. Popeo will become Treasurer, Chief Financial
Officer and Secretary of HRP. 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 Winthrop Financial
Company as 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.
The Advisory Agreement. The following is a summary of our advisory
agreement with RMR. Because it is a summary, 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.
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RMR is required to use its best efforts to present us with a continuing and
suitable investment program consistent with our investment policies and
objectives. Subject to its duty of overall management and supervision, the Board
of Trustees has delegated to RMR the power and duty to:
o provide research and economic and statistical data in connection with
our investments and recommend changes in our investment policies when
appropriate;
o investigate and evaluate investment opportunities and make
recommendations concerning specific investments to the Trustees;
o manage our short-term investments including the acquisition and sale
of money market instruments;
o administer our day-to-day operations including the leasing of our
properties and relations with our tenants;
o investigate, negotiate and enter contracts on our behalf in
furtherance of our investment activities and objectives;
o act as attorney-in-fact or agent in acquiring and disposing of our
investments and funds, and in handling, prosecuting and settling any
of our claims;
o invest and reinvest any of our money;
o monitor our investments and all services provided to us as would be
done by a prudent owner;
o administer such day-to-day bookkeeping and accounting functions as are
required for the management of our assets, contract for audits and
prepare or cause to be prepared such reports as may be required by any
governmental authority in connection with the conduct of our 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, RMR may use
facilities, personnel and support services of various of its affiliates.
Under the advisory agreement, RMR assumes no responsibility other than to
render the services described therein in good faith and is not responsible for
any action of the Board of Trustees in following or declining to follow any
advice or recommendation of RMR. In addition, we have agreed to indemnify RMR,
its shareholders, directors, officers, employees and affiliates against
liabilities relating to certain acts or omissions of RMR undertaken on our
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. The advisory agreement can
be terminated by majority vote of the Independent Trustees upon 60 days' notice
to RMR. Pursuant to the advisory agreement, RMR 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
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is principally engaged in the business of ownership of senior housing,
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 our Independent Trustees.
Compensation to RMR. It is intended that the Board of Trustees, acting by a
majority vote of the Independent Trustees, will determine the amount of
compensation paid to RMR and will determine whether to renew, extend or amend
the advisory agreement, in each case based on such factors as it deems
appropriate. Such factors may include:
o the size of the advisory fee in relation to the size, composition,
quality and profitability of our investments;
o the success of RMR in generating opportunities that meet our
investment objectives;
o the quality and extent of services and advice furnished by RMR;
o the rates charged by others performing comparable services; and
o the costs of similar services incurred by self-advised REITs.
The advisory agreement currently provides for (1) an annual advisory fee,
payable monthly and reconciled annually, and (2) an annual incentive fee. The
annual advisory fee is equal to the sum of 0.7% of the average invested capital
up to $250 million, plus 0.5% of the average invested capital equal to or
exceeding $250 million. "Average invested capital" means the daily weighted
average of the total book value of our assets invested, directly or indirectly,
in equity interests in and loans secured by real estate and personal property
owned in connection with such real estate, before reserves for depreciation or
bad debts or other similar non-cash reserves. The annual incentive fee is equal
to 15% of the annual increase in our funds from operations (as defined in the
advisory agreement) per share (but in no event more than $.01 per share), times
the weighted average number of shares outstanding on a fully diluted basis in
each year. The annual incentive fees payable to RMR will be paid in our common
shares valued at market value. No incentive fees will be payable for the initial
term of the advisory agreement.
The advisory agreements currently in effect between RMR and HRP, and
between RMR and HPT are substantially similar to the advisory agreement between
RMR and us. Upon completion of this offering, RMR's contract with HRP will be
amended so that HRP's investment in the Company will not be counted for purposes
of determining the advisory fees payable by HRP to RMR.
We are not expected to have any employees or administrative officers
separate from RMR. Services which might otherwise be provided by employees will
be provided to us by employees of RMR. Similarly, office space will be provided
to us by RMR. Although we do not expect to have significant general and
administrative operating expenses in addition to fees payable to RMR, we will be
required to pay various other expenses, including the costs and expenses of
acquiring, owning and disposing of our real estate interests (including
appraisal, reporting, audit and legal fees), the costs of borrowing money and
the costs of securities listing, transfer, registration and compliance with
reporting requirements and shareholder communications generally. Also, we will
pay the fees of our Independent Trustees.
Legal Proceedings
We have a limited operating history and are not currently a party to any
legal proceedings. We are not aware of any material legal proceeding affecting
our initial properties for which we might become liable. Moreover, HRP has
agreed to indemnify us for any liability affecting any properties transferred to
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us or for which we may become liable as a result of receiving properties
transferred to us if such liability arose out of an action or inaction by HRP or
an event that occurred before the transfer of the properties to us.
Certain Transactions
We are currently a 100% owned subsidiary of HRP. Our Managing Trustees,
Barry M. Portnoy and Gerard M. Martin, also own RMR and act as managing trustees
of HRP. As a result of these relationships, HRP and Messrs. Portnoy and Martin,
have material interests in several of the transactions that will be completed
simultaneously with this offering:
o The 14 Marriott properties that we currently own will be subjected to
mortgages for $250 million immediately after the closing of this
offering. These mortgage proceeds will be paid to HRP to satisfy
intercompany debt created as part of our formation transaction. HRP
will not be liable for this mortgage debt.
o HRP is currently contractually bound to purchase the 14 new Marriott
properties for $193.8 million. Upon completion of this offering we
will assume HRP's purchase obligation.
o Upon completion of this offering RMR will become our investment
advisor. Assuming the purchase of 14 new properties from Marriott
pursuant to the contract terms, the pro forma annual advisory fee that
we will pay to RMR will be $4.6 million. HRP's annual advisory fees to
RMR will be reduced by approximately the same amount.
o Messrs. Portnoy and Martin will purchase 350,000 of our common shares
simultaneously with the completion of this offering. Messrs. Portnoy
and Martin will pay the same price per share as public investors pay
in this offering.
o Upon the completion of this offering, 13.2 million of our common
shares will be distributed to HRP shareholders. We will receive no
consideration for this distribution.
o After this offering, HRP will retain 13.2 million of our common
shares. By retaining these common shares, HRP will be able to
participate in our future success through distributions and
appreciation, if any, in the price of our common shares.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following discussion sets forth our policies regarding investments,
dispositions, financings, conflicts of interest and certain 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 our shareholders. We cannot, however, change our
policy of seeking to remain qualified as a REIT nor can we enter into certain
extraordinary transactions (such as a merger or the sale of all or substantially
all of our assets) without the approval of two thirds of our shareholders. Upon
completion of this offering, HRP will own 35% of our common shares and any such
transaction would likely require HRP's approval.
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Investment Policies
Acquisitions. We will pursue growth by acquiring additional senior housing,
congregate communities, assisted living properties and nursing homes. In making
future acquisitions, we will consider a range of factors including:
o the proposed acquisition price of the proposed property;
o the estimated replacement cost of the proposed property;
o proposed lease terms;
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.
We intend to acquire properties which will enhance the diversity of our
portfolio in respect to tenants, type of services provided and locations.
However, we have no policies which would limit the percentage of our assets
which may be invested in any individual property or type of property or in
properties leased to any single tenant or to an affiliated group of tenants.
Other Investments in Real Estate. We expect to emphasize direct wholly
owned investments in fee interests. However, in certain circumstances we may
invest in leaseholds, joint ventures, mortgages and other real estate interests.
We may invest in real estate joint ventures if we conclude that by doing so, we
may benefit from the participation of co-venturers or that our opportunity to
participate in the investment is contingent on the use of a joint venture
structure. We may invest in participating, convertible or other types of
mortgages if we conclude that by doing so, we may benefit from the cash flow or
any appreciation in the value of the subject property. At all times, we intend
to make our investments consistent with our continued qualification as a REIT
under the Tax Code.
Disposition Policies
We have no current intention to dispose of any of our initial properties or
other properties we may acquire. We anticipate that future disposition
decisions, if any, will be made based on factors such as the following: (1)
potential opportunities to increase revenues and property values by reinvesting
sale proceeds; (2) the proposed sale price; (3) the strategic fit of the
property with the rest of our portfolio; (4) the potential for, or the existence
of, any environmental or regulatory problems affecting a particular property;
(5) the existence of alternative needs for capital; and (6) the maintenance of
our qualification as a REIT under the Tax Code.
Financing Policies
We currently intend to employ conservative financing policies in pursuit of
our growth strategy. Although our organizational documents do not limit the
amount of indebtedness we may incur, we
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currently intend to maintain a capital structure in which our debt will not
exceed 50% of our total market capitalization. We will consider future equity
offerings when, in our judgment, doing so will improve our capital structure
without materially adversely affecting the market value of our common shares or
impeding our ability to regularly increase our common share distribution rate.
We hope to achieve an investment grade rating for our debt obligations; but we
do not expect that to happen until we have a successful track record of
operating as an independent public company. Until we achieve an investment grade
rating we expect that the least costly debt capital available to us will be
secured debt. In the future, we may modify our current financing policies in
light of then current economic conditions, relative costs of debt and equity
capital, market values of properties, acquisition opportunities and other
factors, and we may increase or decrease our intended ratio of debt to total
market capitalization accordingly.
Conflict of Interest Policies
Our Declaration of Trust requires that a majority of our Board of Trustees
be Independent Trustees who are not affiliated with RMR or HRP (so long as HRP
remains a shareholder of our Company). In addition, we have adopted certain
policies designed to minimize potential conflicts of interest. However, there
can be no assurance that these policies always will be successful in minimizing
the influences of such conflicts, and, if they are not successful, decisions
could be made that might not fully serve the interests of all shareholders.
Our investment advisor, RMR, also acts as the investment advisor to HRP and
HPT, and also has other business interests. As a result, RMR will not be able to
devote all of its business time and resources to us and conflicts could arise
with respect to the allocation of its business time and resources. Messrs.
Portnoy and Martin, our Managing Trustees, are also managing trustees of HRP and
HPT, and each is a director and 50% shareholder of RMR. The advisory fees paid
to RMR will be based, in part, upon the amount of investments which we make.
From 1978 through March 31, 1997, Mr. Portnoy was a partner in the firm of
Sullivan & Worcester LLP, which acts as counsel to us, HRP, HPT, RMR and their
affiliates. Mr. Portnoy receives and will receive payments from the firm in
respect of his 1997 retirement which relate in part to fees received by the firm
from us, HRP, HPT, RMR and their affiliates.
To address these competing time demands and potential conflicts of
interest, RMR intends that Mr. David Hegarty, our President, Chief Operating
Officer and Secretary, and Mr. Ajay Saini, our Treasurer and Chief Financial
Officer, will devote substantial amounts of their business time to our business.
In addition, pursuant to the advisory agreement, RMR and Messrs. Portnoy and
Martin have agreed not to provide advisory services to, or serve as directors or
officers of, any other REIT which is principally engaged in the business of
ownership of senior housing, 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 our Independent Trustees. To
promote an identity of economic interest among our Managing Trustees, RMR and
our shareholders, Messrs. Portnoy and Martin will purchase 350,000 common shares
at the same price paid by public investors in this offering, and the advisory
fee will be paid, in part, in our common shares. Moreover, the continuation of
the advisory agreement and the fees payable to RMR will be subject to periodic
review by our Independent Trustees. Finally, of course, RMR and Messrs. Portnoy
and Martin are generally required by applicable law to act in accordance with
their fiduciary responsibilities to us.
Policies with Respect to Other Activities
We intend to operate in a manner that will not subject us to regulation
under the Investment Company Act of 1940. We do not currently intend: (1) to
invest in the securities of other issuers for the purpose of exercising control
over such issuer; (2) to underwrite securities of other issuers; or (3) to trade
actively in loans or other investments.
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We may make investments other than as previously described, although we do
not currently intend to do so. We have authority to repurchase or otherwise
reacquire our shares or any other securities we issue and may do so in the
future. The Board of Trustees has no current intention of causing our Company to
repurchase any of the common shares currently offered. If we were to repurchase
any of the common shares currently offered, we would do so only in conformity
with applicable federal and state laws and the requirements for qualifying as a
REIT under the Tax Code. In the future, we may issue shares or any other
securities in exchange for property. Also, although we have no current intention
to do so, we may make loans to third parties, including to our Trustees and
officers and to joint ventures in which we decide to participate.
SUMMARY OF THE TRANSACTION AGREEMENT
We have entered a transaction agreement with HRP (the "Transaction
Agreement"). The Transaction Agreement sets forth the actions necessary to
effect our separation from HRP and governs certain relations between us and HRP
after the separation. RMR and Messrs. Portnoy and Martin will agree to certain
provisions of the Transaction Agreement which affect them. The following is a
summary of the Transaction Agreement.
Among other matters, the Transaction Agreement provides that:
o HRP will transfer title to 84 senior living properties to certain
subsidiaries. The stock of these subsidiaries will then be transferred to
us prior to the closing of this offering.
o At the time the HRP properties are transferred to us they will be free of
mortgage debt, and the leases and mortgages pertaining to these properties
will be in full force and effect.
o Simultaneously with the transfer of properties to us, HRP will assign to us
its rights to purchase and lease 14 new Marriott properties.
o As part of the transfer of properties and assignment of the purchase and
lease agreement from HRP to us, we will assume HRP's obligations regarding
the transferred properties and under the purchase and lease agreement; we
will indemnify HRP from future obligations in this regard.
o In partial consideration of the property transfers, we will issue a $250
million note to HRP. Immediately after completion of this offering we will
undertake a mortgage financing of the 14 Marriott properties that we
acquire from HRP and pay the mortgage proceeds to HRP to satisfy this debt.
HRP will not be liable for this mortgage debt.
o Simultaneously with the completion of this offering, HRP will distribute
13.2 million of our common shares to HRP shareholders. This distribution
will be paid to HRP shareholders on the basis of one of our shares for
every 10 HRP shares held. Fractional shares will not be distributed, but
will be paid in cash by HRP at the offering price.
o Simultaneously with the completion of this offering, Messrs. Portnoy and
Martin will purchase 350,000 of our common shares from us at the same price
paid by public investors in this offering.
o After the completion of this offering and the distribution of our shares,
HRP will own 13.2 million of our common shares, and Messrs. Portnoy and
Martin will beneficially own 463,437 of our shares (including 113,437
shares as their pro rata distribution to HRP shareholders). HRP and Messrs.
Portnoy and Martin will agree not to sell or otherwise transfer any of our
shares which they own for
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at least one year following completion of this offering unless the proposed
transfer is approved by vote of our Board of Trustees, including a majority
of our Independent Trustees.
o HRP will deliver to us all property files and other documentation affecting
the properties to be transferred to us.
o Income and expenses of the properties to be transferred will be apportioned
between us and HRP as of the date of the transfer.
o HRP will make certain representations and warranties to us regarding its
knowledge of the status of the properties transferred to us, including
environmental matters, and regarding the affected tenancies and will
indemnify us for breaches of its representations and warranties.
o HRP will indemnify us with regard to all liabilities retained by it and any
litigation or other third party claims affecting the transferred properties
that relate to activities that occur prior to the date of the HRP
distribution or arise by reason of the transfer, if any.
o Any claim against HRP for breaches of representation and warranties, or
otherwise arising from our formation must be asserted within one year after
the HRP distribution and will not be collectable unless and until a
threshold amount of $1 million is exceeded.
o So long as: (a) HRP remains a shareholder of our Company, (b) HRP and our
Company engage the same investment advisor, or (c) HRP and our Company have
common Managing Trustees: (1) HRP will not invest in senior housing,
congregate communities, assisted living properties or nursing homes without
the prior approval of our Independent Trustees and (2) we will not invest
in office properties, including medical office properties or clinical
laboratory buildings, without the prior approval of HRP's independent
trustees. In the event a particular investment involves both a senior
living property and an office building, the character of the investment
will be determined according to the majority of the investment determined
by appraisal. These non-competition provisions of the Transaction Agreement
do not apply to certain nursing homes which HRP will retain for future
sale.
o We and HRP have agreed to cooperate to enforce certain ownership
limitations in our respective declarations of trusts in order to facilitate
compliance with certain provisions of the Tax Code applicable to our
respective qualifications as REITs.
o All disputes between the parties arising under the Transaction Agreement or
from our formation will be resolved by arbitration.
Because the foregoing is a summary it may not contain all of the
information about the Transaction Agreement that is important to you. If you
would like more information about these matters you should read the entire
Transaction Agreement, a copy of which has been filed with the SEC as an exhibit
to the registration statement of which this prospectus is a part.
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CERTAIN PROVISIONS OF MARYLAND LAW AND
OF THE COMPANY'S DECLARATION OF TRUST AND BY-LAWS
The following is a summary of certain provisions of Maryland law applicable
to the Company and the Declaration of Trust and the By-laws of the Company.
Because it is a summary, it does not contain all the information that may be
important to you in making an investment decision. If you want more information,
you should read the entire Declaration of Trust and the By-laws of the Company,
copies of which are exhibits to the registration statement of which this
prospectus is a part or refer to the applicable provisions of the Maryland laws
described herein.
Trustees
The By-laws provide that the number of trustees of the Company may be
established by the Board of Trustees but may not be fewer than three nor more
than seven. Any vacancy will be filled, at any regular meeting or at any special
meeting called for that purpose, by a majority of the remaining trustees, except
that a vacancy resulting from an increase in the number of trustees must be
filled by a majority of the entire Board of Trustees.
Pursuant to the Declaration of Trust, the Board of Trustees is divided into
three classes of trustees. The initial terms of the first, second and third
classes will expire in 2000, 2001 and 2002, respectively. Beginning in 2000,
trustees of each class will be chosen for three-year terms upon the expiration
of their current terms and each year one class of trustees will be elected by
the shareholders. The Company believes that classification of the Board of
Trustees will help to assure the continuity and stability of the Company's
business strategies and policies as determined by the Board of Trustees. Holders
of Common Shares will have no right to cumulative voting in the election of
trustees. Consequently, at each annual meeting of shareholders, the holders of a
majority of the Common 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, instead of one, will generally be required
to effect a change in a majority of the Board of Trustees. Thus, the classified
board provision could increase the likelihood that incumbent trustees will
retain their positions. The staggered terms of trustees may delay, defer or
prevent a tender offer or an attempt to change control of the Company, even
though a tender offer or change in control might be in the best interest of the
shareholders.
Subject to the provisions described above concerning the Company's
classified Board, a majority of the Trustees holding office are required at all
times to be Independent Trustees. An Independent Trustee is a person who is not
an officer of the Company, of RMR (or a successor investment advisor) or, if HRP
at the time beneficially owns shares of the Company, of HRP. If the Company
fails to meet this requirement as a result of the creation of a vacancy which
must be filled by an Independent Trustee, whether as a result of enlargement of
the Board of Trustees or the resignation, removal or death of a Trustee who is
an Independent Trustee, the application of such requirement will be suspended
for a period of ninety (90) days.
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 votes
entitled to be cast in the election of trustees. This provision, when coupled
with the provision in the By-laws authorizing the Board of Trustees to fill
vacant trusteeships, precludes shareholders from removing incumbent trustees
except upon a substantial affirmative vote and filling the vacancies created by
such removal with their own nominees.
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Advance Notice of Trustee Nominations and New Business
The By-laws of the Company provide that, with respect to an annual meeting
of shareholders, nominations of persons for election to the Board of Trustees
and the proposal of business to be considered by shareholders may be made only
(1) pursuant to the Company's notice of the meeting, (2) by the Board of
Trustees or (3) by a shareholder who is entitled to vote at the meeting and has
complied with the advance notice procedures set forth in the By-laws. The
By-laws also provide that, with respect to special meetings of shareholders,
only the business specified in the Company's notice of meeting may be brought
before the meeting of shareholders and nominations of persons for election to
the Board of Trustees may be made only (1) pursuant to the Company's notice of
the meeting, (2) by the Board of Trustees or (3) provided that the Board of
Trustees has determined that trustees shall be elected at such meeting, by a
shareholder who is entitled to vote at the meeting and has complied with the
advance notice provisions set forth in the By-laws.
The advance notice provisions of the Company's By-laws state that, to be
timely, a shareholder's notice must be delivered to the Company's Secretary at
the principal executive offices of the Company not later than the close of
business on the 90th day nor earlier than the close of business on 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 such anniversary date or if the Trust has not
previously held an annual meeting, notice by a shareholder to be timely must be
so delivered not earlier than the close of business on the 120th day prior to
such annual meeting and not later than the close of business on the later of the
90th day prior to such annual meeting or the tenth day following the day on
which public announcement of the date of such meeting is first made by the
Trust. In the event that the number of Trustees to be elected to the Board of
Trustees is increased and there is no public announcement by the Trust naming
all of the nominees for Trustee or specifying the size of the increased Board of
Trustees at least 90 days prior to the first anniversary of the preceding year's
annual meeting, a shareholder's notice will be considered timely, but only with
respect to nominees for any new positions created by such increase, if it is
delivered not later than the close of business on the tenth day following the
day on which such public announcement is first made by the Trust. The public
announcement of a postponement or adjournment of an annual meeting to a later
date or time will not commence a new time period for the giving of a
shareholder's notice.
Any such notice from a shareholder of the type described in the preceding
paragraph must contain (1) as to each person whom the shareholder proposes to
nominate for election or reelection as a Trustee, all information relating to
such person that is required to be disclosed in solicitations of proxies for
election of Trustees in an election contest, or is otherwise required, in each
case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended, including such person's written consent to being named in the proxy
statement as a nominee and to serving as a Trustee if elected; (2) as to any
other business that the shareholder proposes to bring before the meeting, a
brief description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting and any material interest in
such business of such shareholder and of the beneficial owner, if any, on whose
behalf the proposal is made; and (3) 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 such shareholder, as they appear on the Trust's
books, and of such beneficial owner and the number of each class of shares of
the Trust which are owned beneficially and of record by such shareholder and
such beneficial owner.
The By-laws provide that at special shareholder meetings, the only business
brought before the meeting pursuant to the Company's notice of meeting may be
conducted. Nominations of persons for election to the Board of Trustees may be
made at a special meeting of shareholders at which Trustees are to be elected
(i) pursuant to the Company's notice of meeting, (ii) by or at the direction of
the Board of
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Trustees or (iii), provided that the Board of Trustees has determined that
Trustees are to be elected at such special meeting, by any shareholder of the
Trust who was a shareholder of record both at the time of giving of notice and
at the time of the special meeting, who is entitled to vote at the meeting and
who has complied with advance notice procedures. If the Company calls a special
meeting of shareholders for the purpose of electing one or more Trustees to the
Board of Trustees, any such shareholder may nominate a person or persons (as the
case may be) for election to such position as specified in the Company's notice
of meeting, if the shareholder's notice containing the information described
above with respect to annual meetings is delivered to the Company's Secretary at
the principal executive offices of the Company not earlier than the close of
business on the 120th day prior to such special meeting and not later than the
close of business on the later of the 90th day prior to such special meeting or
the tenth day following the day on which public announcement is first made of
the date of the special meeting and of the nominees proposed by the Trustees to
be elected at such meeting. The public announcement of a postponement or
adjournment of a special meeting to a later date or time commence a new time
period for the giving of a shareholder's notice as described above.
Liability and Indemnification of Trustees and Officers
The Maryland REIT statute 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 the Company contains such a provision which eliminates
such liability to the maximum extent permitted by the Maryland REIT statute.
The Declaration of Trust of the Company authorizes it, to the maximum
extent permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any present or former trustee or officer or (b) any individual who, while a
trustee of the Company and at the request of the Company, serves or has served
another real estate investment trust, corporation, partnership, joint venture,
trust, employee benefit plan or any other enterprise as a trustee, director,
officer or partner of such 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 as a present or
former Trustee or officer of the Company. The By-laws of the Company obligate
it, to the maximum extent permitted by Maryland law, to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any present or former trustee or officer who is made a party to the
proceeding by reason of his service in that capacity or (b) any individual who,
while a trustee or officer of the Company and at the request of the Company,
serves or has served another real estate investment trust, corporation,
partnership, joint venture, trust, employee benefit plan or any other enterprise
as a trustee, director, officer or partner of such real estate investment trust,
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise and who is made a party to the proceeding by reason of his service in
that capacity, against any claim or liability to which he may become subject by
reason of such status. The Declaration of Trust and By-laws also permit the
Company to indemnify and advance expenses to any person who served a predecessor
of the Company in any of the capacities described above and to any employee or
agent of the Company or a predecessor of the Company. The By-laws require the
Company 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 statute 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
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Maryland General Corporation Law, as amended ("MGCL"), 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 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.
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, as amended, is against public policy and is
therefore unenforceable.
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. Our Declaration of Trust also provides that no
shareholder shall be liable for any debt, claim, demand, judgment or obligation
of any kind of, against or with respect to the Company by reason of his being a
shareholder, and that no shareholder shall be subject to any personal liability
whatsoever, in tort, contract or otherwise, to any person in connection with the
property or the affairs of the Company by reason of his being a shareholder.
Despite these facts, counsel has advised us that in some jurisdictions the
possibility exists that shareholders of a trust entity may be held liable for
acts or obligations of the trust. While we intend to conduct our business in a
manner designed to minimize potential shareholder liability, no assurance can be
given that shareholders can avoid liability in all instances in all
jurisdictions. The Trustees do not intend to provide insurance covering these
risks to our shareholders.
Maryland Asset Requirements
To maintain its qualification as a Maryland real estate investment trust,
the Maryland REIT statute requires that the Company hold, either directly or
indirectly, at least 75% of the value of its assets in real estate assets,
mortgages or mortgage related securities, government securities, cash and cash
equivalent items, including high-grade short-term securities and receivables.
The Maryland REIT statute also prohibits a Maryland real estate investment
trust, such as the Company, from using or applying land for farming,
agricultural, horticultural or similar purposes.
Transactions with Affiliates, Trustees, Employees, Officers or Agents
The Declaration of Trust provides that, subject to any express restrictions
adopted by the Trustees in the By-laws or by resolution, the Company may enter
into any contract or transaction of any kind with any person, including any
Trustee, officer, employee or agent of the Trust or any person affiliated with a
Trustee, officer, employee or agent of the Company, whether or not any of them
has a financial interest
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in such transaction. The Declaration of Trust expressly provides that the
Company may engage in a transaction with (a) any Trustee, officer, employee or
agent of the Trust (acting in his individual capacity), (b) any director,
trustee, partner, officer, employee or agent (acting in his individual capacity)
of RMR or any other investment advisor of the Company, (c) RMR or any other
investment advisor of the Company or (d) an affiliate of any of the foregoing,
provided that such transaction has, after disclosure of such affiliation, been
approved or ratified by the affirmative vote of a majority of the Trustees not
having any interest in such transaction and not affiliates of any party to the
transaction after a determination by them that such transaction is fair and
reasonable to the Company and its shareholders. The Declaration of Trust also
provides that the Trustees may permit the formation of a corporation,
partnership, trust or other business association owned by any Trustee, officer,
employee or agent or by their nominees for the purpose of holding title to or
managing the Company's property, provided that the Trustees determine that the
creation of such entity for such purpose is in the best interests of the
Company.
Voting by Shareholders
Whenever shareholders are required or permitted to take any action by a
vote at a meeting of shareholders, such action may be take only by such a vote
at such a meeting of shareholders, and the shareholders do not have the power or
right to take any action by executing written consents in lieu of such vote.
Restrictions on Transfer of Shares
The Declaration of Trust restricts the amount of shares that individual
shareholders may own. These restrictions are intended, among other purposes, to
assist us in complying with REIT qualification restrictions under the Tax Code
and otherwise to promote our orderly governance.
The Declaration of Trust provides that no person may own, or be deemed to
own by virtue of the attribution provisions of the Code, more than 9.8% (the
"Aggregate Share Ownership Limit") of the number or value of the outstanding
shares of beneficial interest of the Company. In addition, the Declaration of
Trust prohibits any person from acquiring or holding, directly or indirectly,
common shares in excess of 9.8% (in value or in number of shares, whichever is
more restrictive) of the aggregate of the outstanding common shares (the "Common
Share Ownership Limit").
The Company's Board of Trustees, in its sole discretion, may exempt a
proposed transferee from the Aggregate Share Ownership Limit and the Common
Share Ownership Limit (an "Excepted Holder"). It is also a condition to a person
being becoming an Excepted Holder that he give written notice to the Company no
later than the 15th day before any proposed transfer which would result in his
owning shares in excess of Aggregate Share Ownership Limit or the Common Share
Ownership Limit. The Board may not grant such an exemption to any person if such
exemption would result in the Company being "closely held" within the meaning of
Section 856(h) of the Tax Code or otherwise would result in the Company failing
to qualify as a REIT. In order to be considered by the Board of Trustees as an
Excepted Holder, a person also must not own, directly or indirectly, an interest
in a tenant of the Company (or a tenant of any entity owned or controlled by the
Company) that would cause the Company to own, directly or indirectly, more than
a 9.9% interest in such a tenant. The person seeking an exemption must represent
to the satisfaction of the Board of Trustees that it will not violate these two
restrictions. The person also must agree that any violation or attempted
violation of any of the foregoing restrictions will result in the automatic
transfer of the shares of beneficial interest causing such violation to a
charitable trust (as described below). In determining whether to grant such an
exemption, the Board of Trustees may consider, among other factors, (1) the
general reputation and moral character of the person requesting an exemption,
(2) whether ownership of shares would be direct or through ownership
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attribution, (3) whether the person's ownership of shares would adversely affect
our ability to acquire additional senior housing, congregate communities,
assisted living properties or nursing homes or engage in other business and (4)
whether granting an exemption for the person requesting an exemption would
adversely affect any of our existing contractual arrangements. In addition, the
Board of Trustees may require any rulings from the Internal Revenue Service,
opinions of counsel, affidavits, undertakings or agreements it deems necessary
or advisable in order to make the foregoing decisions.
The Aggregate Share Ownership Limit and the Common Share Ownership Limit do
not apply to common shares owned, directly or indirectly, by HRP, RMR and their
affiliates.
The Declaration of Trust further prohibits (a) any person from beneficially
or constructively owning shares of beneficial interest of the Company that would
result in the Company being "closely held" under Section 856(h) of the Code or
otherwise cause the Company to fail to qualify as a REIT and (b) any person from
transferring shares of beneficial interest of the Company if such transfer would
result in shares of beneficial interest of the Company being owned by fewer than
100 persons. Any person who acquires or attempts or intends to acquire
beneficial or constructive ownership of shares of beneficial interest of the
Company that will or may violate any of the foregoing restrictions on
transferability and ownership, or any person who would have owned shares of the
beneficial interest of the Company that resulted in a transfer of shares to the
Excess Share Trust (as defined below), is required to give notice immediately to
the Company and provide the Company with such other information as the Company
may request in order to determine the effect of such transfer on the Company's
status as a REIT. The foregoing restrictions on transferability and ownership
will not apply if the Board of Trustees determines that it is no longer in the
best interests of the Company to attempt to qualify, or to continue to qualify,
as a REIT.
If any transfer of shares of beneficial interest of the Company occurs
which, if effective, would result in any person beneficially or constructively
owning shares of beneficial interest of the Company in excess or in violation of
the above transfer or ownership limitations (a "Prohibited Owner"), then that
number of shares of beneficial interest of the Company the beneficial or
constructive ownership of which otherwise would cause such person to violate
such limitations (rounded to the nearest whole share) (the "Excess Shares")
shall be automatically transferred to a trust (the "Excess Share Trust") for the
exclusive benefit of one or more charitable beneficiaries (the "Charitable
Beneficiary"), and the Prohibited Owner shall not acquire any rights in the
Excess Shares. Such automatic transfer shall be deemed to be effective as of the
close of business on the Business Day (as defined in the Declaration of Trust)
prior to the date of such violative transfer. Excess Shares shall be issued and
outstanding shares of beneficial interest of the Company. The Prohibited Owner
shall not benefit economically from ownership of any Excess Shares, shall have
no rights to distributions and shall not possess any rights to vote or other
rights attributable to the Excess Shares. The trustee of the Excess Share Trust
(the "Excess Share Trustee") shall have all voting rights and rights to
distributions with respect to Excess Shares held in the Excess Share Trust,
which rights shall be exercised for the exclusive benefit of the Charitable
Beneficiary. Any distribution paid prior to the discovery by the Company that
shares of beneficial interest have been transferred to the Excess Share Trustee
shall be paid by the recipient of such distribution to the Excess Share Trustee
upon demand, and any distribution authorized but unpaid shall be paid when due
to the Trustee. Any distribution so paid to the Excess Share Trustee shall be
held in trust for the Charitable Beneficiary. The Prohibited Owner shall have no
voting rights with respect to shares of beneficial interest held in the Trust
and, subject to Maryland law, effective as of the date that such shares of
beneficial interest have been transferred to the Excess Share Trust, the Excess
Share Trustee shall have the authority (at the Excess Share Trustee's sole
discretion) (1) to rescind as void any vote cast by a Prohibited Owner prior to
the discovery by the Company that such shares have been transferred to the
Excess Share Trust and (2) to recast such vote in accordance with the desires of
the Excess Share Trustee acting for the benefit of the Charitable Beneficiary.
However, if the Company has already taken
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irreversible trust action, then the Excess Share Trustee shall not have the
authority to rescind and recast such vote.
Within 20 days of receiving notice from the Company that shares of
beneficial interest of the Company have been transferred to the Excess Share
Trust, the Excess Share Trustee shall sell the shares of beneficial interest
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 the Declaration of Trust. Upon such sale, the interest
of the Charitable Beneficiary in the shares sold shall terminate and the Excess
Share Trustee shall distribute the net proceeds of the sale to the Prohibited
Owner and to the Charitable Beneficiary as follows. The Prohibited Owner shall
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 such transaction), the Market Price (as defined in the
Declaration of Trust) of such shares on the day of the event causing the shares
to be held in the Excess Share Trust and (2) the price per share received by the
Excess Share Trustee from the sale or other disposition of the shares held in
the Excess Share Trust. Any net sale proceeds in excess of the amount payable to
the Prohibited Owner shall be paid immediately to the Charitable Beneficiary.
If, prior to the discovery by the Company that shares of beneficial interest
have been transferred to the Excess Share Trust, such shares are sold by a
Prohibited Owner, then (1) such shares shall 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 such shares that exceeds the amount that such Prohibited
Owner was entitled to receive pursuant to the aforementioned requirement, such
excess shall be paid to the Excess Share Trustee upon demand.
In addition, shares of beneficial interest of the Company held in the
Excess Share Trust shall be deemed to have been offered for sale to the Company,
or its designee, at a price per share equal to the lesser of (1) the price per
share in the transaction that resulted in such transfer to the Excess Share
Trust (or, in the case of a devise or gift, the Market Price at the time of such
devise or gift) and (2) the Market Price on the date the Company, or its
designee, accepts such offer. The Company shall have the right to accept such
offer until the Excess Share Trustee has sold the shares of beneficial interest
held in the Excess Share Trust. Upon such a sale to the Company, the interest of
the Charitable Beneficiary in the shares sold shall terminate and the Excess
Share Trustee shall distribute the net proceeds of the sale to the Prohibited
Owner.
All certificates evidencing common shares will bear a legend referring to
the restrictions described above.
Every owner of more than 5% (or such lower percentage as required by the
Tax Code or the regulations promulgated thereunder) of all classes or series of
the Company's common shares, including common shares, within 30 days after the
end of each taxable year, is required to give written notice to the Company
stating the name and address of such owner, the number of shares of each class
and series of shares of beneficial interest of the Company which the owner
beneficially owns and a description of the manner in which such shares are held.
Each such owner shall provide to the Company such additional information as the
Company may request in order to determine the effect, if any, of such beneficial
ownership on the Company's status as a REIT and to ensure compliance with the
Aggregate Share Ownership Limit and the Common Share Ownership Limit. In
addition, each stockholder shall upon demand be required to provide to the
Company such information as the Company may request, in good faith, in order to
determine the Company's status as a REIT and to comply with the requirements of
any taxing authority or governmental authority or to determine such compliance.
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
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quotation system. The Declaration of Trust provides, however, that the fact that
the settlement of any transaction occurs shall not negate the effect of any the
foregoing limitations and any transferee in such a transaction shall be subject
to all of the provisions and limitations described above.
These ownership limitations could delay, defer or prevent a transaction or
a change in control of the Company that might involve a premium price for the
common shares or otherwise be in the best interest of the shareholders.
Business Combinations
Under the MGCL, as applicable to Maryland real estate investment trusts,
certain "business combinations" (including certain mergers, consolidations,
share exchanges and asset transfers and certain issuances and reclassifications
of equity securities) between a Maryland real estate investment trust and any
person who beneficially owns ten percent or more of the voting power of the
trust's shares or an affiliate or associate (as defined in the MGCL) of the
trust who, at any time within the two-year period prior to the date in question,
was the beneficial owner of ten percent or more of the voting power of the then
outstanding voting shares of beneficial interest of the trust (an "Interested
Shareholder") or an affiliate of the Interested Shareholder are prohibited for
five years after the most recent date on which the Interested Shareholder
becomes an Interested Shareholder. Thereafter, any such business combination
must be recommended by the board of trustees of such trust and approved by the
affirmative vote of at least (a) 80% of the votes entitled to be cast by holders
of outstanding voting shares of beneficial interest of the trust and (b)
two-thirds of the votes entitled to be cast by holders of voting shares of the
trust other than shares held by the Interested Shareholder with whom (or with
whose affiliate or associate) the business combination is to be effected,
unless, among other conditions, the trust's common shareholders receive a
minimum price (as defined in the MGCL) 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. These provisions of the MGCL 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.
The Board of Trustees of the Company has adopted a resolution that, any
"business combination" between the Company and any other person is exempted from
the provisions of the MGCL described in the preceding paragraph, provided that
such 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 (as defined in the MGCL) of such person. Such
resolution, however, may be altered or repealed, in whole or in part, at any
time by the Board of Trustees of the Trust.
Control Share Acquisitions
The MGCL, as applicable to Maryland real estate investment trusts, 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 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 such 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 (except
solely by virtue of a revocable proxy), would entitle the acquiror to exercise
voting power in electing trustees within one of the following ranges of voting
power: (1) one-fifth or more but less than one-third, (2) one-third or more but
less than a majority, or (3) a majority or more of all voting power. Control
shares do not include shares the acquiring person is then entitled to vote as a
result of having previously obtained shareholder
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approval. A "control share acquisition" means the acquisition of control shares,
subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (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 question 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,
subject to certain conditions and limitations, the trust may redeem any or all
of the control shares (except those for which voting rights have previously been
approved) for fair value determined, without regard to the absence of voting
rights for the control shares, 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 such shares are considered and not approved. 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 such appraisal rights may not be less than the
highest price per share paid by the acquiror in the control share acquisition.
The control share acquisition statute does not apply (a) to shares acquired
in a merger, consolidation or share exchange if the trust is a party to the
transaction or (b) to acquisitions approved or exempted by a provision in the
declaration of trust or bylaws of the trust adopted before the acquisition of
shares.
The By-laws of the Company contain a provision exempting from the control
share acquisition statute any and all acquisitions by any person of the
Company's shares of beneficial interest. There can be no assurance that such
provision will not be amended or eliminated at any time in the future.
Amendment to the Declaration of Trust
The Declaration of Trust, including its provisions on classification of the
Board of Trustees and removal of trustees, may be amended only by the
affirmative vote of the holders of not less than two thirds of all of the votes
entitled to be cast on the matter. Under the Maryland REIT statute, a real
estate investment trust generally cannot dissolve, amend its declaration of
trust or merge, unless approved by the affirmative vote of shareholders holding
at least two-thirds of the shares entitled to vote on the matter unless a lesser
percentage (but not less than a majority of all of the votes entitled to be cast
on the matter) is set forth in the real estate investment trust's declaration of
trust. The Company's Declaration of Trust does not provide for a lesser
percentage in such situations. 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
Code or the Maryland REIT statute without the affirmative vote or written
consent of the shareholders. The Company's Declaration of Trust permits such
action by the Board of Trustees.
Dissolution of the Company
Pursuant to the Company's Declaration of Trust, the dissolution of the
Company must be approved by a majority of the entire Board of Trustees and by
the affirmative vote of the holders of not less than two thirds of all of the
votes entitled to be cast on the matter.
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Anti-takeover Effect of Certain Provisions of Maryland Law and of the
Declaration of Trust and By-laws
The business combination provisions and, if the applicable provision in the
By-laws is rescinded, the control share acquisition provisions of the MGCL, the
provisions of the Declaration of Trust on classification of the Board of
Trustees and removal of trustees and the advance notice provisions of the
By-laws could delay, defer or prevent a transaction or a change in control of
the Company that might involve a premium price for holders of common shares or
otherwise be in their best interest.
DESCRIPTION OF THE SECURITIES
The following is a summary of the terms of the shares of beneficial
interest of the Company. Because it is a summary, it does not contain all the
information that may be important to you in making an investment decision. If
you want more information, you should read the entire Declaration of Trust and
the By-laws of the Company, copies of which are exhibits to the registration
statement of which this prospectus is a part.
General
The Declaration of Trust provides that the Company may issue up to 50
million shares of beneficial interest, $.01 par value per share, all of which
have been classified as common shares. Upon completion of this offering and the
concurrent offering to Messrs. Martin and Portnoy, 37,624,760 common shares will
be issued and outstanding.
As permitted by the Maryland REIT statute, the Declaration of Trust
contains a provision permitting the Board of Trustees, without any action by the
shareholders of the Company, to amend the Declaration of Trust to increase or
decrease the aggregate number of shares of beneficial interest or the number of
shares of any class of shares of beneficial interest that the Company has
authority to issue. The Declaration of Trust also authorizes the Board of
Trustees to reclassify any unissued shares into other classes or series of
classes of beneficial interest (including a reclassification of common shares
into preferred shares and of preferred shares into common shares), and to
establish the number of shares in each class or series and to set the
preferences, conversion and other rights, voting powers, restrictions,
limitations as to distributions, qualifications or terms or conditions of
redemption for each such class or series.
Common Shares
All common shares offered hereby will be duly authorized, fully paid and
nonassessable. Subject to the preferential rights of any other class or series
of beneficial interest and to the provisions of the Declaration of Trust
regarding the restriction of the transfer of shares of beneficial interest,
holders of common shares are entitled to receive distributions on such shares
if, as and when authorized and declared by the Board of Trustees of the Company
out of assets legally available therefor and to share ratably in the assets of
the Company 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 known debts and liabilities of the Company.
Subject to the provisions of the Declaration of Trust regarding the
restriction of 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, and, except as provided
with
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respect to any other class or series of shares, the holders of such shares will
possess the exclusive voting power. There is no cumulative voting in the
election of trustees, which means that the holders of a majority of the
outstanding common shares can elect all of the trustees then standing for
election and the holders of the remaining shares will not be able to elect any
trustees.
Holders of common shares have no preference, conversion, exchange, sinking
fund, redemption or (subject to the listing of the common shares on the NYSE or
another national securities exchange or its designation as a national market
security on NASDAQ) appraisal rights and have no preemptive rights to subscribe
for any securities of the Company. Subject to the provisions of the Declaration
of Trust regarding the restriction on transfer of shares of beneficial interest,
common shares will have equal distribution, liquidation and other rights.
Under the Maryland REIT statute, a Maryland real estate investment trust
generally cannot dissolve, amend its declaration of trust or merge, unless
approved by the affirmative vote of shareholders holding at least two thirds of
the shares entitled to vote on the matter unless a lesser percentage (but not
less than a majority of all of the votes entitled to be cast on the matter) is
set forth in the trust's Declaration of Trust. The Declaration of Trust of the
Company does not provide for a lesser percentage in such situations. 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 REIT under the Code or the Maryland REIT statute without the affirmative
vote or written consent of the shareholders. The Company's Declaration of Trust
permits such action by the Board of Trustees.
Power to Issue Additional Common Shares
The Company believes that the power of the Board of Trustees to issue
additional authorized but unissued common shares and to classify or reclassify
unissued shares and thereafter to cause the Company to issue such classified or
reclassified shares of beneficial interest will provide the Company with
increased flexibility in structuring possible future financings and acquisitions
and in meeting other needs which might arise. The additional classes or series,
as well as the common shares, will be available for issuance without further
action by the Company's shareholders, unless such action is required by
applicable law or the rules of any stock exchange or automated quotation system
on which the Company's securities may be listed or traded. Although the Board of
Trustees has no intention at the present time of doing so, it could authorize
the Company to issue a class or series that could, depending upon the terms of
such class or series, delay, defer or prevent a transaction or a change in
control of the Company that might involve a premium price for holders of common
shares or otherwise be in their best interest.
Restriction on Transfer of Shares
The Declaration of Trust provides certain restrictions on the amount of
shares which individual shareholders may own. Those restrictions are described
above under the caption "Certain Provisions of Maryland Law and of the Company's
Declaration of Trust and By-laws".
Transfer Agent and Registrar
The transfer agent and registrar for our common shares is_________.
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PRINCIPAL SHAREHOLDERS
The following table displays information regarding the beneficial ownership
of the common shares by (1) each person we know to own beneficially more than 5%
of the outstanding common shares, (2) each of our Trustees and (3) all of our
Trustees and executive officers as a group. Unless otherwise noted, each person
or entity has sole voting and investment power with respect to all common shares
shown.
<TABLE>
<CAPTION>
Beneficial Ownership Beneficial Ownership
Before Offering After Offering
-------------------------- -------------------------
Number Number
Name and Address(1) of Shares Percent of Shares Percent(2)
- ---------------- --------- ------- --------- -------
<S> <C> <C> <C> <C>
HRPT Properties Trust.......................... 26,374,760 100% 13,187,380 35%
Barry M. Portnoy(3)............................ -- -- 13,650,817 36%
Gerard M. Martin(3)............................ -- -- 13,650,817 36%
Bruce M. Gans, M.D............................. -- -- 650 *
Arthur G. Koumantzelis......................... -- -- 804 *
Vacant......................................... -- -- 500 *
David J. Hegarty............................... -- -- 2,070 *
Ajay Saini..................................... -- -- 1,100 *
All Trustees and executive officers as a
group (seven persons).......................... -- -- 13,655,941 36%
- ------------------------------------
<FN>
* Less than 1%.
(1) The address of HRPT Properties Trust 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) Assumes no exercise of the underwriters' over-allotment option.
(3) Messrs. Portnoy and Martin are each managing trustees of HRP. Accordingly, Messrs. Portnoy and Martin may be deemed
to have beneficial ownership of the shares indicated in the table as owned by HRP. In addition, Messrs. Portnoy and
Martin indirectly own 463,437 common shares.
</FN>
</TABLE>
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FEDERAL INCOME TAX CONSIDERATIONS
The following discussion of federal income tax considerations is based on
existing law, is limited to investors who will hold our common shares as an
investment asset (rather than as inventory or as property used in a trade or
business), is not exhaustive of all possible tax considerations, and does not
discuss any state, local, or foreign tax considerations. Additionally, the
following summary does not discuss the particular tax consequences that might be
relevant to you if you are subject to special rules under the federal income tax
law, for example if you are a life insurance company, a regulated investment
company, a financial institution, a broker or dealer in securities or foreign
currency, a person that has a functional currency other than the U.S. dollar, a
person who acquires common shares or options to acquire common shares in
connection with their employment or other performance of services, a person
subject to alternative minimum tax, a person who holds common shares as part of
a straddle, hedging transaction, or conversion transaction or, except as
specifically described in the following summary, a tax-exempt entity or a
foreign person.
The sections of the Tax Code that govern the federal income tax
qualification and treatment of a REIT and its shareholders are highly technical
and complex. The following summary is thus qualified in its entirety by the
applicable Tax Code provisions, the rules and regulations promulgated under such
Tax Code provisions, and the administrative and judicial interpretations of the
Tax Code and its rules and regulations, all of which are subject to change,
possibly with retroactive effect. Future legislative, judicial, or
administrative actions or decisions could affect the accuracy of statements made
in this summary. In addition, no ruling has been sought from the IRS with
respect to any matter described in this summary, and there can be no assurance
that the IRS or a court will agree with the statements made in this summary.
Accordingly, we urge you to consult your own tax advisor with respect to the
federal income tax and other tax consequences of the purchase, holding and sale
of our common shares.
Taxation as a REIT
We will elect to be taxed as a REIT under Sections 856 through 860 of the
Tax Code, commencing with our initial taxable year ending December 31, 1999. To
qualify as a REIT, we must also meet other requirements, which are discussed
below. Our REIT election, assuming continuing compliance with the federal income
tax qualification tests summarized below, will continue in effect for subsequent
taxable years.
We believe that we will be organized and will operate in a manner that
qualifies us to be taxed under the Tax Code as a REIT commencing with our
initial taxable year ending December 31, 1999, and we intend to continue to
operate in a manner to so qualify. No assurance can be given, however, that the
manner in which we will operate will qualify us to be taxed as a REIT. For
periods ending on or before the date we cease to be wholly owned by HRP, we and
our subsidiaries were at all times qualified REIT subsidiaries of HRP under
Section 856(i) of the Tax Code (or equivalently, noncorporate entities that were
part of HRP pursuant to regulations under Section 7701 of the Tax Code), and
thus during such periods we and our subsidiaries were not taxpayers separate
from HRP for federal income tax purposes. Instead, pursuant to the Transaction
Agreement, the federal income tax liabilities and federal income tax filings in
respect of our and our subsidiaries' operations and assets through the date we
cease to be wholly owned by HRP are solely the responsibility of HRP.
We have obtained a legal opinion from our counsel Sullivan & Worcester LLP
that we have been organized in conformity with the requirements for
qualification as a REIT under the Tax Code commencing with our taxable year
ending December 31, 1999 and that our current and anticipated investments and
our plan of operation will enable us to continue to meet the requirements for
qualification and taxation as a REIT under the Tax Code. This opinion is
conditioned upon the
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assumption that our leases, our Declaration of Trust and By-laws, and all other
legal documents to which we are or have been a party have been and will be
complied with by all parties to such documents, upon the accuracy and
completeness of the factual matters described in this prospectus, and upon
representations made by us as to certain factual matters relating to our
organization and operations and our expected manner of operation. In addition,
the opinion of Sullivan & Worcester LLP is 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 either the Internal Revenue Service or a
court, and the IRS or a court could take a position different from that
expressed by counsel.
Our actual qualification and taxation as a REIT will depend upon our
ability to meet on a continuing basis (through actual operating results, asset
composition, distribution levels and diversity of stock ownership) the various
REIT qualification tests imposed under the Tax Code and summarized below. While
we have represented that we plan to operate in a manner to satisfy on a
continuing basis the various REIT qualification tests, Sullivan & Worcester LLP
has not reviewed and will not review our compliance with these tests on a
continuing basis, and thus no assurance can be given that we will satisfy these
tests on a continuing basis. If we fail to qualify as a REIT in any year, we
will be subject to federal income taxation as if we were a domestic corporation,
and our shareholders will be taxed in the same manner as shareholders of
ordinary corporations. In such an event, we could be subject to potentially
significant tax liabilities, and therefore the amount of cash available for
distribution to our shareholders would be reduced or eliminated.
If we qualify for taxation as a REIT and distribute to our shareholders at
least 95% of our "real estate investment trust taxable income" (computed by
excluding any net capital gain and before taking into account any dividends paid
deduction for which we are eligible), we generally will not be subject to
federal corporate income taxes on the amount distributed. This deduction for
dividends paid to shareholders substantially eliminates the federal double
taxation on corporate earnings (once at the corporate level and again at the
shareholder level upon a dividend distribution) that generally results from an
investment in an ordinary corporation.
However, even if we qualify for federal income taxation as a REIT, we may
be subject to federal tax in certain circumstances:
o We will be taxed at regular corporate rates on any undistributed "real
estate investment trust taxable income," including our undistributed
net capital gains.
o Under certain circumstances, we may be subject to the corporate
alternative minimum tax on our items of tax preference, if any.
o If we have (1) net income from the sale or other disposition of
"foreclosure property" (generally, property acquired by us through
foreclosure or otherwise after a default on a loan secured by the
property or on a lease of the property) that is held primarily for sale
to customers in the ordinary course of business or (2) other
nonqualifying income from foreclosure property, then we will be subject
to tax on such income at the highest regular corporate rate (currently
35%).
o If we have net income from prohibited transactions (generally, certain
sales or other dispositions of inventory or property held primarily for
sale to customers in the ordinary course of business, other than
foreclosure property), then that income will be subject to tax at a
100% rate.
o If we should fail to satisfy the 75% gross income test or the 95% gross
income test (both of which are discussed below), but nonetheless
maintain our qualification as a REIT because certain other requirements
are met, we will be subject to tax at a 100% rate on the greater of the
amount
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by which we fail the 75% or the 95% test, multiplied by a fraction
intended to reflect our profitability.
o If we should fail to distribute for any calendar year at least the sum
of (1) 85% of our REIT ordinary income for that year, (2) 95% of our
REIT capital gain net income for that year, and (3) any undistributed
taxable income from prior periods, then we will be subject to a 4%
excise tax on the excess of the required distribution over the amounts
actually distributed.
o If we acquire any asset from a C corporation (generally, a corporation
subject to full corporate level tax) in a transaction in which our
basis in the asset is determined by reference to the basis of the asset
in the hands of the C corporation, and if we subsequently recognize
gain on the disposition of such asset during the ten-year period
beginning on the date on which the asset was acquired by us, then we
will pay tax at the highest regular corporate tax rate (currently 35%)
on the lesser of (1) the excess of the fair market value of the asset
over our basis in the asset on the date acquired by us and (2) the gain
recognized by us in the disposition.
If we should invest in properties in foreign countries, our profits from
such 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 we satisfy the
annual distribution requirements for federal income tax qualification as a REIT
and are therefore not subject to federal corporate income tax on that portion of
our ordinary income and capital gain that is currently distributed to our
shareholders, we will generally not be able to recover the cost of any foreign
tax imposed on profits from our foreign investments by claiming foreign tax
credits against our federal income tax liability on those profits. Moreover, as
a REIT under the Tax Code, we will be unable to pass through to our shareholders
any foreign tax credits.
If we fail to qualify for federal income taxation as a REIT in any taxable
year, and any potentially applicable relief provisions do not apply, then we
will be subject to tax on our taxable income at regular corporate rates (plus
any applicable corporate alternative minimum tax). Distributions to our
shareholders in any year in which we fail to qualify as a REIT will not be
deductible by us, nor will these distributions be required to be made. In that
event, to the extent of our current and accumulated earnings and profits, all
distributions to our shareholders will be taxable as ordinary dividend income,
and subject to certain limitations in the Tax Code will be eligible for the
dividends received deduction for corporations. Unless entitled to relief under
specific statutory provisions, we will also be disqualified from federal income
taxation as a REIT for the following four taxable years. It is not possible to
state whether in all circumstances we would be entitled to statutory relief from
such disqualification. Also, failure to qualify for even one year could result
in our incurring substantial indebtedness (to the extent borrowings are
feasible) or liquidating substantial investments in order to pay the resulting
corporate- level taxes.
REIT Qualification Requirements
General Requirements. Section 856(a) of the Tax 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 common
shares or by transferable certificates of beneficial interest;
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(3) that would be taxable, but for Sections 856 through 859 of the Tax
Code, as an ordinary domestic corporation;
(4) that is neither a financial institution nor an insurance company
subject to certain special provisions of the Tax 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 applied with modifications described
below); and
(7) that meets certain other tests regarding income, assets and
distributions, all as described below.
Section 856(b) of the Tax Code provides that conditions (1) to (4), inclusive,
must be met during the entire taxable year and that condition (5) must be met
during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than 12 months. We believe that we
will satisfy conditions (1) to (4), inclusive, at all times during our taxable
year ending December 31, 1999, and that we will continue to satisfy those
conditions at all times thereafter. We also believe that we will have at least
100 shareholders during the requisite period for each of our taxable years
commencing with our taxable year ending December 31, 1999. There can, however,
be no assurance in this regard. If we have fewer than 100 shareholders during
the requisite period, then condition (5) described above will not be satisfied,
and we would not qualify as a REIT during that taxable year.
By reason of the "closely held" condition (6) above, we will fail to
qualify as a REIT for a taxable year if at any time during the last half of such
year more than 50% in value of our outstanding common shares is owned directly
or indirectly by five or fewer individuals. To help comply with condition (6),
our Declaration of Trust contains certain provisions restricting transfers of
our common shares and giving the Trustees the power to redeem our common shares
involuntarily; similarly, for the purpose of HRP maintaining its own
qualification as a REIT under the Tax Code, HRP's declaration of trust contains
similar provisions that limit concentrated ownership of beneficial interests in
HRP. In addition, if we comply with applicable Treasury regulations for
ascertaining the ownership of our outstanding common shares and do not know (or
exercising reasonable diligence would not have known) whether we failed
condition (6), then we will be treated as satisfying condition (6). Also, our
failure to comply with these applicable Treasury regulations for ascertaining
ownership of our outstanding common shares may result in a penalty of $25,000
($50,000 for intentional violations). Accordingly, we will comply with these
applicable Treasury regulations, and request annually from record holders of
certain significant percentages of our common shares certain information
regarding the ownership of our common shares. Under our Declaration of Trust,
our 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 common shares is owned directly or indirectly by five or fewer
individuals is relaxed in the case of certain pension trusts owning common
shares in a REIT. Common 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 the REIT is a "pension-held REIT," each pension trust
holding more than 10% of the REIT's common shares (by value) generally will be
taxed on a portion of the dividends received from the REIT, based on the ratio
of (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.
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Our Wholly-Owned Subsidiaries. Section 856(i) of the Tax Code provides that
a corporation that is a qualified REIT subsidiary (defined as any corporation
100% of whose stock is held by the REIT) shall not be treated as a separate
corporation. Instead all assets, liabilities, and items of income, deduction,
and credit of a qualified REIT subsidiary are treated as assets, liabilities and
items of income, deduction, and credit of the REIT. We believe that each of our
direct and indirect wholly-owned subsidiaries qualifies either as a qualified
REIT subsidiary within the meaning of Section 856(i) of the Tax Code, or as a
noncorporate entity that for federal income tax purposes is not treated as
separate from its owner pursuant to regulations under Section 7701 of the Tax
Code. Thus, in applying all the federal income tax REIT qualification
requirements described in this summary, our direct and indirect wholly-owned
subsidiaries are ignored, and all assets, liabilities and items of income,
deduction and credit of those subsidiaries are treated as our assets,
liabilities and items of income, deduction and credit.
Our Investments through Partnerships. We 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 Tax 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 such partnership and is deemed to be entitled to the income of the
partnership attributable to such proportionate share. In addition, for these
purposes, the character of the assets and gross income of the partnership
generally retain the same character in the hands of the REIT. Accordingly, our
proportionate share of the assets, liabilities, and items of income of each
partnership in which we are a partner are treated as our assets, liabilities,
and items of income for purposes of the income tests and asset tests discussed
below. In contrast, for purposes of the distribution requirement discussed
below, we must take into account as a partner our distributive share of the
partnership's income as determined under the general federal income tax rules
governing partners and partnerships under Section 701 et seq. of the Tax Code.
Income Tests. There are two gross income requirements applicable to our
Company. First, at least 75% of our gross income (excluding gross income from
certain sales of property held primarily for sale) must be derived directly or
indirectly from investments relating to real property (including "rents from
real property" as defined under Section 856 of the Tax Code), mortgages on real
property, or common shares in other REITs. When we receive new capital in
exchange for our common shares (other than distribution reinvestment amounts) or
in a public offering of five-year or longer debt instruments, income
attributable to the temporary investment of such new capital in stock or a debt
instrument, if received or accrued within one year of our receipt of the new
capital, is also qualifying income under the 75% test. Second, at least 95% of
our gross income (excluding gross income from certain sales of property held
primarily for sale) must be derived from a combination of (1) real property
investments that satisfy the 75% test, (2) dividends, (3) interest, (4) certain
payments under interest rate swap or cap agreements, options, futures contracts,
forward rate agreements, or similar financial instruments, and (5) gain from the
sale or disposition of stock, securities, or real property. For purposes of
these two gross income rules, income derived from a "shared appreciation
provision" in a mortgage loan is generally treated as gain recognized on the
sale of the property to which it relates. We may temporarily invest working
capital in short-term investments, including common shares in other REITs.
Although we will use our best efforts to ensure that the income generated by our
investments will be of a type which satisfies both the 75% and 95% gross income
tests, there can be no assurance in this regard.
In order to qualify as "rents from real property" under Section 856 of the
Tax Code, several requirements must be met. First, the amount of rent received
generally must not be determined from the income or profits of any person, but
may be based on receipts or sales. Second, the Tax Code provides that rents do
not qualify if the REIT owns 10% or more of the tenant, whether directly or
after application of certain attribution rules. While we intend not to lease
property to any party if rents from
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that property would not qualify as rents from real property under Section 856 of
the Tax Code, application of the 10% ownership rule is dependent upon complex
attribution rules including circumstances that may be beyond our control. For
example, ownership (directly or by attribution) by an unaffiliated third party
of more than 10% of our common shares and more than 10% of the stock of one of
our lessees would result in such lessee's rents not qualifying as "rents from
real property." Our Declaration of Trust provides that transfers or purported
acquisitions, directly or by attribution, of common shares that could result in
our disqualification as a REIT under the Tax Code are null and void and permits
the Trustees to repurchase common shares to the extent necessary to maintain our
status as a REIT under the Tax Code. Similarly, for the purpose of HRP
maintaining its own qualification as a REIT under the Tax Code, HRP's
declaration of trust contains provisions that limit concentrated ownership of
beneficial interests in HRP. Furthermore, the Transaction Agreement provides
that HRP will not acquire more than 9.8% of the equity in any of our tenants or
take other actions that may jeopardize our REIT status under the Tax Code, for
so long as HRP owns more than 9.8% of our common stock. Nevertheless, there can
be no assurance that such provisions in our and HRP's declarations of trust and
in the Transaction Agreement will be effective to prevent our REIT status under
the Tax Code from being jeopardized under the 10% lessee affiliate rule.
Furthermore, there can be no assurance that we will be able to monitor and
enforce these restrictions, nor will our shareholders necessarily be aware of
shareholdings attributed to them under the Tax Code's attribution rules. Third,
in order for its rents to qualify as "rents from real property" under Section
856 of the Tax Code, we generally must not manage the property or furnish or
render services to the tenants of such property, except through an independent
contractor from whom we derive no income. There is an exception to this rule
permitting a REIT to perform certain customary tenant services of the sort which
a tax-exempt organization could perform without being considered in receipt of
"unrelated business taxable income" as defined in Section 512(b)(3) of the Tax
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 of the property.
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 such rent attributable to personal property will qualify as "rents
from real property" under Section 856 of the Tax Code; but 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 property (both real and personal) which is rented.
Substantially all of our gross income is expected to be attributable to rental
income. We believe that all or substantially all our rents will qualify as
"rents from real property" for purposes of Section 856 of the Tax Code, but if
for some reason a significant amount of our rents do not so qualify, it may be
difficult or impossible for us to meet the 95% or 75% gross income tests and to
qualify as a REIT for federal income tax purposes.
In order to qualify as mortgage interest on real property for purposes of
the 75% test, interest must derive from a mortgage loan secured by real property
with a fair market value at least equal to the amount of the loan. If the amount
of the loan exceeds the fair market value of the real property, the interest
will be treated as interest on a mortgage loan in a ratio equal to the ratio of
the fair market value of the real property to the total amount of the mortgage
loan.
Any gain realized by us 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 our ability to satisfy the 75% and 95% gross income tests
for federal income tax qualification as a REIT. Under existing law, whether
property is held as inventory or primarily for sale to customers in the ordinary
course of a trade or business is a question of fact that depends on all the
facts and circumstances with respect to the particular transaction. We intend to
(1) hold our real estate assets for investment with a view to long-term income
production and capital appreciation, (2) engage in
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the business of developing, owning and operating our existing real estate assets
and acquiring, developing, owning and operating other real estate assets, and
(3) make occasional dispositions of real estate assets as is consistent with our
investment objectives. We believe that any occasional disposition of real estate
that we might make will not be subject to the 100% penalty tax. But because of
the highly factual nature of the inquiry, we cannot provide assurances as to
whether or not the IRS might successfully assert that one or more of our
occasional dispositions is subject to the 100% penalty tax.
If we fail to satisfy one or both of the 75% or 95% gross income tests for
any taxable year, we may nevertheless qualify as a REIT for that year if (1) our
failure to meet the test was due to reasonable cause and not due to willful
neglect, (2) we reported the nature and amount of each item of our income
included in the 75% or 95% gross income tests (as the case may be) for that
taxable year on a schedule attached to our tax return, and (3) 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 we would be entitled to the
benefit of this relief provision for the 75% and 95% gross income tests. As
discussed above, even if this relief provision did apply to us, a special tax
equal to 100% is imposed upon the greater of the amount by which we failed the
75% test or the 95% test, multiplied by a fraction intended to reflect our
profitability.
Asset Tests. At the close of each quarter of each taxable year, we must
also satisfy three percentage tests relating to the nature of our assets. First,
at least 75% of the value of our total assets must consist of real estate assets
(which for this purpose includes stock or debt instruments held for not more
than one year purchased with proceeds of a stock offering or a long-term (at
least five years) debt offering of ours), cash, cash items, common shares in
other REITs, and government securities. Second, not more than 25% of our total
assets may be represented by securities (other than those securities that count
favorably toward the preceding 75% asset test). Third, of the investments
included in the preceding 25% asset class, the value of any one issuer's
securities owned by us may not exceed 5% of the value of our total assets, and
we 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. We intend to maintain records of the value of our assets to
document our 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.
Annual Distribution Requirements. In order to qualify for taxation as a
REIT under the Tax Code, we are required to make distributions (other than
capital gain dividends) to our shareholders each year in an amount at least
equal to the excess of (A) the sum of (1) 95% of our "real estate investment
trust taxable income" (as defined in Section 857 of the Tax Code, but computed
without regard to the dividends paid deduction and net capital gain) and (2) 95%
of our net income (after tax), if any, from certain property received in
foreclosure, over (B) the sum of certain noncash income of ours (e.g., certain
imputed rental income or certain income from transactions inadvertently failing
to qualify as like-kind exchanges). Such distributions must be paid in the
taxable year to which they relate, or in the following taxable year if declared
before we timely file our tax return for the earlier taxable year and if paid on
or before the first regular distribution payment after that declaration. Also,
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. A distribution which is not pro rata within a class of beneficial
interests in our Company entitled to a distribution, or which is not consistent
with the rights to distributions between classes of beneficial interests in our
Company, is a preferential distribution that is not taken into consideration for
purposes of the distribution requirement, and accordingly the payment of a
preferential distribution could affect our ability to meet the distribution
requirement. Taking into account our distribution policies (including any
dividend reinvestment plan we may adopt), we expect that we will never pay 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 distribution
previously made to meet the
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requirements of the 4% excise tax discussed below. To the extent that we do not
distribute all of our net capital gain and all of our real estate investment
trust taxable income, as adjusted, we will be subject to tax on undistributed
amounts.
In addition, we will be subject to a 4% excise tax to the extent we fail
within a calendar year to make required distributions to our shareholders of 85%
of our ordinary income and 95% of our 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 our 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.
It is possible that from time to time we may not have sufficient cash or
other liquid assets to meet the 95% distribution requirements due to timing
differences between (1) the actual receipt of income and the actual payment of
deductible expenses or distributions and (2) the inclusion of income and the
deduction of expenses or distributions in computing our real estate investment
trust taxable income. The problem of inadequate cash to make required
distributions could also occur as a result of the repayment in cash of principal
amounts due on our outstanding debt, particularly in the case of balloon
repayments or as a result of capital losses on short-term investments of working
capital. In any of these circumstances, we might find it necessary to arrange
for short-term or possibly long-term borrowing, or for new equity financing, to
provide funds for required distributions, or else our REIT status for federal
income tax purposes could be jeopardized. We can provide no assurance that such
borrowing or financing would be available for these purposes or available on
favorable terms.
Under certain circumstances, we may be able to rectify a failure to meet
the distribution requirement for a year by paying "deficiency dividends" to
shareholders in a later year, which may be included in our deduction for
dividends paid for the earlier year, although an interest charge would be
imposed upon us for the delay in distribution. Although we may be able to avoid
being taxed on amounts distributed as deficiency dividends, we may in certain
such circumstances remain liable for the 4% excise tax discussed above.
Federal Income Tax Treatment of Leases
We will be entitled to depreciation deductions from our facilities only if
we are treated for federal income tax purposes as the owner of the facilities,
and if the leases of the facilities are classified for federal income tax
purposes as true leases, rather than as sales or financing arrangements. As to
approximately five to ten percent of our leased facilities which constitute
personal property, it is not entirely clear that we will be treated as the owner
of such personal property and that the leases will be treated as true leases
with respect to such property. We plan to ensure our compliance with the 95%
distribution requirements (and the excise tax required distribution requirement)
by making distributions on the assumption that we are not entitled to
depreciation deductions for the portion of our leased facilities which
constitute personal property, but to perform all our tax reporting by taking
into account personal property depreciation.
In the case of certain sale-leaseback arrangements, the IRS could assert
that we realized prepaid rental income in the year of purchase to the extent
that the value of a leased property exceeds the purchase price paid by us for
that property. In litigated cases involving sale-leasebacks which have
considered this issue, courts have concluded that buyers have realized prepaid
rent where both parties acknowledged that the purported purchase price for the
property was substantially less than fair market value and the purported rents
were substantially less than the fair market rentals. Because of the lack of
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clear precedent, we cannot provide assurances as to whether or not the IRS might
successfully assert the existence of prepaid rental income.
Additionally, Section 467 of the Tax Code (concerning leases with
increasing rents) may apply to certain of our leases because they provide for
rents that increase from one period to the next. Section 467 of the Tax 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, we 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. Because Section 467 of the Tax Code directs
the Treasury to issue regulations providing that rents will not be treated as
increasing for tax avoidance purposes where the increases are based upon a fixed
percentage of lessee receipts, and because regulations proposed to be effective
for "disqualified leaseback agreements" entered into after June 3, 1996 adopt
this rule, the additional rent provisions in our leases that are based on a
fixed percentage of lessee receipts generally should not cause the leases to be
"disqualified leaseback agreements." In addition, the legislative history of
Section 467 of the Tax Code indicates that the Treasury should issue regulations
under which leases providing for fluctuations in rents by no more than a
reasonable percentage from the average rent payable over the term of the lease
will be deemed not motivated by tax avoidance, and the proposed regulations
permit a 10% fluctuation.
Depreciation of Properties
For federal income tax purposes, including for purposes of computing our
earnings and profits (which computation affects the amount of our distributions
that are taxable as dividends to our shareholders, as described in subsequent
sections of this summary), our depreciation deductions for the properties we
owned while we were still a wholly owned subsidiary of HRP will be as follows.
Under one interpretation of applicable Tax Code provisions, our initial tax
basis in these properties will be their fair market value determined as of the
date we cease to be wholly owned by HRP. However, under an alternate
interpretation of these applicable Tax Code provisions, our initial tax basis in
these properties will be the lesser of (1) this fair market value or (2) the sum
of (A) the adjusted tax basis in the properties while we were still a part of
HRP for federal income tax purposes, and (B) the then outstanding balance of
principal and accrued interest on the $250 million loan owed by us to HRP. Even
if this alternate interpretation of the applicable Tax Code provisions is
correct, we anticipate that the fair market value of the subject properties on
the relevant date would be less than the amount described in the preceding
clause (2), so that our initial tax basis in these properties would in any event
be their fair market value determined as of the date we cease to be wholly owned
by HRP. Because of the factual nature of valuation issues, our tax counsel
Sullivan & Worcester LLP is not rendering an opinion on the fair market value of
our properties on the date we cease to be wholly owned by HRP.
Assuming that the first interpretation of the applicable Tax Code
provisions described in the preceding paragraph is correct, we should generally
depreciate the initial fair market value tax basis of the subject properties on
a straight-line basis over 40 years with respect to the realty and over 12 years
with respect to the personalty. In contrast, if the alternate interpretation of
these applicable Tax Code provisions is correct, then we should depreciate the
tax basis in the subject properties in a bifurcated manner: (1) to the extent of
the adjusted tax basis in these properties while we were still a part of HRP for
federal income tax purposes, we should generally carry over the depreciation
methodology then in use (generally straight-line) over the years then remaining
in the depreciation periods for these properties (which would generally be fewer
than 40 years for the realty and fewer than 12 years for the personalty), plus
(2) as to any increment in our tax basis in these properties as a result of our
ceasing to be wholly owned by HRP, depreciation of the increment would generally
be on a straight-line basis over 40 years with respect to the realty and over 12
years with respect to the personalty. In general, as compared to the
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first possible interpretation of the applicable Tax Code provisions, the
alternate interpretation results in accelerated depreciation deductions both for
federal income tax purposes and for earnings and profits purposes. Until we
obtain clear guidance on the proper interpretation of the applicable Tax Code
provisions (perhaps through subsequent clarification of the law, or perhaps
through our obtaining an IRS private letter ruling if we choose to pursue one),
(1) we plan to ensure our compliance with the 95% distribution requirements and
the excise tax required distribution requirement, both described in earlier
sections of this summary, by making distributions on the assumption that, in any
given taxable year, we are only entitled to the lesser of the two possible
interpretations' aggregate depreciation deductions, and (2) we intend to perform
all our tax reporting on the basis of the more conservative depreciation
methodology dictated by the first interpretation of the applicable Tax Code
provisions.
For properties that we acquire after we are no longer wholly owned by HRP,
we expect that for federal income tax purposes (including for purposes of
computing our earnings and profits), (1) our initial tax basis in such acquired
properties will generally be our acquisition cost for such properties, and (2)
we will generally depreciate our real property on a straight-line basis over 40
years and our personal property over 12 years. These results may vary for
properties we acquire through tax-free or other carryover basis acquisitions.
Taxation of U.S. Shareholders
Generally. As used in this summary, the term "U.S. Shareholder" means a
beneficial holder of our common shares that is for federal income tax purposes:
(1) a citizen or resident of the United States,
(2) a corporation or partnership (or other entity treated as a corporation
or partnership for federal income tax purposes) created or organized
in or under the laws of the United States, any state thereof or the
District of Columbia (unless otherwise provided by Treasury
regulations),
(3) an estate the income of which is subject to federal income taxation
regardless of its source, or
(4) a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or
more United States persons have the authority to control all
substantial decisions of the trust (or certain electing trusts in
existence on August 20, 1996 to the extent provided in Treasury
regulations).
As used in this summary, the term "Non-U.S. Shareholder" means a beneficial
holder of our common shares that is not a U.S. Shareholder.
As long as we qualify as a REIT for federal income tax purposes,
distributions made to our U.S. Shareholders out of current or accumulated
earnings and profits will be taken into account by them as ordinary dividend
income (but will not be eligible for the dividends received deduction for
corporations). Distributions that are properly designated by us as capital gain
dividends will be taxed as long-term capital gains (as discussed below) to the
extent they do not exceed our actual net capital gain for the taxable year,
though corporate U.S. Shareholders may be required to treat up to 20% of any
capital gain dividend as ordinary income pursuant to Section 291 of the Tax
Code. In addition, we may elect to retain amounts representing our net capital
gain income. In that case, (1) we will be taxed at regular corporate capital
gains tax rates on retained amounts, (2) each U.S. Shareholder will be taxed on
its proportionate share of the net capital gains retained by us as though that
amount were distributed and designated a capital gain dividend, (3) each U.S.
Shareholder will receive a credit for a proportionate share of the tax paid by
us, (4) each U.S. Shareholder will increase its adjusted basis in our common
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shares by the excess of the amount of its proportionate share of these net
capital gains over its proportionate share of the tax paid by us, and (5) both
we and our corporate U.S. Shareholders will make commensurate adjustments in our
respective earnings and profits for federal income tax purposes. If we should
elect to retain our net capital gain in this fashion, we will notify each U.S.
Shareholder of the relevant tax information within 60 days after the close of
the affected taxable year.
For certain noncorporate U.S. Shareholders, long-term capital gains are
taxed at varying maximum rates of 20% or 25%, depending upon the type of
property disposed of and the previously claimed depreciation with respect to
such property at the time of disposition. If we designate a dividend as a
capital gain dividend (or elect to retain a portion of our net capital gain and
have that amount treated as a distributed and designated capital gain dividend
in the manner described above), we will also designate the portion of the
capital gain dividend that is to be taxed to certain noncorporate U.S.
Shareholders at the varying maximum rates of 20% or 25%.
Distributions in excess of current or accumulated earnings and profits will
not be taxable to a U.S. Shareholder to the extent that they do not exceed the
adjusted basis of the U.S. Shareholder's common shares, but will reduce the U.S.
Shareholder's basis in our common shares. To the extent that our distributions
exceed the adjusted basis of a U.S. Shareholder's common shares, they will be
included in income as long-term capital gain (or short-term capital gain if the
common shares have been held for one year or less), with long-term gain
generally taxed to certain noncorporate U.S. Shareholders at a maximum rate of
20%. U.S. Shareholders may not include in their respective income tax returns
any of our net operating losses or any of our capital losses.
Dividends declared by us 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, provided we actually pay such dividends
during the following January.
The sale or exchange of common shares will result in recognition of gain or
loss to the U.S. Shareholder in an amount equal to the difference between the
amount realized and the U.S. Shareholder's adjusted basis in the common shares
sold or exchanged. Any gain or loss will be capital gain or loss, and will be
long-term capital gain or loss if the U.S. Shareholder's holding period in the
common shares exceeds one year. Long-term capital gains will generally be taxed
to certain noncorporate U.S. Shareholders at a maximum rate of 20%. In addition,
any loss upon a sale or exchange of common shares by a U.S. Shareholder who has
held our common shares for not more than six months (this holding period
determined after applying certain rules under Section 857 of the Tax Code) will
generally be treated as a long-term capital loss to the extent of our
distributions required to be treated by such U.S. Shareholder as long-term
capital gain (including, for this purpose, amounts constructively distributed as
long-term capital gain by virtue of us electing to retain our net capital gain
in the manner described above).
U.S. Shareholders (other than certain corporations) who borrow funds to
finance their acquisition of our common shares could be limited in the amount of
deductions allowed for the interest paid on the indebtedness incurred in such an
arrangement. Under Section 163(d) of the Tax Code, interest paid or accrued on
indebtedness incurred or continued to purchase or carry property held for
investment is generally deductible only to the extent of the investor's net
investment income. A U.S. Shareholder's net investment income will include
ordinary income dividend distributions and, if an appropriate election is made
by such U.S. Shareholder, capital gain dividend distributions received from us;
however, distributions treated as a nontaxable return of the U.S. Shareholder's
basis will not enter into the computation of net investment income. Under
Section 469 of the Tax Code, U.S. Shareholders (other than certain corporations)
generally will not be entitled to deduct losses from so-called passive
activities except to the extent of their income from passive activities. For
purposes of these rules, distributions
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received by a U.S. Shareholder from us will not be treated as income from a
passive activity and thus will not be available to offset a U.S. Shareholder's
passive activity losses.
Tax preference and other items 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 would require tax preference items to
be allocated to our shareholders with respect to any accelerated depreciation
claimed by us; however, we do not expect to claim accelerated depreciation with
respect to our properties.
Taxation of Certain Tax-Exempt U.S. Shareholders
In Revenue Ruling 66-106, the IRS ruled that amounts distributed by a REIT
to a tax-exempt employees' pension trust did not constitute "unrelated business
taxable income," even though the REIT may have financed certain of its
activities with acquisition indebtedness. Although Revenue Rulings are
interpretive in nature and subject to revocation or modification by the IRS,
based upon the analysis and conclusion of Revenue Ruling 66-106, distributions
made by us to U.S. Shareholders that are qualified pension plans (including
individual retirement accounts) or certain other tax-exempt entities should not
constitute unrelated business taxable income, unless the U.S. Shareholder has
financed the acquisition of its common shares of our Company with "acquisition
indebtedness" within the meaning of the Tax Code, or the common shares are
otherwise used in an unrelated trade or business conducted by the U.S.
Shareholder.
Special rules apply to certain tax-exempt pension trusts (including
so-called 401(k) plans but excluding individual retirement accounts or
government pension plans) that own more than 10% by value of a "pension-held
REIT" (defined below) at any time during a taxable year. A pension trust may be
required to treat a certain percentage of all dividends received from the
pension-held REIT during the year as unrelated business taxable income. This
percentage is equal to the ratio of (1) the pension-held REIT's gross income
(less direct expenses related to this income) derived from the conduct of
unrelated trades or businesses (determined as if the pension-held REIT were a
tax-exempt pension fund) to (2) the pension-held REIT's gross income (less
direct expenses related to this income) from all sources, 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 (1) the REIT is "predominantly held" (as
defined below) by tax-exempt pension trusts, and (2) 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 holds more than 25% by value of the REIT's
stock or beneficial interests, or if one or more tax-exempt pension trusts (each
owning more than 10% by value of the REIT's stock or beneficial interests) own
in the aggregate more than 50% by value of the REIT's stock or beneficial
interests. Because of the restrictions in our Declaration of Trust regarding the
ownership concentration of our common shares, and because of the restrictions in
HRP's declaration of trust regarding the ownership concentration of beneficial
interests in HRP, we believe that we will not be a pension-held REIT. However,
because our common shares will be publicly traded, we cannot completely control
whether or not we will become a pension-held REIT.
Taxation of Non-U.S. Shareholders
The rules governing the federal income taxation of Non-U.S. Shareholders
(generally, nonresident alien individuals, foreign corporations, foreign
partnerships, and foreign trusts and estates) are highly complex, and the
following discussion is intended only as a summary of the applicable rules.
Non-U.S. Shareholders should consult with their own tax advisors to determine
the impact of federal, state, local, and foreign tax laws, including any
reporting requirements, with respect to their investment in our
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common shares. In general, a Non-U.S. Shareholder will be subject to regular
federal income tax in the same manner as a U.S. Shareholder with respect to its
investment in our common shares if this investment is effectively connected with
the Non-U.S. Shareholder's conduct of a trade or business in the United States.
In addition, a corporate Non-U.S. Shareholder that receives income that is (or
is deemed) effectively connected with a trade or business in the United States
may also be subject to the 30% branch profits tax under Section 884 of the Tax
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.
Shareholders addresses only those Non-U.S. Shareholders whose investment in our
common shares is not effectively connected with the conduct of a trade or
business in the United States.
A distribution by us to a Non-U.S. Shareholder that is not attributable to
gain from the sale or exchange by us of a United States real property interest
and that is not designated by us as a capital gain dividend will be treated as
an ordinary income dividend to the extent that it is made out of current or
accumulated earnings and profits. Generally, this dividend will be subject to
federal income withholding tax on the gross amount of the payment at the rate of
30%, or a lower rate that may be specified by a tax treaty if the Non-U.S.
Shareholder has in the manner prescribed by the IRS demonstrated to us its
entitlement to benefits under a tax treaty. A distribution of cash in excess of
our earnings and profits will be treated first as a nontaxable return of capital
that will reduce a Non-U.S. Shareholder's basis in its common shares (but not
below zero) and then as gain from the disposition of these common shares, the
tax treatment of which is discussed below. A distribution in excess of our
earnings and profits may be subject to 30% (or applicable lower treaty rate)
withholding if at the time of the distribution it cannot be determined whether
the distribution will be in an amount in excess of our current and accumulated
earnings and profits. If it is subsequently determined that the distribution is,
in fact, in excess of current and accumulated earnings and profits, the Non-U.S.
Shareholder may seek a refund from the IRS. We expect to withhold federal income
withholding tax at the rate of 30% on the gross amount of any distributions on
common shares made to a Non-U.S. Shareholder unless a lower tax treaty rate
applies and the required IRS form evidencing eligibility for that reduced rate
is filed with us.
For any year in which we qualify as a REIT, our 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. Shareholder as if the distributions were gains
effectively connected with a trade or business in the United States conducted by
the Non-U.S. Shareholder. Accordingly, a Non-U.S. Shareholder will be taxed on
these amounts at the normal capital gain rates applicable to a U.S. Shareholder,
subject to any applicable alternative minimum tax and a special alternative
minimum tax in the case of nonresident alien individuals. These distributions
may also be subject to a 30% branch profits tax under Section 884 of the Tax
Code in the hands of a corporate Non-U.S. Shareholder that is not entitled to
treaty relief or exemption. We will be required to withhold from distributions
to Non-U.S. Shareholders, and remit to the IRS, 35% of the maximum amount of any
distribution that could be designated as a capital gain dividend. In addition,
for purposes of this withholding rule, if we designate prior distributions as
capital gain distributions, then subsequent distributions, up to the amount of
the prior distributions, will be treated as capital gain dividends. The amount
of any tax withheld is creditable against the Non-U.S. Shareholder's federal
income tax liability, and any amount of tax withheld in excess of that tax
liability may be refunded provided that an appropriate claim for refund is filed
with the IRS.
Tax treaties may reduce our withholding obligations. Under certain
treaties, however, rates below 30% generally applicable to dividends from United
States corporations may not apply to dividends from a REIT. If the amount of tax
withheld by us with respect to a distribution to a Non-U.S. Shareholder exceeds
the shareholder's federal income tax liability with respect to that
distribution, the Non-U.S. Shareholder may file with the IRS for a refund. In
this regard, it should be noted that the 35% withholding tax rate on capital
gain dividends corresponds to the maximum income tax rate applicable to
corporate Non-U.S. Shareholders but is higher than the 20% and 25% maximum rates
on capital gains
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generally applicable to noncorporate Non-U.S. Shareholders. Treasury regulations
issued on October 6, 1997 alter the withholding rules on distributions paid to a
Non-U.S. Shareholder, and these Treasury regulations are generally effective
with respect to distributions paid after December 31, 1999. Under these Treasury
regulations, to obtain a reduced rate of withholding under an income tax treaty,
a Non-U.S. Shareholder generally will be required to provide an Internal Revenue
Service Form W-8 certifying the Non-U.S. Shareholder's entitlement to benefits
under the treaty. The new Treasury regulations also provide special rules to
determine whether, for purposes of determining the applicability of a tax
treaty, distributions paid to a Non-U.S. Shareholder that is an entity should be
treated as paid to the entity or to those holding an interest in that entity,
and whether the entity or its holders are entitled to benefits under the tax
treaty. These Treasury regulations also alter the information reporting and
backup withholding rules applicable to Non-U.S. Shareholders and, among other
things, provide certain presumptions under which a Non-U.S. Shareholder is
subject to backup withholding and information reporting until we receive
certification of its status.
If the common shares fail to constitute a "United States real property
interest" within the meaning of Section 897 of the Tax Code, gain on sale of the
common shares by a Non-U.S. Shareholder generally will not be subject to federal
income taxation unless (1) investment in the common shares is effectively
connected with the Non-U.S. Shareholder's United States trade or business, in
which case, as discussed above, the Non-U.S. Shareholder would be subject to the
same treatment as U.S. Shareholders on the gain, or (2) the Non-U.S. Shareholder
is a nonresident alien individual who was present in the United States for 183
days or more during the taxable year, in which case the nonresident alien
individual will be subject to a 30% tax on the gain.
The common shares will not constitute a United States real property
interest if we are a "domestically controlled REIT," defined as follows. 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 common shares is held
directly or indirectly by foreign persons. We believe that we will be a
domestically controlled REIT and that the sale of common shares by a Non-U.S.
Shareholder will not be subject to federal income taxation. However, because the
our common shares are publicly traded (and because of possible indirect
ownership through HRP, which is also publicly traded), we can provide no
assurance that we will be a domestically controlled REIT. If we are not a
domestically controlled REIT, whether a Non-U.S. Shareholder's gain on sale of
common shares would be subject to federal income tax as a sale of a United
States real property interest would depend upon whether the common shares are
"regularly traded" (as defined by applicable Treasury regulations) on an
established securities market (e.g., the NYSE, on which the common shares will
be listed) and upon the size of the selling Non-U.S. Shareholder's interest in
our Company. If the gain on the sale of common shares were subject to federal
income taxation, the Non-U.S. Shareholder would be subject to the same treatment
as a U.S. Shareholder with respect to that gain, subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals. In any event, a purchaser of common shares from a
Non-U.S. Shareholder will not be required to withhold on the purchase price if
the purchased common shares are regularly traded on an established securities
market or if we are a domestically controlled REIT. Otherwise, the purchaser of
common shares may be required to withhold 10% of the purchase price paid to the
Non- U.S. Shareholder and to remit that amount to the IRS.
Common shares owned or treated as owned by an individual who is not a
citizen or resident (as defined for United States federal estate tax purposes)
of the United States at the time of death will be includable in the individual's
gross estate for United States federal estate tax purposes unless an applicable
estate tax treaty provides otherwise.
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Backup Withholding and Information Reporting Requirements
We will report to our U.S. Shareholders and to the IRS the amount of
distributions paid during each calendar year and the amount of tax withheld, if
any. Under the backup withholding rules, a U.S. Shareholder may be subject to
backup withholding at the rate of 31% with respect to distributions paid unless
the U.S. Shareholder (a) is a corporation or comes within certain other exempt
categories and, when required, demonstrates that fact or (b) provides a taxpayer
identification number, certifies as to no loss of exemption from backup
withholding rules and otherwise complies with applicable requirements of the
backup withholding rules. A U.S. Shareholder that does not provide us with its
correct taxpayer identification number may be subject to penalties imposed by
the IRS. In addition, we may be required to withhold a portion of capital gain
distributions to any U.S. Shareholder that fails to certify its non-foreign
status to us. Any amounts withheld under the foregoing rules will be creditable
against the U.S. Shareholder's federal income tax liability provided that the
required information is furnished to the IRS.
We will report to our Non-U.S. Shareholders and to the IRS the amount of
distributions paid during each calendar year and the amount of tax withheld, if
any. These information reporting requirements apply regardless of whether
withholding was reduced or eliminated by an applicable tax treaty. Copies of
these information returns may also be made available under the provisions of a
specific treaty or agreement to the tax authorities in the country in which the
Non-U.S. Shareholder resides. As discussed above, withholding tax rates of 30%
and 35% may apply to distributions on common shares to Non-U.S. Shareholders,
and the 1997 Treasury regulations will, when effective, alter the information
reporting and withholding rules applicable to Non-U.S. Shareholders. Among other
things, the 1997 Treasury regulations provide certain presumptions under which a
Non-U.S. Shareholder would be subject to backup withholding and information
reporting until we receive certification from these shareholders of their
Non-U.S. Shareholder status. As noted, the 1997 Treasury regulations are
generally effective with respect to distributions paid after December 31, 1999.
The payment of the proceeds from the disposition of common shares to or
through the United States office of a broker will generally be subject to
information reporting and backup withholding at a rate of 31% unless the owner,
under penalties of perjury, certifies among other things its status as a
Non-U.S. Shareholder, or otherwise establishes an exemption. The payment of the
proceeds from the disposition of common shares to or through a non-United States
office of a broker generally will not be subject to backup withholding and
information reporting. In the case of proceeds from a disposition of common
shares paid to or through a non-United States office of a United States broker
or paid to or through a non-United States office of a non-United States broker
that is (1) a "controlled foreign corporation" for federal income tax purposes
or (2) a person 50% or more of whose gross income from all sources for a certain
three-year period was effectively connected with a United States trade or
business, (a) backup withholding will not apply unless the broker has actual
knowledge that the owner is not a Non-U.S. Shareholder, and (b) information
reporting will not apply if the broker has documentary evidence in its files
that the beneficial owner is a Non-U.S. Shareholder unless the broker has actual
knowledge to the contrary. Under the 1997 Treasury regulations (generally
effective for payments made after December 31, 1999), in the case of proceeds
from a disposition of common shares paid to or though a non-United States office
of a United States broker or paid to or through a non-United States office of a
non-United States broker that is (1) a "controlled foreign corporation" for
federal income tax purposes, (2) a person 50% or more of whose gross income from
all sources for a certain three-year period was effectively connected with a
United States trade or business, (3) a foreign partnership with one or more
partners who are United States persons and who in the aggregate hold more than
50% of the income or capital interest in the partnership, or (4) a foreign
partnership engaged in the conduct of a trade or business in the United States,
(a) backup withholding will not apply unless the broker has actual knowledge
that the owner is not a Non-U.S. Shareholder, and (b) information reporting will
not apply if the Non-U.S. Shareholder certifies its status as a Non-U.S.
Shareholder and further certifies that it has not been, and at the time the
certificate is furnished reasonably expects not to be, present in the United
States for a period aggregating 183 days or more during each calendar year to
which the certification pertains.
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Any amounts withheld from a payment to a Non-U.S. Shareholder will
generally be refunded (or credited against the Non-U.S. Shareholder's United
States federal income tax liability, if any), provided that the required
information is furnished to the IRS.
Other Tax Considerations
You should recognize that our and your present federal income tax treatment
may be modified by legislative, judicial, or administrative actions at any time,
which 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 any new tax legislation or other provisions either directly or
indirectly affecting us or our shareholders. Revisions in federal income tax
laws and interpretations of these laws could adversely affect the tax
consequences of investment in the common shares.
We and our shareholders may also be subject to state or local taxation in
various state or local jurisdictions, including those in which we or our
shareholders transact business or reside. Our and our shareholders' state and
local tax treatment may not conform to the federal income tax consequences
discussed above. Consequently, you should consult your own tax advisor regarding
the effect of state and local tax laws on an investment in our common shares.
ERISA PLANS, KEOGH PLANS AND INDIVIDUAL RETIREMENT ACCOUNTS
General Fiduciary Obligations
Fiduciaries of a pension, profit-sharing or other employee benefit plan
("ERISA Plan") subject to Title I of the Employee Retirement Income Security Act
of 1974 ("ERISA") must consider whether their investment in our common shares
satisfies the diversification requirements of ERISA, whether the investment is
prudent in light of possible limitations on the marketability of the common
shares, whether they have authority to acquire our common shares under the
applicable governing instrument and Title I of ERISA, and 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 (the "Fiduciary Penalty"). Fiduciaries of any Individual Retirement
Account ("IRA"), Keogh Plan or other qualified retirement plan not subject to
Title I of ERISA ("Non-ERISA Plan") should consider that an IRA or non-ERISA
Plan may only make investments that are authorized by the appropriate governing
instrument. Fiduciary shareholders should consult their own legal advisers if
they have any concern as to whether the investment is inconsistent with any of
the foregoing criteria.
Prohibited Transactions
Fiduciaries of ERISA Plans and persons making the investment decision for
an IRA or other Non-ERISA Plan should also consider the application of the
prohibited transaction provisions of ERISA and the Tax Code in making their
investment decision. Sales and certain other transactions between an ERISA Plan,
IRA, or other Non-ERISA Plan and certain persons related to it are prohibited
transactions. The particular facts concerning the sponsorship, operations and
other investments of an ERISA Plan, IRA, or other Non-ERISA Plan may cause a
wide range of other persons to be treated as disqualified persons or parties in
interest with respect to it. A prohibited transaction, in addition to imposing
potential personal liability upon fiduciaries of ERISA Plans, may also result in
the imposition of an excise tax under the Tax Code or a penalty under ERISA upon
the disqualified person or party in interest with respect to the ERISA or
Non-ERISA Plan or IRA. If the disqualified person who engages in the transaction
is the individual on behalf of whom an IRA is maintained (or his beneficiary),
the IRA may
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lose its tax-exempt status and its assets may be deemed to have been distributed
to such individual in a taxable distribution (and no excise tax will be imposed)
on account of the prohibited transaction. Fiduciary shareholders should consult
their own legal advisers if they have any concern as to whether the investment
is a prohibited transaction.
Special Fiduciary and Prohibited Transactions Considerations
The Department of Labor ("DOL"), which has certain administrative
responsibility over ERISA Plans as well as over IRAs and other Non-ERISA Plans,
has issued a regulation defining "plan assets." The regulation generally
provides that when an ERISA or Non-ERISA Plan or IRA acquires a security that is
an equity interest in an entity and that security is neither a "publicly offered
security" nor a security issued by an investment company registered under the
Investment Company Act of 1940, the ERISA or Non-ERISA Plan's or IRA's assets
include both the equity interest and an undivided interest in each of the
underlying assets of the entity, unless it is established either that the entity
is an operating company or that equity participation in the entity by benefit
plan investors is not significant.
The regulation defines a publicly offered security as a security that is
"widely held," "freely transferable" and either part of a class of securities
registered under the Securities Exchange Act of 1934, or sold pursuant to an
effective registration statement under the Securities Act of 1933 (provided the
securities are registered under the Securities Exchange Act of 1934 within 120
days after the end of the fiscal year of the issuer during which the offering
occurred). Our common shares have been registered under the Securities Exchange
Act of 1934.
The regulation provides that a security is "widely held" only if it is part
of a class of securities that is owned by 100 or more investors independent of
the issuer and of one another. However, a security will not fail to be "widely
held" because the number of independent investors falls below 100 subsequent to
the initial public offering as a result of events beyond the issuer's control.
We expect our 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, certain
restrictions ordinarily will not, alone or in combination, affect a finding that
such securities are freely transferable. The restrictions on transfer enumerated
in the regulation as not affecting that finding include: any restriction on or
prohibition against any transfer or assignment which would result in a
termination or reclassification of our Company for federal or state tax
purposes, or would otherwise violate any state or federal law or court order;
any requirement that advance notice of a transfer or assignment be given to our
Company and any requirement that either the transferor or transferee, or both,
execute documentation setting forth representations as to compliance with any
restrictions on transfer which are among those enumerated in the regulation as
not affecting free transferability, including those described in the preceding
clause of this sentence; any administrative procedure which establishes an
effective date, or an event prior to which a transfer or assignment will not be
effective; and any limitation or restriction on transfer or assignment which is
not imposed by the issuer or a person acting on behalf of the issuer. We believe
that the restrictions imposed under the Declaration of Trust on the transfer of
common shares do not result in the failure of our common shares to be "freely
transferable." Furthermore, we believe that at present there exist no other
facts or circumstances limiting the transferability of our common shares which
are not included among those enumerated as not affecting their free
transferability under the regulation, and we do not expect or intend to impose
in the future (or to permit any person to impose on our behalf) any limitations
or restrictions on transfer which would not be among the enumerated permissible
limitations or restrictions.
Assuming that the common shares will be "widely held" and that no other
facts and circumstances exist which restrict transferability of the common
shares, we have received an opinion of counsel that the common shares will not
fail to be "freely transferable" for purposes of the regulation due to the
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restrictions on transfer of the common shares under the Declaration of Trust and
that under the regulation the common shares are publicly offered securities and
our assets will not be deemed to be "plan assets" of any ERISA Plan, IRA or
other Non-ERISA Plan that invests in the common shares.
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UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") is
acting as representative (the "Representative") of each of the underwriters
named below (the "Underwriters") with respect to the offering of 11,000,000
common shares (the "Public Offering"). Subject to the terms and conditions set
forth in an underwriting agreement (the "Underwriting Agreement"), among our
Company and the Underwriters, we have agreed to sell to each of the
Underwriters, and each of the Underwriters severally and not jointly has agreed
to purchase from us, the number of common shares set forth opposite its name
below.
Number of
Underwriter Common Shares
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...............................
Total...................................... 11,000,000
==========
In the Underwriting Agreement, the several Underwriters have agreed,
subject to the terms and conditions set forth therein, to purchase all of the
common shares being sold pursuant to that agreement if any of the common shares
being sold pursuant to the agreement are purchased. Under certain circumstances,
under the Underwriting Agreement, the commitments of non-defaulting Underwriters
may be increased.
The Representative has advised us that the Underwriters propose initially
to offer the common shares to the public at the initial public offering price
set forth on the cover page of this prospectus, and to certain dealers at that
price less a concession not in excess of $ per common share. The Underwriters
may allow, and dealers may re-allow, a discount not in excess of $ per common
share to certain other dealers. After the initial public offering, the public
offering price, concession and discount may be changed.
We have granted an option to the Underwriters, exercisable for 30 days
after the date of this prospectus, to purchase up to 1,650,000 additional common
shares at the public offering price set forth on the cover page of this
prospectus, less the underwriting discount. The Underwriters may exercise this
option solely to cover over-allotments, if any, made on the sale of the common
shares offered hereby. To the extent that the Underwriters exercise this option,
each Underwriter will be obligated, subject to certain conditions, to purchase
approximately the same percentage thereof which the number of shares to be
purchased by it shown in the foregoing table bears to the 11,000,000 shares
offered hereby.
The following table shows the per share and total public offering price,
underwriting discount we will pay and the proceeds we will receive before our
expenses. This information is presented assuming either no exercise or full
exercise of the Underwriters' over-allotment option.
Without
Per Share Option With Option
Public Offering Price....................... $ $ $
Underwriting Discount....................... $ $ $
Proceeds, before expenses, to the Company... $ $ $
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The expenses of the offering (exclusive of the underwriting discount) are
estimated at $2 million and are payable by our Company.
The common shares are being offered by the several Underwriters, subject to
prior sale, when, as and if issued to and accepted by them, subject to approval
of certain legal matters by counsel for the Underwriters and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
their offer and to reject orders in whole or in part.
We have agreed for a period of 90 days, and the Managing Trustees and HRP
have agreed for a period of one year, after the date of this prospectus, subject
to certain exceptions, not to directly or indirectly (1) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant for the sale of or
otherwise dispose of or transfer any common shares or securities convertible
into or exchangeable or exercisable for or repayable with common shares, whether
now owned or thereafter acquired by the person executing the agreement or with
respect to which the person executing the agreement thereafter acquires the
power of disposition, or file a registration statement under the Securities Act
of 1933 with respect to the foregoing or (2) enter into any swap or other
agreement that transfers, in whole or in part, the economic consequence of
ownership of the common shares whether any swap or transaction is to be settled
by delivery of common shares or other securities, in cash or otherwise, without
the prior written consent of Merrill Lynch on behalf of the Underwriters.
We expect that the common shares will be approved for listing on the NYSE
after pricing of the offering, subject to notice of issuance, under the symbol
"__." In order to meet the requirements for listing the common shares on the
NYSE, the Underwriters have undertaken to sell lots of 100 or more common shares
to a minimum of 2,000 beneficial holders.
The Underwriters do not intend to confirm sales of the common shares
offered hereby to any accounts over which they exercise discretionary authority.
We and HRP have agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933 or to
contribute to payments the Underwriters may be required to make in respect
thereof.
Until the distribution of the common shares is completed, rules of the SEC
may limit the ability of the Underwriters and certain selling group members to
bid for and purchase the common shares. As an exception to these rules, the
Representative is permitted to engage in certain transactions that stabilize the
price of the common shares. Stabilization transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
common shares.
If the Underwriters create a short position in the common shares in
connection with the offering, i.e., if they sell more common shares than are set
forth on the cover page of this prospectus, the Representative may reduce that
short position by purchasing common shares in the open market. The
Representative may also elect to reduce any short position by exercising all or
part of the over-allotment option described above.
The Representative may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representative purchases
common shares in the open market to reduce the Underwriters' short position or
to stabilize the price of the common shares, they may reclaim the amount of the
selling concession from the Underwriters and selling group members who sold
those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of those purchases. The imposition of a penalty bid
might also have an effect on the price of the common shares to the extent that
it discourages resales of the common shares.
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Neither we nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common shares. In addition, neither
we nor any of the Underwriters makes any representation that the Representative
will engage in these types transactions or that these transactions, once
commenced, will not be discontinued without notice.
Prior to this offering, there has been no public market for our common
shares. The initial public offering price was determined through negotiations
among us, HRP and the Representative. Among the factors considered in these
negotiations, in addition to prevailing market conditions, were dividend yields
and financial characteristics of publicly traded REITs that we, HRP and the
Representative believe to be comparable to our Company, the expected results of
our operations, estimates of our future business potential and earnings
prospects and the current state of the real estate markets and the economy as a
whole.
We will pay Merrill Lynch an advisory fee equal to % of the gross proceeds
received from the sale of common shares to public investors in the offering for
financial advisory services rendered in connection with our formation.
We are currently negotiating a new $100 million revolving loan arrangement
to be used for working capital and new acquisitions after the completion of the
Public Offering. This credit facility may be arranged by an affiliate of Merrill
Lynch. An origination fee of $ will be paid to Merrill Lynch if Merrill Lynch
arranges the credit facility.
In the ordinary course of their respective businesses, the Underwriters and
their affiliates have engaged in, and may in the future engage in, commercial
banking and investment banking transactions with us.
In addition to the Public Offering, the Company will offer 350,000 common
shares directly to Barry M. Portnoy and Gerard M. Martin, which they may
purchase directly or indirectly through an entity to be established. Messrs.
Portnoy and Martin will pay the same price paid by public investors, and we will
pay no underwriting discount with respect to the sale of these shares. The
Underwriters will not have an over-allotment option with respect to these
shares.
EXPERTS
The balance sheet of our Company at December 21, 1998 and the combined
financial statements of Certain Senior Housing Properties at December 31, 1997
and 1996, and for each of the three years in the period ended December 31, 1997,
appearing in this prospectus and registration statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their reports thereon
appearing elsewhere herein, and are included in reliance upon those reports
given upon the authority of that firm as experts in accounting and auditing.
LEGAL MATTERS
Sullivan & Worcester LLP, Boston, Massachusetts, our lawyers, have issued
an opinion on the validity of the common shares we are currently offering, and
on certain federal income tax and ERISA matters as described under "Federal
Income Tax Considerations" and "ERISA Plans, Keogh Plans and Individual
Retirement Accounts." Brown & Wood LLP, New York, New York, the Underwriters'
lawyers, will also issue an opinion to the Underwriters. Sullivan & Worcester
LLP and Brown & Wood LLP will rely on an opinion of Ballard Spahr Andrews &
Ingersoll, LLP, Baltimore, Maryland, with respect to all matters involving
Maryland law. Barry M. Portnoy was a partner in the firm of Sullivan & Worcester
LLP until March 31, 1997 and is one of our Managing Trustees. Mr. Portnoy is
also a managing trustee of HRP and HPT and a Director and 50% owner of RMR, our
investment advisor.
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Sullivan & Worcester LLP also represents HRP, HPT and RMR and certain of their
affiliates on various matters and Ballard Spahr Andrews & Ingersoll, LLP also
represents HPT and certain of its affiliates on various matters.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement (of which this
prospectus is a part) on Form S- 11 under the Securities Act of 1933, as
amended. The registration statement covers the common shares offered hereby.
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 document 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 our Company and
the common shares offered hereby, please consult 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. 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.
We intend to furnish our shareholders with annual reports containing
audited financial statements certified by independent public accountants and
quarterly reports containing unaudited financial information for the first three
quarters of each year.
91
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
<S> <C> <C>
Unaudited Pro Forma Financial Statements of Senior Housing Properties Trust
Introduction to unaudited pro forma financial statements...............................................F-2
Unaudited pro forma balance sheet as of September 30, 1998.............................................F-3
Unaudited pro forma statement of income for the nine months ended
September 30, 1998.....................................................................................F-4
Unaudited pro forma statement of income for the year ended December 31, 1997...........................F-5
Notes to unaudited pro forma financial statements......................................................F-6
Combined Financial Statements of Certain Senior Housing Properties (wholly owned by HRPT
Properties Trust)
Report of independent auditors........................................................................F-10
Combined balance sheets as of December 31, 1996 and 1997 and as of September 30,
1998 (unaudited)......................................................................................F-11
Combined statements of income for the three years in the period ended December 31,
1997 and for the nine months ended September 30, 1998 (unaudited).....................................F-12
Combined statements of ownership interest of HRPT Properties Trust for the three
years in the period ended December 31, 1997 and for the nine months ended
September 30, 1998 (unaudited)........................................................................F-13
Combined statements of cash flows for the three years in the period ended
December 31, 1997 and for the nine months ended September 30, 1998 (unaudited)........................F-14
Notes to combined financial statements................................................................F-15
Balance Sheet of Senior Housing Properties Trust
Report of independent auditors........................................................................F-19
Balance sheet as of December 21, 1998.................................................................F-20
Notes to balance sheet................................................................................F-21
</TABLE>
F-1
<PAGE>
Senior Housing Properties Trust
Introduction to Unaudited Pro Forma Financial Statements
The following unaudited pro forma balance sheet at September 30, 1998
is intended to present the financial position of the Company as if the
transactions described in the notes had been consummated as of September 30,
1998. The following unaudited pro forma statements of income are intended to
present the results of operations of the Company as if these transactions had
been consummated as of the beginning of the periods presented.
These unaudited pro forma financial statements are not necessarily
indicative of the expected financial position or results of operations of the
Company for any future period. Differences could result from many factors,
including future changes in the Company's investments, changes in interest
rates, changes in the capital structure of the Company and delays in the
acquisition of certain properties. The pro forma information should be read in
conjunction with all of the financial statements and notes thereto and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus.
F-2
<PAGE>
<TABLE>
<CAPTION>
Senior Housing Properties Trust
Unaudited Pro Forma Balance Sheet
September 30, 1998
(dollars in thousands, except per share amounts)
Proposed HRP
Formation at Contribution Proposed IPO and
December 21, HRP and Secured Property
1998 (A) Historical(B) Debt (C) Acquisition (D) Pro Forma
------------ ------------- ------------ ---------------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Real estate properties $ -- $ 615,387 $ -- $ 42,400 $ 657,787
Less accumulated depreciation -- (63,916) -- -- (63,916)
--------- --------- --------- --------- ---------
-- 551,471 -- 42,400 593,871
Real estate mortgages -- 9,671 -- -- 9,671
Cash and cash equivalents 264 -- (3,750) 157,665 154,179
Other assets -- 7,522 3,750 -- 11,272
--------- --------- --------- --------- ---------
$ 264 $ 568,664 $ -- $ 200,065 $ 768,993
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage note payable $ -- $ -- $ 250,000 $ -- $ 250,000
Other liabilities -- 739 -- -- 739
Deferred rents and other deferred revenues -- 28,941 -- -- 28,941
Security deposits -- 15,319 -- -- 15,319
Shareholders' equity:
Common shares of beneficial interest, $.01 par value;
50,000,000 shares authorized; 26,374,760 shares
issued and outstanding; 37,724,760 pro forma
shares issued 264 -- -- 113 377
Additional paid-in capital -- -- 273,665 199,952 473,617
Ownership interest of HRPT Properties Trust -- 523,665 (523,665) -- --
--------- --------- --------- --------- ---------
Total shareholders' equity 264 523,665 (250,000) 200,065 473,994
--------- --------- --------- --------- ---------
$ 264 $ 568,664 $ -- $ 200,065 $ 768,993
========= ========= ========= ========= =========
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
Senior Housing Properties Trust
Unaudited Pro Forma Statement of Income
For the Nine Months Ended September 30, 1998
(amounts in thousands, except per share data)
Formation at HRP Proposed Proposed IPO
December 21, HRP Historical Secured and Property
1998 (A) Historical (E) Adjustments (F) Debt (G) Acquisition (H) Pro Forma
------------ -------------- --------------- -------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental income $ -- $50,142 $ 1,461 $ -- $ 1,757 $53,360
Interest and other income -- 1,953 -- -- -- 1,953
---------- ------- ------- ------- ------- -------
Total revenues -- 52,095 1,461 -- 1,757 55,313
---------- ------- ------- ------- ------- -------
Expenses:
Interest -- 11,505 -- 1,620 -- 13,125
Depreciation -- 10,744 193 -- 377 11,314
Amortization -- -- -- 563 -- 563
General and administrative -- 3,088 43 -- 84 3,215
---------- ------- ------- ------- ------- -------
Total expenses -- 25,337 236 2,183 461 28,217
---------- ------- ------- ------- ------- -------
Net income $ -- $26,758 $ 1,225 $(2,183) $ 1,296 $27,096
========== ======= ======= ======= ======= =======
Weighted average shares outstanding -- 26,375 -- -- 11,350 37,725
========== ======= ======= ======= ======= =======
Net income per common share $ -- $ 0.72
========== =======
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
Senior Housing Properties Trust
Unaudited Pro Forma Statement of Income
For the Year Ended December 31, 1997
(amounts in thousands, except per share data)
Formation at HRP Proposed Proposed IPO
December 21, HRP Historical Secured and Property
1998 (A) Historical (E) Adjustments (F) Debt (G) Acquisition (H) Pro Forma
------------ -------------- --------------- -------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental income $ -- $64,515 $ 4,003 $ -- $ -- $68,518
Interest and other income -- 2,515 -- -- -- 2,515
--------- ------- ------- ------- --------- -------
Total revenues -- 67,030 4,003 -- -- 71,033
--------- ------- ------- ------- --------- -------
Expenses:
Interest -- 13,643 -- 3,857 -- 17,500
Depreciation -- 13,906 660 -- -- 14,566
Amortization -- -- -- 750 -- 750
General and administrative -- 4,289 147 -- -- 4,436
--------- ------- ------- ------- --------- -------
Total expenses -- 31,838 807 4,607 -- 37,252
--------- ------- ------- ------- --------- -------
Net income $ -- $35,192 $ 3,196 $(4,607) $ -- $33,781
========= ======= ======= ======= ========= =======
Weighted average shares outstanding -- 26,375 -- -- 11,350 37,725
========= ======= ======= ======= ========= =======
Net income per common share $ -- $ 0.90
========= =======
</TABLE>
F-5
<PAGE>
Senior Housing Properties Trust
Notes To Unaudited Pro Forma Financial Statements
(dollars in thousands)
Basis of Presentation
A. Represents the Company's historical balance sheet at December 21, 1998 and
the historical income statements for the periods ended September 30, 1998
and December 31, 1997. The Company was not in existence prior to December
16, 1998. Upon the Company's formation, it became a wholly owned subsidiary
of HRPT Properties Trust ("HRP") by issuance of 26,374,760 common shares to
HRP for $.01 per share par value. Basic earnings per share equal diluted
earnings per share as there are no common stock equivalent securities
outstanding. See the historical financial statements and notes thereto of
the Company included elsewhere in this prospectus.
Balance Sheet Adjustments
B. Represents the balance sheet impact of the transfer of 84 properties
currently owned by HRP, including certain related assets and liabilities
(the "HRP Properties"), based upon HRP's historical balance sheet carrying
values of these properties.
Real estate properties, net..............................$551,471
Real estate mortgages.......................................9,671
Working capital items, net............................... (37,477)
--------
Ownership interest.......................................$523,665
========
C. Represents the proposed mortgage financing of 14 healthcare properties for
$250 million (the "Proposed Secured Debt"), the incurrence and repayment of
debt to HRP assumed in connection with the transfer of assets and the
distribution of 13,187,380 shares to HRP shareholders (collectively, the
"Proposed HRP Contribution").
Proceeds of Proposed Secured Debt........................$250,000
Proposed HRP Contribution, net........................... 273,665
--------
Reduction in Ownership Interest, net.....................$523,665
========
D. Represents the acquisition of three of the 14 healthcare properties which
are to be acquired and which were fully constructed at September 30, 1998
("Proposed Property Acquisition"), the sale of 11 million shares pursuant
to the proposed initial public offering and the sale of 350,000 shares to
affiliates (collectively, the "Proposed IPO").
Proceeds from the sale of 11 million shares at $19
per share, net of expenses and underwriters discount...$193,415
Proceeds from the sale of shares to affiliates at $19
per share.................................................6,650
Purchase of 3 new healthcare properties.................. (42,400)
--------
Cash and cash equivalents................................$157,665
========
F-6
<PAGE>
Senior Housing Properties Trust
Notes To Unaudited Pro Forma Financial Statements
(dollars in thousands)
Statement of Income Adjustments
E. Represents historical rental and other income, interest, depreciation and
general and administrative expenses arising from the ownership of the HRP
Properties. Rental and mortgage interest income is based on leases and
mortgages in effect with HRP. Interest expense represents an allocated
portion of HRP's interest costs. Depreciation is computed based on HRP's
historical cost on a 40 year life for buildings and improvements and a 12
year life for personal property. General and administrative expenses are
based on the advisory agreements in effect with REIT Management & Research,
Inc. ("RMR") and its predecessor plus an allocated portion of HRP's
historical costs.
F. Represents rental income, depreciation and general and administrative
expenses arising from the acquisition of five of the HRP Properties in
September 1998, the acquisition of one of the HRP Properties in May 1997
and the acquisition of four of the HRP Properties in September 1997 as if
the properties had been acquired as of the first day of the periods
presented. Rental income is based on leases in effect with HRP.
Depreciation is computed based on HRP's historical cost on a 40 year life
for buildings and improvements and a 12 year life for personal property.
General and administrative expenses are based on the advisory agreements
with RMR and its predecessor.
G. Represents the incremental interest and amortization expense of up front
costs from the Proposed Secured Debt.
H. Represents rental income, depreciation and general and administrative
expenses arising from the Proposed Property Acquisition. Rental income is
based on the agreement in effect but does not include income on properties
under construction prior to the time that they commenced operations.
Depreciation is based on a 40 year life for buildings and improvements and
a 12 year life for personal property. General and administrative expenses
are based on the advisory agreement with RMR. Also represents the impact of
the Proposed IPO.
F-7
<PAGE>
Senior Housing Properties Trust
Notes To Unaudited Pro Forma Financial Statements
(dollars in thousands)
Adjusted Pro Forma Financial Statement Adjustments
I. The Company will assume HRP's agreement to purchase and lease 14 healthcare
properties. Three healthcare properties commenced operations subsequent to
January 1, 1998 and 11 healthcare properties are still under construction
and will commence operations subsequent to September 1998 (the
"Construction Properties"). The effect on the Pro Forma Balance Sheet, as
of September 30, 1998 from the acquisition of the 14 properties assuming
they had been fully constructed at September 30, 1998 is as follows:
Construction
Properties Adjusted
Pro Forma Adjustments Pro Forma
--------- ----------- ---------
ASSETS
Real estate properties $ 657,787 $ 151,400 $ 809,187
Less accumulated depreciation (63,916) -- (63,916)
--------- --------- ---------
593,871 151,400 745,271
Real estate mortgages 9,671 -- 9,671
Cash and cash equivalents 154,179 (151,400) 2,779
Other assets 11,272 -- 11,272
--------- --------- ---------
$ 768,993 $ -- $ 768,993
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage note payable $ 250,000 $ -- $ 250,000
Other liabilities 739 -- 739
Deferred rents 28,941 -- 28,941
Security deposits 15,319 -- 15,319
Shareholders' equity 473,994 -- 473,994
--------- --------- ---------
$ 768,993 $ -- $ 768,993
========= ========= =========
F-8
<PAGE>
The effects of rental income, depreciation and general and administrative
expenses on the Pro Forma Statement of Income for the nine months ended
September 30, 1998 from the acquisition of the 14 properties assuming they had
been fully constructed and operating at January 1, 1998 are as follows:
Construction
Properties Adjusted
Pro Forma Adjustments Pro Forma
--------- ----------- ---------
Revenues:
Rental income $53,360 $13,505 $66,865
Interest and other income 1,953 -- 1,953
------- ------- -------
Total revenues 55,313 13,505 68,818
------- ------- -------
Expenses:
Interest 13,125 -- 13,125
Depreciation and amortization 11,877 2,894 14,771
General and administrative 3,215 643 3,858
------- ------- -------
Total expenses 28,217 3,537 31,754
------- ------- -------
Net income $27,096 $ 9,968 $37,064
======= ======= =======
Weighted average shares outstanding 37,725 37,725
======= =======
Net income per common share $ 0.72 $ .98
======= =======
The effects of rental income, depreciation and general and administrative
expenses on the Pro Forma Statement of Income for the year ended December 31,
1997 from the acquisition of the 14 properties assuming they had been fully
constructed and operating at January 1, 1997 are as follows:
Construction
Properties Adjusted
Pro Forma Adjustments Pro Forma
--------- ----------- ---------
Revenues:
Rental income $68,518 $20,349 $88,867
Interest and other income 2,515 -- 2,515
------- ------- -------
Total revenues 71,033 20,349 91,382
------- ------- -------
Expenses:
Interest 17,500 -- 17,500
Depreciation and amortization 15,316 4,361 19,677
General and administrative 4,436 969 5,405
------- ------- -------
Total expenses 37,252 5,330 42,582
------- ------- -------
Net income $33,781 $15,019 $48,800
======= ======= =======
Weighted average shares outstanding 37,725 37,725
======= =======
Net income per common share $ 0.90 $ 1.29
======= =======
F-9
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholder of Senior Housing Properties Trust:
We have audited the accompanying combined balance sheets of Certain Senior
Housing Properties (wholly owned by HRPT Properties Trust) as of December 31,
1997 and 1996, and the related combined statements of income, ownership interest
of HRPT Properties Trust and cash flows, for each of the three years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Certain
Senior Housing Properties (wholly owned by HRPT Properties Trust) at December
31, 1997 and 1996, and the combined results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
December 22, 1998
F-10
<PAGE>
Certain Senior Housing Properties
(wholly owned by HRPT Properties Trust)
Combined Balance Sheets
(dollars in thousands)
As of December 31, As of
--------------------- September 30,
1996 1997 1998
--------- --------- ------------
(Unaudited)
ASSETS
Real estate properties:
Land $ 55,540 $ 57,280 $ 58,688
Buildings and improvements 519,491 546,703 556,699
--------- --------- ---------
575,031 603,983 615,387
Less accumulated depreciation (37,160) (51,066) (63,916)
--------- --------- ---------
537,871 552,917 551,471
Real estate mortgages 9,570 9,683 9,671
Other assets 5,017 7,423 7,522
--------- --------- ---------
$ 552,458 $ 570,023 $ 568,664
========= ========= =========
LIABILITIES AND OWNERSHIP INTEREST
Other liabilities $ 655 $ 692 $ 739
Deferred rents and other deferred revenues 7,604 29,721 28,941
Security deposits 6,420 15,319 15,319
Ownership interest of HRPT
Properties Trust 537,779 524,291 523,665
--------- --------- ---------
$ 552,458 $ 570,023 $ 568,664
========= ========= =========
See accompanying notes
F-11
<PAGE>
Certain Senior Housing Properties
(wholly owned by HRPT Properties Trust)
Combined Statements of Income
(amounts in thousands)
Nine months
Year ended December 31, ended
---------------------------- September 30,
1995 1996 1997 1998
------- ------- ------- -------------
(Unaudited)
Revenues:
Rental income $49,545 $52,511 $64,515 $50,142
Interest and other income 792 1,024 2,515 1,953
------- ------- ------- -------
Total revenues 50,337 53,535 67,030 52,095
------- ------- ------- -------
Expenses:
Interest 13,206 11,590 13,643 11,505
Depreciation 10,943 11,524 13,906 10,744
General and administrative 3,499 3,764 4,289 3,088
------- ------- ------- -------
Total expenses 27,648 26,878 31,838 25,337
------- ------- ------- -------
Net income $22,689 $26,657 $35,192 $26,758
======= ======= ======= =======
See accompanying notes
F-12
<PAGE>
Certain Senior Housing Properties
(wholly owned by HRPT Properties Trust)
Combined Statements of Ownership Interest of
HRPT Properties Trust
(dollars in thousands)
Balance at December 31, 1994 $ 434,328
Net income 22,689
Equity distribution, net (10,524)
--------
Balance at December 31, 1995 446,493
Net income 26,657
Equity contribution, net 64,629
--------
Balance at December 31, 1996 537,779
Net income 35,192
Equity distribution, net (48,680)
--------
Balance at December 31, 1997 524,291
Net income (unaudited) 26,758
Equity distribution, net (unaudited) (27,384)
--------
Balance at September 30, 1998 (unaudited) $ 523,665
=========
See accompanying notes
F-13
<PAGE>
<TABLE>
<CAPTION>
Certain Senior Housing Properties
(wholly owned by HRPT Properties Trust)
Combined Statements of Cash Flows
(dollars in thousands)
Nine months
ended
Year ended December 31, September 30,
1995 1996 1997 1998
--------- --------- --------- ------------
(unaudited)
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $ 22,689 $ 26,657 $ 35,192 $ 26,758
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation 10,943 11,524 13,906 10,744
Other -- -- -- 2,106
Changes in assets and liabilities:
Other assets (700) (1,319) (2,406) (99)
Other liabilities 611 44 37 47
Deferred rents and other deferred revenues -- 693 22,117 (780)
Security deposits 2,586 34 8,899 --
--------- --------- --------- ---------
Cash provided by operating activities 36,129 37,633 77,745 38,776
--------- --------- --------- ---------
Cash Flows From Investing Activities:
Real estate acquisitions and improvements (17,431) (101,590) (14,675) --
Investments in mortgage loans (2,370) (700) (124) --
Repayments of mortgage loans -- 28 11 12
--------- --------- --------- ---------
Cash (used for) provided by investing activities (19,801) (102,262) (14,788) 12
--------- --------- --------- ---------
Cash Flows From Financing Activities:
Equity (distribution) contribution (16,328) 64,629 (62,957) (38,788)
--------- --------- --------- ---------
Cash (used for) provided by financing activities (16,328) 64,629 (62,957) (38,788)
--------- --------- --------- ---------
Increase (decrease) in cash and cash equivalents -- -- -- --
Cash and cash equivalents at beginning of period -- -- -- --
--------- --------- --------- ---------
Cash and cash equivalents at end of period $ -- $ -- $ -- $ --
========= ========= ========= =========
Non-Cash Investing Activities:
Real estate acquisitions $ (5,804) $ -- $ (14,277) $ (11,404)
Non-Cash Financing Activities:
Equity contributions 5,804 -- 14,277 11,404
See accompanying notes
</TABLE>
F-14
<PAGE>
CERTAIN SENIOR HOUSING PROPERTIES
(wholly owned by HRPT Properties Trust)
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 1. Organization
The combined financial statements of Certain Senior Housing Properties (the
"Properties") include the accounts of 70 (75 at September 30, 1998) healthcare
properties and 9 mortgage investments secured by healthcare properties and
certain related assets and liabilities located in 36 states as if the Properties
were owned in an entity separate from HRPT Properties Trust ("HRP"). However,
the Properties do not constitute a legal entity.
Senior Housing Properties Trust (the "Company"), a Maryland real estate
investment trust, was organized on December 16, 1998. The Company is a wholly
owned subsidiary of HRP. The Company is in the process of an initial public
offering pursuant to which it will sell 11 million shares to the public and
350,000 shares to affiliates (combined, the "Offering"). The Company intends to
file a Form S-11 registration statement with the Securities and Exchange
Commission in connection with the Offering.
Prior to the consummation of the Offering, the Company will acquire (through
contribution from HRP) 100% ownership of the Properties.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation. All of the Properties are owned by HRP and HRP's
historical basis in the Properties has been presented. Substantially all of the
rental income and mortgage interest income received by HRP from the tenants and
mortgagors of the Properties is deposited in and commingled with HRP's general
corporate funds. Certain capital investments and other cash requirements of the
Properties were paid by HRP and were charged directly to the Properties.
Interest expense is allocated based on HRP's historical interest expense as a
percentage of average historical real estate investments. General and
administrative costs of HRP were allocated to the Properties based on HRP's
investment advisory agreement formula and certain costs were allocated based on
historical costs as a percentage of HRP's average historical 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 from the existence of
the Properties in a separate entity.
Real Estate Properties and Mortgages. Depreciation on real estate properties is
expensed on a straight-line basis over estimated useful lives of 40 years for
buildings and improvements and 12 years for personal property. Impairment losses
on properties are recognized where indicators of impairment are present and the
undiscounted cash flow (net realizable value) estimated to be generated by the
properties are less than the carrying amount of such 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. Additional
rent and interest revenue is recognized as earned.
F-15
<PAGE>
CERTAIN SENIOR HOUSING PROPERTIES
(wholly owned by HRPT Properties Trust)
NOTES TO COMBINED FINANCIAL STATEMENTS
Use of Estimates. Preparation of these financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that may affect the amounts reported in these
financial statements and related notes. The actual results could differ from
these estimates.
New Accounting Pronouncements. The Financial Accounting Standards Board has
issued Financial Accounting Standards Board Statement No. 128, "Earnings Per
Share" ("FAS 128"), Statement No. 129, "Disclosure of Information about Capital
Structure" ("FAS 129"), Statement No. 130, "Reporting Comprehensive Income"
("FAS 130"), Statement No. 131, "Disclosures About Segments of an Enterprise and
Related Information" ("FAS 131") and Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133"). FAS 128 and FAS 129
were adopted for the 1997 financial statements. The adoption of each of these
statements had no impact on these financial statements. FAS 130 and FAS 131 must
be adopted for the 1998 financial statements and FAS 133 must be adopted for the
year 2000 financial statements. Management anticipates that FAS 130, FAS 131 and
FAS 133 will have no impact on the financial condition or results of operations
of the Properties.
Income Taxes. Throughout the periods presented herein, the Properties'
operations were included in HRP's income tax returns. HRP 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 certain other requirements for qualifying as a real
estate investment trust. However, it is subject to certain state and local taxes
on its income and property.
Note 3. Real Estate Properties
These financial statements include 70 properties representing an aggregate
investment of $604.0 million. In September 1998, five nursing homes were added
to the Properties for an aggregate investment of $11.4 million.
The owned properties are leased on a triple net lease basis, 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-collateralized, cross-defaulted, cross-guaranteed and provide for renewal
terms at existing rates followed by several market rate renewal terms. The
triple net leases generally require the lessee to provide all property
management services.
The future minimum lease payments to be received during the current terms of the
leases as of December 31, 1997, are approximately $62.7 million in 1998, $63.1
million in 1999, $63.8 million in 2000, $63.8 million in 2001, $66.2 million in
2002 and $726.1 million thereafter.
F-16
<PAGE>
CERTAIN SENIOR HOUSING PROPERTIES
(wholly owned by HRPT Properties Trust)
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 4. Real Estate Mortgages
December 31,
--------------------------
1996 1997
-------- ---------
(dollars in thousands)
Mortgage notes receivable due December 2016 $1,723 $1,736
Mortgage notes receivable due December 2016 6,964 7,064
Note receivable due January 2013 883 883
-----------------------
$9,570 $9,683
=======================
At December 31, 1997, the interest rates on the mortgage investments ranged from
9% to 13.75% per annum.
Note 5. Commitments and Contingencies
At December 31, 1997, the Properties had total commitments aggregating $6.2
million to fund or finance improvements to certain leased or mortgaged
properties. In December 1998, HRP agreed to purchase and lease 14 new senior
housing properties for an aggregate amount of $193.8 million (unaudited). Upon
completion of the Offering the Company will assume these commitments. The
acquisition of these properties is subject to various closing conditions
customary in real estate transactions and no assurances can be given as to when
or if this transaction will be consummated.
Note 6. Transactions with Affiliates
HRP has entered an investment advisory agreement with REIT Management &
Research, Inc. ("RMR"), an affiliate of HRP. RMR provides investment, management
and administrative services to HRP, and will provide similar services to the
Company. Prior to December 31, 1997, such services were provided by HRPT
Advisors, Inc. ("Advisors") on similar terms. RMR and Advisors are each owned by
Gerard M. Martin and Barry M. Portnoy, who also serve as managing trustees of
HRP and will serve as Managing Trustees of the Company. RMR and Advisors are
paid by HRP based on a formula amount of gross invested assets of HRP.
Investment advisory fees paid by HRP during 1995, 1996, and 1997 with respect to
the Properties would have been $2.9 million, $3.2 million and $3.5 million,
respectively. RMR is also entitled to an incentive fee paid in restricted shares
of common stock based on a formula. Concurrent with the Offering, the Company
will enter a separate agreement with RMR on substantially similar terms.
F-17
<PAGE>
CERTAIN SENIOR HOUSING PROPERTIES
(wholly owned by HRPT Properties Trust)
NOTES TO COMBINED FINANCIAL STATEMENTS
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 were not materially
different from their carrying values at December 31, 1997:
Carrying Fair Value
Amount Amount
---------------------------------------
(dollars in thousands)
Real estate mortgages $9,683 $10,364
Commitments -- 6,207
The fair values of the real estate mortgages are based on estimates using
discounted cash flow analysis and currently prevailing rates. The fair value of
the commitments represents the actual amounts committed.
Note 8. Concentration of Credit Risk
The assets included in these financial statements are primarily invested in
income producing real estate located throughout the United States. At December
31, 1996 and 1997, the investment in properties purchased from and operated by
Marriott International, Inc. ("Marriott") was $325.5 million, representing 56%
and 53%, respectively, of total investments included in these financial
statements. During 1996 and 1997, the revenue from properties leased to Marriott
was $30.5 million and $30.4 million, respectively, representing 58% and 47%,
respectively, of total investments included in these financial statements.
F-18
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholder of Senior Housing Properties Trust:
We have audited the accompanying balance sheet of Senior Housing Properties
Trust as of December 21, 1998. This balance sheet is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
of the balance sheet provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Senior Housing Properties Trust at
December 21, 1998, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
December 22, 1998
F-19
<PAGE>
Senior Housing Properties Trust
Balance Sheet
December 21, 1998
(dollars in thousands, except per share amounts)
ASSETS
Cash $264
----
$264
====
LIABILITIES AND SHAREHOLDER'S EQUITY
Common shares of beneficial interest, $.01 par value;
50,000,000 shares authorized;
26,374,760 shares issued and outstanding $264
Additional paid-in capital --
----
Total shareholder's equity 264
----
$264
====
See accompanying notes
F-20
<PAGE>
Senior Housing Properties Trust
Notes to Balance Sheet
December 21, 1998
Note 1. Organization
Senior Housing Properties Trust, a Maryland real estate investment trust (the
"Company"), was organized on December 16, 1998. The Company is a wholly owned
subsidiary of HRPT Properties Trust ("HRP"). The Company is in the process of an
initial public offering pursuant to which it plans to issue approximately 11
million shares to the public and 350,000 shares to affiliates (collectively, the
"Offering"). The Company intends to file a Form S-11 registration statement with
the Securities and Exchange Commission in connection with the proposed Offering.
The Company has had no operations. Prior to the consummation of the Offering,
the Company will enter into certain transactions (the "Formation Transactions")
that are expected to result in the Company becoming a publicly traded real
estate investment trust organized to acquire and own senior housing, congregate
communities, assisted living properties and nursing homes that are leased to
unaffiliated tenants.
Note 2. Federal Income Taxes
The Company intends to qualify as a real estate investment trust under the
Internal Revenue Code of 1986, as amended. Accordingly, the Company expects not
to be subject to federal income taxes provided it distributes its taxable income
and meets certain other requirements for qualifying as a real estate investment
trust. The Company will be subject to certain state and local taxes on its
income and property.
Note 3. The Formation Transactions
Prior to the consummation of the Offering, the Company will acquire 84
healthcare properties and certain related assets and liabilities from HRP. In
addition, prior to the consummation of the Offering, the Company will assume
from HRP an agreement to purchase and lease 14 new healthcare properties. The
acquisition of these 14 healthcare properties is expected to occur upon the
closing of the Offering.
Concurrently with the closing of the Offering, the Company will distribute, as a
dividend, 13.2 million of its shares to HRP shareholders on the basis of one
share of the Company for 10 shares of HRP. HRP will retain 13.2 million shares
as an equity investment in the Company. At the conclusion of the Offering, 36%
of the Company will be owned by HRP and affiliates and 64% will be owned by the
general public.
Immediately following the offering, the Company will mortgage finance 14
properties for $250 million. Proceeds will be used to repay debt to HRP created
by the formation of the Company.
F-21
<PAGE>
- -------------------------------------------------------------------------------
11,000,000 Common Shares
Senior Housing Properties Trust
Common Shares
of Beneficial Interest
------------------------------------
PROSPECTUS
------------------------------------
Merrill Lynch & Co.
, 1999
Through and including , 1999 (the 25th day after the date of this prospectus),
all dealers effecting transactions in the common shares, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
<PAGE>
[ALTERNATE PAGE]
- --------------------------------------------------------------------------------
350,000 Common Shares
Senior Housing Properties Trust
Common Shares
of Beneficial Interest
------------------------------------
PROSPECTUS
------------------------------------
, 1999
Through and including , 1999 (the 25th day after the date of this prospectus),
all dealers effecting transactions in the common shares, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
<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 by the Registrant in
connection with the offering of the common shares being registered. All the
amounts shown are estimates except the Securities and Exchange Commission
registration fee, the National Association of Securities Dealers, Inc. fee and
the New York Stock Exchange listing fee.
Item Amount
SEC Registration Fee...................................... $72,280
NASD Fee.................................................. 26,500
New York Stock Exchange Listing Fee....................... *
Transfer Agent's and Registrar's Fees..................... *
Printing and Engraving Fees............................... *
Legal Fees and Expenses (other than Blue Sky)............. *
Accounting Fees and Expenses.............................. *
Blue Sky Fees and Expenses (including fees of counsel).... *
Miscellaneous Expenses.................................... *
--------
Total..................................................... *
========
- --------------------------
* To be provided by Amendment
Item 32. Sales to Special Parties.
See Item 33.
Item 33. Recent Sales of Unregistered Securities.
On December 16, 1998, Senior Housing Properties Trust (the "Trust") was
initially capitalized through the issuance of 26,374,760 shares to HRPT
Properties Trust ("HRP") in exchange for $263,747.60. HRP is currently the sole
shareholder of the Trust. The 26,374,760 shares currently outstanding were
purchased for investment and for the purpose of organizing the Trust. The Trust
believes that the issuance and sale of such 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 the Trust contains such a provision which eliminates
such liability to the maximum extent permitted by the Maryland REIT law.
The Declaration of Trust of the Trust authorizes it, to the maximum
extent permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any present or former trustee or officer or (b) any individual who, while a
trustee of the Trust and at the request of the Trust, serves or has served
another real estate investment trust, corporation, partnership, joint venture,
trust, employee benefit plan or any other enterprise as a trustee, director,
officer or partner of such 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 status as a present or former
Trustee or officer of the Trust. The By-laws of the Trust obligate it, to the
maximum extent permitted by Maryland law, to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (a) any
present or former trustee or officer who is made a party to the proceeding by
reason of his service in that capacity or (b) any individual who, while a
Trustee or officer of the Trust and at the request of the Trust, serves or has
served another real estate investment trust, corporation, partnership, joint
venture, trust, employee benefit plan or any other enterprise as a trustee,
director, officer or partner of such real estate investment trust, corporation,
partnership, joint venture, trust,
II-1
<PAGE>
employee benefit plan or other enterprise and who is made a party to the
proceeding by reason of his service in that capacity, against any claim or
liability to which he may become subject by reason of such status. The
Declaration of Trust and By-laws also permit the Trust to indemnify and advance
expenses to any person who served a predecessor of the Trust in any of the
capacities described above and to any employee or agent of the Trust or a
predecessor of the Trust. The Bylaws require the Trust 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 "MGCL") 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 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.
The form of Underwriting Agreement to be filed by amendment as Exhibit
1.1 to this Registration Statement will provide for the reciprocal
indemnification by the Underwriters of the Trust, and its trustees, officers and
controlling persons and by the Trust of the Underwriters, and their respective
directors, officers and controlling persons, against certain liabilities under
the Securities Act.
Item 35. Treatment of Proceeds From Stock Being Registered.
The consideration to be received by the Trust for the common shares
registered will be credited to the appropriate capital stock account.
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
1.1 Form of Underwriting Agreement. (To be filed by amendment)
2.1 Form of Transaction Agreement. (To be filed by amendment)
3.1 Declaration of Trust of the Trust dated December 16, 1998. (Previously
filed as an exhibit to the registration statement filed on December 24,
1998)
3.2 By-laws of the Trust. (Previously filed as an exhibit to the
registration statement filed on December 24, 1998)
4.1 Stock certificate representing common shares of the Trust. (To be filed
by amendment)
5.1 Opinion of Sullivan & Worcester LLP. (To be filed by amendment)
5.2 Opinion of Ballard, Spahr, Andrews & Ingersoll, LLP. (To be filed by
amendment).
8.1 Opinion of Sullivan & Worcester LLP re: tax matters. (To be filed by
amendment)
10.1 Form of Advisory Agreement. (To be filed by amendment)
II-2
<PAGE>
10.2 Form of Incentive Share Award Plan. (To be filed by amendment)
10.3 Form of Subscription Agreement among Barry M. Portnoy, Gerard M. Martin
and the Trust. (To be filed by amendment)
10.4 Form of Intercompany Note. (To be filed by amendment)
10.5 Form of $100 million Credit Agreement. (To be filed by amendment)
10.6 Form of $250 million Credit Agreement. (To be filed by amendment)
10.7 Leases. (To be filed by amendment)
21.1 Subsidiaries. (To be filed by amendment)
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
filed on December 24, 1998)
27.1 Financial Data Schedule. (Previously filed as an exhibit to the
registration statement filed on December 24, 1998)
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 filed on
December 24, 1998)
99.2 Consent of Arthur G. Koumantzelis to being named as a Trustee nominee.
(Previously filed as an exhibit to the registration statement filed on
December 24, 1998)
Item 37. Undertakings.
The Trust hereby undertakes to provide to the Underwriters at the closing
specified in the Underwriting Agreement, certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to trustees, officers and controlling
persons of the Trust pursuant to the foregoing provisions, or otherwise, the
Trust 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 the Trust of expenses incurred or paid by a trustee, officer or
controlling persons of the Trust 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, the Trust 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.
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-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Trust 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 the January
7, 1999.
SENIOR HOUSING PROPERTIES TRUST
By: *
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 the Trust and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Barry M. Portnoy Managing Trustee January 7, 1999
Barry M. Portnoy
* Managing Trustee January 7, 1999
Gerard M. Martin
* President and Chief Operating January 7, 1999
David J. Hegarty Officer
/s/ Ajay Saini Chief Financial Officer and January 7, 1999
Ajay Saini Treasurer
*By: /s/ Barry M. Portnoy
Barry M. Portnoy
Attorney-in-Fact for such persons
pursuant to powers of attorney
dated December 24, 1998
II-4
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 December 22, 1998, with respect to the balance sheet of
Senior Housing Properties Trust, and our report dated December 22, 1998, with
respect to the combined financial statements of Certain Senior Housing
Properties, both included in pre-effective Amendment No. 1 to the Registration
Statement on Form S-11 and related Prospectus of Senior Housing Properties Trust
dated January 7, 1999.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Boston, Massachusetts
January 7, 1999
