<PAGE>
Filed Pursuant to
Rule 424(B)(3)
Reg. No. 333-69703
PROSPECTUS
HRPT PROPERTIES TRUST
SPIN-OFF OF
SENIOR HOUSING PROPERTIES TRUST
THROUGH DISTRIBUTION OF 13,190,763 COMMON SHARES
To the Shareholders of HRPT Properties Trust:
On or shortly after October 12, 1999, we will distribute to you shares of
our subsidiary, Senior Housing Properties Trust, as a special distribution. You
will receive one share of Senior Housing for every 10 shares of HRPT you own on
October 8, 1999, the record date for the spin-off.
We own a diversified portfolio of 175 office buildings that cost $2.5
billion and 93 senior housing properties that cost $770 million. We believe that
there are attractive investment opportunities available in both office buildings
and senior housing properties. By distributing the Senior Housing shares to our
shareholders we will create two separately focused companies which we believe
can take better advantage of their respective growth opportunities and may be
more attractive to investors than a combined company. Our board of trustees has
unanimously approved the spin-off as being in the best interests of our
shareholders.
Senior Housing's shares will be separately listed on the New York Stock
Exchange under the symbol "SNH." HRPT's shares will continue to trade on the New
York Stock Exchange under the symbol "HRP." The spin-off of Senior Housing's
shares will be the first public distribution of those shares. Accordingly, we
can provide no assurance to you as to what their market price may be.
This prospectus includes a description of the spin-off, as well as
information about HRPT and Senior Housing after the spin-off. YOU SHOULD READ IT
CAREFULLY, ESPECIALLY THE SECTION ENTITLED "RISK FACTORS" THAT BEGINS ON PAGE 13
WHICH DESCRIBES VARIOUS RISKS ASSOCIATED WITH YOUR OWNERSHIP OF SENIOR HOUSING
SHARES, INCLUDING:
- There is no established share price for Senior Housing shares and they may
trade for less than fair value.
- Some of Senior Housing's tenants have experienced problems which may
impair their abilities to pay rent.
- Some of Senior Housing's properties are subject to burdensome regulations.
- Senior Housing's ability to grow will depend upon access to capital which
is not assured.
- Senior Housing's investment advisor may have an incentive to recommend
investments to raise fees.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the Senior Housing common shares or
determined if this prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
We are furnishing this prospectus to provide information to HRPT
shareholders who will receive Senior Housing shares in the spin-off. This
prospectus is not intended as a solicitation to buy or sell any securities of
HRPT or Senior Housing. On behalf of HRPT, we thank you for your continued
support. On behalf of Senior Housing, we welcome you as a new shareholder.
<PAGE>
Sincerely,
<TABLE>
<S> <C>
[LOGO] [LOGO]
John A. Mannix David J. Hegarty
President-Elect of HRPT Properties Trust President of Senior Housing Properties Trust
</TABLE>
The date of this prospectus is September 21, 1999
<PAGE>
HRPT OFFICE BUILDINGS AFTER THE SPIN-OFF
[art] [art]
BRIDGEPOINT SQUARE (5 Buildings) HERALD SQUARE
Austin, TX Washington, DC
441,740 Square Feet, Built 1986-97 187,832 Square Feet, Built 1991
Major Tenant: Motorola, Inc. Major Tenant: InterAmerican Bank
[art]
MELLON BANK CENTER
Philadelphia, PA
1,284,524 Square Feet, Built 1990
Major Tenant: Mellon Bank
[art] [art]
THE PAVILION PUTNAM PLACE (2 Buildings)
Mineola, NY Quincy/Braintree, MA
252,000 Square Feet, Built 1971-90 222,726 Square Feet, Built 1988
Major Tenant: Winthrop University Major Tenant: Putnam Investments,
Hospital Inc.
SENIOR HOUSING PROPERTIES AFTER THE SPIN-OFF
[art] [art]
MARRIOTT INTERNATIONAL, INC. MARRIOTT INTERNATIONAL, INC.
STRATFORD COURT OF BOCA RATON BRIGHTON GARDENS OF SUN CITY
Boca Raton, FL Sun City, AZ
347 Units, Built 1994 148 Units, Built 1990
[art]
BROOKDALE LIVING COMMUNITIES, INC.
THE HALLMARK
Chicago, IL
341 Units, Built 1990
[art] [art]
BROOKDALE LIVING COMMUNITIES, INC. INTEGRATED HEALTH SERVICES, INC.
PARK PLACE BLUE HILL CARE CENTER
Spokane, WA Blue Hill, NE
200 Units, Built 1993 81 Units, Built 1967
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE SPIN-OFF
<TABLE>
<S> <C>
Q: HOW MANY SHARES OF SENIOR HOUSING WILL I RECEIVE?
A: In the spin-off we will distribute to you one share of Senior Housing for every 10
shares of HRPT you own.
Q: WHAT IS SENIOR HOUSING PROPERTIES TRUST?
A: Senior Housing is currently a wholly owned REIT subsidiary of HRPT. It owns 93 senior
housing properties that cost $770 million. Senior Housing's largest investment is $326
million in 14 senior living communities leased to Marriott International, Inc. until
2013.
Q: WHAT ARE SENIOR HOUSING SHARES WORTH?
A: The value of the Senior Housing shares you receive will be determined by their trading
price after the spin-off. We do not know what the trading price will be and we can
provide no assurances as to value.
Q: WHAT WILL HRPT DO AFTER THE SPIN-OFF?
A: HRPT currently owns 175 office buildings that cost $2.5 billion. After the spin-off,
HRPT's principal business will be buying, owning and leasing office buildings.
Q: WHAT WILL SENIOR HOUSING DO AFTER THE SPIN-OFF?
A: Senior Housing will own and lease its portfolio of senior housing properties. It has
arranged a bank credit facility, some of which may be used to purchase new senior
housing properties.
Q: HOW WILL DISTRIBUTIONS CHANGE?
A: We do not expect any change in your combined distribution rate. Currently HRPT's annual
distribution is $1.52 per share. After the spin-off HRPT's annual distribution will be
$1.28 per share, and Senior Housing's annual distribution will be $2.40 per share.
Because you will receive one Senior Housing share for every 10 HRPT shares you own,
your total distributions will be unchanged as a result of the spin-off. The third
quarter 1999 cash distribution of $0.32 per HRPT share and $0.60 per Senior Housing
share will be paid to shareholders of record on October 20, 1999. Cash distributions
are paid about 30 days after the record date.
Q: WILL MY SHARES CONTINUE TO BE LISTED ON THE NEW YORK STOCK EXCHANGE?
A: HRPT's shares will continue to be listed on the NYSE under the symbol "HRP." Senior
Housing's shares also will be listed on the NYSE under the symbol "SNH."
Q: WHAT ARE THE TAX CONSEQUENCES TO ME OF THE SPIN-OFF?
A: The Senior Housing shares you receive will be treated for tax purposes like all other
distributions you receive from HRPT. The taxable value of this distribution will be
determined by the trading price of Senior Housing shares at the time of the spin-off.
Q: WHAT DO I HAVE TO DO TO RECEIVE MY SENIOR HOUSING SHARES?
A: No action by you is required. You do not need to pay any money or surrender your HRPT
shares to receive Senior Housing shares. The number of HRPT shares you own will not
change. If your HRPT shares are held in a brokerage account, your Senior Housing shares
will be credited to that account. If your HRPT shares are held in certificated form, a
certificate representing your Senior Housing shares will be mailed to you. No cash
distributions will be paid and fractional shares will be issued as necessary.
Q: WHERE CAN I GET MORE INFORMATION?
A: You should read this prospectus carefully. You can also call (877) ASK-HRPT.
</TABLE>
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SUMMARY................................................................... 7
The Companies........................................................... 7
Risk Factors............................................................ 8
HRPT Growth Strategy.................................................... 9
Senior Housing Growth Strategy.......................................... 11
Distributions........................................................... 11
Principal Places of Business............................................ 11
Summary Pro Forma Consolidated Financial Information.................... 12
RISK FACTORS.............................................................. 13
There is no established share price for Senior Housing shares and they
may trade for less than fair value.................................... 13
Some of Senior Housing's tenants have experienced problems which may
impair their abilities to pay rent.................................... 13
Some of Senior Housing's properties are subject to burdensome
regulations........................................................... 13
Senior Housing's ability to grow will depend upon access to capital
which is not assured.................................................. 14
Senior Housing's investment advisor may have an incentive to recommend
investments to raise fees and there will be other conflicts of
interest.............................................................. 14
HRPT may be able to control Senior Housing shareholder decisions........ 14
The spin-off will result in benefits to HRPT which could adversely
affect Senior Housing................................................. 15
Ownership limitations and anti-takeover provisions affecting Senior
Housing may prevent shareholders from receiving a takeover premium.... 15
Real estate ownership creates risks and liabilities..................... 16
Changes at Marriott could adversely affect Senior Housing............... 16
The federal income tax treatment of the spin-off is uncertain........... 16
THE SPIN-OFF.............................................................. 17
Key Dates............................................................... 17
Distribution Agent...................................................... 17
Listing and Trading of Senior Housing Shares............................ 17
Background and Reasons for the Spin-Off................................. 17
Manner of Effecting the Spin-Off........................................ 18
The Transaction Agreement............................................... 18
INFORMATION ABOUT HRPT PROPERTIES TRUST AFTER THE SPIN-OFF................ 20
HRPT Investments........................................................ 20
Commercial Office Buildings........................................... 20
Government Office Buildings........................................... 20
Medical and Biotechnology Buildings................................... 20
Equity Investment in Hospitality Properties Trust..................... 21
Equity Investment in Senior Housing Properties Trust.................. 21
Pending Acquisitions.................................................. 21
Development Activities................................................ 21
Location of HRPT Office Buildings....................................... 22
HRPT Tenants............................................................ 23
HRPT Lease Expirations.................................................. 25
HRPT Management......................................................... 26
Additional Information About HRPT....................................... 27
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
INFORMATION ABOUT SENIOR HOUSING PROPERTIES TRUST......................... 28
General................................................................. 28
Growth Strategy......................................................... 28
History and Management.................................................. 29
Senior Housing Real Estate Market....................................... 29
Types of Properties..................................................... 30
Government Regulations and Rate Setting................................. 31
Competition............................................................. 34
SENIOR HOUSING DISTRIBUTION POLICY........................................ 36
SENIOR HOUSING PROPERTIES................................................. 39
SENIOR HOUSING TENANTS.................................................... 44
Marriott International, Inc............................................. 44
Integrated Health Services, Inc......................................... 45
Mariner Post-Acute Network, Inc......................................... 45
Brookdale Living Communities, Inc....................................... 46
Genesis Health Ventures, Inc............................................ 46
Privately Owned Tenants................................................. 47
SENIOR HOUSING LEASES..................................................... 48
Lease Terms............................................................. 49
SENIOR HOUSING SELECTED HISTORICAL FINANCIAL INFORMATION.................. 51
SENIOR HOUSING SELECTED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION...... 52
SENIOR HOUSING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................... 52
Pro Forma Results of Operations......................................... 53
Historical Results of Operations........................................ 53
Liquidity and Capital Resources......................................... 54
Year 2000............................................................... 56
Quantitative and Qualitative Disclosures About Market Risk.............. 57
SENIOR HOUSING MANAGEMENT................................................. 59
Senior Housing Trustees and Executive Officers.......................... 59
Committees of the Board of Trustees..................................... 60
Compensation of the Trustees and Officers............................... 60
Incentive Share Award Plan.............................................. 60
Limitation of Liability and Indemnification............................. 61
Reit Management and the Advisory Agreement.............................. 61
Related Party Transactions.............................................. 64
LEGAL PROCEEDINGS......................................................... 65
SENIOR HOUSING POLICIES................................................... 65
Investment Policies..................................................... 65
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Disposition Policies.................................................... 66
Financing Policies...................................................... 66
Conflict of Interest Policies........................................... 67
Policies with Respect to Other Activities............................... 68
MATERIAL PROVISIONS OF MARYLAND LAW AND OF
SENIOR HOUSING'S DECLARATION OF TRUST AND BYLAWS........................ 69
Trustees................................................................ 69
Advance Notice of Trustee Nominations and New Business.................. 69
Meetings of Shareholders................................................ 70
Liability and Indemnification of Trustees and Officers.................. 70
Shareholder Liability................................................... 71
Maryland Asset Requirements............................................. 71
Transactions with Affiliates............................................ 71
Voting by Shareholders.................................................. 71
Restrictions on Transfer of Shares...................................... 71
Business Combinations................................................... 73
Control Share Acquisitions.............................................. 74
Amendment to the Declaration of Trust, Dissolution and Mergers.......... 75
Anti-takeover Effect of Maryland Law and of the Declaration of Trust and
Bylaws................................................................ 76
DESCRIPTION OF SENIOR HOUSING SECURITIES.................................. 76
General................................................................. 76
Common Shares........................................................... 77
SENIOR HOUSING PRINCIPAL SHAREHOLDERS..................................... 77
FEDERAL INCOME TAX AND ERISA CONSEQUENCES................................. 78
General................................................................. 78
Federal Income Tax Consequences of the Spin-Off to Our Shareholders..... 80
Federal Income Tax Consequences of the Spin-Off to HRPT................. 83
Federal Income Taxation of Senior Housing and its Shareholders.......... 87
Backup Withholding and Information Reporting............................ 100
Other Tax Consequences.................................................. 101
ERISA Consequences for Senior Housing and its Shareholders.............. 102
LEGAL MATTERS............................................................. 104
EXPERTS................................................................... 104
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..................................... 104
FORWARD LOOKING STATEMENTS................................................ 104
WHERE YOU CAN FIND ADDITIONAL INFORMATION................................. 105
INDEX TO FINANCIAL STATEMENTS............................................. F-1
</TABLE>
6
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS SOME INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. THIS SUMMARY MAY NOT CONTAIN ALL THE INFORMATION ABOUT THE SPIN-OFF
WHICH MAY BE IMPORTANT TO YOU. TO BETTER UNDERSTAND THE SPIN-OFF YOU SHOULD
CAREFULLY REVIEW THIS ENTIRE DOCUMENT. REFERENCES IN THIS PROSPECTUS TO "WE,"
"US," "OUR" OR "HRPT" MEAN HRPT PROPERTIES TRUST AND ITS SUBSIDIARIES.
REFERENCES TO "SENIOR HOUSING" MEAN SENIOR HOUSING PROPERTIES TRUST AND ITS
SUBSIDIARIES. UNLESS OTHERWISE INDICATED, THE INFORMATION PRESENTED IN THIS
PROSPECTUS ASSUMES THAT NONE OF HRPT'S SUBORDINATED CONVERTIBLE DEBENTURES ARE
CONVERTED INTO HRPT SHARES BEFORE THE SPIN-OFF.
THE COMPANIES
We are a real estate investment trust, a REIT, which owns a diversified
portfolio of 175 office buildings costing $2.5 billion and 93 senior housing
properties costing $770 million. We also own four million shares of Hospitality
Properties Trust, another NYSE-listed REIT which invests in hotels, that we
founded in 1995. Our current book capitalization includes $1.8 billion of equity
and $1.2 billion of debt. Our current distribution rate is $1.52 per share per
year, payable $0.38 per share per quarter.
HRPT BEFORE THE SPIN-OFF
[CHART]
Our subsidiary, Senior Housing, owns all of our senior housing properties.
Senior Housing is also a REIT. We own all 26 million Senior Housing shares
outstanding and Senior Housing owes us $200 million. We will distribute 13.2
million of our Senior Housing shares to our shareholders on the basis of one
Senior Housing share for every 10 HRPT shares held. Senior Housing has entered a
new bank credit facility for $350 million; it will borrow $200 million under
this facility and pay its debt to us; and $150 million will be available for new
investments by Senior Housing. After the spin-off we will establish a new annual
distribution rate of $1.28 per HRPT share, payable $0.32 per share per quarter;
and Senior Housing will establish a new annual distribution rate of $2.40 per
share, payable $0.60 per share per quarter.
<TABLE>
<S> <C>
HRPT AFTER THE SPIN-OFF SENIOR HOUSING AFTER THE SPIN-OFF
[CHART] [CHART]
</TABLE>
7
<PAGE>
RISK FACTORS
Your ownership of Senior Housing shares will involve risks, including the
following:
- NO ESTABLISHED SHARE PRICE. There is no established share price for Senior
Housing shares. The Senior Housing shares will be traded on the NYSE but we
do not know the price at which they will trade. Senior Housing shares may
trade for less than their fair value.
- POSSIBLE TENANT DEFAULTS. Several of Senior Housing's tenants have recently
reported significant losses, particularly Mariner Post-Acute Network, Inc.,
Integrated Health Services, Inc. and Genesis Health Ventures, Inc.
Properties leased to Mariner, Integrated and Genesis represent 11%, 29% and
2% of Senior Housing's total investments, respectively. One of our tenants,
Frontier Group, Inc., which leases 2% of Senior Housing's total investments,
has recently filed for reorganization under Chapter 11 of the Bankruptcy
Code. If these tenants fail to pay rent, Senior Housing may be unable to pay
its cash distributions to shareholders or to carry out its business plan.
- PROPERTIES SUBJECT TO BURDENSOME REGULATIONS. Some of Senior Housing's
properties are highly regulated. Approximately 57% of the tenant revenues at
Senior Housing's properties are paid by Medicare and Medicaid. Changes in
these regulations or in the amounts of payments available under Medicare and
Medicaid programs may restrict Senior Housing's tenants' ability to pay
rent.
- FAILURE OF GROWTH STRATEGY. Senior Housing's growth strategy depends upon
its ability to raise additional capital and to invest in new properties. No
assurance can be provided that capital will be available at reasonable costs
or that Senior Housing will be able to purchase and lease additional
properties.
- CONFLICTS OF INTEREST. Senior Housing's managing trustees, Barry M. Portnoy
and Gerard M. Martin, own its investment advisor, Reit Management &
Research, Inc. Senior Housing pays Reit Management based in part on the
amount of investments. Reit Management and Messrs. Portnoy and Martin might
have an incentive to cause Senior Housing to acquire assets in order to
raise advisory fees.
- DOMINANT SHAREHOLDER. Upon completion of the spin-off, HRPT will own 49% of
Senior Housing's outstanding shares. This ownership will enable HRPT to have
a significant influence over Senior Housing shareholder decisions.
- BENEFITS TO HRPT. The completion of the spin-off will result in benefits to
HRPT. For example, when HRPT's properties were transferred to Senior
Housing, Senior Housing agreed to pay $200 million to HRPT. After the
spin-off Senior Housing will borrow $200 million to pay this debt.
- OWNERSHIP LIMITATIONS AND ANTI-TAKEOVER PROVISIONS. Other than HRPT,
shareholders are prohibited from owning more than 9.8% of Senior Housing.
Senior Housing's declaration of trust and bylaws contain other provisions
that inhibit a change of control. Because of these limitations Senior
Housing shareholders may be unable to realize a change of control premium
for their shares.
- LIABILITIES OF REAL ESTATE OWNERSHIP. Senior Housing's business will be
subject to risks associated with real estate ownership, including the need
for regular maintenance and repairs, the need for capital expenditures and
possible environmental hazards.
- DEPENDENCE UPON MARRIOTT. Forty-two percent of Senior Housing's investments
are in properties leased to Marriott. An adverse change in Marriott's
financial condition or its operations of the leased properties would
adversely affect Senior Housing's ability to pay distributions.
- TAX RISKS. The federal tax law does not clearly address REIT spin-offs. If
the IRS successfully challenges our reporting of the spin-off, you may have
to pay more taxes.
8
<PAGE>
HRPT GROWTH STRATEGY
After the spin-off, we will be principally focused upon managing and growing
our office building investments. Most of our investments are in multi-tenant
commercial office buildings. We sometimes invest in office buildings leased to
medical providers and government agencies because these types of tenants often
are willing to sign long term leases and have a history of regular renewals. We
prefer to invest in central business districts because there are usually
barriers to new development in those locations. We believe this strategy adds
stability to our portfolio and increases the long term appreciation potential of
our properties.
HRPT OFFICE INVESTMENTS
<TABLE>
<S> <C>
EDGAR REPRESENTATION OF DATA POINTS USED IN
PRINTED GRAPHIC
Commercial Office Tenants $1,589 million 64%
U.S. Government $446 million 18%
Medical and Biotechnology Tenants $445 million 18%
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Central Business Districts $1,578
million 64%
Suburban Areas $902 million 36%
</TABLE>
Our 175 office buildings are located in 27 states and the District of
Columbia. Five market areas contain about two-thirds of our office portfolio:
HRPT GEOGRAPHIC DIVERSIFICATION
<TABLE>
<CAPTION>
MARKET AREA NO. OF BUILDINGS INVESTMENT SQUARE FEET
- ----------------------------------- ----------------- --------------------- ---------------------
(000S)
<S> <C> <C> <C> <C> <C>
Philadelphia, PA................... 17 $530,288 (21%) 3,541,006 (19%)
Austin, TX......................... 25 301,534 (12%) 2,653,088 (15%)
Washington, DC..................... 16 409,322 (17%) 2,177,901 (12%)
Boston, MA......................... 30 191,946 (8%) 1,603,149 (9%)
Southern CA........................ 17 250,351 (10%) 1,126,171 (6%)
Other markets...................... 70 796,106 (32%) 7,128,393 (39%)
--- ---------- --------- ---------- ---------
Total.............................. 175 $2,479,547 (100%) 18,229,708 (100%)
--- ---------- --------- ---------- ---------
--- ---------- --------- ---------- ---------
</TABLE>
9
<PAGE>
Two criteria have historically guided our management and acquisitions of
office buildings and are likely to do so in the future. First, we prefer to
lease to high credit quality tenants. Approximately 52% of our office rents are
paid by tenants who are investment grade rated, including 19% from the U.S.
Government. An additional 10% of our office rents come from publicly owned
companies which are not investment grade rated; and many of our remaining
tenants are large law, accounting and other professional service firms which we
believe have strong credit characteristics. Second, we generally prefer to lease
office buildings for longer rather than shorter terms. Only 20% of our leases
expire in the next three years. Almost half of our leases have remaining terms
of seven or more years.
<TABLE>
<S> <C>
HRPT OFFICE TENANT CREDIT QUALITY HRPT OFFICE LEASE EXPIRATIONS
(BY PERCENTAGE OF RENT) (BY PERCENTAGE OF RENT)
EDGAR REPRESENTATION OF DATA POINTS USED IN
PRINTED GRAPHIC
Investment Grade 52%
Other Public Companies 10%
Private Tenants 38%
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
10 years or more 27%
7-9 years 22%
4-6 years 31%
3 years or less 20%
</TABLE>
At this time we have no plans to undertake speculative development, but we
are exploring some build-to-suit opportunities on land which we own. Generally,
we have only acquired development sites as ancillary property incident to our
purchases of developed income producing properties. We estimate the total
development potential of land which we own at approximately 2.9 million square
feet of office space.
10
<PAGE>
SENIOR HOUSING GROWTH STRATEGY
Senior Housing's 93 properties are leased to nine tenants. Ninety-seven
percent of Senior Housing's investments are leased to subsidiaries of public
companies which have guaranteed the lease obligations. The leases for 91 of
these properties extend to at least 2005. Senior Housing's largest tenant is
Marriott International, Inc. The following chart shows Senior Housing properties
leased to tenants by historical investment at cost and current lease
expirations.
SENIOR HOUSING INVESTMENTS
- - $770 million total assets
- - 42% leased to Marriott
- - 97% leased to public
companies
- - leases for 99% expire
in 2005 or after
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Marriott International14 Properties $326 million Lease expires 2013 42%
Brookdale Living Communities 4 Properties $102 million Lease expires 2019 13%
Mariner Post-Acute Network 26 Properties $86 million Lease expires 2013 11%
Integrated Health Services Lease No. 1 31 Properties $66 million Lease expires
2010 9%
Integrated Health Services Lease No. 2 11 Properties $152 million Lease expires
2006 20%
Genesis Health Ventures 1 Property $13 million - 2% Lease expires 2005 2%
Other Operators 6 Properties $25 million - 3% Leases expire 2001-2005 3%
</TABLE>
The aging of the U.S. population, the increasing percentage of women who
work away from home, the high divorce rate and societal mobility are demographic
facts which tend to increase demand for specialized senior housing properties.
Senior Housing hopes to profit from this increasing demand by buying properties
specially designed to meet the needs of aged residents. Senior Housing expects
that its leases will require rents which exceed its cost of capital and which
increase as the properties' gross revenues increase.
A new Medicare rate setting program that is now being implemented has had
negative impacts upon the financial performance of several of Senior Housing's
tenants. Senior Housing believes that these tenants will pay their lease
obligations, or, if they do not do so, that Senior Housing may be able to re-let
most of these properties to new tenants who will pay comparable rents. In the
future, Senior Housing intends to focus new investments in properties which are
not dependent upon government payment programs. At the same time, however,
Senior Housing believes that the new, lower Medicare rates have reduced the
prices of many nursing homes to levels which may present attractive long term
investment opportunities.
DISTRIBUTIONS
After the spin-off, HRPT's new distribution rate will be $1.28 per share per
year, payable $0.32 per share per quarter. Senior Housing's distribution rate
will be $2.40 per share per year, payable $0.60 per share per quarter. The third
quarter 1999 cash distribution of $0.32 per HRPT share and $0.60 per Senior
Housing share will be paid to shareholders of record on October 20, 1999. Cash
distributions are paid about 30 days after the record date. We expect that, on
an annualized basis, approximately 17% of HRPT's new distributions and 19% of
Senior Housing's distributions will constitute returns of capital.
PRINCIPAL PLACES OF BUSINESS
HRPT and Senior Housing maintain their principal places of business at 400
Centre Street, Newton, MA 02458. HRPT's phone number is (617) 332-3990. Senior
Housing's phone number is (617) 796-8350.
11
<PAGE>
SUMMARY PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following table presents the pro forma impact of the spin-off on HRPT's
income statement and balance sheet and the pro forma income statement and
balance sheet of Senior Housing as a separate company. The Senior Housing
statements include pro rata allocations of interest and general and
administrative expenses for historical periods. In the opinion of management,
the methods of allocation are reasonable. It is impossible to estimate all
operating costs that Senior Housing would incur as a separate company. For
additional information about the amounts appearing in this table, see the
Unaudited Pro Forma Consolidated Financial Statements and notes thereto on pages
F-2 through F-13.
<TABLE>
<CAPTION>
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED, AMOUNTS IN 000S, EXCEPT PER SHARE DATA)
----------------------------------------------------
HRPT SENIOR HOUSING
------------------------------------ --------------
SPIN-OFF
HISTORICAL ADJUSTMENTS PRO FORMA PRO FORMA
----------- ----------- ---------- --------------
<S> <C> <C> <C> <C>
INCOME STATEMENTS
Rental income...................................... $203,335 $(42,409) $160,926 $42,409
Interest and other income.......................... 7,619 (2,881) 4,738 2,881
----------- ----------- ---------- --------------
Total revenues..................................... 210,954 (45,290) 165,664 45,290
----------- ----------- ---------- --------------
Operating expense.................................. 50,548 -- 50,548 --
Interest expense................................... 39,525 (5,600) 33,925 7,531
Depreciation and amortization...................... 37,314 (11,207) 26,107 11,207
General and administrative......................... 9,849 (2,259) 7,590 2,259
----------- ----------- ---------- --------------
Total expenses..................................... 137,236 (19,066) 118,170 20,997
----------- ----------- ---------- --------------
Income before equity in earnings of
Hospitality Properties and Senior Housing........ 73,718 (26,224) 47,494 24,293
Equity in earnings of Hospitality Properties....... 4,029 -- 4,029 --
Equity in earnings of Senior Housing............... -- 11,976 11,976 --
----------- ----------- ---------- --------------
Net income (1)..................................... $77,747 $(14,248) $63,499 $24,293
----------- ----------- ---------- --------------
----------- ----------- ---------- --------------
Average basic shares outstanding................... 131,778 131,778 26,000
----------- ---------- --------------
----------- ---------- --------------
Average diluted shares outstanding................. 143,159 143,159 26,000
----------- ---------- --------------
----------- ---------- --------------
PER SHARE DATA:
Basic and diluted income (1)..................... $0.59 $0.48 $0.93
----------- ---------- --------------
----------- ---------- --------------
Distributions.................................... $0.76 $0.64 $1.20
----------- ---------- --------------
----------- ---------- --------------
BALANCE SHEETS
Real estate investments............................ $3,006,521 $(732,393) $2,274,128 $732,393
Accumulated depreciation........................... (184,992) 105,823 (79,169) (105,823)
----------- ----------- ---------- --------------
2,821,529 (626,570) 2,194,959 626,570
Real estate mortgages.............................. 60,530 (37,638) 22,892 37,638
Investment in Hospitality Properties............... 108,242 -- 108,242 --
Investment in Senior Housing....................... -- 220,548 220,548 --
Cash and equivalents............................... 26,984 (26,593) 391 16,593
Other assets....................................... 84,869 (9,918) 74,951 9,918
----------- ----------- ---------- --------------
$3,102,154 $(480,171) $2,621,983 $690,719
----------- ----------- ---------- --------------
----------- ----------- ---------- --------------
Bank credit facility............................... $-- $-- $-- $200,000
Senior notes payable............................... 957,513 (200,000) 757,513 --
Mortgage notes payable............................. 23,985 -- 23,985 --
Convertible subordinated debentures................ 204,863 -- 204,863 --
Other liabilities.................................. 103,093 (43,360) 59,733 43,360
Shareholders' equity............................... 1,812,700 (236,811) 1,575,889 447,359
----------- ----------- ---------- --------------
$3,102,154 $(480,171) $2,621,983 $690,719
----------- ----------- ---------- --------------
----------- ----------- ---------- --------------
</TABLE>
- ------------------------------
(1) Excludes an HRPT gain on sale of properties of $8.3 million, or $0.06 per
share, and loss on equity transaction of Hospitality Properties of $711,000,
or $0.01 per share, for the six months ended June 30, 1999.
12
<PAGE>
RISK FACTORS
Your ownership of Senior Housing shares will involve various risks. The
following is a listing of the material risks:
THERE IS NO ESTABLISHED SHARE PRICE FOR SENIOR HOUSING SHARES AND THEY MAY TRADE
FOR LESS THAN FAIR VALUE.
There is no established share price for Senior Housing shares. The
distribution of Senior Housing shares is not being underwritten by an investment
bank or otherwise. The Senior Housing shares will be traded on the NYSE but we
do not know the price at which they will trade. We do not know if an active
market for Senior Housing shares will develop. Accordingly, Senior Housing
shares' trading price may not reflect their fair value.
SOME OF SENIOR HOUSING'S TENANTS HAVE EXPERIENCED PROBLEMS WHICH MAY IMPAIR
THEIR ABILITIES TO PAY RENT.
Some of Senior Housing's tenants have recently reported significant losses.
Mariner Post-Acute Network, Inc., which leases 11% of Senior Housing's
investments and pays 18% of Senior Housing pro forma rents, reported a loss of
$405.7 million for the quarter ended June 30, 1999. Integrated Health Services,
Inc., which leases 29% of Senior Housing's investments and pays 30% of Senior
Housing pro forma rents, reported a loss of $4.6 million for the quarter ended
June 30, 1999. Genesis Health Ventures, Inc., which leases 2% of Senior
Housing's investments and pays 2% of Senior Housing's pro forma rents, reported
a loss of $1.0 million for the quarter ended June 30, 1999. One of Senior
Housing's smaller tenants, The Frontier Group, a privately held company which
leases 2% of Senior Housing's investments and pays 2% of Senior Housing's pro
forma rents, filed on July 14, 1999 for reorganization under Chapter 11 of the
Bankruptcy Code. If these tenants fail to pay rent, Senior Housing may be unable
to pay its cash distributions to shareholders or to carry out its business plan.
Because leases for multiple properties to an affiliated group of tenants are
subject to cross default at the election of Senior Housing, a lease default
affecting one property owned by Senior Housing may result in multiple defaults
for material amounts of rent.
SOME OF SENIOR HOUSING'S PROPERTIES ARE SUBJECT TO BURDENSOME REGULATIONS.
Forty-five percent of Senior Housing's total investments are in healthcare
facilities. Investing in healthcare facilities involves the following material
risks:
- COMPLEX REGULATIONS. Detailed specifications for the physical
characteristics of healthcare properties are mandated by various
governmental authorities. Changes in these regulations may require major
capital expenditures. Because Senior Housing's healthcare properties are
triple net leased to tenants, Senior Housing has only limited control over
the maintenance of its properties. Senior Housing regularly monitors
compliance by its tenants with applicable healthcare regulations. Although
Senior Housing has in the past periodically become aware that some tenants
may not have been in full compliance with these regulations, Senior
Housing is not aware of any pending regulatory action against any of its
properties which is likely to prevent their continued operations. Senior
Housing's triple net leases require its tenants to comply with applicable
regulations affecting its properties. Nevertheless, if its tenants fail to
perform these obligations, Senior Housing may be required to do so in
order to maintain the value of its investments.
- DEPENDENCE ON GOVERNMENT PROGRAMS. Approximately 57% of the tenant
revenues at Senior Housing's properties are paid by Medicare and Medicaid.
The Medicare program recently
13
<PAGE>
implemented a prospective payment system for skilled nursing facilities,
which replaces cost-based reimbursements. The Medicare prospective payment
system is being gradually implemented over a three-year period which began
on July 1, 1998, and has already had a negative impact upon the income of
many nursing homes. Many state Medicaid programs have implemented similar
prospective payment systems. The Balanced Budget Act of 1997 restricted
the right of operators of healthcare facilities to challenge state
Medicaid rates in federal courts. Whenever Medicare or Medicaid rates are
reduced, Senior Housing's tenants' ability to pay rent could be
jeopardized.
- SPECIAL PURPOSE BUILDINGS. Senior Housing's properties were specifically
designed for senior housing. If these properties cannot be operated as
senior housing facilities, finding alternative uses for these properties
may be difficult and costly.
SENIOR HOUSING'S ABILITY TO GROW WILL DEPEND UPON ACCESS TO CAPITAL WHICH IS NOT
ASSURED.
As a REIT, Senior Housing is required to distribute 95% of its taxable
income and cannot fund capital needs with income from operations. Senior
Housing's growth strategy requires that it raise additional capital to invest in
new properties. Senior Housing's ability to raise capital in the future will
depend not only upon its performance but also upon capital market conditions
which are beyond its control. Moreover, there are several other REITs and
finance companies that now aggressively compete to purchase and lease senior
housing properties. Accordingly, Senior Housing's growth strategy may not
succeed.
SENIOR HOUSING'S INVESTMENT ADVISOR MAY HAVE AN INCENTIVE TO RECOMMEND
INVESTMENTS TO RAISE FEES AND THERE WILL BE OTHER CONFLICTS OF INTEREST.
Conflicts of interest have arisen and will continue to arise in Senior
Housing's business, including the following:
- Barry M. Portnoy and Gerard M. Martin, who are Senior Housing's managing
trustees, own Reit Management, its investment advisor. Reit Management has
approximately 180 employees and has experience acquiring and managing
properties for two other publicly owned REITs. Senior Housing believes
that the depth of management talent available to it through its advisory
contract with Reit Management will provide Senior Housing with a
competitive advantage and that the fees payable to Reit Management are
commercially reasonable. Nonetheless, Senior Housing did not negotiate its
advisory agreement at arms' length. The advisory fee paid to Reit
Management will be based in part upon the amount of new investments made
by Senior Housing. This fee structure might encourage Reit Management to
advocate acquisitions when doing so is not in the best interests of Senior
Housing.
- In addition to serving as Senior Housing's managing trustees, Messrs.
Portnoy and Martin are managing trustees of HRPT and Hospitality
Properties. They also have business interests separate from these other
REITs. Similarly, Reit Management also acts as the investment advisor to
HRPT and Hospitality Properties and has other business interests. These
various business activities will compete for management time.
HRPT MAY BE ABLE TO CONTROL SENIOR HOUSING SHAREHOLDER DECISIONS.
Upon completion of the spin-off, HRPT will own 49% of Senior Housing's
outstanding shares. Accordingly, HRPT will have a significant influence over
Senior Housing shareholder decisions. This influence may result in decisions
that may not serve the best interests of Senior Housing's other shareholders.
14
<PAGE>
THE SPIN-OFF WILL RESULT IN BENEFITS TO HRPT WHICH COULD ADVERSELY AFFECT SENIOR
HOUSING.
The completion of the spin-off will result in substantial benefits to HRPT,
including the following:
- When HRPT transferred its properties to Senior Housing, Senior Housing
became indebted to HRPT for $200 million. After the spin-off, Senior
Housing will borrow $200 million under its bank credit facility and pay
this debt to HRPT. HRPT will not be liable for any of Senior Housing's
debt.
- Upon completion of the spin-off, Reit Management will become Senior
Housing's investment advisor. Assuming the spin-off is completed on
September 30, 1999, the pro forma advisory fee that Senior Housing will
pay to Reit Management from the completion of the spin-off through
December 31, 1999, the initial term of the agreement, will be
approximately $1.0 million, or $3.9 million on an annualized basis. HRPT's
advisory fees to Reit Management will be reduced by the same amount.
- HRPT currently owns 26 million of Senior Housing's shares. Upon completion
of the spin-off, HRPT will distribute 13.2 million of these shares to its
shareholders and will retain 12.8 million shares. By retaining these
shares, HRPT will be able to participate in Senior Housing's future
success through distributions and any appreciation in Senior Housing's
share price.
- HRPT has agreed not to sell any of its Senior Housing shares for one year
after the spin-off. If HRPT decides to sell thereafter, these sales could
depress the market value of Senior Housing shares.
OWNERSHIP LIMITATIONS AND ANTI-TAKEOVER PROVISIONS AFFECTING SENIOR HOUSING MAY
PREVENT SHAREHOLDERS FROM RECEIVING A TAKEOVER PREMIUM.
Senior Housing's declaration of trust prohibits any shareholder other than
HRPT, Reit Management and their affiliates from owning more than 9.8% of its
outstanding common shares. This provision of the declaration of trust may help
Senior Housing comply with REIT tax requirements. This provision will also
inhibit a change of control of Senior Housing. Its declaration of trust and
bylaws contain other provisions that may increase the difficulty of acquiring
control of Senior Housing by means of a tender offer, open market purchases, a
proxy fight or otherwise, if the acquisition is not approved by Senior Housing's
board of trustees. These other anti-takeover provisions include the following:
- a staggered board of trustees with three separate classes;
- the two-thirds majority shareholder vote required for removal of trustees;
- the availability of additional shares that the board of trustees may
authorize and issue on terms that it determines;
- advance notice procedures with respect to nominations of trustees and
shareholder proposals; and
- the facts that only the board of trustees may call shareholder meetings
and that shareholders are not entitled to act without a meeting.
For all of these reasons, Senior Housing's shareholders may be unable to
realize a change of control premium for their shares.
15
<PAGE>
REAL ESTATE OWNERSHIP CREATES RISKS AND LIABILITIES.
Senior Housing's business will be subject to the following material risks
associated with real estate acquisitions and ownership:
- casualty losses, some of which may be uninsured;
- lease expirations which are not renewed or for properties which can only
be relet at lower rents;
- costs relating to maintenance and repair, and the need to make capital
expenditures due to changes in governmental regulations, including the
Americans with Disabilities Act; and
- environmental hazards created by tenants or abutters for which Senior
Housing may be liable.
CHANGES AT MARRIOTT COULD ADVERSELY AFFECT SENIOR HOUSING.
Forty-two percent of Senior Housing's investments are in properties leased
to Marriott. Today we regard Marriott as a strong credit tenant and its leased
properties are performing well. Nonetheless, the Marriott leases extend for a
long period through 2013. Marriott's financial condition and the performance of
its leased properties may change. Because the investment in properties leased to
Marriott represents such a large percentage of Senior Housing's total
investments, any adverse change in Marriott's financial condition or its
operations of the leased properties would adversely affect Senior Housing's
ability to pay distributions to shareholders.
THE FEDERAL INCOME TAX TREATMENT OF THE SPIN-OFF IS UNCERTAIN.
The Internal Revenue Code does not provide definitive guidance on valuing
Senior Housing shares and on taxing REIT spin-offs. We will perform all our tax
reporting, including statements sent to the IRS and to you, on the basis of our
valuation assumptions and our counsel's opinion on how the spin-off is likely to
be taxed. If the IRS successfully challenges our positions on these issues, we
may be required to amend our reporting and you may have to pay more federal
income taxes.
16
<PAGE>
THE SPIN-OFF
KEY DATES
<TABLE>
<CAPTION>
DATES ACTIVITY
- ------------------------ ----------------------------------------------------------------------------
<S> <C>
September 21, 1999...... PROSPECTUS MAILING DATE. The date the registration statement of which this
prospectus is a part is declared effective by the SEC. We will mail this
prospectus to you on or about this date.
October 8, 1999......... RECORD DATE. HRPT shareholders of record on this date will receive one
Senior Housing share for every 10 HRPT shares owned. We expect that a "when
issued" market on the NYSE for Senior Housing shares may begin two business
days before the record date. If a "when issued" market develops for Senior
Housing shares, HRPT shares will begin to trade "when issued/ex
distribution."
October 12, 1999........ DISTRIBUTION DATE. We expect to deliver 13.2 million shares of Senior
Housing to the distribution agent on this date, and the spin-off will be
completed. If you hold HRPT shares in a brokerage account, your Senior
Housing shares will be credited to your account. If you hold HRPT shares in
certificated form, a certificate representing your Senior Housing shares
will be mailed to you; the mailing process is expected to take about 30
days. If a "when issued" and "when issued/ex distribution" market has
developed for Senior Housing and HRPT shares, respectively, it will cease on
this date; and thereafter those shares will trade in the regular way.
</TABLE>
DISTRIBUTION AGENT
The distribution agent for the spin-off is State Street Bank and Trust
Company, c/o Boston EquiServe, P.O. Box 8200, Boston, Massachusetts 02266-8200;
telephone (800) 426-5523.
LISTING AND TRADING OF SENIOR HOUSING SHARES
Senior Housing shares have been approved for listing on the NYSE. We expect
that trading on a "when issued" basis may commence on or about October 6, 1999.
A "when-issued" market will permit you and others to trade Senior Housing shares
on the NYSE before the shares are distributed.
There is not currently a public market for Senior Housing shares. Prices at
which the Senior Housing shares may trade cannot be predicted. Until and unless
an orderly market for Senior Housing shares develops, the prices at which
trading in the shares occurs may fluctuate significantly. The prices at which
Senior Housing shares trade may be influenced by many factors, including, among
others, the depth and liquidity of the market which develops, investor
perception of Senior Housing's business and growth prospects, the market for
REIT shares generally, Senior Housing's distribution policy and general market
conditions.
BACKGROUND AND REASONS FOR THE SPIN-OFF
HRPT was founded in 1986 to invest in senior housing real estate. For the
past few years, however, most of our investments have been in commercial office
buildings. In 1998 we concluded that a renewed emphasis on senior housing
properties was appropriate. We believe there are attractive investment
opportunities now available in both commercial office buildings and senior
housing. Also in 1998, based upon conversations with our shareholders and with
potential investors,
17
<PAGE>
we became convinced that many REIT investors prefer to invest in companies that
are focused upon one type of property rather than diversified companies.
In December 1998, we determined to divide HRPT into two separate public
companies, one focused upon office buildings and one focused upon senior
housing. Our original plan was to distribute one share of Senior Housing to our
shareholders for every 10 shares of HRPT owned and to simultaneously complete an
initial public offering of an additional 11 million shares of Senior Housing.
Recently, we abandoned our plans for an initial public offering of Senior
Housing shares. Nonetheless, we continue to believe that two separate companies,
one focused upon office buildings and one focused upon senior housing
properties, may be able to take better advantage of their respective growth
opportunities. For this reason, in July 1999 we determined to proceed with this
spin-off. Because we are not selling any shares of Senior Housing at this time,
HRPT will retain a larger percentage ownership of Senior Housing than it had
planned to retain in December 1998. Our board of trustees has unanimously
approved the spin-off as being in the best interests of our shareholders.
MANNER OF EFFECTING THE SPIN-OFF
In order to effect the spin-off, we and Senior Housing have taken and expect
to take various actions, including the following:
- In December 1998 we organized Senior Housing as a Maryland REIT which is
100% owned by HRPT. At the time it was organized, Senior Housing had 26.4
million shares outstanding. Since that time some of these shares have been
cancelled and there are now 26 million shares outstanding.
- In June and July 1999 we transferred title to 93 senior housing
investments to other 100% owned REIT subsidiaries of HRPT. These senior
housing subsidiaries were newly created and all their assets and
liabilities relate to these 93 investments.
- In July 1999 Senior Housing accepted a commitment for a new bank credit
facility for up to $350 million. This line of credit is currently
effective.
- On September 1, 1999, HRPT transferred 100% of the ownership of its senior
housing subsidiaries to Senior Housing. In consideration of these
transfers, Senior Housing and one of its subsidiaries agreed to pay $200
million to HRPT. On the date the spin-off is completed 13.2 million shares
of Senior Housing will be distributed to HRPT shareholders.
- Shortly after completion of the spin-off, Senior Housing will borrow $200
million under its bank credit facility and pay its formation debt to HRPT.
HRPT intends to use this $200 million to prepay senior debt.
THE TRANSACTION AGREEMENT
In order to evidence the actions necessary to effect the spin-off and to
govern their relations after the spin-off, HRPT and Senior Housing entered a
transaction agreement. The form of this transaction agreement has been filed
with the SEC as an exhibit to the registration statement of which this
prospectus is a part. If you want more information about the actions which have
been and will be taken to effect the spin-off or about the agreements between
HRPT and Senior Housing
18
<PAGE>
concerning their future relations, you should read the entire transaction
agreement. The provisions of the transaction agreement are summarized as
follows:
- Interest on the $200 million formation debt from Senior Housing and its
subsidiary to HRPT is charged at the same rate as HRPT's weighted average
cost of debt. On September 1, 1999, this interest rate was 7.1% per annum.
- The formation debt will be due and payable by Senior Housing to HRPT
within 10 days after the spin-off. If the formation debt is not timely
paid Senior Housing will be required to secure this debt.
- On the spin-off date, HRPT will make an additional capital contribution to
Senior Housing, in cash, of $1 million, plus $169,500 times the number of
days from and including July 1, 1999, to and excluding the spin-off date.
- HRPT will indemnify Senior Housing with respect to any liability relating
to any property transferred to Senior Housing which arises from litigation
pending at the time of the spin-off.
- Senior Housing will indemnify HRPT from any liability relating to any
property transferred by HRPT to Senior Housing which arises after the
spin-off.
- HRPT and Senior Housing have agreed not to compete with each other.
Specifically, so long as: (a) HRPT remains a more than 10% shareholder of
Senior Housing; (b) HRPT and Senior Housing engage the same investment
advisor; or (c) HRPT and Senior Housing have one or more common managing
trustees; then
--HRPT will not invest in properties involving senior housing without the
prior consent of Senior Housing's independent trustees;
--Senior Housing will not invest in office buildings, including medical
office buildings or clinical laboratory buildings, without the prior
approval of HRPT's independent trustees; and
--If a particular investment involves both senior housing and office
components the character of the investment will be determined by building
area, excluding common areas, unless the boards of trustees of both Senior
Housing and HRPT otherwise agree at that time. Also, these non-competition
provisions will not apply to any investments held by HRPT at the time of
the spin-off.
- HRPT and Senior Housing will cooperate to enforce the ownership
limitations in their respective declarations of trust as may be
appropriate to continue their tax status as REITs and otherwise.
- HRPT and Senior Housing will cooperate to file future tax returns
including appropriate allocations of taxable income, expenses and other
tax attributes.
- HRPT will not sell any of its retained 12.8 million Senior Housing shares
for a period of at least one year following the spin-off without the
consent of Senior Housing's independent trustees.
- HRPT will pay all expenses of the spin-off including the costs of
distributing Senior Housing shares to its shareholders, legal and
accounting charges, SEC filing fees, NYSE listing fees and the up-front
costs of establishing Senior Housing's bank credit facility.
19
<PAGE>
INFORMATION ABOUT HRPT PROPERTIES TRUST AFTER THE SPIN-OFF
HRPT is a REIT that acquires, owns and leases office buildings. After the
spin-off we will own 175 office buildings which had an original cost of $2.5
billion. Of these, 89 are commercial office buildings which had an original cost
of almost $1.6 billion, 28 are buildings leased to the U.S. Government which had
an original cost of $446 million and 58 are medical office and biotechnology
buildings which had an original cost of $445 million. We will also own 4 million
shares of Hospitality Properties and 12.8 million shares of Senior Housing.
HRPT INVESTMENTS
COMMERCIAL OFFICE BUILDINGS. Almost $1.6 billion of our total investments
in office buildings are in multi-tenant commercial buildings. We believe that
current business trends have created favorable investment opportunities for
commercial office properties: some institutional investors have begun disposing
of their direct ownership of properties and investing in more liquid real estate
securities; purchasers of distressed properties in the early 1990s are now
divesting their improved assets; and many businesses are selling their owned
real estate to invest proceeds in core activities. Moreover, unlike many REITs
that buy commercial office buildings, our focus is to acquire stabilized office
buildings with long term leases to strong credit tenants rather than buildings
that might afford turnaround potential because of vacancies or short term
leases.
GOVERNMENT OFFICE BUILDINGS. Over $400 million of our investments in office
buildings are in buildings majority leased to the U.S. Government. Most U.S.
Government office space requirements are managed by the General Services
Administration, the GSA. Most large GSA leases are for initial terms of 10 to 20
years plus renewal options for an additional 5 to 20 years. Many GSA leases
permit the Government to terminate by notice given any time after a so-called
"firm term." The weighted average remaining firm term for our Government tenants
is approximately six years. From 1980 to September 1996, the amount of space
leased by the GSA increased from 139 million square feet to 146 million square
feet. We believe that the GSA's demand for leased space will continue to be
strong as a result of federal budget pressure to limit capital expenditures and
the need to use funds available for capital expenditures to modernize GSA-owned
buildings, over half of which exceed 50 years of age. Based upon the
Government's investments in tenant improvements to our properties, the high cost
of relocation and the stability of the missions and space requirements of the
Government agencies that occupy our properties, we believe that there is a high
probability of GSA lease renewals for our properties through their renewal
options, and in many cases beyond those periods. Moreover, because of the
locations of many of these Government leased buildings and the high standards to
which they have been built, we may be able to lease most of these buildings to
commercial users at comparable or higher rents in the event the Government
terminates or fails to renew any of these leases.
MEDICAL AND BIOTECHNOLOGY BUILDINGS. Over $400 million of our investments
in office buildings are leased to medical providers and to companies engaged in
biotech research and development. The largest of our multi-tenant medical office
buildings is the Cedars Sinai Medical Towers in Los Angeles, California, which
includes 330,715 square feet leased to 115 separate medical practice groups.
This property includes two garages with parking for over 1,600 cars and is
attached by a footbridge to Cedars Sinai Medical Center, one of the largest
hospitals in the western United States. It is our experience that most medical
tenants regularly renew leases at locations which are convenient for the
physicians and their patients. For example, the Cedars Sinai Medical Towers'
current occupancy is almost 100% and, during the early 1990s when many Southern
California office properties suffered occupancy declines, the occupancy at this
property was never below 91%. Similarly, we currently own several biotech
properties in the areas of San Diego, California and
20
<PAGE>
Boston, Massachusetts. The tenants at these buildings have often invested large
amounts in leasehold improvements which would make their relocation difficult
and expensive. Accordingly, it is our expectation that these tenants will
regularly renew expiring leases.
EQUITY INVESTMENT IN HOSPITALITY PROPERTIES TRUST. We have invested $100
million in 4 million common shares of Hospitality Properties, which constitute
7.1% of the total Hospitality Properties common shares outstanding. Hospitality
Properties is a REIT in the business of owning hotels and leasing them to hotel
operating companies. We organized Hospitality Properties in February 1995 as an
outgrowth of our relationship with Host Marriott Corporation and Marriott
International, Inc., which arose from our previous investment in retirement
communities leased to Marriott International. Since August 1995, Hospitality
Properties has successfully completed several public offerings of shares and on
September 1, 1999, had a total market capitalization of $1.9 billion.
Hospitality Properties currently owns or has commitments to purchase 210 hotels,
which are located in 35 states and contain 28,451 rooms. We receive
distributions on our Hospitality Properties shares at the current annual rate of
$2.76 per share. Our financial reports include our share of Hospitality
Properties' operating results using the equity method of accounting. Hospitality
Properties shares are listed on the NYSE, and on September 1, 1999 the last
reported sale price for Hospitality Properties common shares was $25.50 per
share.
EQUITY INVESTMENT IN SENIOR HOUSING PROPERTIES TRUST. After the spin-off
HRPT will retain 12.8 million shares of Senior Housing, which will constitute
49% of the total Senior Housing shares outstanding. Senior Housing is expected
to pay distributions at an initial annual rate of $2.40 per share. HRPT's
financial reports will include Senior Housing operating results using the equity
method of accounting. HRPT does not intend to invest additional money in Senior
Housing, and as Senior Housing grows its investments and issues additional
shares to raise capital we expect that HRPT's ownership percentage of Senior
Housing will decline. We have agreed not to sell these shares, without the
consent of Senior Housing's independent trustees, for a period of one year
following the spin-off transaction. Thereafter, depending upon market
conditions, HRPT may sell these shares to raise capital to invest in additional
office buildings.
PENDING ACQUISITIONS. As of September 1, 1999 we had entered into purchase
agreements to acquire 13 additional office properties for $81.4 million. We
expect to buy these properties during the remainder of 1999, subject to the
satisfactory completion of our diligence. In the normal course of our business
we regularly evaluate opportunities to acquire properties. We currently have
several investment opportunities under consideration. We may acquire additional
office buildings involving material amounts in the future.
DEVELOPMENT ACTIVITIES. HRPT regularly has several million dollars worth of
construction activity underway. Most of this work is tenant fit out, repairs,
maintenance and redevelopment types of construction activities. We believe that
we have the capacity to develop commercial office buildings, but to date we have
not done any speculative development. We currently own a large tract of land in
Austin, Texas and another tract of land in the area of Pittsburgh,
Pennsylvania's new airport which are appropriate for office building
development. Also, several of the office buildings we own have sufficient
adjacent land for new office development. The two large sites and all of the
development sites we own are ancillary investments to existing, fully developed
office buildings. We are currently exploring the possibility of doing
build-to-suit developments on some of our developable land. We estimate that
land we own can support development of approximately 2.9 million square feet of
new office space.
21
<PAGE>
LOCATION OF HRPT OFFICE BUILDINGS
We own 175 office buildings located in 27 states and the District of
Columbia.
[MAP]
<TABLE>
<CAPTION>
NO. OF NO. OF
STATE BUILDINGS STATE BUILDINGS
- -------------------------- ------------- INVESTMENT -------------------------- ------------- INVESTMENT
----------- -----------
(000S) (000S)
<S> <C> <C> <C> <C> <C>
Alaska.................... 1 $1,000 New Hampshire............. 1 $22,147
Arizona................... 6 51,475 New Jersey................ 4 29,947
California................ 18 254,278 New Mexico................ 6 30,298
Colorado.................. 2 20,931 New York.................. 9 266,270
Connecticut............... 2 14,326 Ohio...................... 1 15,275
Delaware.................. 2 58,931 Oklahoma.................. 6 46,262
District of Columbia...... 5 207,855 Pennsylvania.............. 23 582,548
Florida................... 4 11,618 Rhode Island.............. 1 8,010
Georgia................... 1 2,984 Tennessee................. 1 22,325
Kansas.................... 1 5,949 Texas..................... 28 326,315
Maryland.................. 8 164,013 Virginia.................. 4 54,107
Massachusetts............. 29 169,799 Washington................ 2 21,388
Minnesota................. 7 68,504 West Virginia............. 1 4,898
Missouri.................. 1 7,776 Wyoming................... 1 10,318
--- -----------
Total..................... 175 $2,479,547
--- -----------
--- -----------
</TABLE>
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<PAGE>
We intentionally diversify our office investments geographically. At the
same time, we attempt to acquire multiple properties in selected markets to
promote economic efficiencies. We define a market area to include the geographic
area which we believe can be efficiently managed from one central location. The
market areas of the United States which constitute five percent or more of our
total office investments are as follows:
<TABLE>
<CAPTION>
MARKET AREA NO. OF BUILDINGS SQUARE FEET
- --------------------------------- --------------------- INVESTMENT ----------------
----------------
(000S)
<S> <C> <C> <C>
Philadelphia, PA................. 17 $530,288 (21%) 3,541,006 (19%)
Austin, TX....................... 25 301,534 (12%) 2,653,088 (15%)
Washington, DC................... 16 409,322 (17%) 2,177,901 (12%)
Boston, MA....................... 30 191,946 (8%) 1,603,149 (9%)
Southern CA...................... 17 250,351 (10%) 1,126,171 (6%)
</TABLE>
HRPT TENANTS
HRPT prefers to lease its properties to strong credit tenants. Our largest
tenant is the U.S. Government. Fifty-two percent of our office rent is derived
from companies whose senior unsecured obligations are rated investment grade.
Ten percent of our office rent comes from other public companies that are not
rated investment grade but for whom credit evaluation information is readily
available. Approximately 27% of our private company tenants are large law,
accounting and professional service firms which we believe have strong credit
characteristics but which are not investment grade rated.
<TABLE>
<CAPTION>
PERCENTAGE OF
TENANT OFFICE RENT(1)
- ----------------------------------------------------------------------- ---------------
<S> <C>
U.S. Government........................................................ 18.5%
Other investment grade tenants......................................... 33.9%
Other publicly owned tenants........................................... 10.0%
-----
Subtotal investment grade and publicly owned tenants................... 62.4%
Other tenants.......................................................... 37.6%
-----
Total.................................................................. 100.0%
-----
-----
</TABLE>
- ------------------------
(1) Percentage of office rent is based on leases in effect on July 31, 1999.
About 71% of our office rent is gross rent; 10% of our office rent is net
rent; most of our Government leases require modified gross rent.
Accordingly, the data shown in this table is not necessarily indicative of
contributions to our net operating income.
23
<PAGE>
Other than the U.S. Government, no tenant accounts for more than 5% of our
office rents. The following is a list of all our other tenants who are
responsible for 1% or more of our rents:
<TABLE>
<CAPTION>
PERCENTAGE OF
TENANT OFFICE RENT
- --------------------------------------------------------------------- -----------------
<S> <C>
SmithKline Beecham plc............................................... 4.0%
Health Insurance Plan of New York.................................... 2.8%
Solectron Corporation................................................ 2.7%
FMC Corporation...................................................... 2.4%
PNC Bank Corp........................................................ 2.2%
Mellon Bank Corporation.............................................. 2.0%
Motorola, Inc........................................................ 1.9%
Ballard Spahr Andrews & Ingersoll, LLP............................... 1.6%
Chase Corporation.................................................... 1.6%
Fallon Health Clinics, Inc........................................... 1.4%
Raytheon Company..................................................... 1.4%
Cedars Sinai Medical Center.......................................... 1.3%
Marsh & McLennan Companies, Inc...................................... 1.3%
The Limited, Inc..................................................... 1.2%
Capital Cities Media, Inc............................................ 1.1%
</TABLE>
24
<PAGE>
HRPT LEASE EXPIRATIONS
HRPT generally prefers to enter into longer term leases with periodic rent
adjustments rather than short term or fixed rate leases. The following table
sets forth the percentage of our office rent and occupied square feet
represented by leases that expire in the years indicated.
<TABLE>
<CAPTION>
PERCENTAGE
PERCENTAGE OF OCCUPIED OF OCCUPIED
YEAR OFFICE RENT SQUARE FEET(2) SQUARE FEET
- ------------------------------------------------- OFFICE RENT(1) --------------- --------------- ---------------
---------------
(000S)
<S> <C> <C> <C> <C>
1999............................................. $7,194 2.0% 249,433 1.4%
2000............................................. 24,095 6.6% 1,008,413 5.7%
2001............................................. 43,906 12.0% 1,787,704 10.1%
2002............................................. 28,980 7.9% 1,225,962 6.9%
2003............................................. 44,470 12.2% 1,819,422 10.2%
2004............................................. 40,046 10.9% 1,831,473 10.3%
2005............................................. 30,551 8.4% 1,565,720 8.8%
2006............................................. 25,732 7.0% 1,247,197 7.0%
2007............................................. 22,923 6.3% 1,428,692 8.0%
2008............................................. 7,392 2.0% 306,789 1.7%
2009 and thereafter.............................. 90,415 24.7% 5,320,862 29.9%
--------------- ----- --------------- -----
Totals........................................... $365,704 100.0% 17,791,667 100.0%
--------------- ----- --------------- -----
--------------- ----- --------------- -----
</TABLE>
- ------------------------
(1) Office rent represents rents due under leases that existed as of July 31,
1999. Total rent for office properties for the year ended December 31, 1998,
was $245,955,000, and total rent for office properties for the six months
ended June 30, 1999 was $158,889,000. About 71% of our office rent is gross
rent; 10% of our office rent is net rent; most of our Government leases
require modified gross rent. Accordingly, the rent shown in this table is
not necessarily indicative of contributions to our net operating income.
(2) Represents square feet occupied as of July 31, 1999. This 17.8 million
square feet of occupied space accounts for 98% of our total office space
available for rent.
25
<PAGE>
HRPT MANAGEMENT
After the spin-off, the trustees and executive officers of HRPT will be as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------- --- --------------------------------------------------
<S> <C> <C>
Barry M. Portnoy............... 54 Managing Trustee (term will expire in 2002)
Gerard M. Martin............... 64 Managing Trustee (term will expire in 2000)
Rev. Justinian Manning, C.P.... 73 Independent Trustee (term will expire in 2000)
Patrick F. Donelan............. 57 Independent Trustee (term will expire in 2001)
Vacancy........................ Independent Trustee (term will expire in 2002)
John A. Mannix................. 43 President and Chief Operating Officer
John Popeo..................... 39 Treasurer, Chief Financial Officer and Secretary
David M. Lepore................ 39 Senior Vice President
</TABLE>
BARRY M. PORTNOY has been a managing trustee of both HRPT and Hospitality
Properties since their organization in 1986 and 1995, respectively. Mr. Portnoy
is also a Director and 50% owner of Reit Management. Mr. Portnoy has been
actively involved in real estate and real estate finance activities as an
attorney, investor and manager for over 20 years. Mr. Portnoy was a partner in
the law firm of Sullivan & Worcester LLP, Boston, Massachusetts from 1978
through March 31, 1997, and he served as Chairman of that firm from 1994 through
March 1997.
GERARD M. MARTIN has been a managing trustee of both HRPT and Hospitality
Properties since their organization in 1986 and 1995, respectively. Mr. Martin
is also a Director and 50% owner of Reit Management. Mr. Martin has been active
in the real estate and senior housing industries as a developer, owner and
manager for approximately 30 years. During the past five years, Mr. Martin's
principal employment has been as a managing trustee of HRPT and Hospitality
Properties.
THE REVEREND JUSTINIAN MANNING, C.P. has been, since September 1990, the
pastor of St. Gabriel's parish in Brighton, Massachusetts. He is also on the
Board of Directors of Charlesview, a low and moderate income housing program. He
is past Treasurer and a former Director of St. Paul's Benevolent, Educational
and Missionary Institute, a New Jersey corporation, which oversees foundations
in various states and the Institute's Overseas Missions. He was formerly on the
Board of Directors of St. Paul's Monastery Manor in Pittsburgh, Pennsylvania, a
congregate housing facility. He belonged to the Provincial Council of the
Passionist Provincialate and is the former Director of Consolidation for the
Community.
PATRICK F. DONELAN has been since 1998 a Director of Dresdner Kleinwort
Benson, and since 1996 an Executive Vice President of Dresdner Kleinwort Benson
North America LLC, a New York based bank, which is a subsidiary of Dresdner Bank
AG of Germany. Prior to 1996 Mr. Donelan was Chairman of Kleinwort Benson North
America, Inc., a subsidiary of Kleinwort Benson Ltd. of England, which was
acquired by Dresdner Bank AG in 1995.
VACANCY. Currently our third independent trustee is Dr. Bruce Gans. Upon
completion of this spin-off Dr. Gans will resign from HRPT and be elected an
independent trustee of Senior Housing. We intend to elect a third independent
trustee after Dr. Gans resigns, but we have not yet selected anyone to fill this
position.
JOHN A. MANNIX will become our President and Chief Operating Officer upon
completion of the spin-off. Mr. Mannix has served as our Executive Vice
President since May 1998. Mr. Mannix has been a Vice President of our investment
advisor, Reit Management, and its affiliates since 1989. Mr. Mannix is a member
of the Urban Land Institute.
JOHN POPEO will become our Treasurer, Chief Financial Officer and Secretary
upon completion of the spin-off. Mr. Popeo has been the Treasurer and Chief
Financial Officer of Reit Management
26
<PAGE>
since 1997. Prior to 1997, he was employed by The Beacon Companies from 1988
through 1992 and as Vice President and Controller from 1996 through 1997. From
1992 through 1996 he was employed by First Winthrop Corp. as Vice President and
Controller. Mr. Popeo has held various positions in the real estate industry
from 1985 through 1988, prior to which he was employed by the public accounting
firm of Laventhol and Horwath. Mr. Popeo is a certified public accountant.
DAVID M. LEPORE is our Senior Vice President. Mr. Lepore is responsible for
building operations, leasing and acquisition diligence for our properties. Mr.
Lepore has been employed in various capacities by our investment advisor, Reit
Management, since 1992. Prior to 1992 he was employed by The Beacon Companies.
Mr. Lepore is a member of Building Owners and Managers Association and is a
certified Real Property Administrator.
ADDITIONAL INFORMATION ABOUT HRPT
If you would like more information about HRPT than is included in this
prospectus, you should study the public information which we have filed with the
SEC.
27
<PAGE>
INFORMATION ABOUT SENIOR HOUSING PROPERTIES TRUST
GENERAL
Senior Housing is a REIT organized under Maryland law to acquire, own and
lease senior apartments, congregate communities, assisted living properties and
nursing homes. Senior Housing owns 93 properties which have 13,571 units and are
leased to nine different tenants.
GROWTH STRATEGY
The population of the United States is aging. Senior Housing believes that
this demographic fact will increase the demand for existing senior apartments,
congregate communities, assisted living properties and nursing homes and
encourage development of new properties. Senior Housing's basic business plan is
to profit from the increasing demand in two ways. First, Senior Housing intends
to purchase additional properties and lease them at initial rents that are
greater than its costs of acquisition capital. Second, Senior Housing intends to
structure leases that provide for periodic rental increases based in part upon
gross operating revenue increases at its properties.
A primary purpose of the spin-off is to form a new REIT with a strong core
of senior housing real estate and a management team dedicated to take advantage
of present market conditions. To facilitate these efforts two senior officers of
Senior Housing's investment advisor will devote approximately 75% of their
business time to growing Senior Housing's business. David J. Hegarty is
currently the President and Chief Operating Officer of both Reit Management and
HRPT and a Director of Reit Management. Ajay Saini is currently a Vice President
of Reit Management and Treasurer and Chief Financial Officer of HRPT. Upon
completion of the spin-off, Messrs. Hegarty and Saini will resign their
positions at HRPT and assume similar positions at Senior Housing. Mr. Hegarty
will remain an officer and a Director of Reit Management and Mr. Saini will
remain an officer of Reit Management. Other personnel of Reit Management
including Senior Housing's managing trustees, Messrs. Portnoy and Martin, will
also devote a significant part of their time to assist in Senior Housing's
growth efforts.
Senior Housing believes that current market conditions make a focus on
senior housing investments appropriate at this time for the following reasons:
- A large number of new properties developed by start up assisted living
companies during the past few years have been completed and are now
available for investment with limited start up risks.
- The current shortage of debt and equity capital for real estate
investments associated with healthcare has reduced the financing options
available to all senior housing property owners and limited the amount of
new development activities being undertaken.
- The combination of the foregoing circumstances has made prices of senior
housing properties, especially nursing homes, more attractive than they
have been during the past three years.
Senior Housing will use bank loans initially to fund its acquisitions.
Periodically, Senior Housing will repay the bank loans with long term debt or
equity issuances. For more information about Senior Housing's bank credit
facility, see "Senior Housing Policies--Financing Policies" on page 66 of this
prospectus.
28
<PAGE>
HISTORY AND MANAGEMENT
Senior Housing is currently a 100% owned subsidiary of HRPT. There are 26
million shares of Senior Housing outstanding. As part of the spin-off HRPT will
distribute 13.2 million Senior Housing shares to HRPT's shareholders on the
basis of one Senior Housing share for every 10 HRPT shares owned on the record
date of October 8, 1999. After the spin-off Senior Housing will be a separate
public company, 51% owned by the public and 49% owned by HRPT, and Senior
Housing's shares will trade on the NYSE. For more information about the
formation of Senior Housing, see "The Spin-Off" on page 17 of this prospectus.
Senior Housing's operations will be conducted by its investment advisor. The
investment advisor has approximately 180 full time employees, including a
headquarters management staff, four regional offices and other personnel located
throughout the United States. Based upon 13 years of investing and managing
senior housing real estate through HRPT and four years of operating Hospitality
Properties, Reit Management and its principals have experience in managing REITs
to produce increasing distributions and have extensive contacts in the senior
housing industry. Senior Housing believes that this experience and these
contacts will allow Senior Housing to keep abreast of industry developments and
learn of business opportunities as they occur.
The principals of Reit Management, Barry M. Portnoy and Gerard M. Martin,
founded HRPT in 1986 as a public company with $63 million invested in seven
healthcare properties leased to two tenants. Since 1986, under the direction of
Messrs. Portnoy and Martin and other personnel of Reit Management, HRPT has made
51 consecutive quarterly distributions and has increased its distribution rate
13 times. In 1995 Reit Management organized Hospitality Properties, a REIT that
invests in hotel properties. At its initial public offering in August 1995,
Hospitality Properties had $329 million invested in 37 hotels leased to one
tenant. Since it was founded in 1995, Hospitality Properties has raised
approximately $2 billion of capital, paid 16 consecutive quarterly distributions
and increased its distribution rate 11 times. YOU SHOULD NOTE THAT THE PAST
SUCCESS OF REIT MANAGEMENT AND ITS AFFILIATE IN MANAGING HRPT AND HOSPITALITY
PROPERTIES IS NOT NECESSARILY INDICATIVE OF WHAT SENIOR HOUSING'S PERFORMANCE
WILL BE. IN PARTICULAR, HRPT AND HOSPITALITY PROPERTIES HAVE OPERATED IN MARKET
CONDITIONS WHICH ARE SUBSTANTIALLY DIFFERENT FROM THE MARKET CONDITIONS IN WHICH
SENIOR HOUSING WILL OPERATE.
SENIOR HOUSING REAL ESTATE MARKET
DEMAND GROWTH. Senior Housing believes that three important demographic
trends will increase demand for senior apartments, congregate communities,
assisted living properties and nursing homes for the foreseeable future:
- First, the U.S. Census Bureau has projected that the U.S. population over
age 85 will increase from 3.1 million in 1990, to 4.3 million in 2000, to
5.7 million in 2010 and to 6.5 million in 2020. As people age they have an
increasing need for the type of assistance with daily living activities
that is provided in senior apartments, congregate communities, assisted
living properties and nursing homes. This is because old age is usually
accompanied by various physical disabilities and because the aging process
sometimes is accompanied by Alzheimer's disease and other forms of
dementia that require specialized, secure housing.
- Second, societal changes during the past 35 years in the U.S. have made
senior housing more often required than in historical periods. The
increasing percentage of women working away from their homes, the high
divorce rate and societal mobility have all combined to make traditional
arrangements of family care for aging relatives less available. These
social trends show no sign of reversal in the foreseeable future.
29
<PAGE>
- Third, economic factors appear to encourage demand for specialized senior
housing properties. Although some people extol the benefits of homemaker
services and home healthcare, it is generally more economically efficient
to congregate the elderly in properties with specialized services than to
bring those services to diverse locations. Similarly, the cost containment
pressure to reduce lengths of stay for the elderly in high cost
specialized properties such as hospitals has increased the need for
intermediate care properties.
PAYMENT ISSUES. Since the introduction of the Medicare and Medicaid
programs in the late 1960s, governments have become the principal payment source
for senior housing properties in which healthcare services are provided, such as
nursing homes. In the past few years a number of federal and state laws have
been enacted to reduce the growth of Medicare and Medicaid expenditures. These
laws have made it less profitable to own and operate senior housing properties
in which healthcare services are provided.
Senior Housing believes that the net effect of the increasing demand for
senior housing properties and the payment limitations in the Medicare and
Medicaid programs may make it increasingly profitable to own and operate senior
housing properties which are able to attract residents who use private resources
to pay occupancy costs and increasingly less profitable to own and operate
senior housing properties which depend upon the Medicare and Medicaid programs.
TYPES OF PROPERTIES
Senior Housing expects to invest in properties which offer four types of
senior housing accommodations, including some properties that combine more than
one type in a single building or campus.
SENIOR APARTMENTS. Senior apartments are marketed to residents who are
generally capable of caring for themselves. Residence is generally restricted on
the basis of age. Purpose built properties may have special function rooms,
concierge services, high levels of security and centralized call buttons for
emergency use. Tenants at these properties who need healthcare or assistance
with the activities of daily living are expected to contract independently for
those services with homemakers or home healthcare companies.
CONGREGATE COMMUNITIES. Congregate communities also provide a high level of
privacy to residents and require residents to be capable of relatively high
degrees of independence. Unlike a senior apartment property, a congregate
community usually bundles several services as part of a regular monthly
charge--for example, one or two meals per day in a central dining room, weekly
maid service or a social director. Additional services are generally available
from staff employees on a fee-for-service charge basis. In some congregate
communities, separate parts of the property are dedicated to assisted living or
nursing services.
ASSISTED LIVING PROPERTIES. Assisted living properties are typically
comprised of one bedroom suites which include private bathrooms and efficiency
kitchens. Services provided usually include three meals per day in a central
dining room, daily housekeeping, laundry, medical reminders and 24 hour
availability of assistance with the activities of daily living such as dressing
and bathing. Professional nursing and healthcare services are usually available
at the facility on call or at regularly scheduled times. Since the early 1990s
there has been an explosive growth in the number of small public companies
developing purpose built assisted living properties. Many of those properties
have recently been completed and are now fully occupied and appropriate
investments for Senior Housing.
30
<PAGE>
NURSING HOMES. Nursing homes generally provide extensive nursing and
healthcare services similar to those available in hospitals, without the high
costs associated with operating theaters, emergency rooms or intensive care
units. A typical purpose built nursing home includes mostly two-bed rooms with a
separate toilet in each room and shared dining and bathing facilities. Some
private rooms are often available for those residents who can afford to pay
higher rates or for patients whose medical conditions require segregation.
Nursing homes are generally staffed by licensed nursing professionals 24 hours
per day.
During the past few years nursing home owners and operators have faced two
significant business challenges. First, the rapid expansion of the assisted
living industry which started in the early 1990s has attracted a number of
residents away from nursing homes. This was especially significant because the
residents who elected assisted living facilities had often previously been the
most profitable residents in the nursing homes--residents who required a lesser
amount of care and who were able to pay higher private rates rather than
government rates. According to a 1998 study by SMG Marketing Group, Inc., the
average occupancy of U.S. nursing homes declined from 93% in 1994 to about 88%
in 1997.
The second major challenge arose as a result of Medicare and Medicaid cost
containment laws beginning in 1994, particularly 1997 federal legislation that
required the Medicare program to implement a prospective payment program for
various subacute services provided in skilled nursing homes. Implementation of
this Medicare prospective payment program began on July 1, 1998. Prior to the
prospective payment program Medicare paid nursing home operators based upon
audited costs for services provided. The prospective payment system sets
Medicare rates based upon government estimated costs of treating specified
medical conditions. Although it is possible that a nursing home may increase its
profit if it is able to provide quality services at below average costs, Senior
Housing believes that the effect of the new Medicare rate setting methodology
will be to reduce the profitability of Medicare services in nursing homes. This
belief is based on similar Medicare changes that were implemented for hospitals
during the 1980s. Several of Senior Housing's tenants have recently reported
significant operating losses, particularly Mariner Post-Acute Network, Inc.,
Integrated Health Services, Inc. and Genesis Health Ventures, Inc.
Starting in 1995 HRPT formed the opinion that the market value of nursing
home properties did not adequately reflect the negative impact of then current
and emerging market conditions. For this reason beginning in 1996 HRPT began to
limit its nursing home purchases and to dispose of nursing home properties which
were dependent upon subacute services paid by Medicare. Senior Housing now
believes that the market is in the process of taking account of these factors
and adjusting the prices of nursing home properties. Senior Housing also
believes that the demographic factors described above combined with the adjusted
pricing levels may make nursing home properties attractive investments at this
time. Senior Housing expects to focus its future assisted living and nursing
home investments in facilities that have a high percentage of non-government
revenues. When Senior Housing invests in assisted living properties and nursing
homes that are dependent upon government revenues it will attempt to set the
purchase prices and rents at levels which are securely covered by existing and
projected cash flows from its tenants' operations.
GOVERNMENT REGULATIONS AND RATE SETTING
SENIOR APARTMENTS. Generally, government programs do not pay for housing in
senior apartments. Rents are paid from the residents' private resources.
Accordingly, the government regulations that apply to these types of properties
are generally limited to zoning, building and fire codes, Americans with
Disabilities Act requirements and other life safety type regulations applicable
to residential real estate. Government rent subsidies and government assisted
development financing
31
<PAGE>
for low income senior housing are exceptions to these general statements. The
development and operation of subsidized senior housing properties are subject to
numerous governmental regulations. While it is possible that Senior Housing may
purchase and lease some subsidized senior apartment properties, it does not
expect these investments to be a major part of its future business, and today it
owns no properties where rent subsidies are applicable.
CONGREGATE COMMUNITIES. Senior Housing understands that generally
government benefits are not available to congregate communities and the resident
charges in these properties are paid from private resources. However, a number
of Federal Supplemental Security Income program benefits pay housing costs for
elderly or disabled residents to live in these types of residential facilities.
The Social Security Act requires states to certify that they will establish and
enforce standards for any category of group living arrangement in which a
significant number of supplemental security income residents reside or are
likely to reside. Categories of living arrangements which may be subject to
these state standards include congregate facilities and assisted living
properties. Because congregate communities usually offer common dining
facilities, in many locations they are required to obtain licenses applicable to
food service establishments in addition to complying with land use and life
safety requirements. In many states, congregate communities are licensed by
state health departments, social service agencies, or offices on aging with
jurisdiction over group residential facilities for seniors. To the extent that
congregate communities maintain units in which assisted living or nursing
services are provided, these units are subject to applicable state regulations.
In some states, insurance or consumer protection agencies regulate congregate
communities in which residents pay entrance fees or prepay other costs.
ASSISTED LIVING. According to the National Academy for State Health Policy,
by early 1999, 32 states provided Medicaid payments for residents in some
assisted living properties under waivers granted by the Health Care Finance
Administration of the U.S. Department of Health and Human Services or under
Medicaid state plans and three other states are planning to do so. Because rates
paid to assisted living property operators are lower than rates paid to nursing
home operators some states use this waiver program as a means of lowering the
cost of services for residents who may not need the higher intensity of medical
care provided in nursing homes. States that administer Medicaid programs for
assisted living facilities are responsible for monitoring the services at and
physical conditions of the participating properties. Different states apply
different standards in these matters, but generally Senior Housing believes
these monitoring processes are similar to the concerned states' inspection
processes for nursing homes.
Because of the large number of states using Medicaid to purchase services at
assisted living properties, it is not surprising that a majority of states have
adopted licensing standards applicable to assisted living facilities. According
to a 1998 study by the National Academy for State Health Policy, 33 states had
taken steps to implement assisted living policies as of June 1998, and 11 others
had instituted processes to study the issue. According to the National
Conference of State Legislatures, 32 states planned to consider legislation
related to assisted living during 1999. State regulatory models vary; there is
no national consensus on a definition of assisted living, and no uniform
approach by the states to regulating assisted living facilities. Some state
licensing standards apply to assisted living facilities whether or not they
accept Medicaid funding. Moreover, the 1998 National Academy for State Health
Policy study referenced above found that several states require certificates of
need from state health planning authorities before new assisted living
properties may be developed. Also, the study found that three states have
adopted moratoria on the development of new assisted living facilities. Based on
Senior Housing's analysis of current economic and regulatory trends, it believes
that assisted living properties that become dependent upon Medicaid payments for
a majority of their revenues will decline in value because Medicaid rates will
fail to keep up with
32
<PAGE>
increasing costs. For the same reason, Senior Housing also believes that
assisted living properties located in states that adopt certificate of need
requirements or otherwise restrict the development of new assisted living
properties will increase in value because these limitations upon development
will help ensure higher occupancy and higher non-governmental rates.
Accordingly, Senior Housing intends to focus new investments in assisted living
properties that are not overly dependent upon governmental revenues and that are
in areas where there are barriers to competition created by certificate of need
laws or otherwise.
One federal government study was recently completed and another is currently
underway to provide background information and make recommendations regarding
the regulation of, and the possibility of increased governmental funding for,
the assisted living industry. In April 1999, the General Accounting Office
issued a report to the Senate Special Committee on Aging and the Committee held
hearings on consumer protection and quality of care issues in assisted living
facilities. The GAO studied assisted living facilities in four states and found
a variety of residential settings serving a wide range of resident health and
care needs. The GAO found that providers often give consumers insufficient
information to determine whether a particular facility can meet their needs and
that state licensing and oversight approaches vary widely. The GAO anticipates
that as the states increase the use of Medicaid to pay for assisted living,
federal financing will likewise grow, and these trends will focus more public
attention on the place of assisted living in the continuum of long-term care and
upon state standards and compliance approaches. The second study is being
conducted by the Department of Health and Human Services' Assistant Secretary
for Planning and Evaluation and is expected to touch upon all aspects of the
assisted living industry including quality of care and financing. The 1998
National Academy for State Health Policy study referenced above and an April
1999 report on a national survey of assisted living facilities are part of this
second study, which is expected to be completed during 1999. Senior Housing
cannot predict whether these studies will result in governmental policy changes
or new legislation, or what impact any changes may have. Based upon its analysis
of current economic and regulatory trends, Senior Housing does not believe that
the federal government is likely to have a material impact upon the current
regulatory environment in which the assisted living industry operates unless it
also undertakes expanded funding obligations; and Senior Housing does not
believe a materially increased financial commitment from the federal government
is presently likely. However, it does anticipate that assisted living facilities
will increasingly be licensed and regulated by the various states, and that with
the absence of federal standards, the states' policies will continue to vary
widely.
NURSING HOMES. About 67% of all nursing home revenues in 1997 came from
government Medicare and Medicaid programs. Nursing homes are also among the most
highly regulated businesses in the country. The federal and state governments
regularly monitor the quality of care provided at nursing homes and regularly
inspect the physical condition of nursing home properties. These periodic
inspections and occasional changes in life safety and physical plant
requirements sometimes require nursing home owners to spend money for capital
improvements. These mandated capital improvements have in the past usually
resulted in Medicare and Medicaid rate adjustments, albeit on the basis of
amortization of expenditures over extended useful lives of the improvements.
However, under the new Medicare payment system capital costs are part of the
prospective rate and will not be facility specific. Other recent legislative and
regulatory actions with respect to state Medicaid rates and the Medicare
prospective payment system which began being phased in during 1998 are limiting
the reimbursement levels for some nursing home and other eldercare services. At
the same time federal enforcement and oversight of nursing homes is increasing,
thereby making licensing and certification of these facilities more rigorous.
These actions have adversely affected the
33
<PAGE>
revenues and increased the expenses of many nursing home operators, including
several of Senior Housing's tenants.
The federal Health Care Financing Administration, HCFA, has begun to
implement an initiative to increase the effectiveness of Medicare/Medicaid
nursing facility survey and enforcement activities. HCFA's initiative follows
its July 1998 report to Congress on the effectiveness of the survey and
enforcement system, several March 1999 reports by HCFA's Office of Inspector
General concerning quality of care in nursing homes, a July 1998 General
Accounting Office investigation which found inadequate care in a significant
proportion of California nursing homes, a March 1999 GAO report which
recommended that HCFA and the states strengthen their compliance and enforcement
practices to better ensure that nursing homes provide adequate care, and recent
hearings by the Senate Special Committee on Aging on these issues. HCFA plans to
focus survey and enforcement efforts at nursing homes with repeat violations of
Medicare/Medicaid standards, including chain-operated facilities with patterns
of noncompliance. HCFA also plans to require state agencies to use enforcement
sanctions and remedies more promptly and effectively when substandard care is
identified. HCFA is increasing its oversight of state survey agencies. In
addition HCFA has adopted new regulations expanding federal and state authority
to impose civil money penalties in instances of noncompliance. Medicare/Medicaid
survey results for each nursing home are being posted on the internet. Federal
efforts to target fraud and abuse by Medicare and Medicaid providers have also
increased. An adverse determination concerning any tenant's license or
eligibility for Medicare or Medicaid reimbursement could restrict its ability to
pay rent.
Most states also limit the number of nursing homes by requiring developers
to obtain certificates of need before new facilities may be built. Even in those
states such as California and Texas that have eliminated certificate of need
laws, the state health authorities usually have retained other means of limiting
new nursing home development. Examples of these other means are the use of
licensing laws or limitations upon participation in the state Medicaid program.
Senior Housing believes that these governmental limitations generally make
nursing home properties more valuable by extending their useful lives and
limiting competition.
COMPETITION
Several REITs which own apartments have focused some of their investments on
senior apartments. In addition, there are several publicly owned REITs that
today focus upon investing in healthcare real estate. Also, some asset based
finance companies and banks have marketing programs to provide sale leaseback
and mortgage financing for these types of properties. Some of these competitors
have resources that are greater than those which Senior Housing has and some
have a lower cost of capital. For example, Pacific Gulf Properties, Inc. is an
established REIT with $876 million in total assets that develops and owns senior
housing properties. Healthcare Property Investors, Inc., with assets of $1.5
billion, and Nationwide Health Properties, Inc., with assets of $1.4 billion,
both emphasize investments in assisted living properties and both have good
access to debt capital because of their investment grade ratings. Also, GMAC, a
finance affiliate of General Motors Corporation, has a group of personnel that
focus upon making nursing home mortgage loans. Nonetheless, Senior Housing
believes that it will be able to successfully compete for new investments for at
least five reasons:
First, Senior Housing will commence business with a large and diversified
portfolio of properties that are subject to long term leases.
Second, unlike most of its competitors, Senior Housing will be exclusively
focused on senior housing properties. Senior Housing does not intend to invest
in medical office buildings or any properties which do not benefit from the
projected aging of the American population.
34
<PAGE>
Third, current market conditions have created an opportunity for a new
market entrant to invest in senior housing properties. A large number of
recently developed properties are currently available for purchase. Concerns
about the new Medicare prospective payment system have limited capital for new
development and have reduced financing alternatives available to some of Senior
Housing's competitors and prospective tenants. These same concerns have caused
nursing homes to be revalued so that purchase prices and rents can be set at
levels which are well covered by current and projected property operations.
Fourth, Senior Housing's proposed methods of doing business are intended to
be attractive to prospective sellers and tenants. Senior Housing intends to do
business with sellers and tenants who are unaffiliated with it and to retain the
financial flexibility to work with tenants to meet their business requirements.
Some of Senior Housing's REIT competitors are under common control with large
tenants which compete with other prospective tenants. This fact often makes
sellers and tenants reluctant to disclose to their competitors the operating
information necessary for a successful transaction. Some of the finance
companies that target healthcare property investments and some healthcare REITs
that emphasize mortgage lending depend upon the asset backed bond markets for
funding. Asset backed financing has historically afforded borrowers and tenants
limited flexibility to adjust mortgage or lease terms to accommodate changes in
the tenants' businesses during long term leases. Although Senior Housing may
borrow on a secured basis, it expects to retain title to all of its property
investments in order to be able to work with tenants to meet their business
requirements.
Finally, and perhaps most importantly, Senior Housing's investment advisor,
Reit Management, and Messrs. Portnoy, Martin, Hegarty and Saini have experience
and contacts in the senior housing real estate market based upon their history
of acquiring and managing senior housing investments through HRPT.
35
<PAGE>
SENIOR HOUSING DISTRIBUTION POLICY
After completion of the spin-off, Senior Housing intends to make regular
quarterly distributions to shareholders. The initial distribution of $0.60 per
Senior Housing share will relate to the 1999 third quarter and will be paid to
Senior Housing shareholders of record on October 20, 1999. Cash distributions
are paid about 30 days after the record date. Senior Housing intends to maintain
this rate for one year following the spin-off unless its operating results
differ materially from what it now expects. Senior Housing expects that this
distribution rate will exceed its minimum distribution requirement to maintain
REIT status and will exceed its earnings. Distributions in excess of earnings
represent return of capital for federal income tax purposes. Assuming that its
distribution rate remains unchanged for the next year, and that its earnings for
this period are as estimated in the table below, Senior Housing estimates that
approximately 19% of its annual distributions in its first year of operations
will be a return of capital. The percent of annual distributions which will be a
return of capital for tax purposes will vary from tax year to tax year. Under
current law, distributions in excess of earnings which are a return of capital
are not taxable but these amounts reduce a shareholder's basis in his shares,
and, accordingly, increase taxable gains when shares are sold. For a more
detailed discussion of the tax consequences of Senior Housing's distributions,
see "Federal Income Tax and ERISA Consequences" beginning on page 78 of this
prospectus.
The initial distribution rate was set based upon Senior Housing's estimate
of the cash available for distribution and FFO it believes it will realize from
its existing properties during the year following the spin-off. All future
distributions will be set by its board of trustees. When deciding the amount of
future distributions Senior Housing expects its board of trustees will primarily
consider the actual cash available for distribution and FFO realized and
projections of future cash available for distribution and FFO. However, in
making these decisions the board may consider capital requirements, the legal
requirements that REITs distribute at least 95% of net taxable earnings and
other factors the board deems relevant from time to time. The amounts of future
cash available for distribution, FFO and distributions are not now known or
knowable and they cannot be assured.
The following table sets forth Senior Housing's calculation of estimated
earnings, FFO and cash available for distribution for the twelve months
following the spin-off. In making these estimates Senior Housing has started its
calculation with historical audited operating results and made adjustments to
reflect known events which have occurred and events which it expects to occur at
or shortly after the completion of the spin-off. In this calculation no effect
is shown from changes in working capital, I.E., changes in current assets or
current liabilities, because these changes are not expected to be material.
Similarly, except for the $200 million to be borrowed under Senior Housing's
bank credit facility, no effect is shown from possible future financing or
investing activities because these activities cannot now be estimated. In
considering this table you should recognize that FFO and cash available for
distribution may not be as good a measure of operating performance as earnings
determined according to generally accepted accounting principles, or GAAP.
Similarly, FFO and cash available for distribution are not intended to
substitute for cash flow determined according to GAAP. Cash available for
distribution and FFO are presented because Senior Housing believes they will be
a basis used by investors to compare Senior Housing's operating results with
those of other REITs, because they were used to set the initial distribution
rate and because Senior Housing expects they will be important considerations
used by Senior Housing's board of trustees to determine future distributions.
36
<PAGE>
CALCULATION OF ESTIMATED EARNINGS, FFO AND CASH AVAILABLE
FOR DISTRIBUTION FOR THE TWELVE MONTHS FOLLOWING THE SPIN-OFF
(000S EXCEPT PER SHARE AMOUNTS AND PERCENTAGES)
<TABLE>
<CAPTION>
PRO FORMA
----------
<S> <C>
Net income for the year ended December 31, 1998........................................... $51,691
Plus: net income for the six months ended June 30, 1999................................. 24,293
Less: net income for the six months ended June 30, 1998................................. (25,219)
----------
Net income for the 12 months ended June 30, 1999.......................................... 50,765
Plus adjusted real estate depreciation for the 12 months following completion of the
spin-off (1)............................................................................ 20,466
----------
FFO for the 12 months following completion of the spin-off (2)............................ 71,231
Net effect of non-cash rents (3).......................................................... (3,076)
----------
Estimated cash flow from operating activities for the 12 months following completion of
the spin-off (4)........................................................................ $68,155
----------
----------
Estimated cash available for distribution for the 12 months following completion of the
spin-off................................................................................ $68,155
----------
----------
Estimated cash distributions for the 12 months following completion of the spin-off (5)... $62,400
----------
----------
Initial annual distribution per share (5)................................................. $2.40
----------
----------
Estimated percentage of distributions in excess of net income for the 12 months following
completion of the spin-off, I.E., return of capital (6)................................. 18.6%
----------
----------
Distribution payout ratio of estimated cash available for distribution for the 12 months
following completion of the spin-off (7)................................................ 91.6%
----------
----------
</TABLE>
- ------------------------
(1) Pro forma real estate depreciation for the year ended December 31, 1998, of
$18.5 million plus pro forma real estate depreciation for the six months
ended June 30, 1999, of $11.2 million minus pro forma real estate
depreciation for the six months ended June 30, 1998, of $9.2 million.
(2) Funds from operations or "FFO," as defined in the white paper on funds from
operations which was approved by the Board of Governors of NAREIT in March
1995, is net income computed in accordance with GAAP, before gains or losses
from sales of properties and extraordinary items, plus depreciation and
amortization and after adjustment for unconsolidated partnerships and joint
ventures. Senior Housing considers FFO to be an appropriate measure of
performance for an equity REIT, along with cash flow from operating
activities, financing activities and investing activities, because it
provides investors with an indication of an equity REIT's ability to incur
and service debt, make capital expenditures, pay distributions and fund
other cash needs. Senior Housing computes FFO in accordance with the
standards established by NAREIT which may not be comparable to FFO reported
by other REITs that do not define the term in accordance with the current
NAREIT definition or that interpret the current NAREIT definition
differently. FFO does not represent cash generated by operating activities
in accordance with GAAP and should not be considered as an alternative to
net income, determined in accordance with GAAP, as an indication of
financial performance or the cash flow from operating activities, determined
in accordance with GAAP, as a measure of liquidity.
37
<PAGE>
(3) Represents the difference between annual rental revenue calculated in
accordance with GAAP and cash amounts currently being paid by tenants.
(4) For purposes of this presentation there are assumed to be no significant
sources or uses of cash for investing and financing activities for the 12
months following completion of the spin-off because Senior Housing is not
now able to estimate these sources and uses.
(5) Based on a total of 26 million shares to be outstanding after the spin-off
and assuming no additional shares are issued and that the distribution rate
remains unchanged.
(6) This estimated percentage is calculated as the excess of estimated cash
distributions for the 12 months following the spin-off of $62,400,000 over
pro forma net income for the 12 months ended June 30, 1999, of $50,765,000
divided by estimated cash distributions for the 12 months following the
spin-off of $62,400,000.
(7) The distribution payout ratio of estimated pro forma FFO for the 12 months
following completion of the spin-off will be 87.6%.
38
<PAGE>
SENIOR HOUSING PROPERTIES
Senior Housing has investments totaling $770 million in 93 properties
located in 26 states:
[CHART]
<TABLE>
<CAPTION>
NO. OF NO. OF
STATE PROPERTIES STATE PROPERTIES
- ------------------------- --------------- INVESTMENT ------------------------- --------------- INVESTMENT
----------- ----------
(000S) (000S)
<S> <C> <C> <C> <C> <C>
Arizona.................. 6 $42,861 Missouri................. 2 $3,788
California............... 8 53,879 Nebraska................. 10 10,667
Colorado................. 8 34,348 New Jersey............... 1 13,007
Connecticut.............. 6 53,762 New York................. 1 10,700
Florida.................. 5 131,990 North Carolina........... 3 6,389
Georgia.................. 4 12,308 Ohio..................... 1 3,445
Illinois................. 2 98,742 Pennsylvania............. 1 15,598
Iowa..................... 6 8,207 South Dakota............. 3 7,589
Kansas................... 1 1,320 Texas.................... 1 12,410
Louisiana................ 1 18,887 Virginia................. 3 57,666
Maryland................. 1 33,080 Washington............... 2 19,542
Massachusetts............ 4 69,562 Wisconsin................ 8 33,904
Michigan................. 2 9,135 Wyoming.................. 3 7,245
-- ----------
Total 93 $770,031
-- ----------
-- ----------
</TABLE>
39
<PAGE>
The following table presents information about the 93 properties that Senior
Housing owns, grouped by tenant:
<TABLE>
<CAPTION>
BUILT/
LOCATION PROPERTY TYPE RENOVATED(1) UNITS/BEDS(2)
- ---------------------------------- ----------------- --------------- --------------- HISTORICAL
INVESTMENT
AT COST(3)
-----------
(000S)
<S> <C> <C> <C> <C>
MARRIOTT INTERNATIONAL, INC.
Scottsdale, AZ Assisted Living 1990 148 $9,926
Sun City, AZ Assisted Living 1990 148 11,916
Laguna Hills, CA Congregate Care 1991 402 31,791
Boca Raton, FL Congregate Care 1999 347 44,836
Deerfield Beach, FL Congregate Care 1986 288 16,935
Fort Myers, FL Congregate Care 1987 463 23,905
Palm Harbor, FL Congregate Care 1992 319 33,863
Port St. Lucie, FL Assisted Living 1993 128 12,451
Arlington Heights, IL Congregate Care 1986 363 36,742
Silver Spring, MD Congregate Care 1992 351 33,080
Bellaire, TX Assisted Living 1991 145 12,410
Arlington, VA Congregate Care 1992 419 18,889
Charlottesville, VA Congregate Care 1991 315 29,829
Virginia Beach, VA Assisted Living 1990 114 8,948
------ -----------
3,950 325,521
BROOKDALE LIVING COMMUNITIES, INC.
Mesa, AZ Congregate Care 1985 185 14,800
Chicago, IL Congregate Care 1990 341 62,000
Brighton, NY Congregate Care 1988 103 10,700
Spokane, WA Congregate Care 1993 200 14,350
------ -----------
829 101,850
MARINER POST-ACUTE NETWORK, INC.
Phoenix, AZ Nursing Home 1984 127 3,185
Yuma, AZ Nursing Home 1984 128 2,326
Yuma, AZ Congregate Care 1984 65 708
Fresno, CA Nursing Home 1985 180 3,503
Lancaster, CA Nursing Home 1994 99 3,488
Newport Beach, CA Nursing Home 1994 167 4,128
Stockton, CA Nursing Home 1991 122 3,136
Tarzana, CA Nursing Home 1969 192 3,060
Thousand Oaks, CA Nursing Home 1970 124 3,454
Van Nuys, CA Nursing Home 1984 58 1,319
Lakewood, CO Nursing Home 1985 175 4,721
Littleton, CO Nursing Home 1965 230 5,576
Concord, NC Nursing Home 1990 110 2,216
Wilson, NC Nursing Home 1990 119 2,402
Winston-Salem, NC Nursing Home 1990 80 1,771
Huron, SD Nursing Home 1977 163 3,256
Huron, SD Congregate Care 1968 59 1,014
Sioux Falls, SD Nursing Home 1979 139 3,319
Brookfield, WI Nursing Home 1995 226 12,697
Clintonville, WI Nursing Home 1965 78 1,761
Clintonville, WI Nursing Home 1969 109 1,747
Madison, WI Nursing Home 1987 73 1,887
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
BUILT/
LOCATION PROPERTY TYPE RENOVATED(1) UNITS/BEDS(2)
- ---------------------------------- ----------------- --------------- ---------------
HISTORICAL
INVESTMENT
AT COST(3)
-----------
(000S)
<S> <C> <C> <C> <C>
Milwaukee, WI Nursing Home 1983 215 $5,043
Milwaukee, WI Nursing Home 1997 102 1,601
Pewaukee, WI Nursing Home 1969 237 3,416
Waukesha, WI Nursing Home 1995 105 5,752
------ -----------
3,482 86,486
INTEGRATED HEALTH SERVICES, INC.
(LEASE NO. 1)
Canon City, CO (4) Nursing Home/
Senior Apartments 1984 157 6,520
Colorado Springs, CO Nursing Home 1996 132 5,481
Delta, CO Nursing Home 1978 100 3,737
Grand Junction, CO Nursing Home 1986 120 4,408
Grand Junction, CO Nursing Home 1995 82 3,905
College Park, GA Nursing Home 1985 100 3,025
Dublin, GA Nursing Home 1968 130 4,504
Glenwood, GA Nursing Home 1972 62 1,742
Marietta, GA Nursing Home 1973 109 3,037
Clarinda, IA Nursing Home 1968 117 1,823
Council Bluffs, IA Nursing Home 1963 62 1,217
Mediapolis, IA Nursing Home 1973 62 2,121
Pacific Junction, IA Nursing Home 1978 12 343
Winterset, IA (4) Nursing Home/
Senior Apartments 1995 118 2,703
Ellinwood, KS Nursing Home 1972 59 1,320
Tarkio, MO Nursing Home 1996 95 2,455
Ainsworth, NE (5) Nursing Home 1995 50 447
Ashland, NE (5) Nursing Home 1996 101 1,859
Blue Hill, NE (5) Nursing Home 1996 81 1,125
Edgar, NE (5) Nursing Home 1995 54 139
Grand Island, NE Nursing Home 1996 80 1,934
Gretna, NE (5) Nursing Home 1995 62 944
Lyons, NE (5) Nursing Home 1974 84 814
Milford, NE (5) Nursing Home 1970 66 908
Sutherland, NE (5) Nursing Home 1995 62 1,276
Waverly, NE (5) Nursing Home 1995 50 1,221
Laramie, WY Nursing Home 1986 144 4,022
Worland, WY (4) Nursing Home/
Senior Apartments 1996 99 3,223
------ -----------
2,450 66,253
INTEGRATED HEALTH SERVICES, INC.
(LEASE NO. 2)
Cheshire, CT (6) Nursing Home 1971 210 9,459
Waterbury, CT (6) Nursing Home 1974 180 10,941
New Haven, CT (6) Nursing Home 1971 195 17,870
Slidell, LA (7) Nursing Home 1989 118 18,887
Middleboro, MA Nursing Home 1987 124 17,523
Worcester, MA Nursing Home 1990 173 18,769
Boston, MA Nursing Home 1985 201 24,978
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
BUILT/
LOCATION PROPERTY TYPE RENOVATED(1) UNITS/BEDS(2)
- ---------------------------------- ----------------- --------------- ---------------
HISTORICAL
INVESTMENT
AT COST(3)
-----------
(000S)
<S> <C> <C> <C> <C>
Hyannis, MA Nursing Home 1982 142 $8,292
Howell, MI (7) Nursing Home 1985 189 4,956
Farmington, MI (7) Nursing Home 1991 153 4,179
Canonsburg, PA Nursing Home 1990 140 15,598
------ -----------
1,825 151,452
GENESIS HEALTH VENTURES, INC.
Burlington, NJ Nursing Home 1994 150 13,007
------ -----------
150 13,007
PRIVATE COMPANY TENANTS
St. Joseph, MO Nursing Home 1976 120 1,333
Seattle, WA Nursing Home 1964 103 5,192
Waterford, CT Nursing Home 1989 148 5,253
Killingly, CT Nursing Home 1989 190 6,060
Willimantic, CT Nursing Home 1989 124 4,179
Grove City, OH Nursing Home 1965 200 3,445
------ -----------
885 25,462
------ -----------
TOTAL PORTFOLIO 13,571 $770,031
------ -----------
------ -----------
</TABLE>
- ------------------------
(1) The dates presented are the later of the date of original construction or
the date of substantial renovation as evidenced by capital expenditures in
excess of 20% of HRPT's historical investment.
(2) Units/beds are a customary measure of property values used in the senior
housing industry.
(3) Represents HRPT's historical costs before depreciation.
(4) Two properties are located at each of these locations.
(5) These properties are mortgage investments. HRPT had nominal price purchase
options for all these mortgaged properties which have been assigned to
Senior Housing.
(6) These three properties are managed by Integrated Health. Under this
management agreement, Integrated has guaranteed the rent for these
properties and that rent obligation is subject to cross default with other
obligations under Integrated's Lease No. 2.
(7) These properties are mortgage investments. The mortgage collateral secures
all Integrated's obligations under Lease No. 2 and the mortgages are subject
to cross default with Integrated's other obligations under this lease.
42
<PAGE>
The following table presents operating information about the occupancy,
gross revenues and revenue sources of Senior Housing's properties grouped by
leases and the amount of annual rents payable to Senior Housing under these
leases:
<TABLE>
<CAPTION>
PROPERTY LEVEL OPERATING INFORMATION(1)
-------------------------------------------------
PERCENTAGE OF
FACILITY REVENUES
SENIOR FROM SOURCES OTHER
HOUSING FACILITY FACILITY THAN
TENANT RENTS OCCUPANCY REVENUES MEDICARE/MEDICAID
- ------------------------------------------------ ----------- --------------- --------- ---------------------
<S> <C> <C> <C> <C>
(IN 000S) (IN 000S)
Marriott International, Inc..................... $ 30,894 93% $ 132,802 94%
Brookdale Living Communities, Inc............... 11,074 95% 21,226 100%
Mariner Post-Acute Network, Inc................. 16,716 84% 142,423 22%
Integrated Health Services, Inc.................
(Lease No. 1) 8,826 79% 70,419 33%
Integrated Health Services, Inc.................
(Lease No. 2) 18,085 82% 100,821 12%
Genesis Health Ventures, Inc.................... 1,444 97% 9,141 32%
Private Company Tenants......................... 3,489 81% 44,954 16%
--
----------- --------- ---
$ 90,528 86% $ 521,786 43%
--
--
----------- --------- ---
----------- --------- ---
</TABLE>
- ------------------------
(1) Represents actual data for the one year period ended June 30, 1999, except
for Marriott data, which is for the 36 week period ended September 9, 1998,
the most recent data available to Senior Housing, annualized. Actual
Marriott facility revenue for the 36 week period ended September 9, 1998,
was $92.6 million; for the one year period ended December 31, 1997, the most
recent full year period for which Marriott data is available to Senior
Housing, facility occupancy was 96%, facility revenue was $128.6 million and
the percent of facility revenue from sources other than Medicare/Medicaid
was 93%.
43
<PAGE>
SENIOR HOUSING TENANTS
Senior Housing's financial condition depends, in part, upon the financial
condition of its tenants. Senior Housing's largest tenant is Marriott.
Ninety-six percent of Senior Housing's rent is paid by public companies. If you
want more information about any of Senior Housing's publicly owned tenants you
should study the public information which they have filed with the SEC. The
following charts show Senior Housing's mix of tenants on the basis of annual
current rent:
<TABLE>
<CAPTION>
BY ANNUAL RENT
<S> <C>
- - $91 million total current
rent EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
- - 96% of rent comes from
public companies
- - 34% of rent comes from
Marriott
- - leases for 99% expire
in 2005 or after
<CAPTION>
MARRIOTT INTERNATIONAL $30.9
MILLION 34%
<S> <C>
Brookdale Living Communities $11.1 million 12%
Mariner Post-Acute Network $16.7 million 18%
Integrated Health Services Lease No. 1 $8.8
million 10%
Integrated Health Services Lease No. 2 $18.1
million 20%
Genesis Health Ventures $1.4 million 2%
Other Operators $3.5 million 4%
</TABLE>
MARRIOTT INTERNATIONAL, INC.
Marriott is a NYSE listed company. Marriott's major businesses are
developing, operating and managing hotels, senior housing properties and
time-share resorts. Senior Housing currently owns 14 congregate communities and
assisted living properties with 3,950 units that are leased to subsidiaries of
Marriott. The annual rent under this lease is $30.9 million, which is 34% of
Senior Housing's total annual rent. Marriott International, Inc. has guaranteed
all of these lease obligations to Senior Housing.
The following table presents summary financial information of Marriott from
its Annual Report on Form 10-K for the year ended January 1, 1999, and Quarterly
Report on Form 10-Q for the period ended June 18, 1999.
SUMMARY FINANCIAL INFORMATION OF MARRIOTT INTERNATIONAL, INC.
(IN MILLIONS)
<TABLE>
<CAPTION>
AS OF OR FOR THE
AS OF OR FOR THE YEAR ENDED 24 WEEKS ENDED
------------------------------------- ------------------------
JANUARY 3, JANUARY 2, JANUARY 1, JUNE 19, JUNE 18,
1997 1998 1999 1998 1999
----------- ----------- ----------- ----------- -----------
Sales..................................... $ 5,738 $ 7,236 $ 7,968 $ 3,642 $ 3,937
<S> <C> <C> <C> <C> <C>
Net income................................ 270 324 390 190 214
Total assets.............................. 5,161 6,233 6,559
Debt...................................... 422 1,267 1,178
</TABLE>
44
<PAGE>
INTEGRATED HEALTH SERVICES, INC.
Integrated is a NYSE listed company. Integrated's major businesses are
operating nursing homes and providing home healthcare services. Senior Housing
currently owns 27 nursing homes and three senior apartments with 3,205 units
that are leased to subsidiaries of Integrated. In addition, Senior Housing has
mortgage investments secured by 12 nursing homes with 1,070 units. Annual rent
of $22.8 million and interest of $4.1 million total to $26.9 million, or 30% of
Senior Housing's total annual revenues. These 42 properties are divided into two
pools, and the obligations under the leases and mortgages within each pool are
subject to cross default and collateralization covenants with all other
properties in the same pool. Integrated has guaranteed all of these lease and
mortgage obligations to Senior Housing.
The following table presents summary financial information of Integrated
from its Annual Report on Form 10-K for the year ended December 31, 1998, and
Quarterly Report on Form 10-Q for the period ended June 30, 1999.
SUMMARY FINANCIAL INFORMATION OF INTEGRATED HEALTH SERVICES, INC.
(IN MILLIONS)
<TABLE>
<CAPTION>
AS OF OR FOR THE
SIX MONTHS ENDED
AS OF OR FOR THE YEAR ENDED
DECEMBER 31, JUNE 30,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
Total revenue...................................... $ 1,204 $ 1,403 $ 2,972 $ 1,502 $ 1,244
<S> <C> <C> <C> <C> <C>
Earnings (loss) from continuing operations......... 48 3 137 83 (11)
Net earnings (loss)................................ 46 (34) (68) 79 (11)
Total assets....................................... 5,002 5,393 5,404
Debt............................................... 3,219 3,383 3,451
</TABLE>
MARINER POST-ACUTE NETWORK, INC.
Mariner is a NYSE listed company. Mariner's principal business is operating
nursing homes. Senior Housing currently owns 24 nursing homes and two congregate
communities with 3,482 units that are leased to subsidiaries of Mariner. The
annual rent under this lease is $16.7 million, which is 18% of Senior Housing's
total annual rent. Mariner has guaranteed all of these lease obligations to
Senior Housing.
The following table presents summary financial information of Mariner from
its Annual Report on Form 10-K for the year ended September 30, 1998, and
Quarterly Report on Form 10-Q for the period ended June 30, 1999.
SUMMARY FINANCIAL INFORMATION OF MARINER POST-ACUTE NETWORK, INC.
(IN MILLIONS)
<TABLE>
<CAPTION>
AS OF OR FOR THE
NINE MONTHS ENDED
AS OF OR FOR THE YEAR ENDED
SEPTEMBER 30, JUNE 30,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net revenue.............................................. $ 1,114 $ 1,140 $ 2,036 $ 1,403 $ 1,775
Net income (loss)........................................ 43 44 (210) (46) (524)
Total assets............................................. 874 3,037 2,596
Debt..................................................... 253 1,978 822
</TABLE>
45
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC.
Brookdale is a Nasdaq listed company. Brookdale's principal business is
operating senior housing and congregate communities. Senior Housing currently
owns four congregate communities with 829 units that are leased to a subsidiary
of Brookdale. The annual rent under this lease is $11.1 million, which is 12% of
Senior Housing's total annual rent. Brookdale has guaranteed all of these lease
obligations to Senior Housing.
The following table presents summary financial information of Brookdale from
its Annual Report on Form 10-K for the year ended December 31, 1998, and
Quarterly Report on Form 10-Q for the period ended June 30, 1999.
SUMMARY FINANCIAL INFORMATION OF BROOKDALE LIVING COMMUNITIES, INC.
(IN 000S)
<TABLE>
<CAPTION>
AS OF OR FOR THE AS OF OR FOR THE
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------- --------------------
1997(1) 1998 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total revenue............................................. $30,237 $77,701 $35,549 $51,634
Net income................................................ 445 6,654 2,632 5,397
Total assets.............................................. 183,169 244,633 339,451
Debt...................................................... 96,167 106,877 192,729
</TABLE>
- ------------------------
(1) Total revenue and net income are for the period from May 7, 1997 (inception)
through December 31, 1997.
GENESIS HEALTH VENTURES, INC.
Genesis is a NYSE listed company. Genesis' major businesses are operating
nursing homes, congregate communities and assisted living properties. Senior
Housing currently owns one nursing home with 150 units that is leased to a
subsidiary of Genesis. The annual rent under this lease is $1.4 million, which
is 2% of Senior Housing's total annual rent.
The following table presents summary financial information of Genesis from
its Annual Report on Form 10-K for the year ended September 30, 1998, and
Quarterly Report on Form 10-Q for the period ended June 30, 1999.
SUMMARY FINANCIAL INFORMATION OF GENESIS HEALTH VENTURES, INC.
(IN MILLIONS)
<TABLE>
<CAPTION>
AS OF OR FOR THE
AS OF OR FOR THE NINE MONTHS ENDED
YEAR ENDED
SEPTEMBER 30, JUNE 30,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
Total net revenue..................................... $ 671 $ 1,100 $ 1,405 $ 999 $ 1,409
<S> <C> <C> <C> <C> <C>
Net income (loss)..................................... 37 48 (24) 41 2
Total assets.......................................... 1,434 2,627 2,698
Debt.................................................. 660 1,408 1,503
</TABLE>
46
<PAGE>
PRIVATELY OWNED TENANTS
In addition to the publicly owned tenants described above, Senior Housing
currently leases six nursing homes with 885 beds to four separate private
company tenants. These leases require total annual rent of $3.5 million. None of
these private companies has significant net worth or significant other business
activities.
Four of Senior Housing's properties leased to two of these private tenants
were originally leased to Sun Healthcare Group, Inc. These properties have been
subleased and the new tenants have assumed direct responsibility for these
leases. Sun has also remained obligated under the leases. The following table
presents summary financial information of Sun from its Annual Report on Form
10-K for the year ended December 31, 1998, and Quarterly Report on Form 10-Q for
the period ended June 30, 1999.
SUMMARY FINANCIAL INFORMATION OF SUN HEALTHCARE GROUP, INC.
(IN MILLIONS)
<TABLE>
<CAPTION>
AS OF OR FOR THE
SIX MONTHS ENDED
AS OF OR FOR THE YEAR ENDED
DECEMBER 31, JUNE 30,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Total net revenue........................................ $ 1,316 $ 2,011 $ 3,088 $ 1,494 $ 1,274
Net income (loss)........................................ 22 35 (754) 9 (702)
Total assets............................................. 2,579 2,468 1,833
Debt..................................................... 1,546 1,863 1,929
</TABLE>
On July 14, 1999, one of Senior Housing's private company tenants, The
Frontier Group, filed for reorganization under Chapter 11 of the Bankruptcy
Code. Frontier leases three nursing homes from Senior Housing for total rent of
$2.1 million per year. Sun Healthcare is also obligated under this lease. Based
upon the six months ended June 30, 1999 information available to Senior Housing,
one of these nursing homes produced operating income in excess of its allocated
rent, one facility produced operating income equal to 92% of its allocated rent
and one facility with occupancy of only 69% had operating losses. Senior Housing
is preparing to collect its rent, including arrearages of approximately
$711,500, from Frontier or Sun and, if necessary, to operate these properties
for its own account until these properties are leased to a substitute tenant.
47
<PAGE>
SENIOR HOUSING LEASES
The following table presents information about Senior Housing's leases
(dollars in thousands except guarantee information):
<TABLE>
<CAPTION>
INTEGRATED INTEGRATED
MARRIOTT BROOKDALE MARINER LEASE NO. 1 LEASE NO. 2 GENESIS
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
NUMBER OF PROPERTIES 14 4 26 31 11 1
NUMBER OF BEDS/UNITS 3,950 829 3,482 2,450 1,825 150
LOCATED IN NO. OF STATES 7 4 6 7 5 1
HISTORICAL INVESTMENT $325,521 $101,850 $86,486 $66,253 $151,452 $13,007
TENANT Subsidiaries Subsidiary of Subsidiaries Subsidiaries Subsidiaries Subsidiary of
of Marriott Brookdale of Mariner of Integrated of Integrated Genesis
CURRENT ANNUAL RENT $30,894 $11,074 $16,716 $8,826 $18,085 $1,444
RENT INCREASE FORMULA 4.5% of 10% of CPI based CPI based 3% of $13 per annum
increase in increases in increases increases increases in increase
gross gross gross
revenues revenues revenues
starting in starting in
1999 2000
CURRENT LEASE EXPIRATION 2013 2019 2013 2010 2006 2005
RENEWAL OPTIONS All or none; All or none; All or none; All or none; All or none; All or none;
4 for 5 years 2 for 25 2 for 10 2 for 13 2 for 10 2 for 10
each years each years each years each years each years each
and 1 for 5
years
CROSS DEFAULT PROVISION Yes Yes Yes Yes Yes N/A
SUBORDINATED MANAGEMENT FEE Yes Yes Yes Yes Yes Yes
GUARANTEES Public Public Public Public Public A multi-
company company company company company property
parent has parent has parent has parent has parent has parent
guaranteed guaranteed guaranteed guaranteed guaranteed company of
the lease. the lease. the lease. In the lease. the lease. the tenant
addition, has
there is a guaranteed
$15 million the lease. In
security addition,
deposit and a there is a
pledge of $235,000
other assets. security
deposit.
<CAPTION>
PRIVATE
COMPANIES TOTAL
---------- ---------
<S> <C> <C>
NUMBER OF PROPERTIES 6 93
NUMBER OF BEDS/UNITS 885 13,571
LOCATED IN NO. OF STATES 4 26
HISTORICAL INVESTMENT $25,462 $770,031
TENANT Four Nine
private tenants
companies
CURRENT ANNUAL RENT $3,489 $90,528
RENT INCREASE FORMULA Various
CURRENT LEASE EXPIRATION 2001, 2001-2019
2003, 2005
RENEWAL OPTIONS Various
CROSS DEFAULT PROVISION N/A
SUBORDINATED MANAGEMENT FEE Yes
GUARANTEES Various
affiliates
of the
private
company
tenants
have
provided
guarantees.
In
addition,
Sun
Healthcare
is
obligated
on four of
these
leases.
</TABLE>
48
<PAGE>
LEASE TERMS
All of Senior Housing's leases are so called "triple net" leases which
require the tenants to maintain Senior Housing's properties during the lease
terms and to indemnify it for liability which may arise by reason of its
ownership of the properties. The following is a summary of material terms of
Senior Housing's leases in addition to the terms set forth in the foregoing
chart. Senior Housing's material leases have been filed with the SEC as exhibits
to its registration statement on Form S-11 of which this prospectus is a part.
If you want more information about these leases you should review these
documents.
CROSS DEFAULT. Whenever Senior Housing leases more than one property to a
single tenant or a group of affiliated tenants all those leases are cross
defaulted. There are two lease combinations with Integrated. The obligations for
all of the properties under each of the lease combinations are subject to cross
default, but the two lease combinations are themselves not subject to cross
default. Integrated has guaranteed both lease combinations.
ALL OR NONE RENEWAL OPTIONS. Whenever Senior Housing leases more than one
property to a single tenant or a group of affiliated tenants, lease renewal
options may only be exercised on an all or none basis. This means that a tenant
or group of affiliated tenants cannot decide to exercise renewal options for
strong performing properties unless it also renews the leases for all other
leased properties. The two Integrated lease combinations may be separately
renewed for all properties in each combination of leases.
MAINTENANCE AND ALTERATIONS. All of Senior Housing's tenants are required
to maintain, at their expense, the leased properties in good order and repair,
including structural and nonstructural maintenance. Except in the case of
properties leased to Marriott, capital alterations and additions to any leased
property which exceed a threshold amount of aggregate cost may only be made with
Senior Housing's prior consent. Any alterations or improvements made to any
leased property during the terms of the leases become Senior Housing's property,
subject to Senior Housing's obligation to pay to the tenants unamortized costs
at lease termination. At the end of the leases, Senior Housing's tenants are
required to surrender their leased properties in substantially the same
condition as existed on the commencement dates of the leases, subject to any
permitted alterations and subject to ordinary wear and tear.
ASSIGNMENT. Senior Housing's consent is generally required for any
assignment or sublease of its properties. In the event of a subletting, the
initial tenant remains liable under the lease and all guarantees and other
security remain in place.
ENVIRONMENTAL MATTERS. Senior Housing's tenants are required, at their
expense, to remove and dispose of any hazardous substance at the leased
properties in compliance with all applicable environmental laws and regulations
and to pay any costs Senior Housing incurs in connection with removal and
disposal. Each tenant has indemnified Senior Housing for any claims asserted as
a result of the presence of hazardous substances at any property and from a
violation or alleged violation of any applicable environmental law or
regulation.
INDEMNIFICATION AND INSURANCE. Each tenant has agreed to indemnify Senior
Housing from all claims arising from Senior Housing's ownership or their use of
its properties. Each tenant is required to maintain insurance on Senior
Housing's properties covering:
- comprehensive general liability for damage to property or bodily injury
arising out of the ownership, use, occupancy or maintenance of the
properties;
49
<PAGE>
- commercial property "all risk" liability for damage to improvements,
merchandise, trade fixtures, furnishings, equipment and personal property;
- workers' compensation liability;
- business interruption loss;
- in some cases, medical malpractice; and
- other losses customarily insured by businesses similar to the business
conducted at Senior Housing's properties.
The leases require that Senior Housing be named as an additional insured under
these policies.
DAMAGE, DESTRUCTION OR CONDEMNATION. In the event any of Senior Housing's
properties is damaged by fire, or other casualty or is taken for a public use,
Senior Housing receives all insurance or taking proceeds and its tenants are
required to pay any difference between the amount of proceeds and the historical
investment by Senior Housing or HRPT in the affected property. In the event of
material destruction or condemnation, some tenants have a right to purchase the
affected property for amounts at least equal to Senior Housing's or HRPT's
historical investment in the property.
EVENTS OF DEFAULT. Events of default under Senior Housing's leases include
the following:
- the failure of the tenant to pay rent when due;
- the failure of the tenant to perform key terms, covenants or conditions of
its lease and the continuance thereof for a specified period after written
notice;
- the occurrence of events of insolvency with respect to the tenant;
- the failure of the tenant to maintain required insurance coverages; or
- the revocation of any material license necessary for the tenant's
operation of Senior Housing's property.
REMEDIES. Upon the occurrence of any event of default, Senior Housing may:
- terminate the affected lease and accelerate the rent;
- terminate the tenant's rights to the affected property, relet the property
and recover from the tenant the difference between the amount of rent
which would have been due under the applicable lease and the rent received
under the reletting; and
- make any payment or perform any act required to be performed by the tenant
under its lease.
The defaulting tenant is obligated to reimburse Senior Housing for all payments
made and all costs and expenses incurred in connection with any exercise of the
foregoing remedies.
GROUND LEASE TERMS. The land underlying two of Senior Housing's properties
is leased. Senior Housing's leases require its tenants to pay and perform all
obligations arising under these ground leases. These ground leases terminate on
2086 and 2079. The annual rents payable under the ground leases in 1998 totaled
$138,100. If Senior Housing's tenants fail to pay the applicable ground rent,
Senior Housing may have to do so in order to protect its investment in these
properties.
50
<PAGE>
SENIOR HOUSING SELECTED HISTORICAL FINANCIAL INFORMATION
The following table presents selected historical financial information and
other data for the properties owned by Senior Housing. This financial data has
been derived from HRPT's historical financial statements for the years ended
December 31, 1994 through 1998, and the unaudited historical financial
statements for the six-month periods ended June 30, 1998 and 1999. Per share
data has not been presented because Senior Housing was not a publicly held
company during the periods presented. Senior Housing is currently a 100% owned
subsidiary of HRPT, and none of its properties are encumbered by debt. The
following table includes pro rata allocations of interest expense and general
and administrative expenses for historical periods. In the opinion of Senior
Housing's management, the methods used for allocating interest and general and
administrative expenses are reasonable. However, it is impossible to estimate
all operating costs that Senior Housing would have incurred as a separate public
company. Accordingly, the net income and funds from operations shown are not
necessarily indicative of results that Senior Housing will realize as a separate
company. Additionally, year to year comparisons are impacted by property
acquisitions during the historical periods. For more information see Senior
Housing Properties Trust's Consolidated Historical Financial Statements and
notes thereto appearing on pages F-14 to F-22.
<TABLE>
<CAPTION>
(000S EXCEPT PROPERTY DATA)
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------------- ----------------------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ---------- --------- --------- ---------- ----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues:
Rental income............... $46,429 $62,586 $66,202 $78,463 $82,542 $40,324 $42,409
Interest and other income... 1,554 4,018 4,240 5,708 5,764 2,886 2,881
---------- ---------- ---------- --------- --------- ---------- ----------
Total revenues............ 47,983 66,604 70,442 84,171 88,306 43,210 45,290
---------- ---------- ---------- --------- --------- ---------- ----------
Expenses:
Interest.................... 5,430 16,937 14,719 16,958 19,293 9,263 9,992
Depreciation................ 9,711 14,748 15,383 17,826 18,297 9,102 11,207
General and
administrative............ 2,691 3,857 3,899 4,664 4,480 2,174 2,259
---------- ---------- ---------- --------- --------- ---------- ----------
Total expenses............ 17,832 35,542 34,001 39,448 42,070 20,539 23,458
---------- ---------- ---------- --------- --------- ---------- ----------
Net income.................... $30,151 $31,062 $36,441 $44,723 $46,236 $22,671 $21,832
---------- ---------- ---------- --------- --------- ---------- ----------
---------- ---------- ---------- --------- --------- ---------- ----------
OTHER DATA:
Properties at end of
period.................... 68 76 83 88 93 88 93
Operating activities cash
flows..................... $44,150 $48,331 $51,308 $91,094 $60,236 $31,975 $32,808
Investing activities cash
flows..................... (319,704) (39,301) (105,566) (19,663) 306 135 188
Financing activities cash
flows..................... 275,554 (9,030) 54,258 (71,431) (60,403) (32,110) (32,967)
Funds from operations(1).... 39,862 45,810 51,824 62,549 64,533 31,773 33,039
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
----------------------------------------------------------- ------------------------
1994 1995 1996 1997 1998 1998 1999
----------- ----------- ----------- --------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total real estate investments
(before depreciation)....... $ 579,633 $ 624,738 $ 730,304 $ 759,121 $ 770,219 $ 758,986 $ 770,031
Total assets (after
depreciation)............... 556,668 587,701 679,201 692,586 686,296 682,682 674,294
</TABLE>
- ------------------------------
(1) Funds from operations or "FFO," as defined in the white paper on funds from
operations which was approved by the Board of Governors of NAREIT in March
1995, is net income computed in accordance with GAAP, before gains or losses
from sales of properties and extraordinary items, plus depreciation and
amortization and after adjustment for unconsolidated partnerships and joint
ventures. Senior Housing considers FFO to be an appropriate measure of
performance for an equity REIT, along with cash flow from operating
activities, financing activities and investing activities, because it
provides investors with an indication of an equity REIT's ability to incur
and service debt, make capital expenditures, pay distributions and fund
other cash needs. Senior Housing computes FFO in accordance with the
standards established by NAREIT which may not be comparable to FFO reported
by other REITs that do not define the term in accordance with the current
NAREIT definition or that interpret the current NAREIT definition
differently. FFO does not represent cash generated by operating activities
in accordance with GAAP and should not be considered as an alternative to
net income, determined in accordance with GAAP, as an indication of
financial performance or the cash flow from operating activities, determined
in accordance with GAAP, as a measure of liquidity.
51
<PAGE>
SENIOR HOUSING SELECTED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following table presents selected pro forma financial information for
Senior Housing for the year ended December 31, 1998, and the six months ended
June 30, 1999, to reflect the effects of the spin-off. For more information see
the Unaudited Pro Forma Consolidated Financial Statements appearing on pages F-8
through F-13.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1998 1999
------------ --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
OPERATING DATA: (000S EXCEPT PER SHARE DATA)
Revenues:
Rental income.................................................................... $ 84,003 $ 42,409
Interest and other income........................................................ 5,764 2,881
------------ -------
Total revenues................................................................. 89,767 45,290
------------ -------
Expenses:
Interest......................................................................... 15,063 7,531
Depreciation..................................................................... 18,490 11,207
General and administrative....................................................... 4,523 2,259
------------ -------
Total expenses................................................................. 38,076 20,997
------------ -------
Net income......................................................................... $ 51,691 $ 24,293
------------ -------
------------ -------
Earnings per share................................................................. $1.99 $0.93
------------ -------
------------ -------
</TABLE>
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1999
-------------
(UNAUDITED)
(000S)
<S> <C>
BALANCE SHEET DATA:
Total real estate investments (before depreciation)................................................ $ 770,031
Total assets (after depreciation).................................................................. 690,719
Bank credit facility............................................................................... 200,000
</TABLE>
SENIOR HOUSING MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion presents an analysis of the results of operations
of the properties owned by Senior Housing for the years ended December 31, 1996,
1997 and 1998, the six month periods ended June 30, 1998 and 1999, and the pro
forma results of operations of Senior Housing for the year ended December 31,
1998, and the six months ended June 30, 1999. This discussion includes
references to funds from operations. Funds from operations, or "FFO," as defined
in the white paper on funds from operations which was approved by the Board of
Governors of NAREIT in March 1995, is net income computed in accordance with
GAAP, before gains or losses from sales of properties and extraordinary items,
plus depreciation and amortization and after adjustment for unconsolidated
partnerships and joint ventures. Senior Housing considers FFO to be an
appropriate measure of performance for an equity REIT, along with cash flow from
operating activities, financing activities and investing activities, because it
provides investors with an indication of an equity REIT's ability to incur and
service debt, make capital expenditures, pay distributions and fund other cash
needs. Senior Housing computes FFO in accordance with the standards established
by NAREIT which may not be comparable to FFO reported by other REITs that do not
define the term in accordance with the current NAREIT definition or that
interpret the current NAREIT definition differently. FFO does not represent cash
generated by operating activities in accordance
52
<PAGE>
with GAAP and should not be considered as an alternative to net income,
determined in accordance with GAAP, as an indication of financial performance or
the cash flow from operating activities, determined in accordance with GAAP, as
a measure of liquidity.
PRO FORMA RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999. For the pro forma six months ended June 30,
1999, giving effect to the spin-off and the related transactions, revenues would
have been $45.3 million, total expenses would have been $21.0 million and net
income would have been $24.3 million or $0.93 per share. Compared to historical
results total expenses and interest expense decreased by $2.5 million. Interest
expense decreased due to lower interest expense from pro forma borrowings of
$200 million under Senior Housing's bank credit facility compared to the
allocated portion of historical allocated interest expense incurred by HRPT.
On a pro forma basis for the six months ended June 30, 1999, funds from
operations would have been $35.5 million. The pro forma average shares
outstanding would have been 26 million.
YEAR ENDED DECEMBER 31, 1998. For the pro forma year ended December 31,
1998, giving effect to the spin-off and the related transactions, revenues would
have been $89.8 million, total expenses would have been $38.1 million and net
income would have been $51.7 million or $1.99 per share. Compared to historical
results, total revenue increased by $1.5 million and total expenses decreased by
$4.0 million. Revenue increased due to rent generated from the acquisition of
five properties in 1998. Total expenses decreased primarily because of reduced
interest expense of $4.2 million. Interest expense decreased due to lower
interest expense from pro forma borrowings of $200 million under Senior
Housing's bank credit facility compared to allocated historical interest expense
incurred by HRPT.
On a pro forma basis for the year ended December 31, 1998, funds from
operations would have been $70.2 million. The pro forma average shares
outstanding would have been 26 million.
HISTORICAL RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999, COMPARED TO 1998. For the six months ended
June 30, 1999, compared to the six months ended June 30, 1998, total revenues
increased by $2.1 million, total expenses increased by $2.9 million and net
income decreased by $839,000. Total revenues increased due to rent generated
from the acquisition of five properties subsequent to June 30, 1998. Total
expenses increased primarily because of higher depreciation of $2.1 million due
to property acquisitions and higher allocated interest expense as a result of
increased borrowings by HRPT. Net income was $21.8 million and $22.7 million for
the six months ended June 30, 1999 and 1998, respectively. There were no shares
outstanding during these periods. On pro forma 26 million average shares
outstanding net income per share would have been $0.84 and $0.87 for the six
months ended June 30, 1999 and 1998, respectively.
Funds from operations increased by $1.3 million for the six months ended
June 30, 1999, compared to the prior period due to income from five properties
acquired subsequent to June 30, 1998.
YEAR ENDED DECEMBER 31, 1998, COMPARED TO 1997. For the year ended December
31, 1998, compared to the year ended December 31, 1997, total revenues increased
by $4.1 million, total expenses increased by $2.6 million and net income
increased by $1.5 million. Total revenues increased due to rent generated from
the acquisition of five properties during 1998 and the full year impact of the
rent generated from five properties acquired during 1997. Total expenses
increased primarily because of higher allocated interest expense of $2.3
million, which resulted from increased
53
<PAGE>
borrowings by HRPT. Net income was $46.2 million and $44.7 million for the year
ended December 31, 1998 and 1997, respectively. There were no shares outstanding
during these periods. On pro forma 26 million average shares outstanding net
income per share would have been $1.78 and $1.72 for the year ended December 31,
1998 and 1997, respectively.
Funds from operations increased by $2.0 million for the year ended December
31, 1998, compared to the prior period due to income from five properties
acquired during 1998 and the full year impact of income from five properties
acquired during 1997.
YEAR ENDED DECEMBER 31, 1997, COMPARED TO 1996. For the year ended December
31, 1997, compared to the year ended December 31, 1996, total revenues increased
by $13.7 million, total expenses increased by $5.4 million and net income
increased by $8.3 million. Total revenues increased due to rent generated from
the acquisition of five properties during 1997 and the full year impact of the
rent generated from seven properties acquired during 1996. Total expenses
increased primarily because of higher allocated interest expense of $2.2
million, which resulted from increased borrowings by HRPT, and higher
depreciation expense of $2.4 million due to property acquisitions. Net income
was $44.7 million and $36.4 million for the year ended December 31, 1997 and
1996, respectively. There were no shares outstanding during these periods. On
pro forma 26 million average shares outstanding net income per share would have
been $1.72 and $1.40 for the year ended December 31, 1997 and 1996,
respectively.
Funds from operations increased by $10.7 million for the year ended December
31, 1997, compared to the prior period due to the income from the acquisition of
five properties during 1997 and the full year impact of income from seven
properties acquired during 1996.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, Senior Housing had cash and cash equivalents of $168,000
and prior to the spin-off Senior Housing will receive at least $16.4 million
from HRPT. For the six months ended June 30, 1999 and 1998, cash flows from
operating activities were $32.8 million and $32.0 million, respectively, cash
flows from investing activities were $188,000 and $135,000, respectively, and
cash used for financing activities was $33.0 million and $32.1 million,
respectively. Senior Housing expects the cash transferred to it and future cash
flow from operating activities will be sufficient to meet its short term and
long term working capital requirements including its first distribution of $15.6
million or $0.60 per share for the quarter ending on September 30, 1999, which
it expects to pay during the fourth quarter of 1999.
For the twelve months subsequent to the spin-off, Senior Housing expects
that cash flows from operating activities and the availability of amounts under
its bank credit facility will be sufficient to meet its short term and long term
liquidity requirements for operations, working capital and distributions.
Senior Housing has accepted a commitment for a $350 million, three-year,
interest only bank credit facility. This bank credit facility will be secured by
first mortgages on 18 of Senior Housing's properties. The interest rate will be
LIBOR plus 2.0% per annum and will increase by 0.25% if Senior Housing's debt to
total capital, as defined, exceeds 50%. The bank credit facility will be
available for acquisitions, working capital and for general business purposes.
Senior Housing will have the ability to repay and redraw amounts under this bank
credit facility until its maturity in 2002. Senior Housing's bank credit
facility documentation will have customary representations, warranties,
covenants and event of default provisions. The material restrictive financial
covenants will require Senior Housing to:
- limit debt to no more than 60% of total capital, as defined;
54
<PAGE>
- maintain a ratio of net income plus interest expense and depreciation to
interest expense of at least 1.5; and
- maintain a tangible net worth, as defined, of $450 million, subject to
increases based on equity issuances.
After the spin-off Senior Housing will borrow $200 million under this bank
credit facility to pay the formation debt to HRPT and will have $150 million
available for acquisitions, working capital and general business purposes.
Total assets decreased by $12.0 million from $686.3 million as of December
31, 1998, to $674.3 million as of June 30, 1999. The decrease is primarily due
to depreciation on real estate properties.
After completion of the spin-off, in both the short term and the long term
Senior Housing intends to acquire additional senior housing properties. These
purchases will be initially funded with excess working capital, if any,
generated by Senior Housing and proceeds of borrowings under the bank credit
facility. After properties are acquired, bank credit facility borrowings may be
repaid with long term debt or equity capital. After completion of the spin-off,
Senior Housing expects to have: $200 million of debt outstanding; book equity of
$447.4 million; and total real estate assets, at historical cost, of $770
million. In these circumstances, Senior Housing believes that it will have
sufficient access to capital markets to meet its growth objectives and refinance
its debt as needed. Of course, however, access to growth capital will depend
upon numerous facts, including some beyond Senior Housing's control; and Senior
Housing can provide no assurance that it will be able to raise additional
capital in sufficient amounts, or at appropriate costs, to fund growth or to
repay debt in both the short term and the long term.
INFLATION. Inflation might have both positive and negative impacts upon
Senior Housing's business. Inflation might cause the value of Senior Housing's
real estate investments to increase. Similarly, in an inflationary environment,
the percentage rents which Senior Housing receives based upon CPI increases or
as a percentage of its tenants' revenues should increase and rent yields Senior
Housing could charge for new investments would likely increase. Offsetting these
benefits, inflation might cause the costs Senior Housing pays for equity and
debt capital to increase. To mitigate the adverse impact of increased costs of
debt capital in the event of material inflation Senior Housing may purchase
interest rate cap contracts whenever it has a large amount of floating rate debt
outstanding and it believes material interest rate increases are likely to
occur. On balance, Senior Housing does not believe that the modest inflation
which it expects may occur in the U.S. economy during the next few years will
have any material effect on its business.
DEFLATION. Deflation would have business consequences to Senior Housing
which are the inverse of the impact of inflation. If new construction costs
decline, the value of Senior Housing's existing real estate investments may
decline. The value of Senior Housing's long term minimum rent leases might
increase but some tenants might have trouble paying Senior Housing's rent in a
deflationary environment, and the amounts of its percentage rent increases might
decline or disappear. Deflation might lower Senior Housing's costs of debt
capital; however, deflation's impact on Senior Housing's cost of equity capital
is uncertain. Senior Housing does not believe that the U.S. economy is likely to
experience serious deflation in the foreseeable future. Senior Housing believes
that modest deflation would have no effect upon its business and serious
deflation would have a negative effect upon its business.
55
<PAGE>
YEAR 2000
The in-house computer systems are limited to software and hardware developed
by third parties and installed, operated and monitored by Senior Housing's
investment advisor, Reit Management. All of the computer systems, which are
limited to information systems, were installed within the last two years. All of
the critical enterprise wide systems are warrantied in writing to be year 2000
compliant by the manufacturers and have been tested by Reit Management. These
systems include the network hardware, the network operating system, the desktop
operating system, business application software, financial accounting software
and communication software. Other than those operated by its tenants, Senior
Housing has no critical non information technology systems, and no such systems
are provided to it by Reit Management. All costs associated with Senior
Housing's computer systems are borne by Reit Management.
All of Senior Housing's properties are leased on a triple net basis and are
not managed by Senior Housing. Ninety-seven percent of Senior Housing's tenants
are operated by public companies which have filed reports containing year 2000
preparedness information with the SEC. The leases require the tenants to conduct
the daily operations of the properties and the scope of the tenants'
responsibility includes ensuring preparedness for the year 2000. Because of its
leases, the only actions that Senior Housing can take with respect to its
properties are to inquire of its tenants, monitor its tenants' SEC filings and
evaluate their year 2000 preparedness plans for all systems, including financial
and nonfinancial systems such as elevators, heating and ventilation and life
safety systems. Six of the nine Senior Housing tenants that operate 97% of
Senior Housing's investments have responded in writing to Senior Housing's
inquiries regarding their preparedness for issues related to the year 2000.
Based on these responses and tenant public disclosures which Senior Housing has
reviewed, Senior Housing believes that its tenants are in the process of
studying their systems and the systems for their vendors, suppliers and service
providers to ensure preparedness but none of Senior Housing's tenants has yet
reported they are year 2000 compliant. Current levels of preparedness are varied
and include partially completed inventory and assessment of potential risks,
testing, implementation of plans for remediation and reprogramming. While Senior
Housing believes that the efforts of its tenants described in their responses
and in their public filings will be adequate to address year 2000 concerns,
there can be no guarantee that all tenant operations and those of their vendors
and payors, including federal and state Medicare and Medicaid systems, will be
year 2000 compliant on a timely basis and will not have a material effect on
Senior Housing.
If Senior Housing's efforts and the efforts of its vendors, customers and
tenants, and their customers and vendors to prepare for the year 2000 were
ineffective, the operation of Senior Housing's properties could be subject to
significant adverse effects, including, but not limited to, loss of business and
growth opportunities, reduced revenues and increased expenses which might cause
operating losses to its tenants. Continued or severe operating losses may cause
one or more of Senior Housing's tenants to default on their leases. Numerous
lease defaults could jeopardize Senior Housing's ability to maintain its
financial results of operations, meet its financial, operating and capital
obligations and timely pay its distributions to shareholders.
In particular, the worst case scenario which Senior Housing can envision at
this time is that some of its tenants may be unable to pay their rents on a
timely basis because some of their payment sources, such as Medicare or
Medicaid, are delayed. In these circumstances, Senior Housing may be unable to
meet its debt obligations or to timely pay distributions.
Senior Housing does not currently have a contingency plan in place in the
event it, or its tenants, do not successfully remedy year 2000 compliance issues
that are identified in a timely manner or fail to identify any year 2000 issues.
Senior Housing will evaluate the status of its year
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2000 compliance plan during the fourth quarter of 1999 and determine whether a
contingency plan is necessary.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Senior Housing is exposed to market changes in interest rates. Because
interest on all its outstanding debt is at a floating rate, changes in interest
rates will not affect the value of outstanding debt instruments. However,
changes in interest rates will affect Senior Housing's operating results. For
example, the interest rate payable on Senior Housing's pro forma outstanding
indebtedness of $200 million at June 30, 1999, would have been 7.25% per annum.
An immediate 10% change in that interest rate, or 72.5 basis points, would
increase or decrease Senior Housing's costs by $1.5 million, or $0.06 per share
per year:
IMPACT OF CHANGES IN INTEREST RATES
(IN 000S)
<TABLE>
<CAPTION>
INTEREST RATE TOTAL INTEREST
PER YEAR OUTSTANDING DEBT EXPENSE PER YEAR
--------------- ---------------- ----------------
<S> <C> <C> <C>
At June 30:.................................................... 7.25% $ 200,000 $ 14,500
10% Reduction:................................................. 6.53% 200,000 13,060
10% Increase:.................................................. 7.98% 200,000 15,960
</TABLE>
The foregoing table presents a so called "shock" analysis which assumes that
the interest rate change by 10%, or 72.5 basis points, is in effect for a whole
year. If interest rates were to change gradually over one year the impact would
be less.
Senior Housing borrows in U.S. dollars and all of its current borrowings are
subject to interest at LIBOR plus a premium. Accordingly, Senior Housing is
vulnerable to changes in U.S. dollar based short term rates, specifically LIBOR.
During the past few months short term U.S. dollar based interest rates have
tended to rise, increasing by about 50 basis points. Senior Housing is unable to
predict the direction or amount of interest rate changes during the next year.
Senior Housing has decided not to purchase an interest rate cap or other hedge
to protect against future rate increases, but it may enter such agreements in
the future. Also, it may incur additional debt at floating or fixed rates, which
would increase its exposure to market changes in interest rates.
Senior Housing currently owns mortgage receivables with a carrying value of
$37.6 million. When comparable term market interest rates decline the value of
these receivables increases; when comparable term market interest rates rise the
value of those receivables declines. Using discounted cash flow analyses at
weighted average estimated per year market rates for December 31, 1998, and June
30, 1999, of 10% and 10.75%, respectively, the estimated fair values of Senior
Housing's pro forma mortgage receivables were as follows:
<TABLE>
<CAPTION>
CARRYING VALUE
OF MORTGAGE ESTIMATED
VALUATION DATE RECEIVABLES FAIR VALUE
- -------------------------------------------------------------------------------------- -------------- -----------
(IN 000S)
<S> <C> <C>
December 31, 1998..................................................................... $ 37,826 $ 40,525
June 30, 1999......................................................................... 37,638 38,522
</TABLE>
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An immediate 10% change in the market rate of interest, or 108 basis points,
applicable to Senior Housing mortgage receivables at June 30, 1999, would affect
the fair value of those receivables as follows:
<TABLE>
<CAPTION>
CARRYING VALUE
INTEREST RATE OF MORTGAGE ESTIMATED
PER YEAR RECEIVABLES FAIR VALUE
------------- -------------- -----------
(IN 000S)
<S> <C> <C> <C>
Estimated market:....................................................... 10.75% $ 37,638 $ 38,522
10% reduction:.......................................................... 9.67% 37,638 41,123
10% increase:........................................................... 11.83% 37,638 36,161
</TABLE>
If the market rate changes occurred gradually over time, the effect of these
changes would be realized gradually. Because Senior Housing's mortgage
receivables are fixed rate instruments, changes in market interest rates will
have no effect on Senior Housing's operating results unless these receivables
are sold. At this time Senior Housing expects to hold its existing mortgages to
their maturity and not to realize any profit or loss from trading these mortgage
receivables. Also, Senior Housing does not presently expect to expand its
mortgage investments.
The interest rate changes which affect the valuations of Senior Housing's
mortgages are U.S. dollar long term rates for corporate obligations of companies
with ratings similar to Senior Housing's mortgagors.
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SENIOR HOUSING MANAGEMENT
SENIOR HOUSING TRUSTEES AND EXECUTIVE OFFICERS
Senior Housing has two categories of trustees: (1) managing trustees who are
employees of Reit Management and involved in Senior Housing's day-to-day
activities; and (2) independent trustees who are not employees of Reit
Management and not involved in Senior Housing's day-to-day activities. Senior
Housing's bylaws require that a majority of its trustees be independent
trustees. Also, although it is not required by Senior Housing's bylaws, it is
Senior Housing's policy that the same person may not simultaneously serve as an
independent trustee of both Senior Housing and HRPT so long as HRPT owns more
than 10% of the shares of Senior Housing. The bylaws and this policy do not
prohibit former trustees, officers, employees or persons otherwise affiliated
with HRPT or Reit Management from serving as independent trustees of Senior
Housing.
After completion of the spin-off, Senior Housing's trustees and executive
officers will be as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- ------------------------------------------------------------
<S> <C> <C>
Barry M. Portnoy.............. 54 Managing Trustee (term will expire in 2000)
Gerard M. Martin.............. 64 Managing Trustee (term will expire in 2001)
Bruce M. Gans, M.D............ 52 Independent Trustee (term will expire in 2000)
Arthur G. Koumantzelis........ 68 Independent Trustee (term will expire in 2002)
Vacancy....................... Independent Trustee (term will expire in 2001)
David J. Hegarty.............. 42 President, Chief Operating Officer and Secretary
Ajay Saini.................... 39 Treasurer and Chief Financial Officer
</TABLE>
BARRY M. PORTNOY has been a managing trustee of both HRPT and Hospitality
Properties since their organization in 1986 and 1995, respectively. Mr. Portnoy
is also a Director and 50% owner of Reit Management. Mr. Portnoy has been
actively involved in real estate and real estate finance activities as an
attorney, investor and manager for over 20 years. Mr. Portnoy was a partner in
the law firm of Sullivan & Worcester LLP, Boston, Massachusetts from 1978
through March 31, 1997, and he served as Chairman of that firm from 1994 through
March 1997.
GERARD M. MARTIN has been a managing trustee of both HRPT and Hospitality
Properties since their organization in 1986 and 1995, respectively. Mr. Martin
is also a Director and 50% owner of Reit Management. Mr. Martin has been active
in the real estate and senior housing industries as a developer, owner and
manager for approximately 30 years. During the past five years, Mr. Martin's
principal employment has been as a managing trustee of HRPT and Hospitality
Properties.
BRUCE M. GANS, M.D. has been Senior Vice President for Continuing Care,
Chairman of Physical Medicine and Rehabilitation at North Shore Long Island
Jewish Health System and Professor of Physical Medicine and Rehabilitation at
the Albert Einstein College of Medicine since April 1999. Prior to April 1999
Dr. Gans was a Professor and Chairman of the Department of Physical Medicine and
Rehabilitation at Wayne State University and a Senior Vice President of the
Detroit Medical Center since 1989. Dr. Gans has been a trustee of HRPT since
1995. Upon completion of the spin-off, Dr. Gans will resign from HRPT and will
become one of Senior Housing's independent trustees.
ARTHUR G. KOUMANTZELIS has been President and Chief Executive Officer of
Gainesborough Investments LLC, a private investment company, since June 1998.
From 1990 to 1998, Mr. Koumantzelis was Senior Vice President and Chief
Financial Officer of Cumberland Farms, Inc., a private company engaged in the
convenience store business and in the distribution and retail sale
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of gasoline. Mr. Koumantzelis has been a trustee of Hospitality Properties since
its initial public offering in 1995, and was a trustee of HRPT from 1992 through
August 1995. Upon completion of the spin-off, Mr. Koumantzelis will become one
of Senior Housing's independent trustees.
VACANCY. Following the completion of the spin-off, Senior Housing intends to
elect another independent trustee. At this time, no person has been selected to
fill this position.
DAVID J. HEGARTY is the President, Chief Operating Officer and Secretary of
Senior Housing. Mr. Hegarty is also, and has been since 1994, the President,
Chief Operating Officer and Secretary of HRPT. Upon completion of the spin-off,
Mr. Hegarty will resign from HRPT. Mr. Hegarty is also a Director and the
President and Secretary of Reit Management and will continue in these positions
after the spin-off. Mr. Hegarty has served HRPT, Reit Management and their
affiliates in various capacities since 1987, prior to which he was an audit
manager with Ernst & Young LLP. Mr. Hegarty is a certified public accountant.
AJAY SAINI is the Treasurer and Chief Financial Officer of Senior Housing.
Mr. Saini is also, and has been since 1994, the Treasurer and Chief Financial
Officer of HRPT. Upon completion of the spin-off, Mr. Saini will resign from
HRPT. Mr. Saini is also a Vice President of Reit Management and will continue in
this position after the spin-off. Mr. Saini has served HRPT, Reit Management and
their affiliates in various capacities since June 1990, prior to which he was
employed by Ernst & Young LLP. Mr. Saini is a certified public accountant.
COMMITTEES OF THE BOARD OF TRUSTEES
Promptly following completion of the spin-off, the board of trustees will
establish an audit committee that will consist of independent trustees. The
audit committee will make recommendations concerning the engagement of
independent public accountants, review the plans and results of the audit
engagement, approve professional services provided by the independent public
accountants, consider the appropriateness of audit and nonaudit fees charged by
Senior Housing's accountants and review the adequacy of Senior Housing's
internal accounting controls.
The entire board of trustees will function as a compensation committee to
implement Senior Housing's incentive share award plan described below.
COMPENSATION OF THE TRUSTEES AND OFFICERS
Senior Housing will pay its independent trustees an annual fee of $20,000,
plus a fee of $500 for each meeting attended. Each independent trustee will
automatically receive an annual grant of 500 common shares after the completion
of the spin-off, or upon initial election to fill the current vacant position,
and at the first meeting of the board of trustees following each annual meeting
of shareholders, commencing in 2000. In addition, Senior Housing will pay the
independent trustee serving as chairman of the audit committee $2,000 per year.
This position is expected to rotate annually among the independent trustees.
Senior Housing will also reimburse expenses its trustees incur in attending
meetings. Senior Housing's managing trustees and officers are employees of Reit
Management and they will not receive compensation directly from Senior Housing,
except reimbursement of expenses and under the incentive share award plan.
INCENTIVE SHARE AWARD PLAN
Senior Housing has adopted an incentive share award plan and has reserved
1.3 million shares to grant to its independent trustees, officers and
consultants, including employees of Reit Management, but not Reit Management
itself which will be paid under its contract described below. Senior Housing has
established the incentive share award plan to ensure that its independent
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trustees, officers and others responsible for its operations have similar
interests with shareholders. In addition, the incentive share award plan will
permit Senior Housing to compensate affiliates for the performance of services
and duties in addition to those compensated by Reit Management.
As discussed above, the independent trustees will automatically receive
grants of 500 common shares per year as part of their annual compensation. In
granting other incentive share awards, the board of trustees intends to consider
a range of factors regarding potential grantees, including the complexity and
duration of tasks performed and the amount and terms of common shares previously
granted. The vesting schedule of each incentive share award will be determined
at the time of grant. No awards will be granted under the incentive share award
plan before completion of the spin-off, and no individuals have yet been
selected to receive any awards.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Under Senior Housing's declaration of trust and bylaws, its trustees,
officers and employees are entitled to indemnification. You can find more
information about indemnification of trustees, officers and employees in the
section entitled "Material Provisions of Maryland Law and of Senior Housing's
Declaration of Trust and Bylaws" on page 69 of this prospectus.
REIT MANAGEMENT AND THE ADVISORY AGREEMENT
REIT MANAGEMENT. Reit Management is a Delaware corporation owned by Barry
M. Portnoy and Gerard M. Martin. Its principal place of business is 400 Centre
Street, Newton, Massachusetts and its telephone number is (617) 928-1300. Reit
Management has approximately 180 full time employees including a headquarters
staff, four regional offices and other personnel located throughout the United
States. Reit Management also acts as the investment advisor to HRPT and
Hospitality Properties.
The directors of Reit Management are Barry M. Portnoy, Gerard M. Martin and
David J. Hegarty. The officers of Reit Management are David J. Hegarty,
President and Secretary, John G. Murray, Executive Vice President, John A.
Mannix, Vice President, Thomas M. O'Brien, Vice President, Ajay Saini, Vice
President, David M. Lepore, Vice President, Jennifer B. Clark, Vice President,
and John Popeo, Treasurer. A biographical summary of the officers of Reit
Management who are not described above under "--Senior Housing Trustees and
Executive Officers" or under "Information about HRPT After the Spin-off--HRPT
Management" on page 26 of this prospectus follows:
JOHN G. MURRAY, age 38, is the Executive Vice President of Reit Management.
Mr. Murray also is and has been the President, Chief Operating Officer and
Secretary of Hospitality Properties since 1996. Mr. Murray has served in various
capacities for HRPT, Reit Management and their affiliates since 1993. Prior to
1993, Mr. Murray was Director of Finance, Business Analysis and Planning at
Fidelity Brokerage Services, Inc. from 1992 to 1993 and Director of Acquisitions
from 1990 through 1991. Prior to 1990, Mr. Murray was employed by Ernst & Young
LLP. Mr. Murray is a certified public accountant.
THOMAS M. O'BRIEN, age 33, is and has been a Vice President of Reit
Management since 1996. Mr. O'Brien is and also has been the Treasurer and Chief
Financial Officer of Hospitality Properties since 1996. Prior to 1996, Mr.
O'Brien was employed by Arthur Andersen LLP for eight years. Mr. O'Brien is a
certified public accountant.
JENNIFER B. CLARK, age 38, is a Vice President of Reit Management. Ms. Clark
joined Reit Management in July 1999 and will be primarily responsible for
leasing HRPT's office buildings.
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From 1994 to July 1999, Ms. Clark's principal employment was as a partner
specializing in real estate law at the law firm of Sullivan & Worcester LLP,
counsel to Reit Management and its affiliates, including HRPT, Hospitality
Properties and Senior Housing.
THE ADVISORY AGREEMENT. The following is a summary of Senior Housing's
advisory agreement with Reit Management. Although it is a summary of the
material terms, it does not contain all the information that may be important to
you. If you would like more information, you should read the entire agreement,
which has been filed with the SEC as an exhibit to the registration statement of
which this prospectus is a part.
Reit Management is required to use its best efforts to present Senior
Housing with a continuing and suitable investment program consistent with Senior
Housing's investment policies. Subject to its duty of overall management and
supervision, the board of trustees has delegated to Reit Management the power
and duty to:
- provide research and economic and statistical data in connection with
Senior Housing's investments and recommend changes in Senior Housing's
investment policies when appropriate;
- investigate and evaluate investment, financing and refinancing
opportunities and make recommendations concerning specific investments to
the trustees;
- manage Senior Housing's short-term investments including the acquisition
and sale of money market instruments;
- administer Senior Housing's day-to-day operations including the leasing of
Senior Housing's properties and relations with Senior Housing's tenants;
- investigate, negotiate and enter contracts for the purchase, lease or
servicing of real estate and related interests, on Senior Housing's behalf
in furtherance of Senior Housing's investment objectives;
- investigate, negotiate and enter contracts for the financing and
refinancing of investments, on Senior Housing's behalf in furtherance of
the financing objectives of Senior Housing;
- act as attorney-in-fact or agent in acquiring and disposing of Senior
Housing's real estate investments, and in handling, prosecuting and
settling any of Senior Housing's claims;
- monitor Senior Housing's real property and other investments as would be
done by a prudent owner;
- monitor all third-party services provided to Senior Housing as would be
done by a prudent owner;
- administer the day-to-day bookkeeping and accounting functions as are
required for the management of Senior Housing's assets, contract for
audits and prepare or cause to be prepared reports required by any
governmental authority in connection with the conduct of Senior Housing's
business;
- provide office space, office equipment and the use of accounting or
computing equipment when required;
- provide personnel necessary for the performance of the foregoing services;
and
- upon request by the trustees, make reports of its performance of the
foregoing services.
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In performing its services under the advisory agreement, Reit Management may
use facilities, personnel and support services of various of its affiliates.
Under the advisory agreement, Reit Management assumes no responsibility
other than to render the services described therein in good faith and is not
responsible for any action of the Senior Housing board of trustees in following
or declining to follow any advice or recommendation of Reit Management. In
addition, Senior Housing has agreed to indemnify Reit Management, its
shareholders, directors, officers, employees and affiliates against liabilities
relating to acts or omissions of Reit Management undertaken on Senior Housing's
behalf in good faith.
The initial term of the advisory agreement expires on December 31, 1999.
Renewals or extensions of the advisory agreement will be subject to the periodic
approval of a majority of the independent trustees. Under the advisory
agreement, Reit Management and Messrs. Portnoy and Martin have agreed not to
provide advisory services to, or serve as a director or officer of, any other
REIT which is principally engaged in the business of owning and leasing senior
apartments, congregate communities, assisted living or nursing home properties
or to make competitive direct investments in these types of properties, in each
case, without the consent of Senior Housing's independent trustees.
COMPENSATION TO REIT MANAGEMENT. The board of trustees, acting by a
majority vote of the independent trustees, will determine the amount of
compensation paid to Reit Management when it determines whether to renew, extend
or amend the advisory agreement, based on factors it deems appropriate. These
factors are expected to include:
- the size of the advisory fee in relation to the size, composition, quality
and profitability of Senior Housing's investments;
- the success of Reit Management in generating opportunities that meet
Senior Housing's investment objectives;
- the quality and extent of services and advice furnished by Reit
Management;
- the rates charged by others performing comparable services; and
- the costs of similar services incurred by other REITs.
The advisory agreement currently provides for an annual advisory fee and an
annual incentive fee. The advisory fee is payable monthly and reconciled
annually. The advisory fee is equal to the sum of 0.5% of the historical cost of
the assets transferred to Senior Housing by HRPT, plus 0.7% of Senior Housing's
real estate investments up to an additional $250 million made after the
completion of the spin-off, plus 0.5% of Senior Housing's real estate
investments exceeding these amounts. The annual incentive fee is equal to 15% of
the annual increase in Senior Housing's funds from operations per share times
the weighted average number of shares outstanding on a diluted basis in each
year; provided however, the annual incentive fee shall be no more than $0.02
times the weighted average number of shares. The annual incentive fees payable
to Reit Management will be paid in Senior Housing's shares at market value. No
incentive fees will be payable for 1999.
The advisory agreements currently in effect between Reit Management and HRPT
and between Reit Management and Hospitality Properties are substantially similar
to the advisory agreement between Reit Management and Senior Housing. Upon
completion of the spin-off, Reit Management's contract with HRPT will be amended
to make clear that HRPT's historical cost of real estate assets used to
calculate the advisory fees payable by HRPT will exclude HRPT's investment in
Senior Housing. Accordingly, the advisory fees paid by HRPT will decline by an
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amount equal to the fees payable by Senior Housing, and the total fees payable
to Reit Management will be unchanged as a result of the spin-off.
Senior Housing is not expected to have any employees or administrative
officers separate from Reit Management. Services which might otherwise be
provided by employees will be provided to Senior Housing by employees of Reit
Management. Similarly, office space will be provided to Senior Housing by Reit
Management. Although Senior Housing does not expect to have significant general
and administrative operating expenses in addition to fees payable to Reit
Management, Senior Housing will be required to pay various other expenses,
including the costs and expenses of acquiring, owning and disposing of Senior
Housing's real estate interests. These costs and expenses include acquisition
and disposition diligence, audit and legal fees, the costs of borrowing money
and the costs of securities listing, transfer, registration, compliance with
public reporting requirements and shareholder communications generally. Also,
Senior Housing will pay the fees of its independent trustees.
RELATED PARTY TRANSACTIONS
Senior Housing is currently a 100% owned subsidiary of HRPT. Senior
Housing's managing trustees, Barry M. Portnoy and Gerard M. Martin, also own
Reit Management, and act as managing trustees of HRPT. As a result of these
relationships, HRPT and Messrs. Portnoy and Martin have material interests in
transactions with Senior Housing, including the following:
- Senior Housing is indebted to HRPT for $200 million. After the spin-off
Senior Housing will borrow $200 million under its bank credit facility and
pay this $200 million formation debt to HRPT.
- Upon completion of the spin-off, Reit Management will become Senior
Housing's investment advisor. Assuming the spin-off is completed on
September 30, 1999, the pro forma advisory fee that Senior Housing will
pay to Reit Management from the completion of the spin-off through the
initial term of the agreement on December 31, 1999, will be approximately
$1.0 million, or $3.9 million on an annualized basis. HRPT's advisory fees
to Reit Management will be reduced by the same amount.
- After the spin-off, HRPT will retain 12.8 million of Senior Housing
shares. By retaining these shares, HRPT will be able to participate in
Senior Housing's future success through distributions and appreciation, if
any, in the price of these shares.
- Three of the eleven properties included in the Integrated Health Services
Lease No. 2 are leased by a corporation owned by Messrs. Portnoy and
Martin. Integrated manages these properties under contracts which expire
in 2006 and are renewable thereafter. Under these management arrangements,
Integrated is financially responsible for the operation of these three
properties and has guaranteed the lease obligations due to Senior Housing.
Integrated's obligations for these leases are subject to cross default and
cross collateralization with other lease and mortgage obligations of
Integrated to Senior Housing included in Integrated's Lease No. 2. Messrs.
Portnoy and Martin have not received, and do not expect to receive, net
economic benefits from their ownership of this tenant entity, and they are
not obligated for these leases to Senior Housing. The arrangement by which
an entity owned by Messrs. Portnoy and Martin became a tenant for these
three properties was established in 1994 in order to facilitate licensing
for a predecessor of Integrated.
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LEGAL PROCEEDINGS
Senior Housing has a limited operating history and is not currently a party
to any legal proceedings. Senior Housing is not aware of any material legal
proceeding affecting its properties for which it might become liable. Moreover,
HRPT has agreed to indemnify Senior Housing for any pending litigation affecting
the properties transferred to Senior Housing.
SENIOR HOUSING POLICIES
The following discussion sets forth Senior Housing's policies regarding
investments, dispositions, financings, conflicts of interest and other
activities. The board of trustees has set these policies and although there is
no current intention to do so, the board of trustees may amend or revise these
policies at any time without a vote of shareholders.
INVESTMENT POLICIES
ACQUISITIONS. Senior Housing intends to buy additional senior apartments,
congregate communities, assisted living properties and nursing homes. It is
Senior Housing's policy to acquire assets primarily for income and secondarily
for their appreciation potential. In making future acquisitions, Senior Housing
will consider a range of factors including:
- the acquisition price of the proposed property;
- the estimated replacement cost of the proposed property;
- proposed lease terms;
- the financial strength and operating reputation of the proposed tenant;
- historical and projected cash flows of the property to be acquired;
- the location and competitive market environment of the proposed property;
- the physical condition of the proposed property and its potential for
redevelopment or expansion; and
- the price segment and payment sources in which the proposed property is
operated.
Senior Housing intends to acquire properties which will enhance the
diversity of its portfolio in respect to tenants, types of services provided and
locations. Senior Housing has no policies which specifically limit the
percentage of its assets which may be invested in any individual property, in
any one type of property, in properties leased to any one tenant or in
properties leased to an affiliated group of tenants.
OTHER INVESTMENTS IN REAL ESTATE. Senior Housing expects to emphasize
direct wholly owned investments in fee interests. However, circumstances may
arise in which Senior Housing may invest in leaseholds, joint ventures,
mortgages and other real estate interests. Senior Housing may invest in real
estate joint ventures if it concludes that by doing so it may benefit from the
participation of co-venturers or that Senior Housing's opportunity to
participate in the investment is contingent on the use of a joint venture
structure. Senior Housing may invest in participating, convertible or other
types of mortgages if it concludes that by doing so it may benefit from the cash
flow or appreciation in the value of a property which is not available for
purchase.
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DISPOSITION POLICIES
From time to time Senior Housing may consider the sale of one or more of its
properties. Future disposition decisions, if any, will be made based on a number
of factors including the following:
- the proposed sale price;
- the strategic fit of the property with the rest of Senior Housing's
portfolio;
- potential opportunities to increase revenues by reinvesting sale proceeds;
- the potential for, or the existence of, any environmental or regulatory
problems affecting a particular property;
- Senior Housing's alternative capital needs; and
- the maintenance of Senior Housing's qualification as a REIT under the
Internal Revenue Code.
Integrated holds purchase options on four of the nursing homes included in
the Integrated Lease No. 2. Under the options, Integrated has the right to
purchase one of these properties per year commencing in February 2000. The
purchase option prices for these properties are approximately equal to their
historical costs. It is presently unknown if Integrated intends to purchase
these properties.
FINANCING POLICIES
Senior Housing has accepted a commitment for a bank credit facility. This
bank credit facility will enable Senior Housing to borrow up to $350 million.
The facility will require payment of interest only at LIBOR plus a premium. The
maturity of this facility will be in three years ending in late 2002. Two
hundred million dollars will be borrowed under this facility shortly after the
spin-off and used to pay Senior Housing formation debt to HRPT. The balance of
$150 million under this facility will be available to Senior Housing after the
spin-off to fund new acquisitions and for general business purposes. This bank
credit facility will be secured by first mortgages upon, and a collateral
assignment of leases from, 18 properties owned by Senior Housing. This bank
credit facility has several covenants typically found in revolving loan
facilities including covenants to maintain a minimum net worth and minimum
collateral value and which prohibit Senior Housing from incurring debt in excess
of 60% of its total capital. This bank credit facility has been entered into by
Senior Housing. A copy of the credit facility documentation has been filed as an
exhibit to the registration statement of which this prospectus is part. If you
want more information concerning this bank credit facility you should refer to
that filing.
Senior Housing intends to use this bank credit facility to fund future
acquisitions and for working capital. Periodically, Senior Housing expects to
repay amounts drawn under the bank credit facility with proceeds of equity and
long term debt offerings. Senior Housing's organizational documents do not limit
the amount of indebtedness it may incur. At present Senior Housing expects to
maintain a capital structure in which Senior Housing's debt will not exceed 60%
of its total capital. Senior Housing will consider future equity offerings when,
in its judgment, doing so will improve its capital structure without materially
adversely affecting the market value of its shares. During the next few years
Senior Housing expects to lower its target maximum debt to capitalization ratio
to 50% and to achieve an investment grade rating for its debt obligations; but
it does not expect this to happen until it has operated as an independent public
company for several years. Until it achieves an investment grade rating, Senior
Housing expects that the least costly debt capital
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available to it will be secured debt and that most of its debt will be secured.
In the future, Senior Housing may modify its current financing policies in light
of then current economic conditions, relative costs of debt and equity capital,
acquisition opportunities and other factors; and its intended ratio of debt to
total capital may change.
CONFLICT OF INTEREST POLICIES
Senior Housing has adopted several policies to mitigate existing and
potential conflicts of interest, as follows:
<TABLE>
<CAPTION>
CONFLICT POLICY
- ------------------------------------ ------------------------------------------------
<S> <C>
Reit Management is also the invest- Mr. Hegarty, HRPT's current President and Chief
ment advisor for HRPT and Operating Officer, and Mr. Saini, HRPT's current
Hospitality Properties and has other Treasurer and Chief Financial Officer will
business interests. Messrs. Portnoy resign from HRPT and assume similar positions at
and Martin will be managing trustees Senior Housing. They will devote approximately
of Senior Housing, HRPT and 75% of their business time to Senior Housing.
Hospitality Properties and have Reit Management and Messrs. Portnoy and Martin
other business interests. Messrs. have agreed not to provide advisory services or
Hegarty and Saini will be officers serve as trustees or officers of any other REIT
of Senior Housing and Reit which is principally engaged in owning and
Management. Conflicts arise in the leasing senior apartments, congregate
allocation of management time. communities, assisted living properties or
nursing homes, or to make competitive direct
investments in these types of properties, in
each case, without the consent of Senior
Housing's independent trustees.
Messrs. Portnoy and Martin own, and The continuation of the advisory agreement and
Messrs. Hegarty and Saini are the fees payable to Reit Management will be
employed by, Reit Management. The subject to periodic review and approval by
fees paid by Senior Housing to Reit Senior Housing's independent trustees. The
Management are based in part upon incentive fees payable to Reit Management will
the size of Senior Housing's be based upon increases in FFO per share and
investment portfolio. These will be paid in shares of Senior Housing.
circumstances might provide an
economic incentive for Reit
Management and Messrs. Portnoy,
Martin, Hegarty and Saini to
encourage Senior Housing's
investments to raise fees.
After the spin-off, HRPT will own HRPT does not intend to purchase additional
12.8 million shares, 49%, of Senior shares of Senior Housing. Over time, as Senior
Housing's shares. This will afford Housing issues shares to fund its growth, HRPT's
HRPT considerable influence over ownership percentage will decline. So long as
Senior Housing shareholder actions. HRPT owns over 10% of Senior Housing's shares,
Sales of these shares by HRPT could no one will serve simultaneously as an
depress the market price of Senior independent trustee of both Senior Housing and
Housing's shares. HRPT. HRPT has agreed to not sell its Senior
Housing shares for one year following the
spin-off without the consent of Senior Housing's
independent trustees.
</TABLE>
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<TABLE>
<CAPTION>
CONFLICT POLICY
- ------------------------------------ ------------------------------------------------
<S> <C>
Mr. Portnoy, one of the Senior Hous- Mr. Portnoy will not participate in the review
ing's managing trustees, was a or approval of any fees payable by Senior
partner and chairman of Sullivan & Housing to Sullivan & Worcester, LLP.
Worcester, LLP, Senior Housing's
counsel. Mr. Portnoy retired from
that firm in 1997 and will receive
payments from that firm for the next
five years in respect of his
retirement.
Other conflicts may develop from A majority of Senior Housing's board of trustees
time to time. will consist of independent trustees who are not
employees of Reit Management and who do not
participate in its day to day activities. No
trustee or officer will participate in decisions
made by Senior Housing in which he or she has a
material adverse interest. It is Senior
Housing's policy that officers and trustees will
disclose their adverse interests to the board of
trustees, and the board of trustees, acting
without the participation of any trustee holding
the adverse interest, will determine whether the
adverse interest is material. Reit Management
and all the trustees and officers of Senior
Housing are required by applicable laws to act
in accordance with their fiduciary
responsibilities to Senior Housing, and it is
Senior Housing's policy that those laws be
followed.
</TABLE>
POLICIES WITH RESPECT TO OTHER ACTIVITIES
Senior Housing expects to operate in a manner that will not subject it to
regulation under the Investment Company Act of 1940. Except for the possible
acquisition of other REITs which are engaged in similar businesses, Senior
Housing does not currently intend to invest in the securities of other companies
for the purpose of exercising control, to underwrite securities of other
companies or to trade actively in loans or other investments.
Senior Housing may make investments other than as previously described,
although it does not currently intend to do so. Senior Housing has authority to
repurchase or otherwise reacquire its shares or other securities it issues and
may do so in the future. In the future, Senior Housing may issue shares or other
securities in exchange for property. Also, although it has no current intention
to do so, Senior Housing may make loans to third parties, including to Senior
Housing's trustees and officers and to joint ventures in which it participates.
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MATERIAL PROVISIONS OF MARYLAND LAW AND OF
SENIOR HOUSING'S DECLARATION OF TRUST AND BYLAWS
Senior Housing is organized as a perpetual life Maryland real estate
investment trust. The following is a summary of Senior Housing's declaration of
trust and bylaws and several provisions of Maryland law. Because it is a
summary, it does not contain all the information that may be important to you.
If you want more information, you should read Senior Housing's entire
declaration of trust and bylaws, copies of which are exhibits to the
registration statement of which this prospectus is a part or refer to the
provisions of Maryland law.
TRUSTEES
Senior Housing's declaration and bylaws provide that the board of trustees
will establish the number of trustees. There may not be less than three nor more
than seven trustees. In the event of a vacancy, a majority of the remaining
trustees will fill the vacancy, except that a majority of the entire board of
trustees must fill a vacancy resulting from an increase in the number of
trustees. Senior Housing's bylaws require that a majority of its trustees will
be independent trustees except for temporary periods due to vacancies.
Senior Housing's declaration of trust divides the board of trustees into
three classes. The initial term of the first class will expire in 2000; the
initial term of the second class will expire in 2001; and the initial term of
the third class will expire in 2002. Beginning in 2000, shareholders will elect
trustees of each class for three-year terms upon the expiration of their current
terms. Shareholders will elect only one class of trustees each year. Senior
Housing believes that classification of the board will help to assure the
continuity of Senior Housing's business strategies and policies. There will be
no cumulative voting in the election of trustees. Consequently, at each annual
meeting of shareholders, the holders of a majority of Senior Housing's shares
will be able to elect all of the successors of the class of trustees whose terms
expire at that meeting.
The classified board provision could have the effect of making the
replacement of incumbent trustees more time consuming and difficult. At least
two annual meetings of shareholders will generally be required to effect a
change in a majority of the board of trustees.
The declaration of trust provides that a trustee may be removed with or
without cause by the affirmative vote of at least two-thirds of the shares
entitled to be cast in the election of trustees. This provision precludes
shareholders from removing incumbent trustees unless they can obtain a
substantial affirmative vote of shares.
ADVANCE NOTICE OF TRUSTEE NOMINATIONS AND NEW BUSINESS
Senior Housing's bylaws provide that nominations of persons for election to
the board of trustees and proposals for business to be considered at shareholder
meetings may be made only in Senior Housing's notice of the meeting, by the
board of trustees, or by a shareholder who is entitled to vote at the meeting
and has complied with the advance notice procedures set forth in the bylaws.
Under Senior Housing's bylaws, a shareholder's notice of nominations for
trustee or other matters to be considered at a shareholders meeting must be
delivered to Senior Housing's secretary at Senior Housing's principal office not
later than the close of business on the 90th day and not earlier than the 120th
day prior to the first anniversary of the preceding year's annual meeting. In
the event that the date of the annual meeting is advanced by more than 30 days
or delayed by more than 60 days from the anniversary date, or if Senior Housing
has not previously held an annual meeting, a shareholder's notice must be
delivered not later than the later of 90 days prior to the annual meeting or the
10th day following the day on which Senior Housing first makes a public
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announcement of the date of the meeting. Any notice from a shareholder of
nominations for trustee or other matters to be considered at a shareholder
meeting must contain the following:
- as to each person nominated for election as a trustee, all information
relating to the person that is required to be disclosed in solicitations
of proxies for election of trustees or otherwise required by Regulation
14A under the Securities Exchange Act of 1934, together with the nominee's
written consent to being named in the proxy statement as a nominee and to
serving as a trustee if elected;
- as to other business that the shareholder proposes to bring before the
meeting, a brief description of the business, the reasons for conducting
the business and any material interest in the business of the shareholder
and of the beneficial owner, if any, on whose behalf the proposal is made;
and
- as to the shareholder giving the notice and the beneficial owner, if any,
on whose behalf the nomination or proposal is made, the name and address
of the shareholder and beneficial owner and the number of Senior Housing's
shares which (s)he or they own beneficially and of record.
MEETINGS OF SHAREHOLDERS
Under Senior Housing's bylaws, Senior Housing's annual meeting of
shareholders will take place on the second Thursday of May of each year, unless
a different date is set by the board of trustees. All meetings of shareholders
may be called only by the board of trustees.
LIABILITY AND INDEMNIFICATION OF TRUSTEES AND OFFICERS
To the maximum extent permitted by Maryland law, Senior Housing's
declaration of trust and bylaws include provisions limiting the liability of
Senior Housing's present and former trustees, officers and shareholders for
damages and obligating Senior Housing to indemnify them against any claim or
liability to which they may become subject by reason of their status or actions
as present or former Senior Housing trustees, officers or shareholders. Senior
Housing's bylaws also obligate it to pay or reimburse the people described above
for reasonable expenses in advance of final disposition of a proceeding.
Maryland law permits a real estate investment trust to indemnify and advance
expenses to its trustees, officers, employees and agents to the same extent
permitted by the Maryland General Corporation Law for directors and officers of
Maryland corporations. The Maryland corporation statute permits a corporation to
indemnify its present and former directors and officers against judgments,
penalties, fines, settlements and reasonable expenses incurred in connection
with any proceeding to which they may be made a party by reason of their service
in those capacities. However, a Maryland corporation is not permitted to provide
this type of indemnification if the following is established:
- the act or omission of the director or officer was material to the matter
giving rise to the proceeding and was committed in bad faith or was the
result of active and deliberate dishonesty;
- the director or officer actually received an improper personal benefit in
money, property or services; or
- in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful.
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The Maryland corporation statute permits a corporation to advance reasonable
expenses to a director or officer upon the corporation's receipt of the
following:
- 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
- a written undertaking by him or on his behalf to repay the amount paid or
reimbursed by the corporation if it is ultimately determined that this
standard of conduct was not met.
The SEC has expressed the opinion that indemnification of trustees, officers
or persons otherwise controlling a company for liabilities arising under the
Securities Act of 1933 is against public policy and is therefore unenforceable.
SHAREHOLDER LIABILITY
Under the Maryland REIT statute, a shareholder is not personally liable for
the obligations of a real estate investment trust solely as a result of his
status as a shareholder. Senior Housing's declaration of trust provides that no
shareholder will be liable for any debt, claim, demand, judgment or obligation
of any kind of, against or with respect to, Senior Housing by reason of being a
shareholder. Despite these facts, Senior Housing's legal counsel has advised it
that in some jurisdictions the possibility exists that shareholders of a trust
entity such as Senior Housing may be held liable for acts or obligations of the
trust. While Senior Housing intends to conduct its business in a manner designed
to minimize potential shareholder liability, it can give no assurance that you
can avoid liability in all instances in all jurisdictions. Senior Housing's
trustees do not intend to provide insurance covering these risks to Senior
Housing's shareholders.
MARYLAND ASSET REQUIREMENTS
To maintain Senior Housing's qualification as a real estate investment
trust, the Maryland REIT statute requires that at least 75% of the value of
Senior Housing's assets be real estate, mortgages or mortgage-related
securities, government securities, cash and cash equivalent items, including
short-term securities and receivables. The Maryland REIT statute also prohibits
Senior Housing from using or applying land for farming, agricultural,
horticultural or similar purposes. These provisions of the Maryland REIT statute
have been repealed effective October 1, 1999.
TRANSACTIONS WITH AFFILIATES
Senior Housing's declaration of trust allows it to enter into contracts and
transactions of any kind with any person, including any of Senior Housing's
trustees, officers, employees or agents or any person affiliated with them.
Other than general legal principles applicable to self-dealing by fiduciaries,
there are no prohibitions in Senior Housing's declaration or bylaws which would
prohibit dealings between Senior Housing and its affiliates.
VOTING BY SHAREHOLDERS
Whenever shareholders are required or permitted to take any action by a
vote, the action may only be taken by a vote at a shareholders meeting. Under
Senior Housing's declaration and bylaws shareholders do not have the right to
take any action by written consents instead of a vote.
RESTRICTIONS ON TRANSFER OF SHARES
Senior Housing's declaration of trust restricts the amount of shares that
individual shareholders may own. These restrictions are intended to assist with
REIT compliance under the Internal Revenue Code and otherwise to promote Senior
Housing's orderly governance. These restrictions do
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not apply to HRPT, Reit Management or their affiliates. All certificates
evidencing Senior Housing shares will bear a legend referring to these
restrictions.
Senior Housing's declaration of trust provides that no person may own, or be
deemed to own by virtue of the attribution provisions of the Internal Revenue
Code, more than 9.8% of the number or value of Senior Housing's outstanding
shares. Senior Housing's declaration also prohibits any person from beneficially
or constructively owning shares if that ownership would result in Senior Housing
being closely held under Section 856(h) of the Internal Revenue Code or would
otherwise cause it to fail to qualify as a REIT.
Senior Housing's board of trustees, in its discretion, may exempt a proposed
transferee from the share ownership limitation. So long as the board of trustees
determines that it is in Senior Housing's best interest to qualify as a REIT,
the board may not grant an exemption if the exemption would result in Senior
Housing failing to qualify as a REIT. In determining whether to grant an
exemption, the board of trustees may consider, among other factors, the
following:
- the general reputation and moral character of the person requesting an
exemption;
- whether the person's ownership of shares would adversely affect Senior
Housing's ability to acquire additional properties; and
- whether granting an exemption would adversely affect any of Senior
Housing's existing contractual arrangements or business policies.
In addition, the board of trustees may require rulings from the Internal Revenue
Service, opinions of counsel, affidavits, undertakings or agreements it deems
advisable in order to make the foregoing decisions.
If a person attempts a transfer of Senior Housing's shares in violation of
the ownership limitations described above, then that number of shares which
would cause the violation will be automatically transferred to a trust for the
exclusive benefit of one or more charitable beneficiaries designated by Senior
Housing. The prohibited owner will not acquire any rights in these excess
shares, will not benefit economically from ownership of any excess shares, will
have no rights to distributions and will not possess any rights to vote. This
automatic transfer will be deemed to be effective as of the close of business on
the business day prior to the date of the violative transfer.
Within 20 days of receiving notice from Senior Housing that its shares have
been transferred to an excess share trust, the excess share trustee will sell
the shares held in the excess share trust to a person designated by the excess
share trustee whose ownership of the shares will not violate the ownership
limitations set forth in Senior Housing's declaration of trust. Upon this sale,
the interest of the charitable beneficiary in the shares sold will terminate and
the excess share trustee will distribute the net proceeds of the sale to the
prohibited owner and to the charitable beneficiary as follows:
- The prohibited owner will receive the lesser of:
(1) the price paid by the prohibited owner for the shares or, if the
prohibited owner did not give value for the shares in connection with the
event causing the shares to be held in the excess share trust, E.G., a
gift, devise or other similar transaction, the market price of the shares
on the day of the event causing the shares to be transferred to the
excess share trust; and
(2) the net price received by the excess share trustee from the sale of the
shares held in the excess share trust.
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- Any net sale proceeds in excess of the amount payable to the prohibited
owner shall be paid to the charitable beneficiary.
If, prior to Senior Housing's discovery that shares of beneficial interest
have been transferred to the excess share trust, a prohibited owner sells those
shares, then:
(1) those shares will be deemed to have been sold on behalf of the excess
share trust; and
(2) to the extent that the prohibited owner received an amount for those
shares that exceeds the amount that the prohibited owner was entitled to
receive from a sale by an excess share trustee, the prohibited owner must
pay the excess to the excess share trustee upon demand.
Also, shares of beneficial interest held in the excess share trust will be
offered for sale to Senior Housing, or its designee, at a price per share equal
to the lesser of:
(1) the price per share in the transaction that resulted in the transfer to
the excess share trust or, in the case of a devise or gift, the market
price at the time of the devise or gift; and
(2) the market price on the date Senior Housing or its designee accepts the
offer.
Senior Housing will have the right to accept the offer until the excess share
trustee has sold the shares held in the excess share trust. The net proceeds of
the sale to Senior Housing will be distributed similar to any other sale by an
excess share trustee.
Every owner of more than 5% of all classes or series of Senior Housing's
shares is required to give written notice to Senior Housing within 30 days after
the end of each taxable year stating the name and address of the owner, the
number of shares of each class and series of Senior Housing's shares which the
owner beneficially owns, and a description of the manner in which those shares
are held. If the Internal Revenue Code or applicable tax regulations specify a
threshold below 5%, this notice provision will apply to those persons who own
Senior Housing's shares of beneficial interest at the lower percentage. In
addition, each shareholder is required to provide Senior Housing upon demand
with any additional information that it may request in order to determine Senior
Housing's status as a REIT, to determine Senior Housing's compliance with the
requirements of any taxing authority or government and to determine and ensure
compliance with the foregoing share ownership limitations.
The restrictions described above will not preclude the settlement of any
transaction entered into through the facilities of the NYSE or any other
national securities exchange or automated inter-dealer quotation system. The
declaration of trust provides, however, that the fact that the settlement of any
transaction occurs will not negate the effect of any of the foregoing
limitations and any transferee in this kind of transaction will be subject to
all of the provisions and limitations described above.
BUSINESS COMBINATIONS
The Maryland corporation statute contains a provision which regulates
business combinations with interested shareholders. This provision applies to
Maryland real estate investment trusts like Senior Housing. Under the Maryland
corporation statute, business combinations such as mergers, consolidations,
share exchanges and the like between a Maryland real estate investment trust and
an interested shareholder are prohibited for five years after the most recent
date on which the shareholder becomes an interested shareholder. Under the
statute the following persons are deemed to be interested shareholders:
- any person who beneficially owns 10% or more of the voting power of the
trust's shares;
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- an affiliate or associate of the trust who, at any time within the
two-year period prior to the date in question, was the beneficial owner of
10% or more of the voting power of the then outstanding voting shares of
the trust; or
- an affiliate of an interested shareholder.
After the five-year prohibition period has ended, a business combination
between a trust and an interested shareholder must be recommended by the board
of trustees of the trust and must receive the following shareholder approvals:
- the affirmative vote of at least 80% of the votes entitled to be cast; and
- the affirmative vote of at least two-thirds of the votes entitled to be
cast by holders of shares other than shares held by the interested
shareholder with whom or with whose affiliate or associate the business
combination is to be effected.
The second shareholder approval is not required if the trust's shareholders
receive the minimum price set forth in the Maryland corporation statute for
their shares and the consideration is received in cash or in the same form as
previously paid by the interested shareholder for its shares.
The foregoing provisions of the Maryland corporation statute do not apply,
however, to business combinations that are approved or exempted by the board of
trustees of the trust prior to the time that the interested shareholder becomes
an interested shareholder. Senior Housing's board of trustees has adopted a
resolution that any business combination between Senior Housing and any other
person is exempted from the provisions of the Maryland corporation statute
described in the preceding paragraphs, provided that the business combination is
first approved by the board of trustees, including the approval of a majority of
the members of the board of trustees who are not affiliates or associates of the
acquiring person. This resolution, however, may be altered or repealed in whole
or in part at any time.
CONTROL SHARE ACQUISITIONS
The Maryland corporation statute contains a provision which regulates
control share acquisitions. This provision also applies to Maryland real estate
investment trusts. The Maryland corporation statute provides that control shares
of a Maryland real estate investment trust acquired in a control share
acquisition have no voting rights except to the extent that the acquisition is
approved by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares of beneficial interest owned by the acquiror, by officers or by
trustees who are employees of the trust. Control shares are voting shares of
beneficial interest which, if aggregated with all other shares of beneficial
interest previously acquired by the acquiror, or in respect of which the
acquiror is able to exercise or direct the exercise of voting power, would
entitle the acquiror to exercise voting power in electing trustees within one of
the following ranges of voting power:
- one-fifth or more but less than one-third,
- one-third or more but less than a majority, or
- a majority or more of all voting power.
An acquiror must obtain the necessary shareholder approval each time he acquires
control shares in an amount sufficient to cross one of the thresholds noted
above.
Control shares do not include shares which the acquiring person is entitled
to vote as a result of having previously obtained shareholder approval by virtue
of a revocable proxy. The Maryland corporation statute provides a list of
exceptions from the definition of control share acquisition.
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A person who has made or proposes to make a control share acquisition, upon
satisfaction of the conditions set forth in the statute, including an
undertaking to pay expenses, may compel the board of trustees of the trust to
call a special meeting of shareholders to be held within 50 days of demand to
consider the voting rights of the shares. If no request for a meeting is made,
the trust may itself present the matter at any shareholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then
the trust may redeem any or all of the control shares for fair value determined
as of the date of the last control share acquisition by the acquiror or of any
meeting of shareholders at which the voting rights of those shares are
considered and not approved. The right of the trust to redeem any or all of the
control shares is subject to conditions and limitations listed in the statute.
The trust may not redeem shares for which voting rights have previously been
approved. Fair value is determined without regard to the absence of voting
rights for the control shares. If voting rights for control shares are approved
at a shareholders meeting and the acquiror becomes entitled to vote a majority
of the shares entitled to vote, all other shareholders may exercise appraisal
rights. The fair value of the shares as determined for purposes of these
appraisal rights may not be less than the highest price per share paid by the
acquiror in the control share acquisition.
The control share acquisition statute does not apply to the following:
- shares acquired in a merger, consolidation or share exchange if the trust
is a party to the transaction; or
- acquisitions approved or exempted by a provision in the declaration of
trust or bylaws of the trust adopted before the acquisition of shares.
Senior Housing's bylaws contain a provision exempting any and all
acquisitions by any person of Senior Housing's shares of beneficial interest
from the control share acquisition statute. This provision may be amended or
eliminated at any time in the future.
AMENDMENT TO THE DECLARATION OF TRUST, DISSOLUTION AND MERGERS
Under the Maryland REIT statute, a real estate investment trust generally
cannot dissolve, amend its declaration of trust or merge, unless these actions
are approved by at least two-thirds of all shares entitled to be cast on the
matter. The statute allows a trust's declaration of trust to set a lower
percentage, so long as the percentage is not less than a majority. Senior
Housing's declaration of trust provides for approval of any of the foregoing
actions by a majority of shares entitled to vote on these actions provided the
action in question has been approved by the Senior Housing board of trustees.
The declaration of trust further provides that if permitted in the future by
Maryland law, the majority required to approve any of the foregoing actions will
be the majority of shares voted. Under the Maryland REIT statute, a declaration
of trust may permit the trustees by a two-thirds vote to amend the declaration
of trust from time to time to qualify as a real estate investment trust under
the Internal Revenue Code or the Maryland REIT statute without the affirmative
vote or written consent of the shareholders. Senior Housing's declaration of
trust permits this type of action by the board of trustees. The declaration of
trust also permits the board of trustees to effect changes in Senior Housing's
unissued shares, as described more fully below, and to change the company's name
without shareholder approval, and provides that, to the extent permitted in the
future by Maryland law, the board of trustees may amend any other provision of
the declaration of trust without shareholder approval.
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ANTI-TAKEOVER EFFECT OF MARYLAND LAW AND OF THE DECLARATION OF TRUST AND BYLAWS
The following provisions in Senior Housing's declaration and bylaws and in
Maryland law could delay or prevent a change in control of Senior Housing:
- the limitation on ownership and acquisition of more than 9.8% of Senior
Housing shares;
- the classification of the board of trustees into classes and the election
of each class for three-year staggered terms;
- the requirement of a two-thirds majority vote of shareholders for removal
of trustees;
- the facts that the board can increase the size of the board to create a
vacancy and fill it and that shareholders are not entitled to act without
a meeting;
- the provision that only the board of trustees may call meetings of
shareholders;
- the advance notice requirements for shareholder nominations for trustees
and other proposals;
- the control share acquisitions provisions of Maryland law, if the
applicable provisions in Senior Housing's bylaws are rescinded;
- the business combination provisions of Maryland law, if the applicable
resolution of the board of trustees is rescinded or if the board of
trustees' approval of a combination is not obtained; and
- the ability of the board of trustees to authorize and issue additional
shares, including additional classes of shares with rights defined at the
time of issuance, without shareholder approval.
DESCRIPTION OF SENIOR HOUSING SECURITIES
The following is a summary description of the material terms of Senior
Housing's shares of beneficial interest. Because it is a summary, it does not
contain all of the information that may be important to you. If you want more
information, you should read Senior Housing's declaration of trust and bylaws,
copies of which are exhibits to the registration statement of which this
prospectus is a part.
GENERAL
Senior Housing's declaration of trust provides that it may issue up to 50
million shares of beneficial interest, $0.01 par value per share, all of which
have been classified as common shares. Upon completion of the spin-off, 26
million common shares will be issued and outstanding.
As permitted by the Maryland REIT statute, Senior Housing's declaration of
trust also contains a provision permitting the board of trustees, without any
action by Senior Housing's shareholders, to amend the declaration of trust to
increase or decrease the total number of shares of beneficial interest, to issue
new and different classes of shares in any amount or to reclassify any unissued
shares into other classes or series of classes that it chooses. Senior Housing
believes that giving these powers to its board of trustees will provide it with
increased flexibility in structuring possible future financings and acquisitions
and in meeting other business needs which might arise. Although the board of
trustees has no intention at the present time of doing so, it could authorize
Senior Housing to issue a class or series that could, depending upon the terms
of the class or series, delay or prevent a change in control of Senior Housing.
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COMMON SHARES
All Senior Housing common shares to be distributed in the spin-off will be
duly authorized, fully paid and nonassessable. Subject to the preferential
rights of any other class or series of shares which may be issued and to the
provisions of the declaration of trust regarding the restriction of the
ownership of shares of beneficial interest, holders of common shares are
entitled to the following:
- to receive distributions on their shares if, as and when authorized and
declared by Senior Housing's board of trustees out of assets legally
available for distribution; and
- to share ratably in Senior Housing's assets legally available for
distribution to its shareholders in the event of its liquidation,
dissolution or winding up after payment of or adequate provision for all
of its known debts and liabilities.
Subject to the provisions of the declaration of trust regarding the
restriction on the transfer of shares of beneficial interest, each outstanding
common share entitles the holder to one vote on all matters submitted to a vote
of shareholders, including the election of trustees.
Holders of common shares have no preference, conversion, exchange, sinking
fund, redemption or appraisal rights.
Shareholders will have no preemptive rights to subscribe for any of Senior
Housing's securities. Subject to the provisions of the declaration of trust
regarding the restriction on ownership of shares of beneficial interest, common
shares will have equal distribution, liquidation and other rights.
SENIOR HOUSING PRINCIPAL SHAREHOLDERS
The following table displays information regarding the beneficial ownership
of Senior Housing's common shares by each person Senior Housing knows to own
beneficially more than 5% of its outstanding common shares, each of Senior
Housing's trustees and executive officers and all of Senior Housing's trustees
and executive officers as a group. Unless otherwise noted, each person or entity
has sole voting and investment power with respect to all shares shown.
<TABLE>
<CAPTION>
BENEFICIAL
OWNERSHIP
BENEFICIAL OWNERSHIP AFTER THE
BEFORE THE SPIN-OFF SPIN-OFF(5)
---------------------- -------------------
NUMBER NUMBER
NAME AND ADDRESS(1) OF SHARES PERCENT OF SHARES PERCENT
- ---------------------------------------------------------------------- ---------- -------- ---------- -------
<S> <C> <C> <C> <C>
HRPT.................................................................. 26,000,000 100 % 12,809,237 49.3%
Barry M. Portnoy (2).................................................. -- -- 12,927,159 49.7%
Gerard M. Martin (2).................................................. -- -- 12,927,159 49.7%
Bruce M. Gans, M.D.................................................... -- -- 200 *
Arthur G. Koumantzelis................................................ -- -- 319 *
David J. Hegarty (3).................................................. -- -- 2,670 *
Ajay Saini (4)........................................................ -- -- 1,352 *
All Trustees and executive officers as a group (six persons).......... -- -- 12,936,185 49.8%
</TABLE>
- ------------------------
* Less than 1%.
(1) The address of HRPT is 400 Centre Street, Newton, Massachusetts 02458. The
address of each other named person or entity is c/o Senior Housing
Properties Trust, 400 Centre Street, Newton, Massachusetts 02458.
(2) Messrs. Portnoy and Martin are each managing trustees of HRPT. Accordingly,
Messrs. Portnoy and Martin may be deemed to have beneficial ownership of the
shares indicated in the table as owned by HRPT. Messrs. Portnoy and Martin
indirectly will jointly own 113,437 shares. Each of Messrs. Portnoy and
Martin individually own 4,485 shares.
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(3) Includes 230 shares held jointly by Mr. Hegarty and his wife.
(4) Includes 50 shares in Mr. Saini's IRA account and two shares as custodian
for Mr. Saini's minor daughter.
(5) The number of shares and percentages presented assumes that 131.9 million
HRPT shares are outstanding on the record date. If all of the outstanding
HRPT convertible subordinated debentures were converted at $18 per share to
HRPT common shares on or prior to the record date, the number of shares and
applicable percentages would be as follows: HRPT, 11.7 million shares
(44.9%); Barry M. Portnoy, 11.8 million shares (45.3%); Gerard M. Martin
11.8 million shares (45.3%); and all trustees and executive officers as a
group (six persons), 11.8 million shares (45.4%).
FEDERAL INCOME TAX AND ERISA CONSEQUENCES
GENERAL
The following summary description of federal income tax and ERISA
consequences relating to HRPT, Senior Housing and their respective shareholders
supplements the description of these matters in our annual report on Form 10-K
for the year ended December 31, 1998. Sullivan & Worcester LLP, Boston,
Massachusetts, has rendered a legal opinion that the discussions in this section
are accurate in all material respects and fairly summarize the federal income
tax and ERISA issues of the spin-off, and the opinions of counsel referred to in
this section represent Sullivan & Worcester LLP's opinions on those subjects.
Specifically, subject to the qualifications and assumptions contained in its
opinions and in this prospectus, Sullivan and Worcester LLP has rendered
opinions to the effect that:
- we have been organized and have qualified as a REIT under the Internal
Revenue Code of 1986, as amended, for our 1987 through 1998 taxable years,
and our current investments and plan of operation will enable us to
continue to meet the requirements for qualification and taxation as a REIT
under the Internal Revenue Code; our actual qualification as a REIT,
however, will depend upon our ability to meet, and our meeting, through
actual annual operating results and distributions, the various REIT
qualification tests imposed under the Internal Revenue Code;
- under the Department of Labor's ERISA "plan assets" regulations, our
common shares are publicly offered securities and our assets will not be
deemed plan assets under ERISA;
- for its 1999 taxable year that commences on the date of the spin-off,
Senior Housing will be organized as a REIT under the Internal Revenue
Code, and its current investments and plan of operation will enable it to
meet the requirements for qualification and taxation as a REIT under the
Internal Revenue Code; Senior Housing's actual qualification as a REIT,
however, will depend upon its ability to meet, and its meeting, through
actual annual operating results and distributions, the various REIT
qualification tests imposed under the Internal Revenue Code; and
- under the plan assets regulations, Senior Housing's common shares will be
publicly offered securities and its assets will not be deemed plan assets
under ERISA.
These opinions are conditioned upon the assumption that our and Senior Housing's
leases, our and Senior Housing's declarations of trust and Bylaws, the
transaction agreement, and all other legal documents to which we or Senior
Housing are or have been a party to have been and will be complied with by all
parties to these documents, upon the accuracy and completeness of the factual
matters described in this prospectus, and upon factual representations we and
Senior Housing have
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made. The opinions of Sullivan & Worcester LLP are based on the law as it exists
today, but the law may change in the future, possibly with retroactive effect.
Also, an opinion of counsel is not binding on the Internal Revenue Service or
the courts, and the IRS or a court could take a position different from that
expressed by counsel.
The following summary of federal income tax and ERISA consequences is based
on existing law, and is limited to investors who own our shares and Senior
Housing shares as investment assets rather than as inventory or as property used
in a trade or business. The summary does not discuss the particular tax
consequences that might be relevant to you if you are subject to special rules
under the federal income tax law, for example if you are:
- a bank, life insurance company, regulated investment company, or other
financial institution,
- a broker or dealer in securities or foreign currency,
- a person who has a functional currency other than the U.S. dollar,
- a person who acquires our shares or Senior Housing shares in connection
with his employment or other performance of services,
- a person subject to alternative minimum tax,
- a person who owns our shares or Senior Housing 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 Internal Revenue Code that govern the federal income tax
qualification and treatment of a REIT and its shareholders are complex. This
presentation is a summary of applicable Internal Revenue Code provisions,
related rules and regulations and administrative and judicial interpretations,
all of which are subject to change, possibly with retroactive effect. Future
legislative, judicial, or administrative actions or decisions could affect the
accuracy of statements made in this summary. Neither we nor Senior Housing has
sought a ruling from the IRS with respect to any matter described in this
summary, and neither we nor Senior Housing can assure you that the IRS or a
court will agree with the statements made in this summary. In addition, the
following summary is not exhaustive of all possible tax consequences, and does
not discuss any state, local, or foreign tax consequences. For all these
reasons, we urge you and any prospective acquiror of Senior Housing shares to
consult with a tax advisor about the federal income tax and other tax
consequences of the acquisition, ownership and disposition of our shares, as
well as the acquisition, ownership and disposition of Senior Housing shares.
Federal income tax consequences may differ depending on whether or not a
person is a "U.S. person." For purposes of this summary, a U.S. person for
federal income tax purposes is:
- a citizen or resident of the United States, including an alien individual
who is a lawful permanent resident of the United States or meets the
substantial presence residency test under the federal income tax laws,
- a corporation, partnership or other entity treated as a corporation or
partnership for federal income tax purposes, that is created or organized
in or under the laws of the United States, any state thereof or the
District of Columbia, unless otherwise provided by Treasury regulations,
- an estate the income of which is subject to federal income taxation
regardless of its source, or
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- a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United
States persons have the authority to control all substantial decisions of
the trust, or electing trusts in existence on August 20, 1996 to the
extent provided in Treasury regulations,
whose status as a U.S. person is not overridden by an applicable tax treaty.
FEDERAL INCOME TAX CONSEQUENCES OF THE SPIN-OFF TO OUR SHAREHOLDERS
IN GENERAL. Our distribution of Senior Housing shares in the spin-off will
affect us and our shareholders in the same manner as any other distribution of
cash or property we make. These tax consequences are summarized below:
- We generally are not subject to tax on our net income to the extent we
distribute it to our shareholders.
- Distributions to you out of our current or accumulated earnings and
profits that we do not designate as capital gain dividends generally will
be taken into account by you as ordinary income dividends. To the extent
of our net capital gain for the taxable year, we may designate dividends
as capital gain dividends that will be taxable to you as long-term capital
gain.
- Distributions in excess of our current and accumulated earnings and
profits will not be taxable to you to the extent that they do not exceed
your adjusted basis in our shares, but rather will reduce the adjusted
basis in those shares.
- Distributions in excess of our current and accumulated earnings and
profits that exceed your adjusted basis in our shares generally will be
taxable as capital gain from the sale of those shares.
- Our current earnings and profits for a year will be allocated among each
of the distributions for that year, in proportion to the amount of each
distribution.
- Because we are a REIT, neither our ordinary income dividends nor our
capital gain dividends will qualify for any dividends received deduction
for our corporate shareholders.
Accordingly, the spin-off of Senior Housing shares will be treated as a
distribution by us to our shareholders in the amount of the fair market value of
the Senior Housing shares distributed. We expect that a portion of this
distribution will be taxable to you as a dividend and a portion will be treated
as a tax-free reduction in your adjusted basis in our shares. You will have a
tax basis in the Senior Housing shares you receive equal to their fair market
value at the time of the spin-off, and your holding period in those shares
commences on the day after the spin-off.
We believe that for all federal income tax purposes each Senior Housing
share may be properly valued on the distribution date as the average of the
reported high and low trading prices for Senior Housing shares in the public
market on that date, and we will perform all our tax reporting, including
statements supplied to you and to the IRS, on the basis of this average price,
called the distribution price. However, it is possible that for federal income
tax purposes the fair market value of a Senior Housing share that we distribute
will differ from the fair market value of a Senior Housing share received by you
in the distribution. Because of the factual nature of the value of the Senior
Housing shares distributed by us and the value of the Senior Housing shares
received by each of you, our counsel is unable to render an opinion on these
values.
As described in more detail below, although existing authority does not
provide definitive guidance on valuing Senior Housing shares or on whether
Section 351(a) applies to the spin-off, on
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the basis of our valuation assumptions and our counsel's opinion that Section
351(a) likely applies, we will:
- recognize a significant portion of the gains, but none of the losses, on
Senior Housing's properties and other assets; and
- recognize gains but not losses on our distribution of Senior Housing
shares.
We will perform all our tax reporting, including statements sent to the IRS and
to you, on this basis, but we could in the future be required to amend these tax
reports if the IRS successfully challenges our valuation assumptions or our
counsel's interpretation of the federal income tax laws. Gains that we recognize
in the spin-off will increase our 1999 current earnings and profits, and this
will increase the total amount of our 1999 distributions, including the
distribution of Senior Housing shares, that is taxable as a dividend to you.
Computing the amount of these gains and the additional taxable dividend amount
is a complex calculation which requires information, including the distribution
price for Senior Housing shares at the time of the spin-off and market values
for Senior Housing properties and other assets at the time of the spin-off, that
is not available at this time. Based on our current market value assumptions, on
the total number of our shares presently outstanding, and on an assumed
distribution price for Senior Housing shares of $24 per share, we estimate that
if you own one of our common shares for the entire 1999 calendar year, then as a
result of the Senior Housing spin-off you will have an additional taxable
dividend of approximately $1.20 per share. For higher Senior Housing share
distribution prices, the additional taxable dividend amount would be higher, and
for lower distribution prices the additional taxable dividend amount would be
lower. Based on our current assumptions, we estimate that the additional taxable
dividend may fluctuate by up to $0.20 per HRPT share for each $1 fluctuation in
the distribution price for Senior Housing shares. However, a definitive
additional taxable dividend computation will not be possible until after the
spin-off.
To the extent we can, we intend to designate a portion of any additional
taxable dividend as a capital gain dividend that generally will be subject to
tax at the maximum capital gain rates of 20% and 25% in the case of our
noncorporate shareholders.
TAXATION OF TAX-EXEMPT ENTITIES. Tax-exempt entities are generally not
subject to federal income taxation except to the extent of their "unrelated
business taxable income," often referred to as UBTI, as defined in Section
512(a) of the Internal Revenue Code. As with our other distributions, the
distribution of Senior Housing shares to you if you are a tax-exempt entity
should generally not constitute UBTI, provided that you have not financed the
acquisition of our shares with acquisition indebtedness within the meaning of
Section 514 of the Internal Revenue Code. However, if you are a tax-exempt
pension trust, including a so-called 401(k) plan but excluding an individual
retirement account or government pension plan, that owns more than 10% by value
of a pension-held REIT, then you may have to report a portion of the dividends
that you receive from the REIT as UBTI. Although we cannot provide complete
assurance on this matter, we believe that we have not been and will not become a
pension-held REIT.
TAXATION OF NON-U.S. PERSONS. If you are a non-U.S. person, the spin-off of
Senior Housing shares will generally be taxable to you in the same manner as any
other distribution of cash or property that we make to you. The rules governing
the federal income taxation of non-U.S. persons are complex, and the following
discussion is intended only as a summary of these rules. If you are a non-U.S.
person, we urge you to consult with your own tax advisor to determine the impact
of federal, state, local, and foreign tax laws, including any tax return filing
and other reporting requirements, with respect to the spin-off of Senior Housing
shares and your investment in our shares.
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You will generally be subject to regular federal income tax in the same
manner as a U.S. person with respect to the spin-off of Senior Housing shares
and your investment in our shares, if this investment is effectively connected
with your conduct of a trade or business in the United States. In addition, if
you are a corporate shareholder, your income that is effectively connected with
a trade or business in the United States may also be subject to the 30% branch
profits tax under Section 884 of the Internal Revenue Code, which is payable in
addition to regular federal corporate income tax. The balance of this summary
addresses only those non-U.S. persons whose investment in our common shares is
not effectively connected with the conduct of a trade or business in the United
States.
We are not at this time designating the distribution of Senior Housing
shares as a capital gain dividend that is subject to 35% withholding for
non-U.S. persons, and accordingly the 30% or applicable lower treaty rate
withholding will be imposed upon the fair market value of Senior Housing shares
that we distribute to you. We or other applicable withholding agents will
collect the amount required to be withheld by reducing to cash for remittance to
the IRS a sufficient portion of the Senior Housing shares that you would
otherwise receive, and you will bear the brokerage or other costs for this
withholding procedure. Because we cannot determine our current and accumulated
earnings and profits until the end of our taxable year, withholding at the rate
of 30% or applicable lower treaty rate will be imposed on the gross fair market
value of the Senior Housing shares distributed to you. Notwithstanding this and
other withholding on distributions in excess of our current and accumulated
earnings and profits, these distributions are a nontaxable return of capital to
the extent that they do not exceed your adjusted basis in our shares, and the
nontaxable return of capital will reduce your adjusted basis in these shares. To
the extent that distributions in excess of current and accumulated earnings and
profits exceed your adjusted basis in our shares, the distributions will give
rise to tax liability only if you would otherwise be subject to tax on any gain
from the sale or exchange of our shares. Your gain from the sale or exchange of
our shares will not be taxable if:
- our shares are "regularly traded" within the meaning of Treasury
regulations under Section 897 of the Internal Revenue Code and you have at
all times during the preceding five years owned 5% or less by value of our
outstanding shares, or
- we are a "domestically controlled REIT" within the meaning of Section 897
of the Internal Revenue Code.
Although we cannot provide complete assurance on this matter, we believe that
our shares are regularly traded and that we are a domestically controlled REIT.
You may seek a refund of amounts withheld on distributions to you in excess of
our current and accumulated earnings and profits, provided that you furnish the
required information to the IRS.
We expect that a portion of some or all of our 1999 distributions will be
treated for federal income tax purposes as attributable to our dispositions of
United States real property interests. To the extent that a portion of any of
our distributions, including the distribution of Senior Housing shares, is
attributable to our disposition of United States real property interests, you
will be subject to tax on this portion as though it were gain effectively
connected with a trade or business in the United States. Accordingly, you will
be taxed on these amounts at the capital gain rates applicable to a U.S. person,
subject to any applicable alternative minimum tax and to a special alternative
minimum tax in the case of nonresident alien individuals; you will be required
to file a United States federal income tax return reporting these amounts, even
if applicable withholding is imposed as described below; and if you are a
corporation, you may owe the 30% branch profits tax under Section 884 of the
Internal Revenue Code in respect of these amounts.
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We and other applicable withholding agents will be required to withhold from
distributions to shareholders that are non-U.S. persons, and to remit to the
IRS, 35% of the maximum amount of any distribution that could be designated by
us as a capital gain dividend. In addition, if we designate prior distributions
as capital gain dividends, then subsequent distributions up to the amount of the
designated prior distributions will be treated as capital gain dividends for
purposes of the 35% withholding rule. After the close of our 1999 taxable year,
we expect to designate to the maximum extent possible a portion of one or more
of our 1999 distributions as capital gain dividends, and accordingly 35%
withholding will be imposed upon our subsequent distributions to non-U.S.
persons to that extent.
The amount of any tax withheld on distributions to you is creditable against
your United States federal income tax liability, and any amount of tax withheld
in excess of that tax liability may be refunded if you file an appropriate claim
for refund with the IRS. New Treasury regulations will alter reporting of and
withholding on distributions paid to you with respect to our shares. Under
recent administrative guidance, these new Treasury regulations are to be
effective generally for payments made after December 31, 2000. Among other
changes, the new Treasury regulations generally require non-U.S. persons and
withholding agents to use the new IRS Forms W-8 series, rather than the
predecessor IRS Forms W-8, 1001 and 4224.
FEDERAL INCOME TAX CONSEQUENCES OF THE SPIN-OFF TO HRPT
The Internal Revenue Code imposes upon us various REIT qualification tests
comparable to those imposed upon Senior Housing and discussed below. While we
believe that we have operated and will operate in a manner to satisfy the
various REIT qualification tests, counsel has not reviewed and will not review
our compliance with these tests on a continuing basis. The following discussion
summarizes REIT qualification and taxation issues under the Internal Revenue
Code implicated by our spin-off of Senior Housing shares.
IN GENERAL. So long as Senior Housing and its subsidiaries remain our
wholly owned direct or indirect subsidiaries, they will be qualified REIT
subsidiaries under Section 856(i) of the Internal Revenue Code or, equivalently,
noncorporate entities that are taxed as part of us under regulations issued
under Section 7701 of the Internal Revenue Code. During these periods Senior
Housing and its subsidiaries will not be taxpayers separate from HRPT for
federal income tax purposes. Under the transaction agreement, the federal income
tax liabilities and federal income tax filings for Senior Housing and its
subsidiaries for these periods are the responsibility of HRPT.
When we cease to wholly own Senior Housing and its subsidiaries as a result
of the spin-off of Senior Housing shares, the following will be deemed to have
occurred for federal income tax purposes:
- Immediately preceding the spin-off of Senior Housing shares, we disposed
of the properties and assets of Senior Housing and its subsidiaries in an
exchange, called a deemed exchange, in which our aggregate amount realized
equaled the sum of the fair market value of the total number of Senior
Housing shares owned by us immediately preceding the spin-off, plus the
promissory obligations owing to us from Senior Housing immediately
preceding the spin-off, including the then outstanding balance of
principal and accrued interest on the formation debt, plus the aggregate
amount of liabilities that are associated with the Senior Housing
properties and assets and that remain the responsibility of Senior Housing
and its subsidiaries after the spin-off.
- Immediately after the deemed exchange, we distributed to our shareholders
13.2 million of the Senior Housing shares we were treated as having
received in the deemed exchange.
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VALUING SENIOR HOUSING SHARES. Our aggregate amount realized in the deemed
exchange and our tax consequences upon the distribution of Senior Housing shares
both depend on the fair market value of the Senior Housing shares. Under
applicable judicial precedent, it is possible that for federal income tax
purposes the following three valuations may differ:
- the per share fair market value of the Senior Housing shares we are
treated as receiving in the deemed exchange;
- the per share fair market value of the Senior Housing shares that we
distribute; and
- the average of the reported high and low trading prices for the Senior
Housing shares in the public market on the date of the spin-off, called
the distribution price.
Because of the factual nature of the value of the Senior Housing shares,
Sullivan & Worcester LLP is unable to render an opinion on these values. We
believe that for all federal income tax purposes the per share fair market value
of Senior Housing shares may be properly valued at the distribution price.
Accordingly, the distribution price will be used for all our tax reporting,
including for purposes of computing the aggregate amount realized in the deemed
exchange and for purposes of computing any gain or loss we may have on the
distribution of Senior Housing shares. We may be required to amend these tax
reports, including those sent to our shareholders, if the IRS successfully
challenges our valuation assumptions.
TAXATION OF THE DEEMED EXCHANGE. The Internal Revenue Code and applicable
authorities do not provide definitive guidance on whether Section 351(a) applies
to the deemed exchange. Sullivan & Worcester LLP has opined that it is likely
that the deemed exchange is an exchange under Section 351(a) which will be a
partially taxable transaction in which our losses are not recognized, and in
which our gains are recognized only to the extent of the value of property other
than Senior Housing shares, including the outstanding balance of principal and
accrued interest on the formation debt, that we receive in the deemed exchange.
We expect that the then outstanding balance on the formation debt will be
sufficiently large so that we will recognize a significant portion of our gains
realized in the deemed exchange.
However, if the deemed exchange is not an exchange under Section 351(a),
then the deemed exchange will be a fully taxable transaction in which our gains
are recognized in full immediately, and in which our losses are recognized in
full when we own 50% or less of both the voting power and the value of Senior
Housing's outstanding stock. Although the IRS could assert that a control
premium causes us to own more than 50% of the value of Senior Housing even
though we own less than half of its shares, we believe that our ownership of
Senior Housing will be below the 50% voting and valuation thresholds immediately
after the spin-off. Because of the factual nature of valuations, our counsel is
unable to render an opinion on values. Whether or not the deemed exchange is an
exchange under Section 351(a) also will have an impact on our tax basis in the
Senior Housing shares that we distribute and those that we retain, as well as on
Senior Housing's initial tax bases and depreciation schedule in its properties
and assets, all as described below.
Whether the deemed exchange is an exchange under Section 351(a) depends upon
the application of rules that foreclose Section 351(a) treatment for property
transfers to a REIT that accomplish diversification. Thus, under Section
1.351-1(c) of the Treasury Regulations, if the deemed exchange and our
distribution of Senior Housing shares result, directly or indirectly, in HRPT
diversifying its ownership of the Senior Housing properties and assets, then the
deemed exchange
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will not be an exchange under Section 351(a). For this purpose, there is no
proscribed diversification if either:
- there is no plan or intention for Senior Housing to issue more than a de
minimis number of shares following the spin-off, or
- the Senior Housing portfolio of properties and assets is already
sufficiently diversified.
Although it is contemplated that Senior Housing will issue additional shares in
the future to raise capital and grow as an independent REIT, at the time of the
spin-off we expect there to be no specific plan for raising additional capital.
In addition, we believe that the Senior Housing portfolio is diversified for
purposes of these rules, given the properties' diversity in geography, size,
age, operating history and remaining lease terms. While it is true that the
Senior Housing properties are at present leased to only a modest number of
tenants, we believe this does not detract from the diversified nature of the
Senior Housing portfolio because the owner of the portfolio continues to have an
economic stake in each individual property through its residual interest in each
property at the expiration of that property's lease term, and receiving rent, in
respect of a significant number of properties in the portfolio, that is based in
part on the gross revenues which the tenant is able to derive from that
property. Further, we believe that the Senior Housing portfolio's modest number
of tenants is consistent with the business model of several other publicly
traded REITs and with prudent real estate investment practices generally. Based
on these and other representations we made regarding the diversity of the Senior
Housing portfolio, our counsel has opined that it is likely that the deemed
exchange will be an exchange described in Section 351(a), and we will perform
all our tax reporting, including statements supplied to our shareholders and to
the IRS, accordingly. We may be required to amend these tax reports, including
those sent to our shareholders, if the IRS successfully challenges our position
that the deemed exchange is an exchange described in Section 351(a). We expect
to ensure our 1999 and future compliance with the 95% REIT distribution
requirements of the Internal Revenue Code by making distributions to our
shareholders that are sufficient regardless of whether the deemed exchange is an
exchange described under Section 351(a).
Regardless of whether Section 351(a) governs the deemed exchange, the
aggregate amount realized in the deemed exchange, as well as the property other
than Senior Housing shares that we receive in the deemed exchange, will be
allocated among the assets of Senior Housing in proportion to their relative
fair market values. With respect to each Senior Housing asset, we will realize
gain or loss, as the case may be, equal to the difference between the aggregate
amount realized in the deemed exchange allocable to that asset and our adjusted
tax basis in that asset. If Section 351(a) applies to the deemed exchange, then
we will recognize any realized gain in a Senior Housing asset only to the extent
of that asset's allocable share of the property we receive in the deemed
exchange other than Senior Housing shares, and we will not recognize any
realized loss in a Senior Housing asset. We and our wholly owned direct and
indirect subsidiaries have held the Senior Housing assets for investment with a
view to long-term income production and capital appreciation, and the conversion
of Senior Housing into a separate REIT by means of the spin-off of Senior
Housing shares represents a new, unique opportunity to maximize the value of our
investment in the Senior Housing assets. We therefore believe that our gains on
Senior Housing assets in the deemed exchange will be gains from assets held for
investment. Accordingly, our gains on realty or mortgages on real property will
be qualifying gross income under the 75% and 95% gross income tests of Section
856(c)(2)-(3) of the Internal Revenue Code. Although our gains on personalty
other than mortgages will not be qualifying income under either the 75% or the
95% gross income test, we expect to recognize little or no gain of this type.
However, if any of our gains on Senior Housing assets in the deemed exchange
were to be characterized as gains from the disposition of inventory or
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other property held primarily for sale to customers, these gains would be
subject to the 100% penalty tax of Section 857(b)(6) of the Internal Revenue
Code. In addition, some of the Senior Housing assets in the deemed exchange were
acquired in carryover basis transactions from C corporations within the last ten
years. Accordingly, we are subject to a REIT-level federal tax on the gains on
these assets, which federal tax we anticipate to be less than $1 million. Our
payment of this REIT-level federal tax will constitute a deduction for us in
computing the amount of our income that we must distribute to our shareholders
and in computing the portion of our distributions to our shareholders that
constitutes taxable income rather than a return of capital.
TAXATION OF THE DISTRIBUTION. Our distribution of Senior Housing shares in
the spin-off will be treated in the same manner as any other distribution of
cash or property that we may make. Thus, the distribution of Senior Housing
shares together with our other 1999 distributions will entitle us to a dividends
paid deduction to the extent of our earnings and profits for the year, assuming
as expected that these distributions exceed our earnings and profits. In
addition, we will recognize gain from the distribution of these Senior Housing
shares equal to the excess, if any, of the fair market value of the total number
of Senior Housing shares that we distribute, over our tax basis in those
distributed Senior Housing shares. In contrast, we will not recognize loss on
the distribution even if our tax basis in the distributed Senior Housing shares
exceeds their fair market value.
Under applicable judicial precedent, it is possible that for federal income
tax purposes the per share fair market value of the Senior Housing shares we
distribute will differ from the distribution price. In addition, our counsel is
unable to render an opinion on the fair market value of the total number of
Senior Housing shares that we distribute because of the factual nature of value
determinations. However, on the basis of valuation assumptions described above,
the fair market value of the total number of Senior Housing shares that we
distribute may be computed as the distribution price multiplied by the number of
Senior Housing shares distributed. Our tax basis in the distributed Senior
Housing shares is computed as described below and depends upon whether Section
351(a) governs the deemed exchange.
Any gain that we recognize on our distribution of Senior Housing shares will
be qualifying gross income under the 75% and 95% gross income tests of Section
856(c)(2)-(3) of the Internal Revenue Code, provided that we are not treated as
holding the distributed Senior Housing shares as inventory or other property
held primarily for sale to customers. If any of this gain were characterized as
the sale of inventory or other property held primarily for sale to customers,
this would not affect our ability to satisfy the 75% and 95% gross income tests,
but the recharacterized gain would be subject to the 100% penalty tax of Section
857(b)(6) of the Internal Revenue Code. Although we can provide no assurance on
this matter, because we and our wholly owned direct and indirect subsidiaries
have held the Senior Housing properties and assets for investment with a view to
long-term income production and capital appreciation, and because the conversion
of Senior Housing into a separate REIT by means of the distribution of Senior
Housing shares represents a new, unique opportunity to maximize the value of our
investment in the Senior Housing properties and assets, we do not believe that
we have held the Senior Housing shares as inventory or other property held
primarily for sale to customers.
If we are correct that the deemed exchange is governed by Section 351(a),
then our tax basis in the 100% of the Senior Housing shares that we own
immediately prior to the distribution of Senior Housing shares will be equal to,
and our tax basis in each individual Senior Housing share will be its pro rata
share of, the following sum:
(1) our aggregate adjusted tax bases in the Senior Housing properties and
assets immediately prior to the deemed exchange; plus
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(2) all gains that we recognize in the deemed exchange; minus
(3) Senior Housing's promissory obligations owing to us immediately
preceding the spin-off, including the then outstanding balance of
principal and accrued interest on the formation debt; minus
(4) the aggregate amount of liabilities that are associated with the Senior
Housing properties and assets and that remain the responsibility of
Senior Housing and its subsidiaries after the spin-off.
As described above, we believe that each Senior Housing share we receive in the
deemed exchange may be valued at the distribution price, and we expect that a
significant portion of the realized gains, but none of the realized losses, in
the deemed exchange will be recognized. Accordingly, we expect that our tax
basis in each of the Senior Housing shares that we own immediately prior to the
distribution will be, at most, only a few dollars per share below the
distribution price, and may possibly exceed the distribution price. Under these
circumstances, we could recognize gain but no loss on our distribution of Senior
Housing shares.
Alternatively, if the deemed exchange is not governed by Section 351(a), our
tax basis in the 100% of the Senior Housing shares that we own immediately prior
to the spin-off will be their fair market value as determined for purposes of
computing our aggregate amount realized in the deemed exchange. Accordingly, in
the spin-off we would be distributing Senior Housing shares that each have a
fair market value and tax basis equal to the distribution price, and so we would
not recognize any gain or loss in the distribution.
OUR CONTINUED INVESTMENTS IN SENIOR HOUSING. After the distribution of
Senior Housing shares, we will continue to own Senior Housing shares, and we
expect Senior Housing to qualify as a REIT under the Internal Revenue Code. For
so long as it qualifies as a REIT, our continued investment in Senior Housing
shares will count favorably toward the 75%, 25%, 10%, and 5% gross assets tests
of Section 856(c)(4) of the Internal Revenue Code; similarly, the dividend
income we receive on Senior Housing shares will count as qualifying income for
us under the 75% and 95% gross income tests of Section 856(c)(2)-(3) of the
Internal Revenue Code.
We expect Senior Housing to pay off the formation debt soon after our
spin-off of Senior Housing shares, but if it does not do so, then we will
exercise our rights to have the formation debt adequately secured, within 20
days of the spin-off, by mortgages on the real property owned by one or more of
Senior Housing's subsidiaries. Accordingly, we expect that if the formation debt
is not paid in full soon after the spin-off, then our investment in the
formation debt, as adequately secured by mortgages on real estate, will also
count favorably toward the 75%, 25%, 10%, and 5% gross assets tests of Section
856(c)(4) of the Internal Revenue Code, and similarly the interest income from
the formation debt will count as qualifying income for us under the 75% and 95%
gross income tests of Section 856(c)(2)-(3) of the Internal Revenue Code.
The transaction agreement contains provisions that require Senior Housing
and HRPT to refrain from taking actions that may jeopardize each other's
qualification as a REIT under the Internal Revenue Code.
FEDERAL INCOME TAXATION OF SENIOR HOUSING AND ITS SHAREHOLDERS
IN GENERAL. Senior Housing will elect to be taxed as a REIT under Sections
856 through 860 of the Internal Revenue Code commencing with its 1999 taxable
year. Senior Housing's 1999 taxable year will begin when it ceases to be wholly
owned by HRPT and will end on December 31, 1999. Senior Housing's REIT election,
assuming continuing compliance with the federal income tax
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qualification tests summarized below, continues in effect for subsequent taxable
years. Although no assurance can be given, Senior Housing believes that it will
be organized and will operate in a manner that qualifies it to be taxed under
the Internal Revenue Code as a REIT.
As a REIT, Senior Housing generally will not be subject to federal income
tax on its net income distributed as dividends to its shareholders.
Distributions to Senior Housing shareholders generally will be includable in
their income as dividends to the extent the distributions do not exceed Senior
Housing's current or accumulated earnings and profits. A portion of these
dividends may be treated as capital gain dividends, as explained below. No
portion of any dividends will be eligible for the dividends received deduction
for corporate shareholders. Distributions in excess of current or accumulated
earnings and profits generally will be treated for federal income tax purposes
as a return of capital to the extent of a recipient shareholder's basis in its
shares, and will reduce this basis.
Senior Housing's counsel, Sullivan & Worcester LLP, has opined that Senior
Housing will be organized as a REIT under the Internal Revenue Code for its 1999
taxable year, and that its current investments and plan of operation will enable
it to meet the requirements for qualification and taxation as a REIT under the
Internal Revenue Code. Senior Housing's actual qualification and taxation as a
REIT will depend upon its ability to meet the various REIT qualification tests
imposed under the Internal Revenue Code and summarized below. While Senior
Housing believes that it will operate in a manner to satisfy the various REIT
qualification tests, counsel has not reviewed and will not review compliance
with these tests on a continuing basis. If Senior Housing fails to qualify as a
REIT in any year, it will be subject to federal income taxation as if it were a
domestic corporation, and its shareholders will be taxed like shareholders of
ordinary corporations. In this event, Senior Housing could be subject to
significant tax liabilities, and the amount of cash available for distribution
to its shareholders may be reduced or eliminated.
If Senior Housing qualifies for taxation as a REIT and distributes to its
shareholders at least 95% of its "real estate investment trust taxable income,"
computed by excluding any net capital gain and before taking into account any
dividends paid deduction for which it is eligible, it generally will not be
subject to federal corporate income taxes on the amount distributed. However,
even if Senior Housing qualifies for federal income taxation as a REIT, it may
be subject to federal tax in the following circumstances:
- Senior Housing will be taxed at regular corporate rates on any
undistributed "real estate investment trust taxable income," including its
undistributed net capital gains.
- If Senior Housing's alternative minimum taxable income exceeds its taxable
income, it may be subject to the corporate alternative minimum tax on its
items of tax preference.
- If Senior Housing has net income from the sale or other disposition of
"foreclosure property" that is held primarily for sale to customers in the
ordinary course of business or other nonqualifying income from foreclosure
property, it will be subject to tax on this income at the highest regular
corporate rate, which is currently 35%.
- If Senior Housing has net income from prohibited transactions, including
sales or other dispositions of inventory or property held primarily for
sale to customers in the ordinary course of business other than
foreclosure property, it will be subject to tax on this income at
a 100% rate.
- If Senior Housing fails to satisfy the 75% gross income test or the 95%
gross income test discussed below, but nonetheless maintains its
qualification as a REIT, it will be subject to tax
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at a 100% rate on the greater of the amount by which it fails the 75% or
the 95% test, multiplied by a fraction intended to reflect its
profitability.
- If Senior Housing fails to distribute for any calendar year at least the
sum of 85% of its REIT ordinary income for that year, 95% of its REIT
capital gain net income for that year, and any undistributed taxable
income from prior periods, it will be subject to a 4% excise tax on the
excess of the required distribution over the amounts actually distributed.
- If Senior Housing acquires an asset from a corporation in a transaction in
which its basis in the asset is determined by reference to the basis of
the asset in the hands of a present or former C corporation, and if it
subsequently recognizes gain on the disposition of this asset during the
ten-year period beginning on the date on which the asset ceased to be
owned by the C corporation, then Senior Housing will pay tax at the
highest regular corporate tax rate, which is currently 35%, on the lesser
of the excess of the fair market value of the asset over the C
corporation's basis in the asset on the date the asset ceased to be owned
by the C corporation, or the gain recognized in the disposition.
If Senior Housing invests in properties in foreign countries, its profits
from these investments will generally be subject to tax in the countries where
those properties are located. The nature and amount of this taxation will depend
on the laws of the countries where the properties are located. If Senior Housing
operates as it currently intends, then it will distribute its taxable income to
its shareholders and it will not pay federal corporate income tax, and thus it
generally cannot recover the cost of foreign taxes imposed on its foreign
investments by claiming foreign tax credits against its federal income tax
liability. Nor can Senior Housing pass through to its shareholders any foreign
tax credits.
If Senior Housing fails to qualify for federal income taxation as a REIT in
any taxable year, then it will be subject to federal taxes in the same manner as
an ordinary corporation. Distributions to its shareholders in any year in which
it fails to qualify as a REIT will not be deductible, nor will these
distributions be required to be made. In that event, to the extent of current
and accumulated earnings and profits, all distributions to Senior Housing
shareholders will be taxable as ordinary dividend income, and subject to
limitations in the Internal Revenue Code, will be eligible for the dividends
received deduction for corporate recipients. Senior Housing would also generally
be disqualified from federal income taxation as a REIT for the four taxable
years following disqualification. Failure to qualify for federal income taxation
as a REIT for even one year could result in Senior Housing incurring substantial
indebtedness or liquidating substantial investments in order to pay the
resulting corporate-level taxes.
GENERAL REIT QUALIFICATION REQUIREMENTS. Section 856(a) of the Internal
Revenue Code defines a REIT as a corporation, trust or association:
(1) that is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable shares or
by transferable certificates of beneficial interest;
(3) that would be taxable, but for Sections 856 through 859 of the Internal
Revenue Code, as an ordinary domestic corporation;
(4) that is neither a financial institution nor an insurance company subject
to special provisions of the Internal Revenue Code;
(5) the beneficial ownership of which is held by 100 or more persons;
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(6) that is not "closely held" as defined under the personal holding company
stock ownership test, as described below; and
(7) that meets other tests regarding income, assets and distributions, all
as described below.
Section 856(b) of the Internal Revenue Code provides that conditions (1) to (4),
inclusive, must be met during the entire taxable year and that condition (5)
must be met during at least 335 days of a taxable year of 12 months, or during a
pro rata part of a taxable year of less than 12 months. Section 856(h)(2) of the
Internal Revenue Code provides that conditions (5) and (6) need not be met for
Senior Housing's 1999 taxable year, which taxable year commences on the date of
the spin-off. Senior Housing believes that it will satisfy conditions (1) to
(6), inclusive, for its 1999 taxable year, and that it will continue to satisfy
those conditions in future taxable years. There can, however, be no assurance in
this regard.
By reason of condition (6) above, Senior Housing will fail to qualify as a
REIT for a taxable year if at any time during the last half of the year more
than 50% in value of its outstanding shares is owned directly or indirectly by
five or fewer individuals. To help comply with condition (6), Senior Housing's
declaration of trust contains provisions restricting transfers of its shares.
Similarly, for the purpose of HRPT maintaining its own qualification as a REIT
under the Tax Code, HRPT's declaration of trust contains comparable provisions
that limit concentrated ownership of shares in HRPT. In addition, commencing
with its 1999 taxable year, if Senior Housing complies with applicable Treasury
regulations for ascertaining the ownership of its outstanding shares and does
not know, or exercising reasonable diligence would not have known, that it
failed condition (6), then it will be treated as satisfying condition (6). Also,
Senior Housing's failure to comply with these applicable Treasury regulations
for ascertaining ownership of its outstanding shares may result in a penalty of
$25,000, or $50,000 for intentional violations. Accordingly, Senior Housing
intends to comply with these Treasury regulations, and to request annually from
record holders of significant percentages of its shares information regarding
the ownership of its shares. Under Senior Housing's declaration of trust, its
shareholders are required to respond to these requests for information.
The rule that an entity will fail to qualify as a REIT for a taxable year if
at any time during the last half of the year more than 50% in value of its
outstanding shares is owned directly or indirectly by five or fewer individuals
is relaxed in the case of pension trusts owning shares in a REIT. Shares in a
REIT held by a pension trust are treated as held directly by the pension trust's
beneficiaries in proportion to their actuarial interests in the pension trust.
Consequently, five or fewer pension trusts could own more than 50% of the
interests in an entity without jeopardizing that entity's federal income tax
qualification as a REIT. However, as discussed below, if a REIT is a
"pension-held REIT," each pension trust owning more than 10% of the REIT's
shares by value generally will be taxed on a portion of the dividends received
from the REIT, based on the ratio of
(1) the REIT's gross income for the year that would be unrelated trade or
business income if the REIT were a qualified pension trust, to
(2) the REIT's total gross income for the year.
SENIOR HOUSING'S SUBSIDIARIES AND PARTNERSHIPS. Section 856(i) of the
Internal Revenue Code provides that any corporation 100% of whose stock is held
by a REIT is a qualified REIT subsidiary and shall not be treated as a separate
corporation. The assets, liabilities and items of income, deduction and credit
of a qualified REIT subsidiary are treated as the REIT's. Senior Housing
believes that each of its direct and indirect wholly owned subsidiaries will
either be a qualified REIT subsidiary within the meaning of Section 856(i) of
the Internal Revenue Code, or a noncorporate entity that for federal income tax
purposes is not treated as separate from its owner under regulations issued
under Section 7701 of the Internal Revenue Code. Thus, in applying all the
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federal income tax REIT qualification requirements described in this summary,
Senior Housing's direct and indirect wholly owned subsidiaries are ignored, and
all assets, liabilities and items of income, deduction and credit of its direct
and indirect wholly owned subsidiaries are treated as Senior Housing's.
Senior Housing may invest in real estate through one or more limited or
general partnerships or limited liability companies that are treated as
partnerships for federal income tax purposes. In the case of a REIT that is a
partner in a partnership, regulations under the Internal Revenue Code provide
that, for purposes of the REIT qualification requirements regarding income and
assets discussed below, the REIT is deemed to own its proportionate share of the
assets of the partnership corresponding to the REIT's proportionate capital
interest in the partnership and is deemed to be entitled to the income of the
partnership attributable to this proportionate share. In addition, for these
purposes, the character of the assets and gross income of the partnership
generally retain the same character in the hands of the REIT. Accordingly,
Senior Housing's proportionate share of the assets, liabilities, and items of
income of each partnership in which it is a partner are treated as Senior
Housing's for purposes of the income tests and asset tests discussed below. In
contrast, for purposes of the distribution requirement discussed below, Senior
Housing must take into account as a partner its distributive share of the
partnership's income as determined under the general federal income tax rules
governing partners and partnerships under Sections 701 through 777 of the
Internal Revenue Code.
INCOME TESTS. There are two gross income requirements for qualification as
a REIT under the Internal Revenue Code:
- First, at least 75% of Senior Housing's gross income, excluding gross
income from sales or other dispositions of property held primarily for
sale, must be derived from investments relating to real property,
including "rents from real property" as defined under Section 856 of the
Internal Revenue Code, mortgages on real property, or shares in other
REITs. When Senior Housing receives new capital in exchange for its shares
or in a public offering of five-year or longer debt instruments, income
attributable to the temporary investment of this new capital in stock or a
debt instrument, if received or accrued within one year of its receipt of
the new capital, is generally also qualifying income under the 75% test.
- Second, at least 95% of Senior Housing's gross income, excluding gross
income from sales or other dispositions of property held primarily for
sale, must be derived from a combination of items of real property income
that satisfy the 75% test described above, dividends, interest, payments
under interest rate swap or cap agreements, options, futures contracts,
forward rate agreements, or similar financial instruments, and gains from
the sale or disposition of stock, securities, or real property.
For purposes of these two requirements, income derived from a "shared
appreciation provision" in a mortgage loan is generally treated as gain
recognized on the sale of the property to which it relates. Although Senior
Housing will use its best efforts to ensure that the income generated by its
investments will be of a type which satisfies both the 75% and 95% gross income
tests, there can be no assurance in this regard.
In order to qualify as "rents from real property" under Section 856 of the
Internal Revenue Code, several requirements must be met:
- First, the amount of rent received generally must not be based on the
income or profits of any person, but may be based on receipts or sales.
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- Second, rents do not qualify if the REIT owns 10% or more of the tenant,
whether directly or after application of attribution rules. While Senior
Housing intends not to lease property to any party if rents from that
property would not qualify as rents from real property, application of the
10% ownership rule is dependent upon complex attribution rules and
circumstances that may be beyond Senior Housing's control. For example, an
unaffiliated third party's ownership directly or by attribution of 10% or
more of Senior Housing's shares, or 10% or more of HRPT's shares for so
long as HRPT owns 10% or more of Senior Housing, as well as 10% or more of
the stock of a Senior Housing lessee, would result in that lessee's rents
not qualifying as rents from real property. Senior Housing's declaration
of trust disallows transfers or purported acquisitions, directly or by
attribution, of its shares that could result in disqualification as a REIT
under the Internal Revenue Code and permits its trustees to repurchase the
shares to the extent necessary to maintain Senior Housing's status as a
REIT under the Internal Revenue Code. Similarly, for the purpose of HRPT
maintaining its own qualification as a REIT under the Internal Revenue
Code, HRPT's declaration of trust contains provisions that generally limit
concentrated ownership of HRPT's shares to 8.5% or below. Furthermore, the
transaction agreement provides that HRPT will not take any actions that
may jeopardize Senior Housing's REIT status under the Internal Revenue
Code. Nevertheless, there can be no assurance that these provisions in
Senior Housing's and HRPT's declarations of trust and the provisions of
the transaction agreement will be effective to prevent REIT status under
the Internal Revenue Code from being jeopardized under the 10% lessee
affiliate rule. Furthermore, there can be no assurance that Senior Housing
will be able to monitor and enforce these restrictions, nor will Senior
Housing's shareholders necessarily be aware of ownership of shares
attributed to them under the Internal Revenue Code's attribution rules.
- Third, in order for rents to qualify, Senior Housing generally must not
manage the property or furnish or render services to the tenants of the
property, except through an independent contractor from whom Senior
Housing derives no income. There is an exception to this rule permitting a
REIT to perform customary tenant services of the sort which a tax-exempt
organization could perform without being considered in receipt of
"unrelated business taxable income" as defined in Section 512(b)(3) of the
Internal Revenue Code. In addition, a DE MINIMIS amount of noncustomary
services will not disqualify income as "rents from real property" so long
as the value of the impermissible services does not exceed 1% of the gross
income from the property.
- Fourth, if rent attributable to personal property leased in connection
with a lease of real property is 15% or less of the total rent received
under the lease, then the rent attributable to personal property will
qualify as rents from real property; if this 15% threshold is exceeded,
the rent attributable to personal property will not so qualify. The
portion of rental income treated as attributable to personal property is
determined according to the ratio of the tax basis of the personal
property to the total tax basis of the real and personal property which is
rented.
Senior Housing believes that all or substantially all its rents will qualify as
rents from real property for purposes of Section 856 of the Internal Revenue
Code.
In order to qualify as mortgage interest on real property for purposes of
the 75% test, interest must derive from a mortgage loan secured by real property
with a fair market value at least equal to the amount of the loan. If the amount
of the loan exceeds the fair market value of the real property, the interest
will be treated as interest on a mortgage loan in a ratio equal to the ratio of
the fair market value of the real property to the total amount of the mortgage
loan.
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Any gain Senior Housing realizes on the sale of property held as inventory
or other property held primarily for sale to customers in the ordinary course of
business will be treated as income from a prohibited transaction that is subject
to a penalty tax at a 100% rate. This prohibited transaction income also may
have an adverse effect upon Senior Housing's ability to satisfy the 75% and 95%
gross income tests for federal income tax qualification as a REIT. Senior
Housing cannot provide assurances as to whether or not the IRS might
successfully assert that one or more of its dispositions is subject to the 100%
penalty tax. However, Senior Housing believes that any occasional disposition of
assets that it might make will not be subject to the 100% penalty tax, because
it intends to:
- own its assets for investment with a view to long-term income production
and capital appreciation;
- engage in the business of developing, owning and operating its existing
properties and acquiring, developing, owning and operating new properties;
and
- make occasional dispositions of its assets consistent with its long-term
investment objectives.
If Senior Housing fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
that year if:
- its failure to meet the test was due to reasonable cause and not due to
willful neglect;
- it reports the nature and amount of each item of its income included in
the 75% or 95% gross income tests for that taxable year on a schedule
attached to its tax return; and
- any incorrect information on the schedule was not due to fraud with intent
to evade tax.
It is impossible to state whether in all circumstances Senior Housing would be
entitled to the benefit of this relief provision for the 75% and 95% gross
income tests. Even if this relief provision did apply, a special tax equal to
100% is imposed upon the greater of the amount by which Senior Housing failed
the 75% test or the 95% test, multiplied by a fraction intended to reflect its
profitability.
ASSET TESTS. At the close of each quarter of each taxable year, Senior
Housing must also satisfy three percentage tests relating to the nature of its
assets:
- First, at least 75% of the value of Senior Housing's total assets must
consist of real estate assets, cash and cash items, shares in other REITs,
government securities, and stock or debt instruments purchased with
proceeds of a stock offering or an offering of its debt with a term of at
least five years, but only for the one-year period commencing with its
receipt of the offering proceeds.
- Second, not more than 25% of Senior Housing's total assets may be
represented by securities other than those securities that count favorably
toward the preceding 75% asset test.
- Third, of the investments included in the preceding 25% asset class, the
value of any one issuer's securities that Senior Housing owns may not
exceed 5% of the value of its total assets, and Senior Housing may not own
more than 10% of any one issuer's outstanding voting securities.
When a failure to satisfy the above asset tests results from an acquisition of
securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close of
that quarter. Senior Housing intends to maintain records of the value of its
assets to document its compliance with the above three asset tests, and to take
actions as may be required to cure any failure to satisfy the tests within 30
days after the close of any quarter.
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ANNUAL DISTRIBUTION REQUIREMENTS. In order to qualify for taxation as a
REIT under the Internal Revenue Code, Senior Housing is required to make annual
distributions other than capital gain dividends to its shareholders in an amount
at least equal to the excess of:
(A) the sum of 95% of Senior Housing's "real estate investment trust taxable
income," as defined in Section 857 of the Internal Revenue Code, but
computed without regard to the dividends paid deduction and net capital
gain, and 95% of Senior Housing's net income after tax, if any, from
property received in foreclosure, over
(B) the sum of Senior Housing's qualifying noncash income, E.G., imputed
rental income or income from transactions inadvertently failing to
qualify as like-kind exchanges.
These distributions must be paid in the taxable year to which they relate, or in
the following taxable year if declared before Senior Housing timely files its
tax return for the earlier taxable year and if paid on or before the first
regular distribution payment after that declaration. Dividends declared in
October, November, or December and paid during the following January will be
treated as having been both paid and received on December 31 of the prior
taxable year. A distribution which is not pro rata within a class of Senior
Housing's beneficial interests entitled to a distribution, or which is not
consistent with the rights to distributions among Senior Housing's classes of
beneficial interests, is a preferential distribution that is not taken into
consideration for purposes of the distribution requirements, and accordingly the
payment of a preferential distribution could affect Senior Housing's ability to
meet the distribution requirements. Taking into account Senior Housing's
distribution policies, including any dividend reinvestment plan it may adopt,
Senior Housing expects that it will not make any preferential distributions. The
distribution requirements may be waived by the IRS if a REIT establishes that it
failed to meet them by reason of distributions previously made to meet the
requirements of the 4% excise tax discussed below. To the extent that Senior
Housing does not distribute all of its net capital gain and all of its real
estate investment trust taxable income, as adjusted, it will be subject to tax
on undistributed amounts.
In addition, Senior Housing will be subject to a 4% excise tax to the extent
it fails within a calendar year to make required distributions to its
shareholders of 85% of its ordinary income and 95% of its capital gain net
income plus the excess, if any, of the "grossed up required distribution" for
the preceding calendar year over the amount treated as distributed for that
preceding calendar year. For this purpose, the term "grossed up required
distribution" for any calendar year is the sum of Senior Housing's taxable
income for the calendar year without regard to the deduction for dividends paid
and all amounts from earlier years that are not treated as having been
distributed under the provision.
If Senior Housing does not have enough cash or other liquid assets to meet
the 95% distribution requirements, it may find it necessary to arrange for new
debt or equity financing to provide funds for required distributions, or else
its REIT status for federal income tax purposes could be jeopardized. Senior
Housing can provide no assurance that financing would be available for these
purposes on favorable terms.
If Senior Housing fails to distribute sufficient dividends for any year, it
may be able to rectify this failure by paying "deficiency dividends" to
shareholders in a later year. These deficiency dividends may be included in
Senior Housing's deduction for dividends paid for the earlier year, but an
interest charge would be imposed upon it for the delay in distribution. Although
Senior Housing may be able to avoid being taxed on amounts distributed as
deficiency dividends, it will remain liable for the 4% excise tax discussed
above.
DEPRECIATION AND FEDERAL INCOME TAX TREATMENT OF LEASES. For properties
purchased after the spin-off, Senior Housing's initial tax basis will generally
be its acquisition cost. Senior Housing will
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generally depreciate its real property on a straight-line basis over 40 years
and its personal property, if any, over 12 years. These depreciation schedules
may vary for properties that Senior Housing acquires through tax-free or
carryover basis acquisitions.
Senior Housing's initial tax bases and depreciation schedules for its assets
at the time of the spin-off will depend upon whether the deemed exchange that
results from the spin-off is an exchange under Section 351(a) of the Internal
Revenue Code. Assuming Section 351(a) treatment, Senior Housing will carry over
HRPT's tax basis and depreciation schedule in each Senior Housing asset, and to
the extent that HRPT recognizes gain on a Senior Housing asset in the deemed
exchange, Senior Housing will have additional tax basis in that asset which it
will depreciate as described above for newly purchased assets. In contrast, if
Section 351(a) treatment does not apply to the deemed exchange, then Senior
Housing will be treated as though it acquired all its assets at the time of the
spin-off in a fully taxable acquisition, thereby acquiring aggregate tax bases
in these assets equal to the aggregate amount realized by HRPT in the deemed
exchange, and Senior Housing will depreciate these tax bases as described above
for newly purchased assets. Senior Housing believes, and Sullivan & Worcester
LLP has opined that it is likely that the deemed exchange will be an exchange
under Section 351(a), and Senior Housing will perform all its tax reporting
accordingly. Senior Housing may be required to amend these tax reports,
including those sent to its shareholders, if the IRS successfully challenges its
position that the deemed exchange is an exchange under Section 351(a). Senior
Housing intends to comply with the 95% REIT distribution requirements in 1999
and future years regardless of whether the deemed exchange is an exchange under
Section 351(a).
Senior Housing will be entitled to depreciation deductions from its
facilities only if it is treated for federal income tax purposes as the owner of
the facilities. This means that the leases of the facilities must be classified
for federal income tax purposes as true leases, rather than as sales or
financing arrangements, and Senior Housing believes this to be the case. In
addition, in the case of sale-leaseback arrangements, the IRS could assert that
Senior Housing realized prepaid rental income in the year of purchase to the
extent that the value of a leased property exceeds the purchase price for that
property. Because of the lack of clear precedent, Senior Housing cannot provide
assurances as to whether the IRS might successfully assert the existence of
prepaid rental income in any of its sale-leaseback transactions.
Additionally, Section 467 of the Internal Revenue Code, which concerns
leases with increasing rents, may apply to those of Senior Housing's leases
which provide for rents that increase from one period to the next. Section 467
of the Internal Revenue Code provides that in the case of a so-called
"disqualified leaseback agreement" rental income must be accrued at a constant
rate. Where constant rent accrual is required, Senior Housing could recognize
rental income from a lease in excess of cash rents and, as a result, encounter
difficulty in meeting the 95% distribution requirement. Disqualified leaseback
agreements include leaseback transactions where a principal purpose for
providing increasing rent under the agreement is the avoidance of federal income
tax. Recently issued Treasury regulations provide that rents will not be treated
as increasing for tax avoidance purposes where the increases are based upon a
fixed percentage of lessee receipts. Therefore, the additional rent provisions
in Senior Housing's leases that are based on a fixed percentage of lessee
receipts generally should not cause the leases to be disqualified leaseback
agreements under Section 467.
TAXATION OF SHAREHOLDERS. As long as Senior Housing qualifies as a REIT for
federal income tax purposes, a distribution to its shareholders that Senior
Housing does not designate as a capital gain dividend will be treated as an
ordinary income dividend to the extent that it is made out of current or
accumulated earnings and profits. Distributions made out of Senior Housing's
current or
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accumulated earnings and profits that Senior Housing properly designates as
capital gain dividends will be taxed as long-term capital gains, as discussed
below, to the extent they do not exceed actual net capital gain for the taxable
year. However, corporate shareholders may be required to treat up to 20% of any
capital gain dividend as ordinary income under Section 291 of the Internal
Revenue Code. In addition, Senior Housing may elect to retain net capital gain
income and treat it as constructively distributed. In that case,
(1) Senior Housing will be taxed at regular corporate capital gains tax
rates on retained amounts,
(2) each shareholder will be taxed on its designated proportionate share of
Senior Housing's retained net capital gains as though that amount were
distributed and designated a capital gain dividend,
(3) each shareholder will receive a credit for its designated proportionate
share of the tax that Senior Housing pays,
(4) each shareholder will increase its adjusted basis in its Senior Housing
shares by the excess of the amount of its proportionate share of these
retained net capital gains over its proportionate share of this tax that
Senior Housing pays, and
(5) both Senior Housing and its corporate shareholders will make
commensurate adjustments in their respective earnings and profits for
federal income tax purposes.
If Senior Housing elects to retain its net capital gains in this fashion, it
will notify its shareholders of the relevant tax information within 60 days
after the close of the affected taxable year. For noncorporate shareholders,
long-term capital gains are generally taxed at maximum rates of 20% or 25%,
depending upon the type of property disposed of and the previously claimed
depreciation with respect to this property.
Distributions in excess of current or accumulated earnings and profits will
not be taxable to a shareholder to the extent that they do not exceed the
shareholder's adjusted basis in the shareholder's Senior Housing shares, but
will reduce the shareholder's basis in those shares. To the extent that these
excess distributions exceed the adjusted basis of a shareholder's shares, they
will be included in income as capital gain, with long-term gain generally taxed
to noncorporate shareholders at a maximum rate of 20%. No shareholder may
include on his federal income tax return any of Senior Housing's net operating
losses or any of its capital losses.
Dividends that Senior Housing declares in October, November or December of a
taxable year to shareholders of record on a date in those months will be deemed
to have been received by shareholders on December 31 of that taxable year,
provided Senior Housing actually pays these dividends during the following
January. Also, items that are treated differently for regular and alternative
minimum tax purposes are to be allocated between a REIT and its shareholders
under Treasury regulations which are to be prescribed. It is possible that these
Treasury regulations will require tax preference items to be allocated to Senior
Housing shareholders with respect to any accelerated depreciation or other tax
preference items that Senior Housing claims.
The sale or exchange of Senior Housing shares will result in recognition of
gain or loss in an amount equal to the difference between the amount realized
and the shareholder's adjusted basis in the shares sold or exchanged. This gain
or loss will be capital gain or loss, and will be long-term capital gain or loss
if the shareholder's holding period in the shares exceeds one year. In addition,
any loss upon a sale or exchange of Senior Housing shares held for six months or
less will generally be treated as a long-term capital loss to the extent of
Senior Housing long-term capital gain dividends during the holding period.
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Noncorporate shareholders who borrow funds to finance their acquisition of
Senior Housing shares could be limited in the amount of deductions allowed for
the interest paid on the indebtedness incurred. Under Section 163(d) of the
Internal Revenue Code, interest paid or accrued on indebtedness incurred or
continued to purchase or carry property held for investment is generally
deductible only to the extent of the investor's net investment income. A
shareholder's net investment income will include ordinary income dividend
distributions received from Senior Housing and, if an appropriate election is
made by the shareholder, capital gain dividend distributions received from
Senior Housing; however, distributions treated as a nontaxable return of the
shareholder's basis will not enter into the computation of net investment
income.
TAXATION OF TAX-EXEMPT SHAREHOLDERS. In Revenue Ruling 66-106, the IRS ruled
that amounts distributed by a REIT to a tax-exempt employees' pension trust did
not constitute "unrelated business taxable income," even though the REIT may
have financed some its activities with acquisition indebtedness. Although
revenue rulings are interpretive in nature and subject to revocation or
modification by the IRS, based upon the analysis and conclusion of Revenue
Ruling 66-106, Senior Housing's distributions made to shareholders that are
tax-exempt pension plans, individual retirement accounts, or other qualifying
tax-exempt entities should not constitute unrelated business taxable income,
unless the shareholder has financed its acquisition of its shares with
"acquisition indebtedness" within the meaning of the Internal Revenue Code.
Special rules apply to tax-exempt pension trusts, including so-called 401(k)
plans but excluding individual retirement accounts or government pension plans,
that own more than 10% by value of a "pension-held REIT" at any time during a
taxable year. The pension trust may be required to treat a percentage of all
dividends received from the pension-held REIT during the year as unrelated
business taxable income. This percentage is equal to the ratio of
(1) the pension-held REIT's gross income derived from the conduct of
unrelated trades or businesses, determined as if the pension-held REIT
were a tax-exempt pension fund, less direct expenses related to that
income, to
(2) the pension-held REIT's gross income from all sources, less direct
expenses related to that income,
except that this percentage shall be deemed to be zero unless it would otherwise
equal or exceed 5%. A REIT is a pension-held REIT if:
- the REIT is "predominantly held" by tax-exempt pension trusts, and
- the REIT would otherwise fail to satisfy the "closely held" ownership
requirement discussed above if the stock or beneficial interests in the
REIT held by tax-exempt pension trusts were viewed as held by tax-exempt
pension trusts rather than by their respective beneficiaries.
A REIT is predominantly held by tax-exempt pension trusts if at least one
tax-exempt pension trust owns more than 25% by value of the REIT's stock or
beneficial interests, or if one or more tax-exempt pension trusts, each owning
more than 10% by value of the REIT's stock or beneficial interests, own in the
aggregate more than 50% by value of the REIT's stock or beneficial interests.
Because of the restrictions in Senior Housing's declaration of trust regarding
the ownership concentration of its shares, and because of the restrictions in
HRPT's declaration of trust regarding the ownership concentration of HRPT's
shares, Senior Housing believes that it will not be a pension-held REIT.
However, because Senior Housing's shares and HRPT's shares will be publicly
traded, Senior Housing cannot completely control whether or not it is or will
become a pension-held REIT.
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TAXATION OF NON-U.S. PERSONS. The rules governing the federal income
taxation of non-U.S. persons are complex, and the following discussion is
intended only as a summary of these rules. If you are a non-U.S. person, we urge
you to consult with your own tax advisor to determine the impact of federal,
state, local, and foreign tax laws, including any tax return filing and other
reporting requirements, with respect to your investment in Senior Housing
shares.
In general, a non-U.S. person will be subject to regular federal income tax
in the same manner as a U.S. person with respect to its investment in Senior
Housing shares if that investment is effectively connected with the non-U.S.
person's conduct of a trade or business in the United States. In addition, a
corporate non-U.S. person that receives income that is or is deemed effectively
connected with a trade or business in the United States may also be subject to
the 30% branch profits tax under Section 884 of the Internal Revenue Code, which
is payable in addition to regular federal corporate income tax. The balance of
this discussion on the federal income taxation of non-U.S. persons addresses
only those non-U.S. persons whose investment in Senior Housing shares is not
effectively connected with the conduct of a trade or business in the United
States.
A distribution by Senior Housing to a non-U.S. person that is not
attributable to gain from the sale or exchange of a United States real property
interest and that is not designated as a capital gain dividend will be treated
as an ordinary income dividend to the extent that it is made out of current or
accumulated earnings and profits. A distribution of this type will generally be
subject to federal income tax and withholding at the rate of 30%, or the lower
rate that may be specified by a tax treaty if the non-U.S. person has in the
manner prescribed by the IRS demonstrated its entitlement to benefits under a
tax treaty. Because Senior Housing cannot determine its current and accumulated
earnings and profits until the end of the taxable year, withholding at the rate
of 30% or applicable lower treaty rate will be imposed on the gross amount of
any distribution to a non-U.S. person that Senior Housing makes and does not
designate a capital gain dividend. Notwithstanding this withholding on
distributions in excess of Senior Housing current and accumulated earnings and
profits, these distributions are a nontaxable return of capital to the extent
that they do not exceed the non-U.S. person's adjusted basis in Senior Housing
shares, and the nontaxable return of capital will reduce the adjusted basis in
these shares. To the extent that distributions in excess of current and
accumulated earnings and profits exceed the non-U.S. person's adjusted basis in
Senior Housing shares, the distributions will give rise to tax liability if the
non-U.S. person would otherwise be subject to tax on any gain from the sale or
exchange of these shares, as discussed below. A non-U.S. person may seek a
refund of amounts withheld on distributions to him in excess of Senior Housing's
current and accumulated earnings and profits, provided that the required
information is furnished to the IRS.
For any year in which Senior Housing qualifies as a REIT, distributions that
are attributable to gain from the sale or exchange of a United States real
property interest are taxed to a non-U.S. person as if these distributions were
gains effectively connected with a trade or business in the United States
conducted by the non-U.S. person. Accordingly, a non-U.S. person will be taxed
on these amounts at the normal capital gain rates applicable to a U.S. person,
subject to any applicable alternative minimum tax and to a special alternative
minimum tax in the case of nonresident alien individuals; the non-U.S. person
will be required to file a United States federal income tax return reporting
these amounts, even if applicable withholding is imposed as described below; and
corporate non-U.S. persons may owe the 30% branch profits tax under Section 884
of the Internal Revenue Code in respect of these amounts. Senior Housing will be
required to withhold from distributions to non-U.S. persons, and remit to the
IRS, 35% of the maximum amount of any distribution that could be designated as a
capital gain dividend. In addition, for purposes of this withholding rule, if
Senior Housing designates prior distributions as capital gain dividends, then
subsequent distributions up to the amount of the designated prior distributions
will be treated as
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capital gain dividends. The amount of any tax withheld is creditable against the
non-U.S. person's federal income tax liability, and any amount of tax withheld
in excess of that tax liability may be refunded provided that an appropriate
claim for refund is filed with the IRS.
Tax treaties may reduce the withholding obligations on Senior Housing
distributions. Under some treaties, however, rates below 30% generally
applicable to ordinary income dividends from United States corporations may not
apply to ordinary income dividends from a REIT. If the amount of tax withheld by
Senior Housing with respect to a distribution to a non-U.S. person exceeds the
shareholder's federal income tax liability with respect to the distribution, the
non-U.S. person may file for a refund of the excess from the IRS. In this
regard, note that the 35% withholding tax rate on capital gain dividends
corresponds to the maximum income tax rate applicable to corporate non-U.S.
persons but is higher than the 20% and 25% maximum rates on capital gains
generally applicable to noncorporate non-U.S. persons. Generally effective with
respect to distributions paid after December 31, 2000, new Treasury regulations
alter the information reporting and backup withholding rules applicable to
non-U.S. persons and provide presumptions under which a non-U.S. person is
subject to backup withholding and information reporting until Senior Housing or
the applicable withholding agent receives certification from the shareholder of
its non-U.S. person status. In some instances, these certification requirements
are more detailed and more involved than those applicable under current Treasury
regulations. The new Treasury regulations also provide special rules to
determine whether, for purposes of determining the applicability of a tax
treaty, Senior Housing's distributions to a non-U.S. person that is an entity
should be treated as paid to the entity or to those owning an interest in that
entity, and whether the entity or its owners are entitled to benefits under the
tax treaty. The general thrust of the new Treasury regulations and their
proposed effective date is to encourage non-U.S. persons and withholding agents
to use as soon as possible the new IRS Forms W-8 series, rather than the
predecessor IRS Forms W-8, 1001, and 4224, and to require use of the new IRS
Forms W-8 series for payments made after December 31, 2000.
If Senior Housing shares are not "United States real property interests"
within the meaning of Section 897 of the Internal Revenue Code, a non-U.S.
person's gain on sale of these shares generally will not be subject to federal
income taxation, except that a nonresident alien individual who was present in
the United States for 183 days or more during the taxable year will be subject
to a 30% tax on this gain. Senior Housing shares will not constitute a United
States real property interest if Senior Housing is a "domestically controlled
REIT." A domestically controlled REIT is a REIT in which at all times during the
preceding five-year period less than 50% in value of its shares is held directly
or indirectly by foreign persons. Senior Housing believes that it will be a
domestically controlled REIT and thus a non-U.S. person's gain on sale of its
shares will not be subject to federal income taxation. However, because these
shares will be publicly traded, and because the shares of HRPT are publicly
traded, Senior Housing can provide no assurance that it will be a domestically
controlled REIT. If Senior Housing is not a domestically controlled REIT, a
non-U.S. person's gain on sale of Senior Housing shares will not be subject to
federal income taxation as a sale of a United States real property interest, if
that class of shares is "regularly traded," as defined by applicable Treasury
regulations, on an established securities market like the New York Stock
Exchange, and the non-U.S. person has at all times during the preceding five
years owned 5% or less by value of that class of shares. If the gain on the sale
of Senior Housing shares were subject to federal income taxation, the non-U.S.
person will generally be subject to the same treatment as a U.S. person with
respect to its gain, will be required to file a United States federal income tax
return reporting that gain, and in the case of corporate non-U.S. persons might
owe branch profits tax under Section 884 of the Internal Revenue Code. In any
event, a purchaser of Senior Housing shares from a non-U.S. person will not be
required to withhold on the purchase price if the
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purchased shares are regularly traded on an established securities market or if
Senior Housing is a domestically controlled REIT. Otherwise, the purchaser of
Senior Housing shares may be required to withhold 10% of the purchase price paid
to the non-U.S. person and to remit the withheld amount to the IRS.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Information reporting and backup withholding may apply to distributions or
proceeds paid to HRPT and Senior Housing shareholders under the circumstances
discussed below. Because the spin-off of Senior Housing shares is an in-kind
distribution on HRPT shares, we or other applicable withholding agents will have
to collect any applicable backup withholding by reducing to cash for remittance
to the IRS a sufficient portion of the Senior Housing shares that the HRPT
shareholder would otherwise receive, and the HRPT shareholder will bear the
brokerage or other costs for this withholding procedure. Amounts withheld under
backup withholding are generally not an additional tax and may be refunded or
credited against the REIT shareholder's federal income tax liability, provided
that it furnishes the required information to the IRS.
A U.S. person will be subject to backup withholding at a 31% rate when it
receives distributions on HRPT or Senior Housing shares or proceeds upon the
sale, exchange, redemption, retirement or other disposition of HRPT or Senior
Housing shares, unless the U.S. person properly executes under penalties of
perjury an IRS Form W-9 or substantially similar form that:
- provides the U.S. person's correct taxpayer identification number; and
- certifies that the U.S. person is exempt from backup withholding because
it is a corporation or come within another exempt category, it has not
been notified by the IRS that it is subject to backup withholding, or it
has been notified by the IRS that it is no longer subject to backup
withholding.
If the U.S. person does not provide its correct taxpayer identification number
on the IRS Form W-9 or substantially similar form, it may be subject to
penalties imposed by the IRS and the REIT may also have to withhold a portion of
any capital gain distributions paid to it. Unless the U.S. person has
established on a properly executed IRS Form W-9 or substantially similar form
that it is a corporation or comes within another exempt category, distributions
on HRPT or Senior Housing shares paid to it during the calendar year, and the
amount of tax withheld if any, will be reported to it and to the IRS.
Distributions on HRPT or Senior Housing shares to a non-U.S. person during
each calendar year, and the amount of tax withheld if any, will generally be
reported to the non-U.S. person and to the IRS. This information reporting
requirement applies regardless of whether the non-U.S. person is subject to
withholding on distributions on HRPT or Senior Housing shares or whether the
withholding was reduced or eliminated by an applicable tax treaty. Also,
distributions paid to a non-U.S. person on HRPT or Senior Housing shares may be
subject to backup withholding at a 31% rate, unless the non-U.S. person properly
certifies its non-U.S. person status on an IRS Form W-8 or substantially similar
form in the manner described above. Similarly, information reporting and 31%
backup withholding will not apply to proceeds a non-U.S. person receives upon
the sale, exchange, redemption, retirement or other disposition of HRPT or
Senior Housing shares, if the non-U.S. person properly certifies its non-U.S.
person status on an IRS Form W-8 or substantially similar form. Even without
having executed an IRS Form W-8 or substantially similar form, however, in some
cases information reporting and 31% backup withholding will not apply to
proceeds that a non-U.S. person receives upon the sale, exchange, redemption,
retirement or other disposition of HRPT or Senior Housing shares if the non-U.S.
person receives those proceeds
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through a broker's foreign office. As described above, new Treasury regulations
alter the information reporting and backup withholding rules applicable to
non-U.S. persons for payments made after December 31, 2000, and in general these
new Treasury Regulations replace IRS Forms W-8, 1001, and 4224 with the new IRS
Forms W-8 series. For a non-U.S. person whose income and gain on HRPT or Senior
Housing shares is effectively connected to the conduct of a United States trade
or business, a slightly different rule may apply to proceeds received upon the
sale, exchange, redemption, retirement or other disposition of HRPT or Senior
Housing shares. Until the non-U.S. person complies with the new Treasury
regulations, information reporting and 31% backup withholding may apply in the
same manner as to a U.S. person, and thus the non-U.S. person may have to
execute an IRS Form W-9 or substantially similar form to prevent the backup
withholding.
OTHER TAX CONSEQUENCES
HRPT's, Senior Housing's and their respective shareholders' federal income
tax treatment may be modified by legislative, judicial, or administrative
actions at any time, which actions may be retroactive in effect. The rules
dealing with federal income taxation are constantly under review by the
Congress, the IRS and the Treasury Department, and statutory changes as well as
promulgation of new regulations, revisions to existing regulations, and revised
interpretations of established concepts occur frequently. No prediction can be
made as to the likelihood of passage of new tax legislation or other provisions
either directly or indirectly affecting HRPT, Senior Housing or their respective
shareholders. Revisions in federal income tax laws and interpretations of these
laws could adversely affect the tax consequences of an investment in HRPT or
Senior Housing shares. HRPT, Senior Housing and their respective shareholders
may also be subject to state or local taxation in various state or local
jurisdictions, including those in which HRPT, Senior Housing or their respective
shareholders transact business or reside. State and local tax consequences may
not be comparable to the federal income tax consequences discussed above.
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ERISA CONSEQUENCES FOR SENIOR HOUSING AND ITS SHAREHOLDERS
FIDUCIARY OBLIGATIONS. Fiduciaries of a pension, profit-sharing or other
employee benefit plan subject to Title I of the Employee Retirement Income
Security Act of 1974, ERISA, must consider the following:
- whether their investment in Senior Housing shares satisfies the
diversification requirements of ERISA;
- whether the investment is prudent in light of possible limitations on the
marketability of Senior Housing shares;
- whether they have authority to acquire Senior Housing 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. Fiduciaries of any IRA, Roth IRA, Keogh Plan or other qualified
retirement plan not subject to Title I of ERISA, referred to as "non-ERISA
plans," should consider that a plan may only make investments that are
authorized by the appropriate governing instrument. Fiduciary shareholders
should consult their own legal advisors if they have any concern as to whether
the investment is consistent with the foregoing criteria.
PROHIBITED TRANSACTIONS. Fiduciaries of ERISA plans and persons making the
investment decision for an IRA or other non-ERISA plan should consider the
application of the prohibited transaction provisions of ERISA and the Internal
Revenue Code in making their investment decision. Sales and other transactions
between an ERISA plan or a non-ERISA plan, and persons related to it are
prohibited transactions. The particular facts concerning the sponsorship,
operations and other investments of an ERISA plan or non-ERISA plan may cause a
wide range of other persons to be treated as disqualified persons or parties in
interest with respect to it. A prohibited transaction, in addition to imposing
potential personal liability upon fiduciaries of ERISA plans, may also result in
the imposition of an excise tax under the Internal Revenue Code or a penalty
under ERISA upon the disqualified person or party in interest with respect to
the plan. If the disqualified person who engages in the transaction is the
individual on behalf of whom an IRA or Roth IRA is maintained or his
beneficiary, the IRA or Roth IRA may lose its tax-exempt status and its assets
may be deemed to have been distributed to the individual in a taxable
distribution on account of the prohibited transaction, but no excise tax will be
imposed. Fiduciary shareholders should consult their own legal advisors if they
have any concern as to whether the ownership of Senior Housing shares involves a
prohibited transaction.
SPECIAL FIDUCIARY AND PROHIBITED TRANSACTIONS CONSEQUENCES. The Department
of Labor, which has administrative responsibility over ERISA plans as well as
non-ERISA plans, has issued a regulation defining "plan assets." The regulation
generally provides that when an ERISA or non-ERISA plan acquires a security that
is an equity interest in an entity and that security is neither a "publicly
offered security" nor a security issued by an investment company registered
under the Investment Company Act of 1940, the ERISA plan's or non-ERISA plan's
assets include both the equity interest and an undivided interest in each of the
underlying assets of the entity, unless it is established either that the entity
is an operating company or that equity participation in the entity by benefit
plan investors is not significant.
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Each class of Senior Housing shares--that is, its common shares and any
class of preferred shares that it may issue in the future--must be analyzed
separately to ascertain whether it is a publicly offered security. The
regulation defines a publicly offered security as a security that is "widely
held," "freely transferable" and either part of a class of securities registered
under the Securities Exchange Act of 1934, or sold under an effective
registration statement under the Securities Act of 1933, provided the securities
are registered under the Securities Exchange Act of 1934 within 120 days after
the end of the fiscal year of the issuer during which the offering occurred.
Senior Housing shares will be registered under the Securities Exchange Act of
1934.
The regulation provides that a security is "widely held" only if it is part
of a class of securities that is owned by 100 or more investors independent of
the issuer and of one another. However, a security will not fail to be "widely
held" because the number of independent investors falls below 100 subsequent to
the initial public offering as a result of events beyond the issuer's control.
Senior Housing expects its common shares to be widely held.
The regulation provides that whether a security is "freely transferable" is
a factual question to be determined on the basis of all relevant facts and
circumstances. The regulation further provides that, where a security is part of
an offering in which the minimum investment is $10,000 or less, some
restrictions on transfer ordinarily will not, alone or in combination, affect a
finding that these securities are freely transferable. The restrictions on
transfer enumerated in the regulation as not affecting that finding include:
- any restriction on or prohibition against any transfer or assignment which
would result in a termination or reclassification for federal or state tax
purposes, or would otherwise violate any state or federal law or court
order;
- any requirement that advance notice of a transfer or assignment be given
to the issuer and any requirement that either the transferor or
transferee, or both, execute documentation setting forth representations
as to compliance with any restrictions on transfer which are among those
enumerated in the regulation as not affecting free transferability,
including those described in the preceding clause of this sentence;
- 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.
Senior Housing believes that the restrictions imposed under the declaration
of trust on the transfer of shares do not result in the failure of its shares to
be "freely transferable." Furthermore, Senior Housing believes that at present
there exist no other facts or circumstances limiting the transferability of its
shares which are not included among those enumerated as not affecting their free
transferability under the regulation, and Senior Housing does not expect or
intend to impose in the future, or to permit any person to impose on its behalf,
any limitations or restrictions on transfer which would not be among the
enumerated permissible limitations or restrictions.
Assuming that each class of Senior Housing's shares will be "widely held"
and that no other facts and circumstances exist which restrict transferability
of these shares, Senior Housing has received an opinion of counsel that its
shares will not fail to be "freely transferable" for purposes of the regulation
due to the restrictions on transfer of the shares under Senior Housing's
declaration of trust and that under the regulation the shares are publicly
offered securities and Senior Housing's assets will not be deemed to be "plan
assets" of any ERISA plan or non-ERISA plan that invests in Senior Housing
shares.
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LEGAL MATTERS
Sullivan & Worcester LLP, Boston, Massachusetts, the lawyers for Senior
Housing, have issued an opinion about the legality of the shares. Sullivan &
Worcester LLP will rely, as to certain matters of Maryland law, upon an opinion
of Ballard Spahr Andrews & Ingersoll, LLP, Baltimore, Maryland. Barry M. Portnoy
was a partner and chairman of the firm of Sullivan & Worcester LLP until March
31, 1997 and is one of Senior Housing's managing trustees. Mr. Portnoy is also a
managing trustee of HRPT, Hospitality Properties and a director and 50% owner of
Reit Management, the investment advisor to Senior Housing, a director and
significant shareholder of one of Senior Housing's tenants. Jennifer B. Clark, a
vice president at Reit Management, was a partner of Sullivan & Worcester LLP
until July 1, 1999. Sullivan & Worcester LLP represents Senior Housing, HRPT,
Hospitality Properties, Reit Management and their affiliates on various matters.
Ballard Spahr Andrews & Ingersoll LLP is a tenant of HRPT and is counsel to the
agent of Senior Housing's bank credit facility.
EXPERTS
The consolidated financial statements and schedules of Senior Housing
Properties Trust at December 31, 1998 and 1997, and for each of the three years
in the period ended December 31, 1998, appearing in this prospectus and
registration statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given on the authority of such firm as
experts in accounting and auditing.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
FORWARD LOOKING STATEMENTS
This prospectus contains statements which constitute forward looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Those statements appear in a number of places in this prospectus and
include statements regarding the intent, belief or expectations of HRPT, Senior
Housing, their trustees or their officers with respect to the declaration or
payment of dividends, the consummation of additional acquisitions, policies and
plans of HRPT and Senior Housing regarding investments, dispositions,
financings, conflicts of interest or other matters, HRPT's and Senior Housing's
qualification and continued qualification as real estate investment trusts or
trends affecting their businesses, financial condition or results of operations.
HRPT and Senior Housing caution you that these forward looking statements are
not guarantees of future performance and involve risks and uncertainties. Actual
results may differ materially from the forward looking statements as a result of
various factors. These factors include, without limitation, changes in financing
terms, HRPT's or Senior Housing's ability or inability to complete acquisitions
and financing transactions, results of operations of HRPT's and Senior Housing's
properties and general changes in economic conditions not presently
contemplated. The "Risk Factors" and "Senior Housing Management's Discussion and
Analysis of Financial Condition and Results of Operations" sections of this
prospectus identify other important factors that could cause these differences.
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WHERE YOU CAN FIND ADDITIONAL INFORMATION
Senior Housing has filed with the SEC a registration statement, of which
this prospectus is a part, on Form S-11 under the Securities Act of 1933. This
prospectus does not contain all the information set forth in the registration
statement. Statements contained in this prospectus as to the content of any
contract or other document filed as an exhibit are not necessarily complete, and
you should consult the copy of those contracts or other documents filed as
exhibits to the registration statement. For further information regarding Senior
Housing, please read the registration statement and the exhibits and schedules
thereto.
You may read and copy the registration statement and its exhibits and
schedules at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. When the Form S-11 becomes effective, Senior Housing
will be subject to the reporting requirements of the Securities Exchange Act of
1934 and the reports, proxy statements and other information filed by Senior
Housing with the SEC can then be inspected and copied at the SEC's Public
Reference Room. You may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. You may access the
electronic filing of the registration statement and its exhibits and schedules
on the SEC's internet site, http://www.sec.gov.
Senior Housing intends to make available to its shareholders annual reports
containing audited financial statements and quarterly reports containing
unaudited financial information for the first three quarters of each year.
------------------------
You should rely only on the information contained in this prospectus. We
have not, and the Senior Housing has not, authorized any person to provide you
with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. HRPT and Senior Housing
believe that the information contained in this prospectus is accurate as of the
date on the cover. Changes may occur after that date, and neither HRPT nor
Senior Housing will update the information except as is required in the normal
course of their respective public disclosure practices. You should assume that
HRPT's and Senior Housing's business, financial condition, results of operations
and prospects may have changed since the date appearing on the cover of this
prospectus.
------------------------
The amended and restated declaration of trust establishing Senior Housing
Properties Trust, dated September 20, 1999, a copy of which, together with all
amendments thereto, is filed in the office of the State Department of
Assessments and Taxation of Maryland, provides that the name "Senior Housing
Properties Trust" refers to the trustees under Senior Housing's declaration as
trustees, but not individually or personally, and that no trustee, officer,
shareholder, employee or agent of Senior Housing shall be held to any personal
liability for any obligation of, or claim against, Senior Housing. All persons
dealing with Senior Housing shall look only to the assets of Senior Housing for
the payment of any sum or the performance of any obligation.
------------------------
The amended and restated declaration of trust establishing HRPT, dated July
1, 1994, a copy of which, together with all amendments thereto, is filed in the
office of the State Department of Assessments and Taxation of Maryland, provides
that the name "HRPT Properties Trust" refers to the trustees under HRPT's
declaration as trustees, but not individually or personally, and that no
trustee, officer, shareholder, employee or agent of HRPT shall be held to any
personal liability for any obligation of, or claim against, HRPT. All persons
dealing with HRPT shall look only to the assets of HRPT for the payment of any
sum or the performance of any obligation.
105
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<S> <C>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF HRPT PROPERTIES TRUST
Introduction to unaudited pro forma consolidated financial statements.............. F-2
Unaudited pro forma consolidated balance sheet as of June 30, 1999................. F-3
Unaudited pro forma consolidated statement of income for the six months ended June
30, 1999......................................................................... F-4
Unaudited pro forma consolidated statement of income for the year ended December
31, 1998......................................................................... F-5
Notes to unaudited pro forma consolidated financial statements..................... F-6
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF SENIOR HOUSING PROPERTIES
TRUST
Introduction to unaudited pro forma consolidated financial statements.............. F-8
Unaudited pro forma consolidated balance sheet as of June 30, 1999................. F-9
Unaudited pro forma consolidated statement of income for the six months ended June
30, 1999......................................................................... F-10
Unaudited pro forma consolidated statement of income for the year ended December
31, 1998......................................................................... F-11
Notes to unaudited pro forma consolidated financial statements..................... F-12
CONSOLIDATED FINANCIAL STATEMENTS OF SENIOR HOUSING PROPERTIES TRUST AND FINANCIAL
STATEMENT SCHEDULES
Report of independent auditors..................................................... F-14
Consolidated balance sheets as of December 31, 1997 and 1998 and June 30, 1999
(unaudited)...................................................................... F-15
Consolidated statements of income for each of the three years in the period ended
December 31, 1998 and for the six months ended June 30, 1998 and 1999
(unaudited)...................................................................... F-16
Consolidated statements of ownership interest of HRPT Properties Trust for each of
the three years in the period ended December 31, 1998 and for the six months
ended June 30, 1999 (unaudited).................................................. F-17
Consolidated statements of cash flows for each of the three years in the period
ended December 31, 1998 and for the six months ended June 30, 1998 and 1999
(unaudited)...................................................................... F-18
Notes to consolidated financial statements......................................... F-19
Schedule III--Real Estate and Accumulated Depreciation............................. S-1
Schedule IV--Mortgage Loans on Real Estate......................................... S-3
</TABLE>
F-1
<PAGE>
HRPT PROPERTIES TRUST
INTRODUCTION TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated balance sheet at June 30,
1999 is intended to present the financial position of HRPT Properties Trust as
if the transactions described in the notes had been completed as of June 30,
1999. The following unaudited pro forma consolidated statements of income are
intended to present the results of operations of HRPT as if these transactions
had been completed as of January 1, 1998.
These unaudited pro forma consolidated financial statements are not
necessarily indicative of what the actual consolidated financial position or
results of operations of HRPT would have been as of the date or for the periods
indicated, nor do they represent our expected consolidated financial position or
results of operations for any future period. Differences would result from,
among other considerations, future changes in HRPT's investments, changes in
rent which we receive, changes in interest rates and changes in the capital
structure of HRPT. For more information about the financial condition and
results of operations of HRPT, please refer to the financial statements of HRPT
filed with the SEC, including the audited consolidated financial statements for
the year ended December 31, 1998, included in HRPT's Current Report on Form 8-K
dated March 5, 1999, and the unaudited consolidated financial statements for the
quarter ended June 30, 1999, included in HRPT's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999.
F-2
<PAGE>
HRPT PROPERTIES TRUST
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL(A) ADJUSTMENTS PRO FORMA
------------- ------------- -----------
<S> <C> <C> <C>
ASSETS
Real estate properties:
Land................................................. $378,714 $(69,673) $309,041
Buildings and improvements........................... 2,627,807 (662,720) 1,965,087
------------- ------------- -----------
3,006,521 (732,393) 2,274,128
Accumulated depreciation............................. (184,992) 105,823 (79,169)
------------- ------------- -----------
2,821,529 (626,570)(B) 2,194,959
Real estate mortgages.................................. 60,530 (37,638)(B) 22,892
Investment in Hospitality Properties................... 108,242 -- 108,242
Investment in Senior Housing........................... -- 220,548(C) 220,548
Cash and cash equivalents.............................. 26,984 (26,593)(D) 391
Other assets, net...................................... 84,869 (9,918)(B) 74,951
------------- ------------- -----------
$3,102,154 $(480,171) $2,621,983
------------- ------------- -----------
------------- ------------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank credit facility................................... $-- $-- $--
Senior notes payable, net.............................. 957,513 (200,000)(E) 757,513
Mortgage notes payable................................. 23,985 -- 23,985
Convertible subordinated debentures.................... 204,863 -- 204,863
Other liabilities...................................... 51,252 (756)(B) 50,496
Deferred rents and other deferred revenues............. 32,509 (27,369)(B) 5,140
Security deposits...................................... 19,332 (15,235)(B) 4,097
Shareholders' equity:
Preferred shares of beneficial interest; $0.01 par
value; 50,000,000 shares authorized; none issued..... -- -- --
Common shares of beneficial interest; $0.01 par value;
150,000,000 shares authorized; 131,894,626 shares
issued and outstanding............................... 1,319 -- 1,319
Additional paid-in capital............................. 1,971,168 -- 1,971,168
Cumulative net income.................................. 643,924 (10,000)(G) 633,924
Cumulative distributions............................... (803,711) (226,811)(F) (1,030,522)
------------- ------------- -----------
Total shareholders' equity........................... 1,812,700 (236,811) 1,575,889
------------- ------------- -----------
$3,102,154 $(480,171) $2,621,983
------------- ------------- -----------
------------- ------------- -----------
</TABLE>
See accompanying notes.
F-3
<PAGE>
HRPT PROPERTIES TRUST
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL(A) ADJUSTMENTS PRO FORMA
------------- ------------- -----------
<S> <C> <C> <C>
Revenues:
Rental income...................................... $203,335 $(42,409) $160,926
Interest and other income.......................... 7,619 (2,881) 4,738
------------- ------------- -----------
Total revenues............................... 210,954 (45,290)(H) 165,664
------------- ------------- -----------
Expenses:
Operating expenses................................. 50,548 -- 50,548
Interest........................................... 39,525 (5,600)(I) 33,925
Depreciation and amortization...................... 37,314 (11,207)(J) 26,107
General and administrative......................... 9,849 (2,259)(K) 7,590
------------- ------------- -----------
Total expenses............................... 137,236 (19,066) 118,170
------------- ------------- -----------
Income before equity in earnings of
Hospitality Properties and Senior Housing,
and gain on sale of properties..................... 73,718 (26,224) 47,494
Equity in earnings of Hospitality Properties........... 4,029 -- 4,029
Equity in earnings of Senior Housing................... -- 11,976(L) 11,976
Loss on equity transaction of Hospitality Properties... (711) -- (711)
------------- ------------- -----------
Income before gain on sale of properties............... 77,036 (14,248) 62,788
Gain on sale of properties............................. 8,307 -- 8,307
------------- ------------- -----------
Net income............................................. $85,343 $(14,248) $71,095
------------- ------------- -----------
------------- ------------- -----------
Weighted average shares outstanding.................... 131,778 -- 131,778
------------- ------------- -----------
------------- ------------- -----------
Basic and diluted earnings per share:
Income before gain on sale of properties........... $0.58 $0.48
------------- -----------
------------- -----------
Net income......................................... $0.65 $0.54
------------- -----------
------------- -----------
</TABLE>
See accompanying notes.
F-4
<PAGE>
HRPT PROPERTIES TRUST
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL(A) ADJUSTMENTS PRO FORMA
------------- ------------- -----------
<S> <C> <C> <C>
Revenues:
Rental income...................................... $340,851 $(82,542) $258,309
Interest and other income.......................... 15,703 (5,764) 9,939
------------- ------------- -----------
Total revenues............................... 356,554 (88,306)(H) 268,248
------------- ------------- -----------
Expenses:
Operating expenses................................. 77,536 -- 77,536
Interest........................................... 64,326 (12,400)(I) 51,926
Depreciation and amortization...................... 60,764 (18,297)(J) 42,467
General and administrative......................... 17,172 (4,480)(K) 12,692
------------- ------------- -----------
Total expenses............................... 219,798 (35,177) 184,621
------------- ------------- -----------
Income before equity in earnings of Hospitality
Properties and Senior Housing, and extraordinary
item............................................... 136,756 (53,129) 83,627
Equity in earnings of Hospitality Properties........... 7,687 -- 7,687
Equity in earnings of Senior Housing................... -- 25,484(L) 25,484
Gain on equity transaction of Hospitality Properties... 2,213 -- 2,213
------------- ------------- -----------
Income before extraordinary item....................... 146,656 (27,645) 119,011
Extraordinary item--early extinguishment of debt....... (2,140) -- (2,140)
------------- ------------- -----------
Net income............................................. $144,516 $(27,645) $116,871
------------- ------------- -----------
------------- ------------- -----------
Weighted average shares outstanding.................... 119,867 -- 119,867
------------- ------------- -----------
------------- ------------- -----------
Basic and diluted earnings per share:
Income before extraordinary item................... $1.22 $0.99
------------- -----------
------------- -----------
Net income......................................... $1.21 $0.98
------------- -----------
------------- -----------
</TABLE>
See accompanying notes.
F-5
<PAGE>
HRPT PROPERTIES TRUST
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
A. Represents the historical consolidated balance sheet and consolidated
statements of income of HRPT Properties Trust ("HRPT") as of the date and
for the periods presented.
CONSOLIDATED BALANCE SHEET ADJUSTMENTS
B. Represents elimination of HRPT's historical carrying value of 93 senior
housing investments and related assets and liabilities transferred by HRPT
to Senior Housing Properties Trust ("Senior Housing").
C. Represents adjustments to reflect HRPT's investment in Senior Housing after
the spin-off and related transactions using the equity method of accounting,
calculated as follows:
<TABLE>
<CAPTION>
Net historical carrying value of 93 senior housing investments and
related assets and liabilities transferred to Senior Housing (see note
B)...................................................................... $630,934
<S> <C>
Estimated cash transferred by HRPT to Senior Housing (see note D)........ 16,425
Cash payment by Senior Housing of the formation debt to HRPT (see note
E)...................................................................... (200,000)
Distribution by HRPT of Senior Housing shares to HRPT shareholders (see
note F)................................................................. (226,811)
---------
HRPT's equity investment in Senior Housing............................... $220,548
---------
---------
</TABLE>
D. Represents the net cash effect of the spin-off and related transactions,
calculated as follows:
<TABLE>
<CAPTION>
Senior Housing cash at June 30, 1999..................................... $(168)
<S> <C>
Estimated cash transferred to Senior Housing from HRPT................... (16,425)
Estimated transaction costs paid by HRPT (not reimbursed by Senior
Housing)................................................................ (10,000)
Cash received by HRPT from Senior Housing to pay the formation debt (see
note E)................................................................. 200,000
Cash used by HRPT to prepay HRPT senior debt outstanding (see note E).... (200,000)
---------
$(26,593)
---------
---------
</TABLE>
E. After completion of the spin-off, Senior Housing will borrow $200,000 under
its bank credit facility to pay the Senior Housing formation debt due HRPT
of $200,000. This adjustment reflects the application of these proceeds by
HRPT to prepay HRPT senior debt outstanding.
F. Represents the distribution of Senior Housing shares to HRPT shareholders on
the basis of one Senior Housing share for each 10 HRPT shares outstanding,
calculated as follows:
<TABLE>
<CAPTION>
Net historical carrying value of 93 senior housing investments and
related assets and liabilities transferred to Senior Housing (see note
B)...................................................................... $630,934
<S> <C>
Estimated cash transferred to Senior Housing............................. 16,425
Cash received by HRPT from Senior Housing to pay the formation debt (see
note E)................................................................. (200,000)
---------
447,359
Multiplied by:
Senior Housing shares distributed to HRPT shareholders (13.19 million)
as a percentage of total Senior Housing shares outstanding (26
million)................................................................ X 50.7%
---------
$226,811
---------
---------
</TABLE>
F-6
<PAGE>
HRPT PROPERTIES TRUST
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
G. Represents estimated transaction costs of $10 million to be expensed by HRPT.
These expenses are not reflected in the pro forma statements of income
because they are not recurring.
CONSOLIDATED STATEMENTS OF INCOME ADJUSTMENTS
H. Represents historical rent, interest and other income realized by HRPT from
properties transferred to Senior Housing.
I. Represents the reduction in HRPT's interest expense, calculated as follows:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
1999 1998
-------------- ------------
<S> <C> <C>
HRPT's senior notes prepaid (see note E)...................... $200,000 $200,000
Multiplied by:
Historical interest rate of debt to be prepaid............... X 5.6% X 6.2%
-------------- ------------
Reduction in HRPT's interest expense.......................... $5,600 $12,400
-------------- ------------
-------------- ------------
</TABLE>
J. Represents the historical depreciation expense related to the properties
transferred to Senior Housing.
K. Represents the amount of HRPT's general and administrative expense allocated
to the properties transferred to Senior Housing. This allocation is based
upon HRPT's advisory fee formula and other costs allocated pro rata to the
historical cost of the transferred assets compared to HRPT's historical cost
of all its properties. Management believes that this method of allocating
general and administrative expenses is reasonable.
L. Represents HRPT's share of the pro forma consolidated net income of Senior
Housing (presented on pages F-10 and F-11), calculated as follows:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
1999 1998
-------------- ------------
<S> <C> <C>
Senior Housing pro forma net income........................... $24,293 $51,691
Multiplied by:
HRPT's ownership of Senior Housing shares (12.81 million) as
a percentage of total Senior Housing shares outstanding (26
million)..................................................... X 49.3% X 49.3%
-------------- ------------
Equity in earnings of Senior Housing.......................... $11,976 $25,484
-------------- ------------
-------------- ------------
</TABLE>
F-7
<PAGE>
SENIOR HOUSING PROPERTIES TRUST
INTRODUCTION TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated balance sheet at June 30,
1999, is intended to present the financial position of Senior Housing Properties
Trust as if the transactions described in the notes had been completed as of
June 30, 1999. The following unaudited pro forma consolidated statements of
income are intended to present the results of operations of Senior Housing as if
these transactions had been completed as of January 1, 1998.
These unaudited pro forma consolidated financial statements are not
necessarily indicative of the expected consolidated financial position or
results of operations of Senior Housing for any future period. Differences could
result from many factors, including future changes in Senior Housing's
investments, changes in interest rates and changes in the capital structure of
Senior Housing. This pro forma information should be read in conjunction with
the audited Consolidated Financial Statements of Senior Housing Properties Trust
and notes thereto appearing on pages F-14 through F-22 and with "Senior Housing
Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this prospectus.
F-8
<PAGE>
SENIOR HOUSING PROPERTIES TRUST
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL(A) ADJUSTMENTS PRO FORMA
------------- ------------- -----------
<S> <C> <C> <C>
ASSETS
Real estate properties:
Land................................................. $69,673 $-- $69,673
Buildings and improvements........................... 662,720 -- 662,720
------------- ------------- -----------
732,393 -- 732,393
Accumulated depreciation............................. (105,823) -- (105,823)
------------- ------------- -----------
626,570 -- 626,570
Real estate mortgages.................................. 37,638 -- 37,638
Cash and cash equivalents.............................. 168 16,425(B) 16,593
Other assets........................................... 9,918 -- 9,918
------------- ------------- -----------
$674,294 $16,425 $690,719
------------- ------------- -----------
------------- ------------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank credit facility................................... $-- $200,000(C) $200,000
Deferred rents and other deferred revenues............. 27,369 -- 27,369
Security deposits...................................... 15,235 -- 15,235
Other liabilities...................................... 756 -- 756
Shareholders' equity:
Common shares of beneficial interest; $0.01 par value;
50,000,000 shares authorized; 26,000,000 pro forma
shares issued and outstanding........................ -- 260(D) 260
Additional paid-in capital............................. -- 447,099(E) 447,099
Ownership interest of HRPT Properties Trust............ 630,934 (630,934)(F) --
------------- ------------- -----------
Total shareholders' equity....................... 630,934 (183,575) 447,359
------------- ------------- -----------
$674,294 $16,425 $690,719
------------- ------------- -----------
------------- ------------- -----------
</TABLE>
See accompanying notes.
F-9
<PAGE>
SENIOR HOUSING PROPERTIES TRUST
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL(A) ADJUSTMENTS PRO FORMA
------------- ------------- -----------
<S> <C> <C> <C>
Revenues:
Rental income...................................... $42,409 $-- $42,409
Interest and other income.......................... 2,881 -- 2,881
------------- ------------- -----------
Total revenues............................... 45,290 -- 45,290
------------- ------------- -----------
Expenses:
Interest........................................... 9,992 (2,461)(G) 7,531
Depreciation....................................... 11,207 -- 11,207
General and administrative......................... 2,259 -- 2,259
------------- ------------- -----------
Total expenses............................... 23,458 (2,461) 20,997
------------- ------------- -----------
Net income............................................. $21,832 $2,461 $24,293
------------- ------------- -----------
------------- ------------- -----------
Weighted average shares outstanding.................... 26,000(H) 26,000
------------- -----------
------------- -----------
Earnings per share..................................... $0.93
-----------
-----------
</TABLE>
See accompanying notes.
F-10
<PAGE>
SENIOR HOUSING PROPERTIES TRUST
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL(A) ADJUSTMENTS PRO FORMA
------------- ------------- -----------
<S> <C> <C> <C>
Revenues:
Rental income...................................... $82,542 $1,461 $84,003
Interest and other income.......................... 5,764 -- 5,764
------------- ------------- -----------
Total revenues............................... 88,306 1,461(I) 89,767
------------- ------------- -----------
Expenses:
Interest........................................... 19,293 (4,230)(G) 15,063
Depreciation....................................... 18,297 193(I) 18,490
General and administrative......................... 4,480 43(I) 4,523
------------- ------------- -----------
Total expenses............................... 42,070 (3,994) 38,076
------------- ------------- -----------
Net income............................................. $46,236 $5,455 $51,691
------------- ------------- -----------
------------- ------------- -----------
Weighted average shares outstanding.................... 26,000(H) 26,000
------------- -----------
------------- -----------
Earnings per share..................................... $1.99
-----------
-----------
</TABLE>
See accompanying notes.
F-11
<PAGE>
SENIOR HOUSING PROPERTIES TRUST
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
A. Represents the historical consolidated balance sheet and consolidated
statements of income of Senior Housing Properties Trust ("Senior Housing")
as presented on pages F-15 and F-16.
CONSOLIDATED BALANCE SHEET ADJUSTMENTS
B. Represents the net cash effect of the spin-off and related transactions on
Senior Housing, calculated as follows:
<TABLE>
<CAPTION>
Estimated cash transferred by HRPT to Senior Housing..................... $16,425
<S> <C>
Borrowing under Senior Housing's bank credit facility (see note C)....... 200,000
Payment by Senior Housing of the formation debt due to HRPT.............. (200,000)
---------
$16,425
---------
---------
</TABLE>
C. Represents the borrowing of $200,000 under Senior Housing's bank credit
facility. The proceeds from this borrowing will be used to pay Senior
Housing's formation debt due to HRPT.
D. Represents the $0.01 per share par value of the 26 million Senior Housing
shares issued and outstanding as of the spin-off date.
E. Represents the adjustments from the spin-off and related transactions to
Senior Housing's equity, calculated as follows:
<TABLE>
<CAPTION>
Ownership interest of HRPT Properties Trust.............................. $630,934
<S> <C>
Payment by Senior Housing of the formation debt due to HRPT (see note
C)...................................................................... (200,000)
Estimated cash transferred to Senior Housing from HRPT (see note B)...... 16,425
---------
Senior Housing equity (includes $220,548 of HRPT's equity investment and
$226,811 distributed in the spin-off)................................... 447,359
Par value of Senior Housing shares outstanding (see note D).............. (260)
---------
Additional paid-in capital............................................... $447,099
---------
---------
</TABLE>
F. Represents reclassification of balance of Ownership Interest of HRPT related
to the spin-off, calculated as follows:
<TABLE>
<CAPTION>
Formation debt due HRPT paid by Senior Housing (see note C).............. $(200,000)
<S> <C>
Estimated cash transferred to Senior Housing from HRPT................... 16,425
Par value of Senior Housing's 26 million shares outstanding (see note
D)...................................................................... (260)
Senior Housing's additional paid-in capital (see note E)................. (447,099)
---------
$(630,934)
---------
---------
</TABLE>
F-12
<PAGE>
SENIOR HOUSING PROPERTIES TRUST
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF INCOME ADJUSTMENTS
G. Represents adjustments to interest expense from the spin-off and related
transactions, calculated as follows:
<TABLE>
<CAPTION>
YEAR ENDED
SIX MONTHS ENDED DECEMBER 31,
JUNE 30, 1999 1998
----------------- ------------
<S> <C> <C>
HRPT interest expense allocated to the Senior Housing
properties................................................ $(9,992) $(19,293)
Interest expense on Senior Housing's $200,000 borrowing
under its bank credit facility (see note C)............... 7,531 15,063
----------------- ------------
$(2,461) $(4,230)
----------------- ------------
----------------- ------------
</TABLE>
The HRPT interest expense allocation to Senior Housing is the historical
amount of HRPT's total interest expense times a fraction, the numerator of
which is the historical cost of HRPT's senior housing properties and the
denominator of which is the historical cost of all HRPT's properties, each
calculated on an average basis for the periods presented. Management
believes this method of allocating interest expense is reasonable.
The interest rate payable by Senior Housing is LIBOR plus a premium, or 7.25%
as of June 30, 1999. Interest expense also includes a fee on the unused
portion of the bank credit facility of 0.375%, or $281 for the six months
ended June 30, 1999, and $563 for the year ended December 31, 1998. The
effect of a 1/8% change in interest rates, on pro forma borrowings will
change interest expense by $250.
H. As of the date of the spin-off, Senior Housing will have 26 million shares
issued and outstanding.
I. Represents rental income, depreciation and general and administrative
expenses arising from the acquisition of five of the Senior Housing
properties in September 1998, as if the properties had been acquired on
January 1, 1998.
F-13
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholder of Senior Housing Properties Trust:
We have audited the accompanying consolidated balance sheets of Senior
Housing Properties Trust as of December 31, 1998 and 1997, and the related
consolidated statements of income, ownership interest of HRPT Properties Trust
and cash flows for each of the three years in the period ended December 31,
1998. Our audits also included the financial statement schedules listed in the
Index at F-1. These financial statements and schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Senior Housing
Properties Trust at December 31, 1998 and 1997, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
July 1, 1999, except for Note 1,
as to which the date is September 1, 1999
F-14
<PAGE>
SENIOR HOUSING PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF JUNE
AS OF DECEMBER 31, 30,
-------------------- ------------
1997 1998 1999
--------- --------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Real estate properties:
Land.................................................... $68,265 $69,673 $69,673
Buildings and improvements.............................. 652,722 662,720 662,720
--------- --------- ------------
720,987 732,393 732,393
Accumulated depreciation................................ (74,213) (94,616) (105,823)
--------- --------- ------------
646,774 637,777 626,570
Real estate mortgages..................................... 38,134 37,826 37,638
Cash and cash equivalents................................. -- 139 168
Other assets.............................................. 7,678 10,554 9,918
--------- --------- ------------
$692,586 $686,296 $674,294
--------- --------- ------------
--------- --------- ------------
LIABILITIES AND OWNERSHIP INTEREST
Deferred rents and other deferred revenues................ $29,721 $28,266 $27,369
Security deposits......................................... 15,235 15,235 15,235
Other liabilities......................................... 692 726 756
Ownership interest of HRPT Properties Trust............... 646,938 642,069 630,934
--------- --------- ------------
$692,586 $686,296 $674,294
--------- --------- ------------
--------- --------- ------------
</TABLE>
See accompanying notes.
F-15
<PAGE>
SENIOR HOUSING PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
------------------------------- ------------------------
1996 1997 1998 1998 1999
--------- --------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income........................ $ 66,202 $ 78,463 $ 82,542 $ 40,324 $ 42,409
Interest and other income............ 4,240 5,708 5,764 2,886 2,881
--------- --------- --------- ----------- -----------
Total revenues................. 70,442 84,171 88,306 43,210 45,290
--------- --------- --------- ----------- -----------
Expenses:
Interest............................. 14,719 16,958 19,293 9,263 9,992
Depreciation......................... 15,383 17,826 18,297 9,102 11,207
General and administrative........... 3,899 4,664 4,480 2,174 2,259
--------- --------- --------- ----------- -----------
Total expenses................. 34,001 39,448 42,070 20,539 23,458
--------- --------- --------- ----------- -----------
Net income............................... $ 36,441 $ 44,723 $ 46,236 $ 22,671 $ 21,832
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
</TABLE>
See accompanying notes.
F-16
<PAGE>
SENIOR HOUSING PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF OWNERSHIP INTEREST OF
HRPT PROPERTIES TRUST
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Balance at December 31, 1995...................................................... $ 573,793
Net income...................................................................... 36,441
Owner contribution, net......................................................... 54,258
---------
Balance at December 31, 1996...................................................... 664,492
Net income...................................................................... 44,723
Owner distribution, net......................................................... (62,277)
---------
Balance at December 31, 1997...................................................... 646,938
Net income...................................................................... 46,236
Owner distribution, net......................................................... (51,105)
---------
Balance at December 31, 1998...................................................... 642,069
Net income (unaudited).......................................................... 21,832
Owner distribution, net (unaudited)............................................. (32,967)
---------
Balance at June 30, 1999 (unaudited).............................................. $ 630,934
---------
---------
</TABLE>
See accompanying notes.
F-17
<PAGE>
SENIOR HOUSING PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
------------------------------- ----------------------
1996 1997 1998 1998 1999
--------- --------- --------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net income................................ $36,441 $44,723 $46,236 $22,671 $21,832
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation............................ 15,383 17,826 18,297 9,102 11,207
Changes in assets and liabilities:
Other assets.......................... (1,317) (2,394) (2,876) 667 636
Deferred rents and other deferred
revenues............................ 723 22,087 (1,455) (496) (897)
Security deposits..................... 34 8,815 -- -- --
Other liabilities..................... 44 37 34 31 30
--------- --------- --------- ---------- ----------
Cash provided by operating activities... 51,308 91,094 60,236 31,975 32,808
--------- --------- --------- ---------- ----------
Cash Flows From Investing Activities:
Real estate acquisitions and
improvements............................ (105,094) (19,799) (2) -- --
Investments in mortgage loans............. (700) (124) -- -- --
Repayments of mortgage loans.............. 228 260 308 135 188
--------- --------- --------- ---------- ----------
Cash (used for) provided by investing
activities............................ (105,566) (19,663) 306 135 188
--------- --------- --------- ---------- ----------
Cash Flows From Financing Activities:
Owner's net contribution (distribution)... 54,258 (71,431) (60,403) (32,110) (32,967)
--------- --------- --------- ---------- ----------
Cash provided by (used for) financing
activities............................ 54,258 (71,431) (60,403) (32,110) (32,967)
--------- --------- --------- ---------- ----------
Increase in cash and cash equivalents....... -- -- 139 -- 29
Cash and cash equivalents at beginning of
period.................................... -- -- -- -- 139
--------- --------- --------- ---------- ----------
Cash and cash equivalents at end of
period.................................... $-- $-- $139 $-- $168
--------- --------- --------- ---------- ----------
--------- --------- --------- ---------- ----------
Non-Cash Investing Activities:
Real estate acquisitions.................. $-- $(9,154) $(9,298) $-- $--
Non-Cash Financing Activities:
Owner's contributions..................... -- 9,154 9,298 -- --
</TABLE>
See accompanying notes.
F-18
<PAGE>
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
The consolidated financial statements of Senior Housing Properties Trust
include the accounts of 81 properties and 12 mortgage receivables (the
"Properties") and of Senior Housing Properties Trust ("Senior Housing Trust").
The Properties and Senior Housing Trust are collectively referred to as "Senior
Housing". These consolidated financial statements are presented as if Senior
Housing was a legal entity separate from HRPT Properties Trust ("HRPT");
however, no such entity exists.
HRPT organized Senior Housing Trust, a 100% owned subsidiary, as a Maryland
real estate investment trust on December 16, 1998. At the time of its
organization, Senior Housing Trust issued 26.4 million shares to HRPT for
consideration of $263,748. Subsequently, 0.4 million shares were cancelled and
26 million shares are currently issued and outstanding.
As of the dates and for the periods presented, the Properties were owned by
HRPT. On or about June 30, 1999, the Properties were transferred by HRPT to
several of its 100% owned subsidiaries. Effective as of September 1, 1999, HRPT
transferred 100% ownership of the several subsidiaries which own the Properties
to Senior Housing Trust. HRPT is in the process of distributing 13.2 million of
its 26 million Senior Housing Trust shares to HRPT's shareholders (the
"Spin-Off"). Senior Housing Trust has filed a registration statement on Form
S-11 with the Securities and Exchange Commission to effect the Spin-Off.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. All of Senior Housing is owned by HRPT, and HRPT's
historical basis has been presented. Substantially all of the rental income and
mortgage interest income received by HRPT from the tenants and mortgagors of
Senior Housing is deposited in and commingled with HRPT's general funds. Capital
investments and other cash required by Senior Housing are provided by HRPT.
Interest expense is allocated based on HRPT's historical interest expense as a
percentage of HRPT's average historical costs of real estate investments.
General and administrative costs of HRPT are allocated to Senior Housing based
on HRPT's investment advisory agreement formula and other costs are allocated
based on historical costs as a percentage of HRPT's average historical costs of
real estate investments. In the opinion of management, the methods for
allocating interest and general and administrative expenses are reasonable. It
is not practicable to estimate additional costs that would have been incurred by
Senior Housing as a separate entity.
REAL ESTATE PROPERTIES AND MORTGAGE INVESTMENTS. Depreciation on real
estate properties is expensed on a straight-line basis over estimated useful
lives of up to 40 years for buildings and improvements and up to 12 years for
personal property. Impairment losses on properties are recognized where
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by the properties are less than the carrying amount of concerned
properties. The determination of net realizable value includes consideration of
many factors including income to be earned from the property, holding costs
(exclusive of interest), estimated selling prices, and prevailing economic and
market conditions. Based upon these factors, the accompanying financial
statements include no impairment losses.
REVENUE RECOGNITION. Rental income from operating leases is recognized on a
straight-line basis over the life of the lease agreements. Interest income is
recognized as earned over the terms of the real estate mortgages. Percentage
rent and supplemental mortgage interest income is recognized as
F-19
<PAGE>
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
earned. For interim periods, percentage rent and supplemental mortgage interest
income are accrued prior to achievement of specified targets when the
achievement of the targets is probable. For the years ended December 31, 1996,
1997 and 1998, percentage rent and supplemental mortgage interest income
aggregated $2.6 million, $2.9 million and $2.9 million, respectively. For the
six months ended June 30, 1998 and 1999, percentage rent and supplemental
mortgage interest income aggregated $1.4 million (unaudited) and $2.0 million
(unaudited), respectively.
USE OF ESTIMATES. Preparation of these financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that may affect the amounts reported in these
financial statements and related notes. The actual results could differ from
these estimates.
INCOME TAXES. Throughout the periods presented herein, Senior Housing's
operations were included in HRPT's income tax returns. HRPT is a real estate
investment trust under the Internal Revenue Code of 1986, as amended.
Accordingly, it is not subject to Federal income taxes provided it distributes
its taxable income and meets other requirements for qualifying as a real estate
investment trust. However, it is subject to state and local taxes on its income
and property. Upon completion of the Spin-Off, Senior Housing intends to qualify
as a real estate investment trust under the Internal Revenue Code of 1986, as
amended.
NOTE 3. REAL ESTATE PROPERTIES
The owned Properties are leased on triple net bases, pursuant to
noncancellable, fixed term operating leases expiring between 2001 to 2019.
Generally, the leases to a single tenant or group of affiliated tenants are
cross-defaulted and cross-guaranteed, and provide for all or none tenant renewal
options at existing rates followed by several market rate renewal terms. These
triple net leases generally require the lessee to pay all property operating
costs.
The future minimum lease payments to be received during the current terms of
the leases, as of December 31, 1998, are approximately $79.4 million in 1999,
$80.1 million in 2000, $80.1 million in 2001, $81.7 million in 2002, $81.9
million in 2003 and $686.6 million thereafter.
NOTE 4. REAL ESTATE MORTGAGES
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1998
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Mortgage notes receivable due December 2016................. $8,800 $8,769
Mortgage note receivable due January 2013................... 883 883
Mortgage note receivable due December 2010.................. 19,184 18,992
Mortgage notes receivable due January 2006.................. 9,267 9,182
---------- ----------
$38,134 $37,826
---------- ----------
---------- ----------
</TABLE>
At December 31, 1998, the interest rates on these notes receivable ranged
from 10.1% to 13.75% per annum.
F-20
<PAGE>
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. COMMITMENTS AND CONTINGENCIES
At December 31, 1998 and June 30, 1999, HRPT had total commitments
aggregating $3.7 million to fund or finance improvements to the Properties. Upon
completion of the Spin-Off, Senior Housing Trust will assume these commitments.
NOTE 6. TRANSACTIONS WITH AFFILIATES
HRPT has entered an investment advisory agreement with Reit Management &
Research, Inc. ("Reit Management"). Reit Management provides investment,
management and administrative services to HRPT, and will provide similar
services to Senior Housing Trust. Reit Management is owned by Gerard M. Martin
and Barry M. Portnoy, who also serve as managing trustees of HRPT and will serve
as managing trustees of Senior Housing Trust. Reit Management is paid by HRPT
based on a formula amount of gross invested assets of HRPT. Investment advisory
fees paid by HRPT to Reit Management during 1996, 1997 and 1998 with respect to
Senior Housing's invested assets were $3.2 million, $3.7 million and $3.8
million, respectively. Reit Management is also entitled to an incentive fee paid
in restricted shares based on a formula. Concurrent with the Spin-Off, Senior
Housing Trust will enter a separate agreement with Reit Management on
substantially similar terms.
NOTE 7. FAIR VALUE OF FINANCIAL INSTRUMENTS AND COMMITMENTS
The financial statements presented include mortgage investments, rents
receivable, other liabilities and security deposits. Except as follows, the fair
values of the financial instruments and commitments to fund improvements were
not materially different from their carrying values at December 31, 1997 and
1998:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
------------------------ ------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate mortgages................................... $ 38,134 $ 40,466 $ 37,826 $ 40,525
Commitments to fund improvements........................ -- 6,207 -- 3,707
</TABLE>
The fair values of the real estate mortgages are based on estimates using
discounted cash flow analyses and currently prevailing market rates. The fair
value of the commitments represent the actual amounts committed.
F-21
<PAGE>
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. CONCENTRATION OF CREDIT RISK
The assets included in these financial statements are primarily income
producing senior housing real estate located throughout the United States. The
following is a summary of the significant lessees and mortgagees as of and for
the years ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1997
-------------------------- --------------------------
INVESTMENT % OF TOTAL REVENUE % OF TOTAL
----------- ------------- ----------- -------------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Marriott International, Inc......... $ 325,521 43% $ 30,365 36%
Integrated Health Services, Inc..... 218,201 29 24,962 30
Brookdale Living Communities,
Inc............................... 101,850 13 10,514 13
Mariner Post-Acute Network, Inc..... 75,080 10 12,441 15
All others.......................... 38,469 5 4,930 6
----------- ----- ----------- -----
$ 759,121 100% $ 83,212 100%
----------- ----- ----------- -----
----------- ----- ----------- -----
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1998
-------------------------- --------------------------
INVESTMENT % OF TOTAL REVENUE % OF TOTAL
----------- ------------- ----------- -------------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Marriott International, Inc......... $ 325,521 42% $ 30,270 35%
Integrated Health Services, Inc..... 217,893 29 26,841 31
Brookdale Living Communities,
Inc............................... 101,850 13 11,074 13
Mariner Post-Acute Network, Inc..... 86,486 11 13,620 15
All others.......................... 38,469 5 4,952 6
----------- ----- ----------- -----
$ 770,219 100% $ 86,757 100%
----------- ----- ----------- -----
----------- ----- ----------- -----
</TABLE>
F-22
<PAGE>
SENIOR HOUSING PROPERTIES TRUST
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST TO
GROSS AMOUNT CARRIED AT
COMPANY COSTS DECEMBER 31, 1998
------------------ CAPITALIZED -----------------------------
BUILDINGS SUBSEQUENT BUILDINGS
AND TO AND
LOCATION STATE LAND EQUIPMENT ACQUISITION LAND EQUIPMENT TOTAL(1)
- ----------------------------------- ----- ------- --------- ---------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Mesa AZ $1,480 $13,320 $-- $1,480 $13,320 $14,800
Phoenix AZ 655 2,525 5 655 2,530 3,185
Scottsdale AZ 979 8,807 140 990 8,936 9,926
Sun City AZ 1,174 10,569 173 1,189 10,727 11,916
Yuma AZ 103 604 1 103 605 708
Yuma AZ 223 2,100 3 223 2,103 2,326
Fresno CA 738 2,577 188 738 2,765 3,503
Laguna Hills CA 3,132 28,184 475 3,172 28,619 31,791
Lancaster CA 601 1,859 1,028 601 2,887 3,488
Newport Beach CA 1,176 1,729 1,223 1,176 2,952 4,128
Stockton CA 382 2,750 4 382 2,754 3,136
Tarzana CA 1,277 977 806 1,278 1,782 3,060
Thousand Oaks CA 622 2,522 310 622 2,832 3,454
Van Nuys CA 716 378 225 718 601 1,319
Canon City CO 292 6,228 -- 292 6,228 6,520
Colorado Springs CO 245 5,236 -- 245 5,236 5,481
Delta CO 167 3,570 -- 167 3,570 3,737
Grand Junction CO 204 3,875 329 204 4,204 4,408
Grand Junction CO 6 2,583 1,316 136 3,769 3,905
Lakewood CO 232 3,766 723 232 4,489 4,721
Littleton CO 185 5,043 348 185 5,391 5,576
Cheshire CT 520 7,380 1,559 520 8,939 9,459
Killingly CT 240 5,360 460 240 5,820 6,060
New Haven CT 1,681 14,953 1,236 1,681 16,189 17,870
Waterbury CT 1,003 9,023 915 1,003 9,938 10,941
Waterford CT 86 4,714 453 86 5,167 5,253
Willimantic CT 134 3,566 479 166 4,013 4,179
Boca Raton FL 4,404 39,633 799 4,474 40,362 44,836
Deerfield Beach FL 1,664 14,972 299 1,690 15,245 16,935
Fort Myers FL 2,349 21,137 419 2,385 21,520 23,905
Palm Harbor FL 3,327 29,945 591 3,379 30,484 33,863
Port St. Lucie FL 1,223 11,009 219 1,242 11,209 12,451
College Park GA 300 2,702 23 300 2,725 3,025
Dublin GA 442 3,982 80 442 4,062 4,504
Glenwood GA 174 1,564 4 174 1,568 1,742
Marietta GA 300 2,702 35 300 2,737 3,037
Clarinda IA 77 1,453 293 77 1,746 1,823
Council Bluffs IA 225 893 99 225 992 1,217
Mediapolis IA 94 1,776 251 94 2,027 2,121
Pacific Junction IA 32 306 5 32 311 343
Winterset IA 111 2,099 493 111 2,592 2,703
Arlington Heights IL 3,621 32,587 534 3,665 33,077 36,742
Chicago IL 6,200 55,800 -- 6,200 55,800 62,000
Ellinwood KS 130 1,137 53 130 1,190 1,320
Boston MA 2,164 20,836 1,978 2,164 22,814 24,978
Hyannis MA 829 7,463 -- 829 7,463 8,292
Middleboro MA 1,771 15,752 -- 1,771 15,752 17,523
Worcester MA 1,829 15,071 1,869 1,829 16,940 18,769
Silver Spring MD 3,229 29,065 786 3,301 29,779 33,080
St. Joseph MO 111 1,027 195 111 1,222 1,333
Tarkio MO 102 1,938 415 102 2,353 2,455
Concord NC 90 2,126 -- 90 2,126 2,216
<CAPTION>
ORIGINAL
ACCUMULATED DATE CONSTRUCTION
LOCATION DEPRECIATION(2) ACQUIRED DATE
- ----------------------------------- --------------- -------- ------------
<S> <C> <C> <C>
Mesa $680 12/27/96 1985
Phoenix 471 6/30/92 1963
Scottsdale 1,033 5/16/94 1990
Sun City 1,218 6/17/94 1990
Yuma 112 6/30/92 1984
Yuma 386 6/30/92 1984
Fresno 646 12/28/90 1963
Laguna Hills 3,072 9/9/94 1975
Lancaster 610 12/28/90 1969
Newport Beach 592 12/28/90 1962
Stockton 507 6/30/92 1968
Tarzana 403 12/28/90 1969
Thousand Oaks 639 12/28/90 1965
Van Nuys 154 12/28/90 1969
Canon City 201 9/26/97 1970
Colorado Springs 169 9/26/97 1972
Delta 115 9/26/97 1963
Grand Junction 650 12/30/93 1968
Grand Junction 513 12/30/93 1978
Lakewood 970 12/28/90 1972
Littleton 1,224 12/28/90 1965
Cheshire 2,626 11/1/87 1963
Killingly 1,970 5/15/87 1972
New Haven 3,423 5/11/92 1971
Waterbury 2,097 5/11/92 1974
Waterford 1,814 5/15/87 1965
Willimantic 1,307 5/15/87 1965
Boca Raton 4,664 5/20/94 1994
Deerfield Beach 1,762 5/16/94 1986
Fort Myers 2,354 8/16/94 1984
Palm Harbor 3,523 5/16/94 1992
Port St. Lucie 1,295 5/20/94 1993
College Park 220 5/15/96 1985
Dublin 312 5/15/96 1968
Glenwood 116 5/15/96 1972
Marietta 211 5/15/96 1967
Clarinda 254 12/30/93 1968
Council Bluffs 164 4/1/95 1963
Mediapolis 303 12/30/93 1973
Pacific Junction 32 4/1/95 1978
Winterset 375 12/30/93 1973
Arlington Heights 3,550 9/9/94 1986
Chicago 2,848 12/27/96 1990
Ellinwood 126 4/1/95 1972
Boston 6,788 5/1/89 1968
Hyannis 1,677 5/11/92 1972
Middleboro 3,501 5/1/88 1970
Worcester 5,522 5/1/88 1970
Silver Spring 3,319 7/25/94 1992
St. Joseph 154 6/4/93 1976
Tarkio 336 12/30/93 1970
Concord 483 9/10/98 1990
</TABLE>
S-1
<PAGE>
SENIOR HOUSING PROPERTIES TRUST
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST TO
GROSS AMOUNT CARRIED AT
COMPANY COSTS DECEMBER 31, 1998
------------------ CAPITALIZED -----------------------------
BUILDINGS SUBSEQUENT BUILDINGS
AND TO AND
LOCATION STATE LAND EQUIPMENT ACQUISITION LAND EQUIPMENT TOTAL(1)
- ----------------------------------- ----- ------- --------- ---------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Wilson NC $27 $2,375 $-- $27 $2,375 $2,402
Winston-Salem NC 75 1,696 -- 75 1,696 1,771
Grand Island NE 119 1,446 369 119 1,815 1,934
Burlington NJ 1,300 11,700 7 1,300 11,707 13,007
Brighton NY 1,070 9,630 -- 1,070 9,630 10,700
Grove City OH 332 3,081 32 332 3,113 3,445
Canonsburg PA 1,499 13,493 606 1,518 14,080 15,598
Huron SD 45 968 1 45 969 1,014
Huron SD 144 3,108 4 144 3,112 3,256
Sioux Falls SD 253 3,062 4 253 3,066 3,319
Bellaire TX 1,223 11,010 177 1,238 11,172 12,410
Arlington VA 1,859 16,734 296 1,885 17,004 18,889
Charlottesville VA 2,936 26,422 471 2,976 26,853 29,829
Virginia Beach VA 881 7,926 141 893 8,055 8,948
Seattle WA 256 4,869 67 256 4,936 5,192
Spokane WA 1,035 13,315 -- 1,035 13,315 14,350
Brookfield WI 834 3,849 8,014 834 11,863 12,697
Clintonville WI 14 1,695 38 14 1,733 1,747
Clintonville WI 49 1,625 87 30 1,731 1,761
Madison WI 144 1,633 110 144 1,743 1,887
Milwaukee WI 232 1,368 1 232 1,369 1,601
Milwaukee WI 277 3,883 -- 277 3,883 4,160
Pewaukee WI 984 2,432 -- 984 2,432 3,416
Waukesha WI 68 3,452 2,232 68 5,684 5,752
Laramie WY 191 3,632 199 191 3,831 4,022
Worland WY 132 2,503 588 132 3,091 3,223
------- --------- ---------- ------- --------- --------
Total $69,030 $628,080 $35,283 $69,673 $662,720 $732,393
------- --------- ---------- ------- --------- --------
------- --------- ---------- ------- --------- --------
<CAPTION>
ORIGINAL
ACCUMULATED DATE CONSTRUCTION
LOCATION DEPRECIATION(2) ACQUIRED DATE
- ----------------------------------- --------------- -------- ------------
<S> <C> <C> <C>
Wilson $538 9/10/98 1990
Winston-Salem 381 9/10/98 1990
Grand Island 150 4/1/95 1963
Burlington 952 9/29/95 1994
Brighton 492 12/27/96 1988
Grove City 430 6/4/93 1965
Canonsburg 3,622 3/1/91 1985
Huron 177 6/30/92 1968
Huron 567 6/30/92 1968
Sioux Falls 561 6/30/92 1960
Bellaire 1,291 5/16/94 1991
Arlington 1,895 7/25/94 1992
Charlottesville 3,048 6/17/94 1991
Virginia Beach 931 5/16/94 1990
Seattle 785 11/1/93 1964
Spokane 581 5/7/97 1993
Brookfield 1,928 12/28/90 1964
Clintonville 389 12/28/90 1960
Clintonville 387 12/28/90 1965
Madison 390 12/28/90 1920
Milwaukee 281 9/10/98 1970
Milwaukee 769 3/27/92 1969
Pewaukee 518 9/10/98 1963
Waukesha 1,036 12/28/90 1958
Laramie 595 12/30/93 1964
Worland 431 12/30/93 1970
---------------
Total $94,616
---------------
---------------
</TABLE>
(1) Aggregate cost for federal income tax purposes is approximately $706,576.
(2) Depreciation is provided for on buildings and improvements for periods
ranging up to 40 years and on equipment up to 12 years.
Reconciliation of the carrying amount of real estate and equipment and
accumulated depreciation at the beginning of the period:
<TABLE>
<CAPTION>
REAL ESTATE AND ACCUMULATED
EQUIPMENT DEPRECIATION
--------------- -------------
<S> <C> <C>
Balance at January 1, 1996 $ 586,940 $ 41,004
Additions 105,094 15,383
--------------- -------------
Balance at December 31, 1996 692,034 56,387
Additions 28,953 17,826
--------------- -------------
Balance at December 31, 1997 720,987 74,213
Additions 11,406 20,403
--------------- -------------
Balance at December 31, 1998 $ 732,393 $ 94,616
--------------- -------------
--------------- -------------
</TABLE>
S-2
<PAGE>
SENIOR HOUSING PROPERTIES TRUST
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
OF LOANS
SUBJECT TO
FINAL FACE VALUE DELINQUENT
INTEREST MATURITY OF CARRYING VALUE PRINCIPAL
LOCATION RATE DATE PERIODIC PAYMENT TERMS MORTGAGE OF MORTGAGE(1) OR INTEREST
- ----------------- ------------ ---------- ----------------------------- ---------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Farmington, MI 11.50% 1/1/06 Principal and interest, $4,200 $4,200 $--
payable monthly in arrears.
$3.8 million due at maturity.
Howell, MI 11.50% 1/1/06 Principal and interest, 4,982 4,982 --
payable monthly in arrears.
$4.5 million due at maturity.
Lyons, NE 10.09% 12/31/16 Principal and interest, 1,563 1,563 --
Milford, NE payable monthly in arrears.
$835 due at maturity.
Ainsworth, NE 10.64% 12/31/16 Principal and interest, 5,154 5,154 --
Ashland, NE payable monthly in arrears.
Blue Hill, NE $2.8 million due at maturity.
Gretna, NE
Sutherland, NE
Waverly, NE
Ainsworth, NE 11.00% 12/31/16 Principal and interest, 2,052 2,052 --
Ashland, NE payable monthly in arrears.
Blue Hill, NE $1.1 million due at maturity.
Edgar, NE
Gretna, NE
Sutherland, NE
Waverly, NE
Lyons, NE
Milford, NE
Slidell, LA 11.00% 12/31/10 Principal and interest, 18,992 18,992 --
payable monthly in arrears.
$13.9 million due at
maturity.
Milwaukee, WI 13.75% 1/31/13 Interest only, payable 883 883 --
monthly in arrears. $883 due
at maturity.
---------- -------------- -----------
$37,826 $37,826 $--
---------- -------------- -----------
---------- -------------- -----------
</TABLE>
(1) Also represents cost for federal income tax purposes.
Reconciliation of the carrying amount of mortgage loans at the beginning of
the period:
<TABLE>
<CAPTION>
<S> <C>
Balance at January 1, 1996 $ 37,798
New mortgage loans 700
Collections of principal (228)
-------
Balance at December 31, 1996 38,270
New mortgage loans 124
Collections of principal (260)
-------
Balance at December 31, 1997 38,134
Collections of principal (308)
-------
Balance at December 31, 1998 $ 37,826
-------
-------
</TABLE>
- ------------------------------
OTHER SCHEDULES
Other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the combined
financial statements, including notes thereto.
S-3
<PAGE>
HRPT OFFICE BUILDINGS AFTER THE SPIN-OFF
[art] [art]
CEDARS SINAI MEDICAL OFFICE WOODMONT OFFICE CENTER
TOWERS AND GARAGES (4 Buildings) Rockville, MD
Los Angeles, CA 187,616 Square Feet, Built 1986
330,715 Square Feet, Built 1979 Significant Tenant: U.S. Government
Major Tenant: Cedars Sinai Hospital -FDA
[art]
PNC BANK BUILDING
Philadelphia, PA
826,220 Square Feet, Built 1983
Significant Tenant: PNC Bank
[art] [art]
109 BROOKLINE AVE. MEMPHIS PLACE
Boston, MA Memphis, TN
287,546 Square Feet, Built 1988 203,089 Square Feet, Built 1985
Significant Tenant: Beth Israel Significant Tenant: Dept. of Justice
Deaconess Hospital
SENIOR HOUSING PROPERTIES AFTER THE SPIN-OFF
[art] [art]
BROOKDALE LIVING COMMUNITIES, INC. MARRIOTT INTERNATIONAL, INC.
THE GABLES OF BRIGHTON VILLA VALENCIA
Brighton, NY Laguna Hills, CA
103 Units, Built 1988 402 Units, Built 1975
[art]
MARRIOTT INTERNATIONAL, INC.
CALUSA HARBOUR
Ft. Meyers, FL
463 Units, Built 1984
[art] [art]
MARINER POST-ACUTE NETWORK, INC. MARRIOTT INTERNATIONAL, INC.
LA MESA CARE CENTER THE COLONNADES
Yuma, AZ Charlottesville, VA
128 Units, Built 1984 315 Units, Built 1991
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
HRPT PROPERTIES TRUST
SPIN-OFF
OF
SENIOR HOUSING PROPERTIES TRUST
THROUGH DISTRIBUTION
OF
13,190,763
COMMON SHARES OF BENEFICIAL INTEREST
---------------------
PROSPECTUS
-----------------------------
SEPTEMBER 21, 1999
Until October 16, 1999 (25 days after the date of this prospectus), all
dealers that effect transactions in these securities may be required to deliver
this prospectus.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
