UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1993
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______ to _____
Commission File Number 1-9317
HEALTH AND REHABILITATION PROPERTIES TRUST
(Exact name of registrant as specified in its charter)
Maryland 04-6558834
(State or other (I.R.S. Employer
jurisdiction Identification No.)
of incorporation)
400 Centre Street, Newton, Massachusetts 02158
(Address of principal executive offices) (Zip Code)
617-332-3990
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Shares of Beneficial Interest New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock of the registrant
held by non-affiliates was $656,557,656 based on the $15-3/8
closing price per share for such stock on the New York Stock
Exchange on March 2, 1994. For purposes of this calculation,
1,996,250 shares held by HRPT Advisors, Inc. (the "Advisor"),
including a total of 1,000,000 shares held by the Advisor solely
in its capacity as voting trustee under certain voting trust
agreements, and an aggregate of 23,313 shares held by the
trustees and executive officers of the registrant, have been
included in the number of shares held by affiliates.
Number of the registrant's Common Shares of Beneficial Interest,
$.01 par value ("Shares"), outstanding as of March 2, 1994:
44,722,500.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K is incorporated
herein by reference from the Company's definitive Proxy Statement
for the annual meeting of shareholders currently scheduled to be
held on May 17, 1994.
THE DECLARATION OF TRUST ESTABLISHING THE COMPANY, DATED OCTOBER
9, 1986, A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS THERETO
(THE "DECLARATION"), IS DULY FILED IN THE OFFICE OF THE
DEPARTMENT OF ASSESSMENTS AND TAXATION OF THE STATE OF MARYLAND,
PROVIDES THAT THE NAME "HEALTH AND REHABILITATION PROPERTIES
TRUST" REFERS TO THE TRUSTEES UNDER THE DECLARATION COLLECTIVELY
AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO
TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF THE TRUST
SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY,
FOR ANY OBLIGATION OF, OR CLAIM AGAINST, THE TRUST. ALL PERSONS
DEALING WITH THE TRUST, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS
OF THE TRUST FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY
OBLIGATION.
<PAGE>
HEALTH AND REHABILITATION PROPERTIES TRUST
1993 FORM 10-K ANNUAL REPORT
Table of Contents
PART I
Page
Item 1. Business . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . 28
Item 3. Legal Proceedings. . . . . . . . . . . . . . . 31
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . 31
PART II
Item 5. Market for the Registrant's Common
Stock and Related Stockholder Matters. . . . 31
Item 6. Selected Financial Data. . . . . . . . . . . . 34
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . 35
Item 8. Financial Statements and Supplementary Data. . 40
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . 40
PART III
To be incorporated by reference from the Company's
definitive Proxy Statement for the annual meeting of shareholders
currently scheduled to be held on May 17, 1994, which will be
filed not later than 120 days after the end of the Company's
fiscal year.
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K. . . . . . . . . . . 41
FINANCIAL STATEMENTS AND SCHEDULES. . . . . . . . . . . . F-1
<PAGE>
PART I
Item 1. Business.
The Company. Health and Rehabilitation Properties Trust
(the "Company") was organized on October 9, 1986 as a Maryland
real estate investment trust. The Company invests in nursing
homes and other income producing health care related real estate.
The Company's investments, to date, have been principally in
nursing homes and other long-term care facilities, assisted
living facilities, retirement complexes and facilities that
provide subacute and other specialty rehabilitation services.
The Company has no current plans to invest in non-health care
related real estate. The facilities in which the Company has
made investments by mortgage, purchase lease or merger
transactions shall hereinafter be referred to individually as a
"Property" and collectively as "Properties".
As of December 31, 1993, the Company owned 68 Properties
acquired for an aggregate of $384.8 million and had mortgage
investments in 76 Properties aggregating $157.3 million, for
total real estate investments of approximately $542 million in
144 Properties located in 27 states. The Properties are
described in "Business -- Developments Since January 1, 1993" and
"Properties".
<TABLE>
<CAPTION>
Number of Total Investment
State Properties at December 31, 1993
(in thousands)
<S> <C> <C>
Alabama............. 2 $3,601
Arizona............. 3 6,219
California.......... 15 41,662
Colorado............ 10 32,990
Connecticut......... 9 83,802
Florida............. 1 965
Georgia............. 4 6,883
Illinois............ 1 2,711
Indiana............. 10 27,318
Iowa................ 10 14,175
Kansas.............. 4 8,521
Kentucky............ 2 19,735
Louisiana........... 5 32,403
Massachusetts....... 7 103,824
Michigan............ 1 7,051
Missouri............ 2 3,178
Nebraska............ 12 16,925
North Carolina...... 10 23,025
Ohio................ 9 27,259
Pennsylvania........ 2 18,490
South Carolina...... 1 886
South Dakota........ 3 7,589
Tennessee........... 1 1,077
Texas............... 7 6,959
Washington.......... 1 5,125
Wisconsin........... 9 33,260
Wyoming............. 3 6,459
Total.......... 144 $542,092
</TABLE>
The Company's principal executive offices are located at 400
Centre Street, Newton, Massachusetts 02158, and its telephone
number is (617) 332-3990.
Investment Policy and Method of Operation. The Company's
investment goals are current income for distribution to
shareholders, capital growth resulting from appreciation in the
residual value of owned Properties, and preservation and
protection of shareholders' capital. The Company's income is
derived primarily from minimum rent and minimum interest payments
under its leases and mortgages and from additional rent and
additional interest payments based upon revenue increases at the
leased and mortgaged Properties.
The Company's day-to-day operations are conducted by HRPT
Advisors, Inc., the Company's investment advisor (the "Advisor").
The Advisor originates and presents investment opportunities to
the Company's Board of Trustees (the "Trustees"). In evaluating
potential investments, the Company considers such factors as: the
adequacy of current and anticipated cash flow from the property
to meet operational needs and financing obligations and to
provide a competitive market return on investment to the Company;
the growth, tax and regulatory environments of the community in
which the property is located; the quality, experience, and
credit worthiness of the property's operator; an appraisal of the
property, if available; occupancy and demand for similar health
care facilities in the same or nearby communities; the mix of
private and government sponsored patients; the mix of cost-based
and charge-based revenues; the construction quality, condition
and design of the property; and the geographic area and type of
property.
In the case of each purchase lease transaction and mortgage
investment originated by the Company to date, the Trustees
considered, among other things, the various factors set forth
above. In connection with the SAFECO transaction and several
loan pool acquisitions from the Resolution Trust Corporation
("RTC") and others described in "Developments since January 1,
1993", the Company considered the seller's information package,
made site visits to a significant number of the facilities and
reviewed other available documentation.
The Trustees have established a policy that the Company will
not purchase or mortgage finance a facility for an amount which
exceeds the appraised value of such facility. Prior to investing
in properties, the Company obtains title commitments or policies
of title insurance insuring that the Company holds title to or
has mortgage interests in such properties, free of material liens
and encumbrances.
The Company's investments may be structured using leases
with minimum and additional rent and escalator provisions, loans
with fixed or floating rates, joint ventures and partnerships
with affiliated or unaffiliated parties, commitments or options
to purchase interests in real estate, mergers or any combination
of the foregoing that will best suit the particular investment.
After an investment has been made in a Property, the Company
makes periodic site visits and conducts Property reviews. The
Property reviews include, among other things: reviews of
licensure and certification materials, regulatory reports,
pending or contemplated building improvements and applications
for certificates or determinations of need, pending litigation
and liens; analysis of staffing patterns, accounts receivable and
cash flow; observation of the overall condition of the Property;
a tour of the Property, usually conducted by a facility
administrator or program director; and discussions with the
facility administrator and other personnel. Financial statements
and patient census information are requested and reviewed
quarterly or as otherwise provided in the mortgage documents.
In connection with the Company's new $110 million revolving
credit facility the Company has agreed to obtain bank syndicate
approval before exceeding certain investment concentrations.
Among these are that no more than 40% of its properties be
operated by any single tenant or mortgagor, and that investment
in rehabilitation treatment, acute care, and psychiatric care
assets, as defined, not exceed 50%, 10% and 10%, respectively, of
total investments. In addition to these restrictions, the
Trustees may establish limitations as they deem appropriate from
time to time. No limits have been set on the number of
properties in which the Company will seek to invest, or on the
concentration of investments involving any one facility or
geographical area; however, the Trustees consider concentration
of investments in determining whether to make new or increase
existing investments. The Company's Declaration of Trust (the
"Declaration") and operating policies provide that any investment
in facilities owned or operated by the Advisor, persons expressly
permitted under the Declaration to own more than 8.5% of the
Company's shares, or any company affiliated with any of the
foregoing must, however, be approved by a majority of the
Trustees not affiliated with any of the foregoing (the
"Independent Trustees").
The Company has in the past and may in the future consider,
from time to time, the acquisition of or merger with other
companies engaged in the same business as the Company; however,
the Company has no present agreements or understandings
concerning any such acquisition or merger. The Company has no
intention of investing in the securities of others for the
purpose of exercising control.
Borrowing Policy. In addition to the use of equity, the
Company utilizes short-term and long-term borrowings to finance
investments. At present, the Company has term and revolving
credit facilities available to it totalling $143 million. As of
March 7, 1994, $73 million of this amount was outstanding, $61.6
million was available to be drawn and $8.4 million will be
available to be drawn upon receipt by the Company's lenders of
certain material relating to the borrowing base. Of the $73
million of indebtedness outstanding, $40 million is outstanding
under a revolving line of credit and $33 million is outstanding
under a term loan facility. All outstanding borrowings are at
variable interest rates determined by formulae based upon the
London Interbank Offered Rate, prime or some other generally
recognized interest rate standard. Fluctuations in interest
rates on all of the outstanding term indebtedness have been
limited by hedging arrangements so that the maximum rates payable
on the first $100 million of indebtedness is 5.5% per annum.
At present, the Company's borrowing guidelines established
by its Trustees and covenants in various bank agreements prohibit
the Company from maintaining a debt to equity ratio of greater
than 1.50 to 1. As of March 7, 1994 the Company's debt to
equity ratio was .16 to 1. The Declaration prohibits the Company
from incurring secured and unsecured indebtedness which in the
aggregate exceeds 300% of the net assets of the Company, unless
approved by a majority of the Independent Trustees. The present
debt to equity limitation in the Company's borrowing policies and
in various bank agreements may in the future be changed. There
can be no assurance that debt capital will in the future be
available at reasonable rates to fund the Company's operations or
growth.
Developments Since January 1, 1993.
January Share Offering. During the first quarter of 1993,
the Company sold 10,350,000 Shares in a public offering and
received net proceeds of approximately $123 million. The
proceeds were used, in part, to prepay $88.5 million in
outstanding indebtedness (which resulted in a write off of $3.4
million in deferred finance charges) and, in part, to fund
transactions described below.
Resolution Trust Corporation Mortgage Portfolios. During
1993, the Company acquired two pools of performing loans secured
by mortgages on 33 nursing homes or retirement facilities
operated by 12 separate companies. Each of these pools was
previously held by a bank taken over by the RTC. The total
outstanding balances of these loans at the time of purchase was
approximately $98 million, and the purchase price of the loans
totalled approximately $88.4 million, of which $65.9 million was
borrowed from DLJ Mortgage Capital, Inc. ("DLJMC"), an affiliate
of Donaldson, Lufkin & Jenrette Securities Corporation. Since
they were acquired, four of these loans have been paid in full
and the DLJMC loan has been repaid in full. Certain information
relating to these transactions is set forth below:
<TABLE>
<CAPTION>
HRP Acquisitions of RTC Mortgages
(dollars in thousands)
No. of
Facilities Outstanding Carrying Annualized
Date ofOriginatingat AcquisitionBalance atPurchase Amount at Interest at
Acquisition Bank (beds) Acquisition Price Dec. 31, 1993Dec. 31, 1993(1)
<S> <C> <C> <C> <C> <C> <C>
May 1993 TransOhio
Federal 27 $79,883$72,411 $64,850 $6,705
Savings Bank (3,552)
SeptemberSan Diego 6 18,200 16,000 13,528 1,623
1993 Home Federal (914)
Savings Bank
- ---------------
</TABLE>
(1) Includes amortization of purchase price discounts.
SAFECO Portfolio. In June 1993, the Company acquired three
nursing homes (428 beds) and related improvement loans for $5.8
million from SAFECO Corporation, an insurance and financial
services holding company. The three nursing homes are leased to
three separate companies pursuant to leases which have initial
terms expiring between 1995 and 2001 and include various
additional rent provisions and renewal options. Total minimum
annual rent and interest from these facilities is approximately
$804,000.
Sun Healthcare. In November 1993, the Company acquired a 143
bed nursing home in Seattle, Washington, for $5.1 million from
Greenery Rehabilitation Group, Inc. ("Greenery"). This facility
was immediately leased to Sun Healthcare Group, Inc. ("Sun").
Simultaneously, the Company's existing lease arrangements with
Sun for three nursing homes in Connecticut, which had been
scheduled to expire in 1997, were combined into one lease which
also covers the Seattle facility and the lease term for all four
facilities was extended through 2005 with renewal options. The
three Connecticut facilities contain 458 beds and were acquired
by the Company in 1987 for approximately $15.5 million. The
total minimum annual rent payable to the Company for these four
facilities is approximately $2.5 million.
Goldome Mortgage Portfolio. In November 1993, the Company
was selected as the winning bidder for a portfolio of performing
mortgage loans originated by Goldome Credit Corporation. These
loans had a combined principal balance of approximately $29.2
million, maturities between 1994 and 1999, and are secured by
mortgages on 18 nursing homes and retirement complexes (1,876
beds) located in eight states and operated by 12 separate
companies. In December 1993, the Company acquired all but one of
these mortgage loans, with a combined principal balance of $27.9
million, for $26.6 million. In February 1994, the Company
acquired the remaining mortgage loan (which related to a property
which was damaged by fire prior to the original closing).
Funding for this investment was provided by borrowing under the
Company's revolving credit facility and from DLJMC. The
annualized interest, including amortization of purchase price
discount, is approximately $3.2 million.
Community Care of America. In December 1993, the Company
purchased for $33.4 million and immediately leased to Community
Care of America, Inc. ("Community Care") 12 nursing homes and
five retirement complexes and provided $26.6 million in financing
for the acquisition of an additional 14 nursing homes and one
retirement complex by Community Care or its affiliates, secured
by mortgages on eleven of the nursing homes or a first lien on
the assets of the operator of the nursing homes or its parent.
The 26 nursing homes contain 2,183 beds and the six retirement
complexes contain 119 units. The purchased facilities have been
leased to Community Care for an initial term of ten years, with
renewal options totalling an additional 26 years. The loans will
mature in 23 years, but may be accelerated by the Company after
ten years in certain circumstances. Total minimum rent and
interest payments are approximately $6.7 million, plus additional
rent commencing in 1996 based upon increases in net patient
revenues at the facilities. Community Care's obligations are
also secured by a $3.8 million security deposit. Subject to
regulatory approvals, the Company may elect, at any time during
the term of the loans, to purchase and lease to the borrower any
or all of the financed nursing homes.
December Share Offering. In December 1993, the Company sold
9,000,000 shares in a public offering and received net proceeds
of approximately $122 million. The proceeds were used to repay
amounts borrowed from DLJMC and to fund the Community Care
transaction. In January 1994, the underwriters exercised their
overallotment option for 601,500 additional shares, resulting in
the Company's receipt of additional net proceeds of approximately
$8.3 million.
Horizon/Greenery Merger. In February 1994, the previously
announced merger transaction (the "Horizon/Greenery Merger")
between Horizon Healthcare Corporation ("Horizon") and Greenery
was consummated.
In connection with this merger:
- Horizon became the lessee of seven facilities
previously leased by the Company to Greenery. The rent
for these facilities is substantially the same as that
previously paid by Greenery. The initial lease term
was extended through June 30, 2005, and Horizon has
renewal options totalling an additional 20 years.
- The Company granted Horizon options to purchase any or
all of the seven leased facilities. The options may be
exercised at a rate of not more than one facility in
any 12 month period and expire December 31, 2003. The
option purchase prices are approximately equal to the
Company's investment in these facilities.
- Horizon purchased from the Company three facilities
previously leased by Greenery. The purchase price of
$28.4 million was paid $23.3 million in cash and the
balance of $5.1 million in a note secured by a first
mortgage on one of the facilities. The mortgage loan
bears interest at 11.5% per annum and matures on
December 31, 2000. The Company realized a gain from
these sales of approximately $3.9 million.
- The Company lent Horizon $4.3 million secured by a
first mortgage on one facility which Horizon acquired
from Greenery in the Horizon/Greenery Merger. The
mortgage loan bears interest at 11.5% per annum and
matures on December 31, 2000.
- Horizon assumed management responsibility for three of
the Company's facilities in Connecticut previously
leased to Greenery. The Company purchased leasehold
improvements made at these facilities by Greenery for
their net book value of approximately $541,000. The
existing leases with Greenery were terminated and the
facilities were leased to Connecticut Subacute
Corporation II ("CSCII"), a newly organized corporation
which is owned by Gerard M. Martin and Barry M.
Portnoy, who are Trustees of the Company. The lease
with CSCII and the management contract with Horizon
will continue for up to five years until the Company
locates a substitute operator. Under the terms of the
management contract between Horizon and CSCII, Horizon
will guarantee the lease payments to the Company, which
are approximately equal to the previous lease
obligations of Greenery for these facilities.
- All obligations of Horizon to the Company under the new
leases, mortgages and management agreements affecting
the former Greenery properties are fully guaranteed by
Horizon and are subject to cross collateralization and
cross default provisions.
As a result of the Horizon/Greenery Merger and the related
transactions, Horizon has become the tenant or mortgagor of 27%
of the Company's total investments and is the largest single
operator of the Company's facilities (before taking into account
the Marriott Transaction described below).
New Revolving Credit Facility. In February 1994, the
Company closed a new $110 million revolving credit facility from
a syndicate of banks (the "New Credit Facility"). The New Credit
Facility replaced the Company's existing $40 million revolving
credit facility, which was scheduled to mature in January 1995.
The New Credit Facility will mature in 1997, unless extended by
the parties. Borrowings on the New Credit Facility will bear
interest, at the Company's option, at a spread over prime or
LIBOR.
Marriott Transaction. On March 17, 1994, the Company agreed
to acquire 14 retirement complexes from affiliates of Host
Marriott Corporation ("HMT") for $320 million, subject to
adjustment (the "Marriott Transaction"). The retirement
complexes are presently leased to and operated by a subsidiary of
Marriott International, Inc. ("Marriott"), and will be acquired
by the Company subject to the existing leases. The complexes are
located in the following seven states: Florida - five complexes;
Virginia - three complexes; Arizona - two complexes; California -
one complex; Illinois - one complex; Maryland - one complex; and
Texas - one complex. The retirement complexes offer a continuum
of services, which may include independent living residences,
assisted living and on-site skilled nursing facilities, and
contain a total of 3,932 residences or beds. The 14 retirement
complexes are triple net leased to a subsidiary of Marriott for
initial terms expiring on December 31, 2013, with renewal options
extending for an additional 20 years. The leases provide for
fixed rent aggregating approximately $28 million per year and
additional rentals equal to 4.5% of annual revenues from
operations in excess of base amounts determined on a facility by
facility basis. All of the leases are subject to cross default
provisions and the obligations under the leases to pay rents due
to the Company are fully guaranteed by Marriott. In addition to
the 14 retirement complexes to be acquired by the Company, the
Company and HMT have agreed to negotiate for the possible
assumption by the Company of HMT obligations to invest in
additional retirement and skilled nursing facility projects to be
operated by Marriott; however, there are presently no agreements
or understandings concerning assumption of the obligations
relating to any specific projects. Upon completion of the
Marriott Transaction, Marriott will become the Company's largest
single tenant comprising 38% of the Company's total investment
portfolio of health care related real estate. Consummation of
the Marriott Transaction is subject to certain conditions
including regulatory approvals. Although no assurance can be
given that the Marriott Transaction will be consummated, the
Company presently anticipates that the transaction will close in
June 1994.
The Advisor. The Advisor is wholly owned by Gerard M.
Martin and Barry M. Portnoy. Messrs. Martin, Portnoy and Mark J.
Finkelstein are the directors of the Advisor, Mr. Finkelstein is
the President and Chief Executive Officer, David J. Hegarty is
the Executive Vice President, Chief Financial Officer and
Secretary and John G. Murray is the Treasurer. These officers of
the Advisor are also officers of the Company. The Advisor
provides management services and investment advice to the
Company. The Advisor's principal executive offices are located
at 400 Centre Street, Newton, Massachusetts 02158, and its
telephone number is (617) 332-3990.
The Advisory Agreement. The following description of the
Advisory Agreement is not complete but contains a summary of the
material provisions. Reference is made to the Advisory
Agreement, as amended, incorporated by reference as an exhibit to
this Form 10-K, for a complete statement of its provisions, and
the following summary is qualified in its entirety by such
reference.
Under the Advisory Agreement, the Advisor is obligated to
use its best efforts to present to the Company a continuing and
suitable investment program consistent with the investment
policies and objectives of the Company. Subject to its duty of
overall management and supervision, the Board of Trustees has
delegated to the Advisor the power and duty to, among other
things, serve as the Company's investment advisor, investigate
and evaluate investment opportunities and recommend them to the
Trustees, manage the Company's short-term investments and
administer the day-to-day operations of the Company. In
performing its services under the Advisory Agreement, the Advisor
may utilize facilities, personnel and support services of various
of its affiliates.
Under the Advisory Agreement, the Advisor assumes no
responsibility other than to render the services described
therein in good faith and is not responsible for any action of
the Trustees in following or declining to follow any advice or
recommendation of the Advisor. In addition, the Company has
agreed to indemnify the Advisor, its shareholders, directors,
officers, employees and affiliates against liabilities relating
to certain acts or omissions of the Advisor.
The Advisory Agreement has been renewed annually since
December 1987 for successive one year terms with the current term
expiring on December 31, 1994. The Advisory Agreement is
renewable annually by the Company if a majority of the
Independent Trustees determine that the Advisor's performance has
been satisfactory. During any renewal term, the Advisory
Agreement may be terminated without penalty by either party
thereto for any reason upon 60 days' written notice.
The Advisory Agreement does not restrict the Advisor from
engaging in other activities or businesses or from acting as
advisor to any other person or entity, including other real
estate investment trusts ("REITs"), even though such person or
entity has investment policies and objectives similar to those of
the Company or competes with the Company. The Advisory Agreement
does require the Advisor, upon request by any Trustee, to
disclose information concerning certain investments by the
Advisor or certain of its affiliates. Although it is not
prohibited from doing so, the Advisor has informed the Trustees
that it does not presently intend to provide advisory services to
any other real estate investment trust and has agreed to inform
the Trustees of any change in such intention.
Compensation to the Advisor. The Declaration provides that
the Board of Trustees, including a majority of the Independent
Trustees, are to determine the amount of compensation which the
Company contracts to pay the Advisor, based upon such factors as
it deems appropriate and to review the compensation the Company
has agreed to pay the Advisor on an annual basis.
The Advisory Agreement provides for an annual advisory fee
equal to 0.70% of the Company's Average Invested Capital, as
defined in the Advisory Agreement, up to $250 million, and 0.50%
of Average Invested Capital equal to or exceeding $250 million;
and an annual incentive fee based upon a formula relating to the
Company's cash flow available for distribution. The Advisor's
fee will be waived to the extent necessary to limit the Company's
total annual operating expenses to the greater of (i) 2% of
Average Invested Capital or (ii) 25% of the Company's Net Income
determined as set forth in the Advisory Agreement. Beginning
with 1994, the Advisor's incentive fee will be paid in restricted
shares of the Company's stock. The aggregate advisory fees paid
to the Advisor for the year ended December 31, 1993, were $2.6
million, of which approximately $1.1 million was attributable to
investments in Greenery, and approximately $200,000 was
attributable to investments in Connecticut Subacute Corporation
("CSC").
The Advisor is required to pay certain fees and expenses of
directors, officers and employees of the Advisor (except fees and
expenses of such persons who are Trustees or officers of the
Company incurred in their capacities as Trustees and officers of
the Company) and miscellaneous administrative expenses relating
to performance of its functions under the Advisory Agreement.
The Advisor is also obligated to pay its own rent, utilities and
other office and overhead expenses, except to the extent such
expenses relate solely to an office maintained by the Company
separate from the office of the Advisor. The Company is required
to pay all other expenses, including the costs and expenses of
acquiring, owning and disposing of the Company's real estate
interests, such as appraisal, reporting, audit and legal fees,
and its costs of borrowing money, and the costs of securities
listing, transfer, registration and compliance with reporting
requirements.
Employees. As of March 16, 1994, the Company had no
employees. The Advisor, which administers the day-to-day
operations of the Company, has thirteen full-time employees and
one part-time employee.
Regulation and Reimbursement; Competition. Compliance with
federal, state and local statutes and regulations governing
health care facilities is a prerequisite to continuation of
health care operations at the Properties. In addition, the
health care industry depends significantly upon federal and
federal/state programs for revenues and, as a result, is
vulnerable to the budgetary policies of both the federal and
state governments.
Certificate of Need and Licensure. Most states in which the
Company has or may invest require certificates of need ("CONs")
prior to expansion of beds or services, certain capital
expenditures, and in some states, a change in ownership. CON
requirements are not uniform throughout the United States.
Changes in CON requirements may affect competition, profitability
of the Properties and the Company's opportunities for investment
in health care facilities.
State licensure requirements, including regulations
providing that commonly controlled facilities are subject to
delicensure if one such facility is delicensed, also affect
facilities in which the Company invests. The Company believes
that each facility in which it has invested is appropriately
licensed. Although each of the facilities has from time to time
received notices of non-compliance with certain standards, and
certain facilities in Connecticut, Massachusetts and North
Carolina are subject to provisional or probationary licenses, the
Company believes that such actions have not, in fiscal year 1993
and through the date hereof, had any material adverse effect on
the operations of the Company. By agreement on February 11,
1994, Horizon's licenses to operate the Massachusetts facilities
leased to it will be probationary subject to certain conditions.
The probationary license agreement resolves an initial denial of
Horizon's application for a determination of suitability for
licensure.
An increasing number of legislative proposals have been
introduced in Congress that would effect major reforms of the
health care system. In 1993, the Clinton administration and
members of Congress introduced far-reaching health-care reform
legislation, including the proposed Health Security Act. The
proposals include universal health coverage, employer mandated
insurance, group health insurance for small businesses, a single
government health insurance plan and cost-containment. The
Company cannot predict whether any such legislative proposals
will be adopted and, if adopted, what effect, if any, such
proposals would have on the business of the lessees, the
mortgagors or the Company. Moreover, Congress has investigated
the head injury rehabilitation industry, and regulatory and other
inquiries about, and legislative proposals for greater regulation
of, the head injury rehabilitation industry are in progress. The
Company cannot predict the effect of congressional or other
investigations or the adverse publicity resulting therefrom on
providers of head injury rehabilitation, whether other reviews
will be initiated or, if initiated, their outcome. An adverse
determination concerning licensure or eligibility for government
reimbursement of any operator could materially adversely affect
that operator, its affiliates and the Company. In addition,
federal and state civil and criminal anti-fraud and anti-kickback
laws and regulations govern financial activities of health care
providers and enforcement proceedings have increased. If any
operator of the Company's Properties were to fail to comply with
such laws or regulations, it, and therefore the Company, could be
materially adversely affected unless and until the Company were
able to re-lease or sell the affected Property or Properties on
favorable terms.
Reimbursement. Reimbursement for health care services
derives principally from the following sources: Medicare, a
federal health insurance program for the aged and certain
chronically disabled individuals; Medicaid, a medical assistance
program for indigent persons operated by individual states with
the financial participation of the federal government; health and
other insurance plans, including health maintenance
organizations; and private funds. These reimbursement sources
are generally contingent upon compliance with state CON and
licensure regulations and with extensive federal requirements for
Medicare and Medicaid participation.
Medicaid programs provide significant current revenues of
nursing facilities. Medicare is not presently a major source of
revenue for the Company's lessees and mortgagors. The Medicaid
program is subject to change and affected by funding restrictions
and budget shortfalls which may materially decrease rates of
payment or delay payment. There is no assurance that Medicaid or
Medicare payments will remain constant or be sufficient to cover
costs allocable to Medicare and Medicaid patients. The operators
of the Properties appeal reimbursement rates from time to time.
The Company cannot predict whether such appeals, if decided
adversely, would have any material effect upon the respective
financial positions of the operators.
Other. Federal law limits Medicare and Medicaid
reimbursement for capital costs related to increases in the
valuation of capital assets solely as a result of a change of
ownership of nursing facilities, and numerous states use more
restrictive standards to limit Medicaid reimbursement of capital
costs. Effective October 1, 1993, Medicare eliminated
reimbursement of return on equity capital for Medicare skilled
nursing homes. Some state Medicaid programs also do not provide
for return on equity capital. In addition, a seller is liable to
the Medicare program, and in certain states may also be liable to
the Medicaid program, for recaptured depreciation. Such
limitations may adversely affect the resale value of some
Properties owned or financed by the Company.
Effective October 23, 1992, DHHS issued final regulations
which limit the amount of Medicare reimbursement available to a
facility for rental or lease expenses paid after a purchase lease
transaction to that amount which would have been reimbursed as
capital costs had the provider retained legal title to the
facility. Limitations on rental expenses contained in the
regulations may adversely affect the financial feasibility of
future purchase lease transactions by denying Medicare and
Medicaid reimbursement for additional rental expenses.
It is not possible to predict the content, scope or impact
of future legislation, regulations or changes in reimbursement or
insurance coverage policies which might affect the health care
industry.
Competition. The Company is one of several REITs currently
investing primarily in health care related real estate. The
REITs compete with one another in that each is continually
seeking attractive investment opportunities in health care
facilities. The Company also competes with banks, non-bank
finance companies, leasing companies and insurance companies.
In addition, the Company competes with the operators of its
Properties in connection with the expansion of their businesses.
Although each of the operators may offer investment opportunities
to the Company, each of the operators or its affiliates will, in
fact, compete with the Company (as well as with others) for
investment opportunities. The operators may own facilities that
are not mortgaged or leased to the Company. An operator, or an
affiliate thereof, could preferentially place patients or operate
special service programs in facilities other than those included
among the Properties. Such preferential treatment and/or new
programs could adversely affect the revenues derived by the
Company under its mortgages and leases.
Federal Income Tax Considerations
The Company intends to be and remain qualified as a real
estate investment trust ("REIT") under Sections 856 through 860
of the Internal Revenue Code of 1986, as amended (the "Code").
The following is a general summary of the Code provisions
governing the federal income tax treatment of REITs. These
provisions are highly technical and complex and this summary is
qualified in its entirety by the applicable Code provisions,
rules and regulations promulgated thereunder, and administrative
and judicial interpretations thereof. Each shareholder therefore
is urged to consult his own tax advisor with respect to the
federal income tax and other tax consequences of the purchase,
holding and sale of shares of beneficial interest of the Company.
The Company has obtained legal opinions that the Company has
been organized in conformity with the requirements for
qualification as a REIT, has qualified as a REIT for its 1987,
1988, 1989, 1990, 1991 and 1992 taxable years, and that its
current and anticipated investments and its plan of operation
will enable it to continue to meet the requirements for
qualification and taxation as a REIT under the Code. Actual
qualification of the Company as a REIT, however, will depend upon
the Company's continued ability to meet, and its meeting, through
actual annual operating results, the various qualification tests
imposed under the Code and discussed below. No assurance can be
given that the actual results of the Company's operation for any
one taxable year will satisfy such requirements.
Taxation of the Company. If the Company qualifies for taxation
as a REIT and distributes to its shareholders at least 95% of its
"real estate investment trust taxable income", it generally will
not be subject to federal corporate income taxes on the amount
distributed. However, a REIT is subject to special taxes on the
net income derived from "prohibited transactions." In addition,
property acquired by the Company as the result of a default or
imminent default on a lease or mortgage is classified as
"foreclosure property". Certain net income from foreclosure
property held by the Company for sale is taxable to it at the
highest corporate marginal tax rate then prevailing.
Section 856(a) of the Code defines a REIT as a corporation,
trust or association: (1) which is managed by one or more
trustees or directors; (2) the beneficial ownership of which is
evidenced by transferable shares or by transferable certificates
of beneficial interest; (3) which would be taxable, but for
Sections 856 through 859 of the Code, as a domestic corporation;
(4) which is neither a financial institution nor an insurance
company subject to certain provisions of the Code; (5) the
beneficial ownership of which is held by 100 or more persons; (6)
which is not closely held as determined under the personal
holding company stock ownership test (as applied with one
modification); and (7) which meets certain other tests, described
below. Section 856(b) of the Code provides that conditions (1)
to (4), inclusive, must be met during the entire taxable year and
that condition (5) must be met during at least 335 days of a
taxable year of 12 months, or during a proportionate part of a
taxable year of less than 12 months. By reason of condition (6)
above, the Company will fail to qualify as a REIT for a taxable
year if at any time during the last half of such year more than
50% in value of its outstanding Shares are owned directly or
indirectly by five or fewer individuals. To help maintain
conformity with condition (6), the Company's Declaration of Trust
(the "Declaration") contains certain provisions restricting share
transfers and giving the Board of Trustees power to redeem shares
involuntarily.
It is the expectation of the Company that it will have at
least 100 shareholders during the requisite period for each of
its taxable years. There can, however, be no assurance in this
connection and, if the Company has fewer than 100 shareholders
during the requisite period, condition (5) described above will
not be satisfied, and the Company would not qualify as a REIT
during such taxable year.
For taxable years beginning after 1993, 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 such year more than 50% in value
of its outstanding shares is owned directly or indirectly by five
or fewer individuals has been liberalized in the case of a
qualified pension trust owning shares in a REIT. Under the new
rule, the requirement is applied by treating shares in a REIT
held by such a pension trust as held directly by its
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 its qualification as a REIT. However, if a REIT is
a "pension-held REIT" as defined in the new law, each pension
trust holding more than 10% of its shares (by value) generally
will be taxable on a portion of the dividends it receives from
the REIT, based on the ratio of the REIT's gross income for the
year which would be unrelated trade or business income if the
REIT were a qualified pension trust to the total gross income of
the REIT for the year. A "pension-held REIT" is one in which at
least one qualified pension trust holds more than 25% (by value)
of the interests by value, or a combination of qualified pension
trusts each of which owns more than 10% by value of the REIT
together holds more than 50% of the REIT interests by value.
To qualify as a REIT for a taxable year under the Code, the
Company must elect to be so treated and must meet other
requirements, certain of which are summarized below, including
percentage tests relating to the sources of its gross income, the
nature of the Company's assets, and the distribution of its
income to shareholders. The Company has made such election for
1987 (its first full year of operations) and such election,
assuming continuing compliance with the qualification tests
discussed herein, continues in effect for subsequent years.
There are three gross income requirements. First, at least
75% of the Company's gross income (excluding gross income from
certain sales of property held primarily for sale) must be
derived directly or indirectly from investments relating to real
property (including "rents from real property") or mortgages on
real property. When the Company receives new capital in exchange
for its shares (other than dividend reinvestment amounts) or in a
public offering of five-year or longer debt instruments, income
attributable to the temporary investment of such new capital in
stock or a debt instrument, if received or accrued within one
year of the Company's receipt of the new capital, is qualifying
income under the 75% test. Second, at least 95% of the Company's
gross income (excluding gross income from certain sales of
property held primarily for sale) must be derived from such real
property investments, dividends, interest, certain payments under
interest rate swap or cap agreements, and gain from the sale or
disposition of stock, securities, or real property or from any
combination of the foregoing. Third, short-term gain from the
sale or other disposition of stock or securities, including,
without limitation, stock in other REITs, dispositions of
interest rate swap or cap agreements, and gain from certain
prohibited transactions or other dispositions of real property
held for less than four years (apart from involuntary conversions
and sales of foreclosure property) must represent less than 30%
of the Company's gross income. (This rule does not apply for a
year in which the REIT is completely liquidated, as to
dispositions occurring after the adoption of a plan of complete
liquidation.) For purposes of these rules, income derived from a
"shared appreciation provision" is treated as gain recognized on
the sale of the property to which it relates. Even though the
Company's present mortgages do not contain shared appreciation
provisions, the Company may make mortgage loans which include
such provisions.
The Company temporarily invests working capital in
short-term investments, including shares in other REITs.
Although the Company will use its best efforts to ensure that its
income generated by these investments will be of a type which
satisfies the 75% and 95% gross income tests, there can be no
assurance in this regard (see discussion above of the "new
capital" rule under the 75% test). Moreover, the Company may
realize short-term capital gain upon sale or exchange of such
investments, and such short-term capital gain would be subject to
the limitations imposed by the 30% gross income test.
In order to qualify as "rents from real property," the
amount of rent received generally must not be determined from the
income or profits of any person, but may be based on receipts or
sales. The Code also provides that rents will not qualify as
"rents from real property," in satisfying the gross income tests,
if the REIT owns 10% or more of the tenant, whether directly or
under certain attribution rules. The Company intends not to
lease property to any party if rents from such property would not
so qualify. Application of the 10% ownership rule is, however,
dependent upon complex attribution rules provided in the Code and
circumstances beyond the control of the Company. Ownership,
directly or by attribution, by an unaffiliated third party of
more than 10% of the Company's shares and more than 10% of the
stock of a lessee would result in lessee rents not qualifying as
"rents from real property". The Declaration provides that
transfers or purported acquisitions, directly or by attribution,
of shares that could result in disqualification of the Company as
a REIT are null and void and permits the Trustees to repurchase
shares to the extent necessary to maintain the Company's status
as a REIT. Nevertheless, there can be no assurance such
provisions in the Declaration will be effective to prevent the
Company's REIT status from being jeopardized under the 10% rule.
Furthermore, there can be no assurance that the Company will be
able to monitor and enforce such restrictions, nor will
shareholders necessarily be aware of shareholdings attributed to
them under the attribution rules. Although the Advisor owns
shares of the Company (and Greenery and Continuing Healthcare
Corporation ("CHCC") formerly owned shares of the Company), the
Company has received a legal opinion that, while the matter is
not entirely free from doubt, under the Code, the relevant
regulations, and the existing facts concerning share ownership
and other matters as they have been represented to legal counsel,
the Company for all periods will not have been treated as owning
more than 10% of the Advisor, Greenery or CHCC. Greenery, CHCC,
the Advisor, Barry M. Portnoy and Gerard M. Martin, have each
represented to the Company that he or it is aware of the 10% rule
and the accompanying attribution rules, and will take no action
which would jeopardize favorable tax treatment of the Company's
rental income on account of the 10% rule.
An issue could have arisen concerning whether rents received
from Greenery in 1987 were "rents from real property" in light of
certain options held by the Advisor during a portion of 1987.
Considering the factual aspects of the matter, certain
representations made by the Independent Trustees, and applicable
legal authority, the Company has received a legal opinion that,
while the matter is not entirely free from doubt, the options
formerly held by the Advisor would at no time have been regarded
as outstanding for stock attribution purposes, and therefore
would not have jeopardized the qualification of the rents
received from Greenery in 1987 as "rents from real property."
In addition, the Company must not manage the property or
furnish or render services to the tenants of such property,
except through an independent contractor from whom the company
derives no income. There is an exception to this rule permitting
a REIT to perform certain customary tenant services of the sort
which a tax-exempt organization could perform without being
considered in receipt of "unrelated business taxable income".
If rent attributable to personal property leased in
connection with a lease of real property is greater than 15% of
the total rent received under the lease, then the portion of rent
attributable to such personal property will not qualify as "rents
from real property." The portion of rental income treated as
attributable to personal property is determined according to the
ratio of the tax basis of the personal property to the total tax
basis of the property which is rented. If rent payments do not
qualify, for the reasons discussed above, as rents from real
property for the purposes of Section 856 of the Code, it will be
more difficult for the Company to meet the 95% or 75% gross
income tests and qualify as a REIT. Finally, 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.
If the Company 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 such year if its failure to meet such test
was due to reasonable cause and not due to willful neglect, it
attaches a schedule of the sources of its income to its return,
and any incorrect information on the schedule was not due to
fraud with intent to evade tax. It is not possible, however, to
state whether in all circumstances the Company would be entitled
to the benefit of these relief provisions. If these relief
provisions apply, a special tax generally equal to 100% is
imposed upon the greater of the amount by which the Company
failed the 75% test or the 95% test, less an amount which
generally reflects the expenses attributable to earning the
nonqualified income.
At the close of each quarter of the Company's taxable year,
it must also satisfy three tests relating to the nature of its
assets. First, at least 75% of the value of the Company's total
assets must consist of real estate assets (including its
allocable share of real estate assets held by joint ventures or
partnerships in which the Company participates), cash, cash items
and government securities. Second, not more than 25% of the
Company's total assets may be represented by securities (other
than those includable in the 75% asset class). Finally, of the
investments included in the 25% asset class, the value of any one
issuer's securities owned by the Company may not exceed 5% of the
value of the Company's total assets, and the Company may not own
more than 10% of any one issuer's outstanding voting securities.
Where a failure to satisfy the 25% asset test results from
an acquisition of securities or other property during a quarter,
the failure can be cured by disposition of sufficient
nonqualifying assets within 30 days after the close of such
quarter. The Company intends to maintain adequate records of the
value of its assets to maintain compliance with the 25% asset
test, and to take such action as may be required to cure any
failure to satisfy the test within 30 days after the close of any
quarter.
The Company, in order to qualify as a REIT, is required to
distribute dividends (other than capital gain dividends) to its
shareholders in an amount equal to or greater than the excess of
(A) the sum of (i) 95% of the Company's "real estate investment
trust taxable income" (computed without regard to the dividends
paid deduction and the Company's net capital gain) and (ii) 95%
of the net income, if any, (after tax) from foreclosure property,
over (B) the sum of certain non-cash income (from certain imputed
rental income and income from transactions inadvertently failing
to qualify as like-kind exchanges). These requirements may be
waived by the IRS if the REIT establishes that it failed to meet
them by reason of distributions previously made to meet the
requirements of the 4% excise tax discussed below. To the extent
that the Company does not distribute all of its net long-term
capital gain and all of its "real estate investment trust taxable
income", it will be subject to tax thereon. In addition, the
Company will be subject to a 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 such preceding calendar year.
For this purpose, the term "grossed up required distribution" for
any calendar year is the sum of the taxable income of the Company
for the 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.
Dividends declared in October, November, or December and paid
during the following January will be treated as having been paid
and received on December 31.
It is possible that the Company, from time to time, may not
have sufficient cash or other liquid assets to meet the 95%
distribution requirements, due to timing differences between the
actual receipt of income and actual payment of deductible
expenses or dividends on the one hand and the inclusion of such
income and deduction of such expenses or dividends in arriving at
"real estate investment trust taxable income" of the Company on
the other hand. The problem of inadequate cash to make required
distributions could also occur as a result of the repayment in
cash of principal amounts due on the Company's outstanding debt,
particularly in the case of "balloon" repayments or as a result
of capital losses on short-term investments of working capital.
Therefore, the Company might find it necessary to arrange for
short-term, or possibly long-term, borrowing, or new equity
financing. If the Company were unable to arrange such borrowing
or financing as might be necessary to provide funds for required
distributions, its REIT status could be jeopardized.
Under certain circumstances, the Company may be able to
rectify a failure to meet the distribution requirement for a year
by paying "deficiency dividends" to shareholders in a later year,
which may be included in the Company's deduction for dividends
paid for the earlier year. The Company may be able to avoid
being taxed on amounts distributed as deficiency dividends;
however, the Company may in certain circumstances remain liable
for the 4% excise tax discussed above.
The Company is also required to request annually from record
holders of certain significant percentages of its shares certain
information regarding the ownership of such shares. Under the
Declaration, shareholders are required to respond to such
requests for information.
Federal Income Tax Treatment of Leases. The availability to
the Company of, among other things, depreciation deductions with
respect to the facilities owned and leased by the Company will
depend upon the treatment of the Company as the owner of the
facilities and the classification of the leases of the facilities
as true leases, rather than as sales or financing arrangements,
for Federal income tax purposes. As to the approximately 5% of
the leased facilities which constitutes personal property, it is
less clear that the Company will be treated as the owner of such
personal property and that the leases will be treated as true
leases with respect to such property. The Company plans to
insure its compliance with the 95% distribution requirement (and
the "required distribution" requirement) by making distributions
on the assumption that it is not entitled to depreciation
deductions for the 5% of the leased facilities which constitute
personal property, but to report the amount of income taxable to
its shareholders by taking into account such depreciation.
Other Issues. In the case of certain sale-leaseback
arrangements, the IRS could assert that the Company realized
prepaid rental income in the year of purchase to the extent that
the value of a leased property exceeds the purchase price paid by
the Company for that property. In litigated cases involving
sale-leasebacks which have considered this issue, courts have
concluded that buyers have realized prepaid rent where both
parties acknowledged that the purported purchase price for the
property was substantially less than fair market value and the
purported rents were substantially less than the fair market
rentals. Because of the lack of clear precedent, complete
assurance cannot be given that the IRS could not successfully
assert the existence of prepaid rental income.
Additionally, it should be noted that Code Section 467
(concerning leases with increasing rents) would apply to the
leases because many of the leases provide for rents that increase
from one period to the next. Section 467 provides that in the
case of a so-called "disqualified leaseback agreement," rental
income must be accrued at a constant rate. If such constant rent
accrual were required, the Company would recognize rental income
in excess of cash rents and, as a result, may fail to meet the
95% dividend distribution requirement. "Disqualified leaseback
agreements" include leaseback transactions where a principal
purpose for providing increasing rent under the agreement is the
avoidance of Federal income tax. Because Section 467 directs the
Treasury to issue regulations providing that rents will not be
treated as increasing for tax avoidance purposes where the
increases are based upon a fixed percentage of lessee receipts,
the additional rent provisions of the leases should not cause the
leases to be "disqualified leaseback agreements". In addition,
the legislative history of Section 467 indicates that the
Treasury should issue regulations under which leases providing
for fluctuations in rents by no more than a reasonable percentage
from the average rent payable over the term of the lease will be
deemed not motivated by tax avoidance; this legislative history
indicated that a standard allowing a 10% fluctuation in rents may
be too restrictive for real estate leases.
Depreciation of Properties. For tax purposes, the Company's
real property generally is depreciated over 40 years and personal
property owned by the Company generally is depreciated over 12
years.
Failure to Qualify. If the Company fails to qualify for
taxation as a REIT in any taxable year, and the relief provisions
do not apply, the Company will be subject to tax on its taxable
income at regular corporate rates (plus any applicable minimum
tax). Distributions to shareholders in any year in which the
Company fails to qualify will not be deductible by the Company
nor will they be required to be made. In such event, to the
extent of current and accumulated earnings and profits, all
distributions to shareholders will be taxable as ordinary income
and, subject to certain limitations in the Code, eligible for the
70% dividends received deduction for corporations. Unless
entitled to relief under specific statutory provisions, the
Company will also be disqualified from taxation as a REIT for the
following four taxable years. It is not possible to state
whether in all circumstances the Company would be entitled to
statutory relief from such disqualification. Failure to qualify
for even one year could result in the Company's incurring
substantial indebtedness (to the extent borrowings are feasible)
or liquidating substantial investments in order to pay the
resulting taxes.
Taxation of United States Shareholders--Generally. As long
as the Company qualifies as a REIT, distributions (including
reinvestments pursuant to the Company's dividend reinvestment
plan) made to the Company's shareholders out of current or
accumulated earnings and profits will be taken into account by
them as ordinary income (which will not be eligible for the 70%
dividends received deduction for corporations). Distributions
that are designated as capital gain dividends will be taxed as
long-term capital gains to the extent they do not exceed the
Company's actual net capital gain for the taxable year although
corporate shareholders may be required to treat up to 20% of any
such capital gain dividend as ordinary income pursuant to Section
291 of the Code. For purposes of computing the Company's
earnings and profits, depreciation on real estate is computed on
a straight-line basis (over 40 years for property acquired after
1986). 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 adjusted basis of the
shareholder's shares, but will reduce the basis of the
shareholder's shares. To the extent that such distributions
exceed the adjusted basis of a shareholder's shares they will be
included in income as long-term capital gain (or short-term
capital gain if the shares have been held for not more than one
year) assuming the shares are a capital asset in the hands of the
shareholder. Shareholders may not include in their individual
income tax returns any net operating losses or capital losses of
the Company.
Dividends declared by the Company in October, November or
December of a taxable year to shareholders of record on a date in
such month, will be deemed to have been received by such
shareholders on December 31, provided the Company actually pays
such dividends during the following January. The Company has,
however, generally declared dividends for the quarter ended
December 31 in January of the following year and paid these
dividends in the following February. As a result, for tax
purposes, the dividend for any calendar year will generally
include the dividends for the first three quarters of that year
plus the dividend for the fourth quarter of the prior year. For
tax purposes, dividends paid in 1987, 1988, 1989, 1990, 1991,
1992 and 1993 aggregated $1.085, $.840, $1.13, $1.16, $1.22,
$1.25 and $1.29, respectively, of which $.289, $.065, $.332,
$.267, $.104, $.218 and $.335, respectively, represented a return
of capital.
A sale of a share will result in recognition of gain or loss
to the holder in an amount equal to the difference between the
amount realized and its adjusted basis. Such a gain or loss will
be capital gain or loss, provided the share is a capital asset in
the hands of the seller. In general, any loss upon a sale or
exchange of shares by a shareholder who has held such shares for
not more than one year (after applying certain rules), will be
treated as a long-term capital loss to the extent of
distributions from the Company required to be treated by such
shareholders as long-term capital gain.
Investors (other than certain corporations) who borrow funds
to finance their acquisition of Shares in the Company could be
limited in the amount of deductions allowed for the interest paid
on the indebtedness incurred in such an arrangement. Under Code
Section 163(d), 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 taxpayer's net
investment income. An investor's net investment income will
include the dividend and capital gain dividend distributions he
receives from the Company; however, distributions treated as a
nontaxable return of the shareholder's basis will not enter into
the computation of net investment income.
In Revenue Ruling 66-106, the IRS ruled that amounts
distributed by a real estate investment trust to a tax-exempt
employee's pension trust did not constitute "unrelated business
taxable income". Revenue rulings are interpretive in nature and
subject to revocation or modification by the IRS. However, based
upon Revenue Ruling 66-106 and the analysis therein, the Company
has received an opinion of counsel that distributions by the
Company to qualified pension plans (including individual
retirement accounts) and other tax-exempt entities should not
constitute "unrelated business taxable income," except as
explained above in the case of a pension trust which holds more
than 10% by value of a "pension-held REIT". This Revenue Ruling
may not apply if a shareholder has borrowed money to acquire
shares.
Under Section 469 of the Code, taxpayers (other than certain
corporations) generally will not be entitled to deduct losses
from so-called passive activities except to the extent of their
income from passive activities. For purposes of these rules,
distributions received by a shareholder from the Company will not
be treated as income from a passive activity and thus will not be
available to offset a shareholder's passive activity losses.
Tax preference and other items which are treated differently
for regular and alternative minimum tax purposes are to be
allocated between a REIT and its shareholders under regulations
which are to be prescribed. It is likely that these regulations
would require tax preference items to be allocated to the
Company's shareholders with respect to any accelerated
depreciation claimed by the Company, but the Company has not
claimed accelerated depreciation with respect to its existing
Properties.
Special Tax Considerations for Foreign Shareholders
The rules governing United States income taxation of
nonresident alien individuals, foreign corporations, foreign
partnerships, and foreign trusts and estates (collectively, "Non-
U.S. Shareholders") are complex, and the following discussion is
intended only as a summary of such rules. Prospective Non-U.S.
Shareholders should consult with their own tax advisors to
determine the impact of Federal, state, and local income tax laws
on an investment in the Company, including any reporting
requirements.
In general, a Non-U.S. Shareholder will be subject to
regular United States income tax with respect to its investment
in the Company if such investment is "effectively connected" with
the Non-U.S. Shareholder's conduct of a trade or business in the
United States, or if the Non-U.S. Shareholder is a nonresident
alien individual who is present in the United States for 183 days
or more during the taxable year. A corporate Non-U.S.
Shareholder that receives income that is (or is treated as)
effectively connected with a U.S. trade or business may also be
subject to the branch profits tax under Section 884 of the Code,
which is payable in addition to regular United States corporate
income tax. The following discussion will apply to Non-U.S.
Shareholders whose investment in the Company is not so
effectively connected.
A distribution by the Company that is not attributable to
gain from the sale or exchange by the Company of a United States
real property interest and that is not designated by the Company
as a capital gain dividend will be treated as an ordinary income
dividend to the extent that it is made out of current or
accumulated earnings and profits. Generally, unless the dividend
is effectively connected with the Non-U.S. Shareholder's conduct
of a trade or business, such a dividend will be subject to a
United States withholding tax equal to 30% of the gross amount of
the dividend unless such withholding is reduced by an applicable
tax treaty. A distribution of cash in excess of the Company's
earnings and profits will be treated first as a nontaxable return
of capital that will reduce a Non-U.S. Shareholder's basis in its
shares (but not below zero) and then as gain from the disposition
of such shares, the tax treatment of which is described under the
rules discussed below with respect to disposition of shares. A
distribution in excess of the Company's earnings and profits may
be subject to 30% dividend withholding if at the time of the
distribution it cannot be determined whether the distribution
will be in an amount in excess of the Company's current and
accumulated earnings and profits. If its subsequently determined
that such distribution is, in fact, in excess of current and
accumulated earnings and profits, the Non-U.S. Shareholder may
seek a refund from the IRS. The Company expects to withhold
United States income tax at the rate of 30% on the gross amount
of any such distributions made to a Non-U.S. Shareholder unless
(i) a lower tax treaty applies and the required form evidencing
eligibility for that reduced rate is filed with the Company or
(ii) the Non-U.S. Shareholder files IRS Form 4224 with the
Company claiming that the distribution is "effectively connected"
income.
For any year in which the Company qualifies as a REIT,
distributions by the Company that are attributable to gain from
the sale or exchange of a United States real property interest
will be taxed to a Non-U.S. Shareholder in accordance with the
Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA").
Under FIRPTA, such distributions are taxed to a Non-U.S.
Shareholder as if such distributions were gains "effectively
connected" with a United States trade or business. Accordingly,
a Non-U.S. Shareholder will be taxed at the normal capital gain
rates applicable to a U.S. Shareholder (subject to any applicable
alternative minimum tax and a special alternative minimum tax in
the case of non-resident alien individuals). Distributions
subject to FIRPTA may also be subject to a 30% branch profits tax
in the hands of a foreign corporate shareholder that is not
entitled to treaty exemption. The Company will be required to
withhold from distributions to Non-U.S. Shareholders, and remit
to the IRS, 35% of the amount of any distribution that could be
designated as capital gain dividends.
Tax treaties may reduce the Company's withholding
obligations. If the amount of tax withheld by the Company with
respect to a distribution to a Non-U.S. Shareholder exceeds the
shareholder's United States liability with respect to such
distribution, the Non-U.S. Shareholder may file for a refund of
such excess from the IRS. It should be noted that the 35%
withholding tax rate on capital gain dividends corresponds to the
maximum income tax rate applicable to corporations but is higher
than the 28% maximum rate on capital gains of individuals.
If the Shares fail to constitute a "United States real
property interest" within the meaning of FIRPTA, a sale of the
Shares by a Non-U.S. Shareholder generally will not be subject to
United States taxation unless (i) investment in the Shares is
effectively connected with the Non-U.S. Shareholder's United
States trade or business, in which case, as discussed above, the
Non-U.S. Shareholder would be subject to the same treatment as
U.S. Shareholders on such gain or (ii) the Non-U.S. Shareholder
is a nonresident alien individual who was present in the United
States for 183 days or more during the taxable year, in which
case the nonresident alien individual will be subject to a 30%
tax on the individual's capital gains.
The Shares will not constitute a United States real property
interest if the Company is a "domestically controlled REIT". A
domestically controlled REIT is a REIT in which at all times
during a specified testing period less than 50% in value of its
shares is held directly or indirectly by Non-U.S. Shareholders.
It is currently anticipated that the Company will be a
domestically controlled REIT, and therefore that the sale of
Shares will not be subject to taxation under FIRPTA. However,
because the Shares will be publicly traded, no assurance can be
given that the Company will continue to be a domestically
controlled REIT. If the Company did not constitute a
domestically controlled REIT, whether a Non-U.S. Shareholder's
sale of Shares would be subject to tax under FIRPTA as a sale of
a United States real property interest would depend on whether
the Shares were "regularly traded" (as defined by applicable
Treasury Regulations) on an established securities market (e.g.,
the New York Stock Exchange, on which the Shares are listed) and
on the size of the selling shareholder's interest in the Company.
If the gain on the sale of the Shares were subject to taxation
under FIRPTA, the Non-U.S. Shareholder would be subject to the
same treatment as a U.S. Shareholder with respect to such gain
(subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien
individuals). In any event, a purchaser of Shares from a Non-
U.S. Shareholder will not be required under FIRPTA to withhold on
the purchase price if the purchased Shares are "regularly traded"
on an established securities market or if the Company is a
domestically controlled REIT. Otherwise, under FIRPTA, the
purchaser of Shares may be required to withhold 10% of the
purchase price and to remit such amount to the IRS.
Federal Estate Tax
Shares owned or treated as owned by an individual who is not
a citizen or resident (as defined for United States federal
estate tax purposes) of the United States at the time of death
will be includible in the individual's gross estate for United
States federal estate tax purposes unless an applicable estate
tax treaty provides otherwise.
Backup Withholding and Information Reporting Requirements
The Company must report annually to the IRS and to each Non-
U.S. Shareholder the amount of dividends paid to, and the tax
withheld with respect to such holder. These information
reporting requirements apply regardless of whether withholding
was reduced or eliminated by an applicable tax treaty. Copies of
these information returns may also be made available under the
provisions of a specific treaty or agreement to the tax
authorities in the country in which the Non-U.S. Shareholder
resides. United States backup withholding tax (which generally
is a withholding tax imposed at the rate of 31% on certain
payments to persons that fail to furnish the information required
under the United States information reporting requirements) will
generally not apply to dividends paid on Shares to a Non-U.S.
Shareholder at an address outside the United States.
The payment of the proceeds from the disposition of Shares
to or through the United States office of a broker will be
subject to information reporting and backup withholding at a rate
of 31% unless the owner, under penalties of perjury, certifies,
among other things, its status as a Non-U.S. Shareholder, or
otherwise establishes an exemption. The payment of the proceeds
from the disposition of Shares to or through a non-U.S. office of
a broker generally will not be subject to backup withholding and
information reporting. In the case of proceeds from a
disposition of Shares paid to or through a non-U.S. office of a
U.S. broker or paid to or through a non-U.S. office of a non-U.S.
broker that is (i) a "controlled foreign corporation" for United
States federal income tax purposes or (ii) a person 50% or more
of whose gross income from all sources for a certain three-year
period was effectively connected with a United States trade or
business, (a) backup withholding will not apply unless the broker
has actual knowledge that the owner is not a Non-U.S.
Shareholder, and (b) information reporting will not apply if the
broker has documentary evidence in its files that the owner is a
Non-U.S. Shareholder (unless the broker has actual knowledge to
the contrary).
Any amounts withheld under the backup withholding rules from
a payment to a Non-U.S. Shareholder will be refunded (or credited
against the Non-U.S. Shareholder's United States federal income
tax liability, if any), provided that the required information is
furnished to the IRS.
Other Tax Consequences. The Company and its shareholders
may be subject to state or local taxation in various state or
local jurisdictions, including those in which it or they transact
business or reside.
There may be other Federal, state, local or foreign income,
or estate and gift, tax considerations applicable to the
circumstances of a particular investor. Shareholders should
consult their own tax advisors with respect to such matters.
ERISA Plans, Keogh Plans and Individual Retirement Accounts
General 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")
("ERISA Plan") must consider whether their investment in the
Company's shares satisfies the diversification requirements of
ERISA, whether the investment is prudent in light of possible
limitations on the marketability of the shares, whether such
fiduciaries have authority to acquire such shares under the
appropriate governing instrument and Title I of ERISA, and
whether such investment is otherwise consistent with their
fiduciary responsibilities. Any ERISA Plan fiduciary should also
consider ERISA's prohibition on improper delegation of control
over or responsibility for "plan assets." 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, such fiduciaries may be
subject to a civil penalty of up to 20% of any amount recovered
by the plan on account of such a violation (the "Fiduciary
Penalty"). Also, fiduciaries of any Individual Retirement
Account ("IRA"), Keogh Plan or other qualified retirement plan
not subject to Title I of ERISA because it does not cover common
law employees ("Non-ERISA Plan") should consider that such an IRA
or non-ERISA Plan may only make investments that are authorized
by the appropriate governing instrument. Fiduciary shareholders
should consult their own legal advisers if they have any concern
as to whether the investment is inconsistent with any of the
foregoing criteria.
Prohibited Transactions. Fiduciaries of ERISA Plans and
persons making the investment decision for an IRA or other
Non-ERISA Plan should also consider the application of the
prohibited transaction provisions of ERISA and the Code in making
their investment decision. Sales and certain other transactions
between an ERISA Plan, IRA, or other Non-ERISA Plan and certain
persons related to it are prohibited transactions. The
particular facts concerning the sponsorship, operations and other
investments of an ERISA Plan, IRA, or other Non-ERISA Plan may
cause a wide range of other persons to be treated as disqualified
persons or parties in interest with respect to it. A prohibited
transaction, in addition to imposing potential personal liability
upon fiduciaries of ERISA Plans, may also result in the
imposition of an excise tax under the Code or a penalty under
ERISA upon the disqualified person or party in interest with
respect to the ERISA or Non-ERISA Plan or IRA. If the
disqualified person who engages in the transaction is the
individual on behalf of whom an IRA is maintained (or his
beneficiary), the IRA may lose its tax-exempt status and its
assets may be deemed to have been distributed to such individual
in a taxable distribution (and no excise tax will be imposed) on
account of the prohibited transaction. Fiduciary shareholders
should consult their own legal advisers if they have any concern
as to whether the investment is a prohibited transaction.
Special Fiduciary and Prohibited Transactions
Considerations. On November 13, 1986 the Department of Labor
("DOL"), which has certain administrative responsibility over
ERISA Plans as well as over IRAs and other Non-ERISA Plans,
issued a final regulation defining "plan assets." The regulation
generally provides that when an ERISA or non-ERISA Plan or IRA
acquires a security that is an equity interest in an entity and
that security is neither a "publicly offered security" nor a
security issued by an investment company registered under the
Investment Company Act of 1940, the ERISA or Non-ERISA Plan's or
IRA's assets include both the equity interest and an undivided
interest in each of the underlying assets of the entity, unless
it is established either that the entity is an operating company
or that equity participation in the entity by benefit plan
investors is not significant.
The regulation defines a publicly offered security as a
security that is "widely held," "freely transferable" and either
part of a class of securities registered under the Securities
Exchange Act of 1934, or sold pursuant to an effective
registration statement under the Securities Act of 1933 (provided
the securities are registered under the Securities Exchange Act
of 1934 within 120 days after the end of the fiscal year of the
issuer during which the offering occurred.) The Company's shares
have been registered under the Securities Exchange Act of 1934.
The regulation provides that a security is "widely held"
only if it is part of a class of securities that is owned by 100
or more investors independent of the issuer and of one another.
However, a security will not fail to be "widely held" because the
number of independent investors falls below 100 subsequent to the
initial public offering as a result of events beyond the issuer's
control.
The regulation provides that whether a security is "freely
transferable" is a factual question to be determined on the basis
of all relevant facts and circumstances. The regulation further
provides that, where a security is part of an offering in which
the minimum investment is $10,000 or less, certain restrictions
ordinarily will not, alone or in combination, affect a finding
that such securities are freely transferable. The restrictions
on transfer enumerated in the regulation as not affecting that
finding include: any restriction on or prohibition against any
transfer or assignment which would result in a termination or
reclassification of the Company for Federal or state tax
purposes, or would otherwise violate any state or Federal law or
court order; any requirement that advance notice of a transfer or
assignment be given to the Company and any requirement that
either the transferor or transferee, or both, execute
documentation setting forth representations as to compliance with
any restrictions on transfer which are among those enumerated in
the regulation as not affecting free transferability, including
those described in the preceding clause of this sentence; any
administrative procedure which establishes an effective date, or
an event prior to which a transfer or assignment will not be
effective; and any limitation or restriction on transfer or
assignment which is not imposed by the issuer or a person acting
on behalf of the issuer. The Company believes that the
restrictions imposed under the Declaration on the transfer of
shares do not result in the failure of the shares to be "freely
transferable." Furthermore, the Company believes that at present
there exist no other facts or circumstances limiting the
transferability of the shares which are not included among those
enumerated as not affecting their free transferability under the
regulation, and the Company 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.
However, the final regulation only establishes a presumption in
favor of a finding of free transferability, and no guarantee can
be given that the DOL or the Treasury Department will not reach a
contrary conclusion.
Assuming that the shares will be "widely held" and that no
other facts and circumstances exist which restrict
transferability of the shares, the Company has received an
opinion of counsel that the shares should not fail to be "freely
transferable" for purposes of the regulation due to the
restrictions on transfer of the shares under the Declaration and
that under the regulation the shares are publicly offered
securities and the assets of the Company will not be deemed to be
"plan assets" of any ERISA Plan, IRA or other Non-ERISA Plan that
invests in the shares.
If the assets of the Company are deemed to be plan assets
under ERISA, (i) the prudence standards and other provisions of
Part 4 of Title I of ERISA would be applicable to investments
made by the Company; (ii) the person or persons having investment
discretion over the assets of ERISA Plans which invest in the
Company would be liable under the aforementioned Part 4 of Title
I of ERISA for investments made by the Company which do not
conform to such ERISA standards unless the Advisor registers as
an investment adviser under the Investment Advisers Act of 1940
and certain other conditions are satisfied; and (iii) certain
transactions that the Company might enter into in the ordinary
course of its business and operation might constitute "prohibited
transactions" under ERISA and the Code.
Item 2. Properties.
General. Approximately 64% of the Company's total
investments are in nursing homes providing long-term care or
retirement complexes, 31% of the Company's total investments are
in nursing homes providing subacute and other specialty
rehabilitation services and 5% are in psychiatric facilities.
The Company believes that the physical plant of each of the
facilities in which it has invested is suitable and adequate for
its present and any currently proposed uses.
The following table summarizes certain information about the
Properties as of December 31, 1993. All dollar figures are in
thousands.
<TABLE>
<CAPTION>
REAL ESTATE OWNED:
Purchase Price/
No. of No. of Mortgage Minimum
Location Facilities Beds Investment Rent/Interest
<S> <C> <C> <C> <C>
Rehabilitation
Facilities
Connecticut 4 660 $42,450 $5,709
Louisiana 1 118 24,376 3,065
Massachusetts 5 762 82,064 10,044
Michigan 1 189 7,051 827
Pennsylvania 1 120 15,599 1,951
<CAPTION>
Long-Term Care and
Retirement Facilities
Arizona 3 320 6,219 911
California 9 1,140 26,549 3,888
Colorado 5 707 19,390 2,546
Connecticut 5 867 40,137 4,804
Illinois 1 230 2,711 397
Iowa 10 676 14,119 1,691
Kansas 1 83 2,209 252
Massachusetts 2 334 21,760 2,752
Missouri 2 215 3,178 498
Ohio 2 400 9,840 1,168
South Dakota 3 381 7,589 1,111
Washington 1 143 5,125 611
Wisconsin 7 1,026 22,977 3,365
Wyoming 3 243 6,459 738
<CAPTION>
Psychiatric
Facilities
Kentucky 1 94 18,373
North Carolina 1 64 6,636 3,377
Total Real Estate:68 8,772 $384,811 $49,705
<CAPTION>
MORTGAGE INVESTMENTS:
Long-Term Care and
Retirement Facilities
Alabama 2 171 $ 3,601 $ 324
California 6 1,011 15,112 1,936
Colorado 5 389 13,600 1,564
Connecticut * 1,215 85
Florida 1 58 965 114
Georgia 4 533 6,883 826
Indiana 10 1,229 27,317 2,828
Iowa * 59 3
Kansas 3 346 6,311 760
Kentucky 1 90 1,362 162
Louisiana 4 387 8,027 1,275
Nebraska 12 834 16,925 1,747
North Carolina 9 879 16,389 1,563
Ohio 7* 903 17,419 2,916
Pennsylvania 1 120 2,891 297
South Carolina 1 102 886 106
Tennessee 1 78 1,077 110
Texas 7 668 6,959 1,171
Wisconsin 2 366 10,283 1,506
Total Mortgages: 76 8,164 $157,281 $19,293
________________
</TABLE>
* Amounts represent or include notes receivable related to
improvements to owned Property, above.
The Lessees and the Mortgagors.
The Company's financial condition depends upon both the
financial condition of the Properties and the financial condition
of the operators of the Properties. The Company believes that its
lessees and mortgagors are able to meet their obligations under
their respective leases and mortgages. The following operators
individually account for 5% or more of the Company's investments.
Horizon. After completion of the Horizon/Greenery Merger,
the Company has invested $140.7 million or 27% of total
investments in 12 Properties (1,738 beds) operated by Horizon.
The occupancy of these facilities was approximately 87% and the
total minimum annual rent and interest due the Company in 1994
for these facilities is $24.6 million. Horizon was formed in
July 1986 by former senior officers of The Hillhaven Corporation.
As of March 1, 1993, Horizon operated 104 facilities located in
18 states. Horizon's common stock is listed on the New York
Stock Exchange ("NYSE").
GranCare. The Company has invested $87 million or 16% of
total investments in 27 Properties (3,908 beds) operated by
GranCare, Inc. ("GranCare"). The occupancy of these facilities
was approximately 89% and the total minimum annual rent and
interest due the Company for these facilities is $12.7 million.
GranCare operates 84 health care facilities and various ancillary
businesses. GranCare Properties in which the Company has
invested are operated by AMS Properties, Inc. ("AMSP") and GCI
Healthcare Centers, Inc. ("GCI"), each an indirect wholly owned
subsidiary of GranCare. The only business of AMSP and GCI is
operation of its respective GranCare Properties. The obligations
of AMSP and GCI to the Company are secured by a pledge of one
million Shares and by guarantees from GranCare and certain of its
affiliates. GranCare's common stock is listed on the NYSE.
Community Care of America. Community Care is a new
corporation organized by certain present and former senior
officers of Integrated Health Services, Inc. and venture capital
investors. The Company invested approximately $60 million, or
11% of total investments, in 26 nursing homes (2,183 beds) and
six retirement housing projects (119 units) operated by Community
Care. The occupancy of these facilities was approximately 88%;
and the total minimum annual rent and interest due to the Company
for these facilities is approximately $6.7 million.
Connecticut Subacute. The Company has invested $32.4
million, or 6% of total investments, in three Properties (480
beds) operated by Connecticut Subacute Corporation ("CSC") and
$34.7 million, or 7% of total investments, in three Properties
(585 beds) operated by CSCII. CSC and CSCII are owned by Barry
M. Portnoy and Gerard M. Martin, trustees of the Company. CSC
and CSCII have agreed to lease these properties from the Company
until the Company locates other suitable operators. The
occupancy was approximately 94% (93% for CSC; 95% for CSCII); and
the total annual rent to the Company for these facilities is $8.6
million ($4.5 million for CSC; $4.1 million for CSCII). Horizon
guarantees CSCII's obligations to the Company for up to five
years.
Item 3. Legal Proceedings.
The Company may be subject to routine litigation in the
ordinary course of business. It is not presently subject to any
legal proceedings which would result in material losses to the
Company. The Company knows of no proceedings contemplated by
governmental authorities relating to the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of shareholders during
the fourth quarter of the year covered by this Form 10-K.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
The Company's Shares are traded on the New York Stock
Exchange (symbol: HRP). The following table sets forth for the
periods indicated the high and low sale prices for the Shares as
reported in the New York Stock Exchange Composite Transactions
reports.
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
1992
First Quarter........... 14 3/4 10 7/8
Second Quarter.......... 12 1/8 8 7/8
Third Quarter........... 12 1/2 11
Fourth Quarter.......... 12 1/2 11 1/4
1993
First Quarter........... 15 11 3/8
Second Quarter.......... 14 12
Third Quarter........... 15 1/8 12 1/2
Fourth Quarter.......... 16 3/4 14
</TABLE>
The closing price of the Shares on the New York Stock
Exchange on March 2, 1994 was $15-3/8.
As of March 2, 1993, there were 3,266 holders of record of
the Shares and the Company estimates that as of such date there
were in excess of 30,000 beneficial owners of the Shares.
Dividends declared with respect to each period for the two most
recent fiscal years and the amount of such dividends and the
respective annualized rates are set forth in the following table.
Annualized
Dividend Dividend
Per Share Rate
1992
First Quarter...... $.31 $1.24
Second Quarter..... .31 1.24
Third Quarter...... .32 1.28
Fourth Quarter..... .32 1.28
1993
First Quarter...... .32 1.28
Second Quarter..... .32 1.28
Third Quarter...... .33 1.32
Fourth Quarter..... .33 1.32
All dividends declared have been paid. The Company intends
to continue to declare and pay future dividends on a quarterly
basis.
In order to qualify for the beneficial tax treatment
accorded to REITs by Sections 856 through 860 of the Internal
Revenue Code of 1986, as amended (the "Code"), the Company is
required to make distributions to shareholders which annually
will be at least 95% of the Company's "real estate investment
trust taxable income" (as defined in the Code). All
distributions will be made by the Company at the discretion of
the Board of Trustees and will depend on the earnings of the
Company, the cash flow available for distribution, the financial
condition of the Company and such other factors as the Board of
Trustees deems relevant. The Company has in the past
distributed, and intends to continue to distribute, substantially
all of its "real estate investment trust taxable income" to its
shareholders.
Dividends declared and paid by the Company in the past have
exceeded earnings and profits and are expected to do so in the
future. For tax purposes, in these circumstances, each dividend
distribution paid with respect to a year is apportioned between a
taxable dividend and a tax-free return of capital. This
apportionment of each year's dividend is the same ratio as the
current and accumulated tax earnings and profits of the Company
bears to the Company's total dividend distributions with respect
to such year. The portion of a distribution treated as tax-free
return of capital reduces a shareholder's basis in his Shares.
The Company reported that 26% of dividends paid with respect to
1993 is considered a return of capital. For income tax purposes,
the dividend paid on February 25, 1994, with respect to cash
available for distribution for the final quarter of fiscal year
1993, is considered a 1994 dividend, and the dividend paid on
February 23, 1993, with respect to cash available for
distribution for the final quarter of 1992, is considered a 1993
dividend.
Maryland law permits a REIT to provide, and the Declaration
provides, that no Trustee, officer, shareholder, employee or
agent of the Company shall be held to any personal liability,
jointly or severally, for any obligation of or claim against the
Company, and that, as far as practicable, each written agreement
of the Company is to contain a provision to that effect. Despite
these facts counsel has advised the Company that in some
jurisdictions the possibility exists that shareholders of a
non-corporate entity such as the Company may be held liable for
acts or obligations of the Company. Counsel has advised the
Company that the State of Texas may not give effect to the
limitation of shareholder liability afforded by Maryland law, but
that Texas law would likely recognize contractual limitations of
liability such as those discussed above. The Company intends to
conduct its business in a manner designed to minimize potential
shareholder liability by, among other things, inserting
appropriate provisions in written agreements of the Company;
however, no assurance can be given that shareholders can avoid
liability in all instances in all jurisdictions.
The Declaration provides that, upon payment by a shareholder
of any such liability, the shareholder will be entitled to
indemnification by the Company. There can be no assurance that,
at the time any such liability arises, there will be assets of
the Company sufficient to satisfy the Company's indemnification
obligation. The Trustees intend to conduct the operations of the
Company, with the advice of counsel, in such a way as to minimize
or avoid, as far as practicable, the ultimate liability of the
shareholders of the Company. The Trustees do not intend to
provide insurance covering such risks to the shareholders.
<PAGE>
Item 6. Selected Financial Data.
Set forth below are selected financial data for the Company
for the periods and dates indicated. This data should be read in
conjunction with, and is qualified in its entirety by reference
to, the financial statements and accompanying notes included
elsewhere in this Form 10-K. Amounts are in thousands, except
per Share information.
<TABLE>
<CAPTION>
Year Ended December 31,
1989 1990 1991 1992 1993
<S> <C> <C> <C> <C> <C>
Operating Statement
Data:
Total revenues........ $23,233 $32,872 $43,835 $48,735 $56,485
Net income............ 7,900 14,280 22,079 27,243 33,417
Cash flow available for
distribution(1)..... 12,561 19,467 30,059 36,853 47,578
Dividends declared.... 13,137 18,927 27,179 33,079 44,869
Per Share:
Net income.......... $ .76 $ .89 $ 1.01 $ 1.02 $ .97
Cash flow available for
distribution(1)... 1.20 1.21 1.38 1.38 1.38
Dividends declared.. 1.14 1.17 1.23 1.26 1.30
Average Shares
Outstanding......... 10,425 16,088 21,834 26,760 34,407
</TABLE>
(1) Cash flow available for distribution is net income plus depreciation
and amortization of deferred interest and finance costs. Distributions
in excess of net income generally constitute a return of capital.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Results of Operations
Year Ended December 31, 1993 compared to Year Ended
December 31, 1992
Total revenues for the year ended December 31, 1993 were
$56.5 million, an increase of $7.8 million or 16% over the year
ended December 31, 1992. Rental income increased to $46.1
million from $43.0 million and interest income increased to
$10.4 million from $5.7 million. Rental income increased as a
result of new purchase lease investments, increases in additional
rent, and improvement financings during 1993. The growth in
interest income is primarily the result of the acquisition since
December 1, 1992, of four pools of performing mortgage loans for
$133.7 million with a principal balance at the time of
acquisition of approximately $148.2 million.
Net income for 1993 increased to $33.4 million, or $.97 per
share, from $27.2 million, or $1.02 per share in the comparable
1992 period. The increase in net income of $6.2 million or 23%
during the 1993 period was primarily the result of new
investments discussed above and a decrease in total expenses of
$2.7 million. On a per share basis, net income decreased
slightly during 1993 primarily as a result of non-recurring
charges related to the early extinguishment of debt. Debt was
retired with the proceeds from the issuance of 10,350,000 and
9,000,000 new shares of the Company's stock during the first and
fourth quarters, respectively, of 1993. Total expenses for 1993
were $18.7 million, a decrease of 13% from $21.5 million for the
comparable 1992 period. Interest expense decreased $3.2 million
as a result of lower average bank borrowings and lower interest
rates during the comparable periods. Advisory fees increased by
$.4 million as a result of new investments while depreciation and
amortization expense remained flat reflecting the fact that the
new mortgage investments occurred throughout the year and the
significant purchase lease investments occurred near year end.
The Company's business plan is to maximize cash flow
available for distribution to shareholders rather than to
maximize net income. Net income is reduced by extraordinary
items, if any, depreciation and amortization and other non-cash
items which have no impact on the cash flow available for
distribution. These items are added back to net income to
determine cash flow available for distribution. Dividends are
principally determined based on the Company's cash flow available
for distribution. The Company's cash flow available for
distribution for the years ended December 31, 1993, and 1992 was
$47.6 million ($1.38 per share) and $36.9 million ($1.38 per
share), respectively. Total cash flow available for distribution
for 1993 increased $10.7 million or 29% over the prior year.
However, on a per share basis, cash flow available for
distribution remained unchanged for the 1993 period compared to
the 1992 period, primarily as a result of the 19.4 million new
shares of the Company's stock issued in 1993. Dividends declared
for the years ended December 31, 1993 and 1992 were $1.30 per
share and $1.26 per share, respectively. Dividends in excess of
net income constitute a return of capital. For 1993, the return
of capital portion was 26% of the dividends.
Cash flow provided by (used for) operations, investing and
financing activities were $46.7 million, ($175.4 million) and
$128.6 million, respectively, for the year ended December 31,
1993, and $41.8 million, ($71.9 million) and $2.0 million,
respectively, for the year ended December 31, 1992.
Year Ended December 31, 1992 compared to Year Ended
December 31, 1991
Total revenues for the year ended December 31, 1992 were
$48.7 million, an increase of $4.9 million or 11% over the year
ended December 31, 1991. Rental income increased to $43.0
million from $36.8 million and interest income decreased to $5.7
million from $7.0 million. Rental income increased primarily as
a result of $54.9 million in purchase lease transactions and
improvement financing during 1992 and the conversion of a $55.0
million mortgage investment to a $72.3 million purchase lease
transaction on March 1, 1991. The change in interest income is
primarily the result of the repayment of the $55.0 million
mortgage investment on March 1, 1991.
Net income for 1992 increased to $27.2 million, or $1.02 per
share, from $22.1 million, or $1.01 per share in the comparable
1991 period. The increase in net income of $5.2 million or 23%
during the 1992 period was primarily the result of new
investments discussed above and a decrease in total expenses of
$.3 million. On a per share basis, net income increased slightly
during 1992 primarily as a net result of new investments made
during the year and the issuance of 6,435,500 new shares of the
Company's stock in September 1991. Total expenses for 1992 were
$21.5 million, a decrease of 1.2% from $21.8 million of the
comparable 1991 period. Interest expense decreased $2.3 million
as a result of lower bank borrowing and lower interest rates
during the comparable periods. Advisory fees increased by $.2
million as a result of new investments since December 31, 1991
and depreciation and amortization expense increased as a result
of the purchase lease and improvement financing investments
during 1992.
The Company's cash flow available for distribution for the
years ended December 31, 1992, and 1991 was $36.9 million ($1.38
per share) and $30.1 million ($1.38 per share), respectively.
Total cash flow available for distribution for 1992 increased
$6.8 million or 23% over the prior year. However, on a per share
basis, cash flow available from operations remained unchanged for
the 1992 period compared to the 1991 period primarily as a net
result of new investments and the issuance of 6,435,500 new
shares of the Company's stock in September 1991. Dividends
declared for the years ended December 31, 1992 and 1991 were
$1.26 per share and $1.23 per share, respectively. Dividends in
excess of net income constitute a return of capital. For 1992,
the return of capital portion was 17% of the dividends.
Cash flow provided by (used for) operations, investing and
financing activities were $41.8 million, ($71.9 million) and $2.6
million, respectively, for the year ended December 31, 1992, and
$19.6 million, ($15.1 million) and $27.8 million, respectively,
for the year ended December 31, 1991.
Liquidity and Capital Resources
Assets increased to $527.7 million as of December 31, 1993
from $374.5 million as of December 31, 1992. The increase of
$153.2 million or 41% is primarily attributable to new real
estate investments of $190.2 million as well as increases in
receivables and other assets of $6.2 million, net of $33.6
million of mortgage principal repayments and $9.8 million of
depreciation and amortization charges for the year ended December
31, 1993.
Real estate mortgages, net, increased as a result of a $72.4
million acquisition of performing mortgage loans with a face
value of $79.9 million from the Resolution Trust Corporation on
May 20, 1993, a $16.0 million acquisition of performing mortgage
loans with a face value of $18.2 million from a group of
institutional investors on September 27, 1993 and a $26.6 million
acquisition of performing mortgage loans with a face value of
$27.9 million originated by Goldome Credit Corporation on
December 10, 1993. These acquisitions were funded using
approximately $22.5 million in cash, $23.0 million borrowed under
the Company's revolving line of credit and $69.5 million borrowed
under a repurchase facility from DLJ Mortgage Capital, Inc.
(DLJMC). The repurchase facility was repaid on December 27,
1993.
On June 4, 1993, the Company acquired three long term care
facilities and related improvement loans pursuant to an Option
Agreement with subsidiaries of SAFECO Corporation, for $5.8
million. The three facilities, which include a total of 428 beds
in Ohio, Iowa and Missouri, are subject to existing leases with
terms expiring between 1995 and 2001 and have several renewal
options. This purchase was funded from the Company's available
cash.
On November 1, 1993, the Company purchased a 143 bed long-
term care facility in Seattle, Washington for $5.1 million from
Greenery Rehabilitation Group, Inc. (Greenery) and simultaneously
leased it to Sun Healthcare Group, Inc. (Sun). In addition, the
Company and Sun agreed to extend the lease arrangements on three
nursing facilities, which had been scheduled to expire in May
1997, through December 2005. The new lease arrangement between
the Company and Sun includes all four facilities and provides for
annual base rent of approximately $2.5 million plus additional
rent beginning in 1995. Sun has renewal options totalling an
additional 20 years. Prior to this transaction, the three
existing leases were between the Company and Horizon Healthcare
Corporation (Horizon) with Sun as sub-lessee to Horizon. This
purchase was funded from the Company's available cash.
On December 30, 1993, the Company completed the financing
for Community Care of America, Inc. (Community Care), a privately
owned corporation, of 26 nursing homes with 2,183 beds and six
retirement apartment complexes with 119 units. The Company
provided financing totalling $26.6 million, secured by mortgages
on certain Nebraska and Colorado facilities and the stock of a
wholly owned subsidiary of Community Care. The Company acquired
the remaining facilities for $33.4 million. In addition, the
Company has agreed to finance up to $7.3 million for capital
improvements to the facilities. The acquired facilities are
leased on a triple net basis. The combined minimum annual rent
and interest revenue expected from this transaction is $6.7
million.
On February 11, 1994, the previously announced merger
transaction between Horizon and Greenery was consummated. In
connection with this merger:
- Horizon has purchased three facilities for $28.4
million from the Company. This has resulted in a gain
to the Company of $3.9 million.
- The Company has provided Horizon with $9.4 million in
first mortgage financing for two facilities in
Michigan. These notes bear interest at 11.5% and have
balloon maturities in December, 2000.
- Horizon has leased seven facilities formerly leased to
Greenery at minimum rents substantially the same as
rent previously paid by Greenery. These leases have 12
year terms and provide renewal options for an
additional 20 years.
- The Company granted Horizon a ten year option to buy,
at a rate of up to one facility per year, any or all of
the seven facilities now leased to Horizon.
- Three facilities in Connecticut have been leased to
Connecticut Subacute Corporation II (CSC II), a newly
formed entity, with lease payments guaranteed by
Horizon for up to five years until a replacement
operator acceptable to the Company is identified.
As a result of the merger, Horizon is now the Company's
largest tenant accounting for approximately 28% of the Company's
total revenues.
At December 31, 1993, the Company had $13.9 million of cash
and cash equivalents. The Company's existing revolving credit
facility had a balance of $40.0 million at December 31, 1993, the
maximum available under this agreement. On February 25, 1994,
the Company closed a new $110 million revolving credit facility
from a syndicate of banks. This facility replaces the existing
line of credit and has a three year maturity with interest at a
spread over LIBOR.
On December 27, 1993, the Company completed an offering of
9,000,000 common shares of beneficial interest to the public.
The net proceeds of the offering of approximately $121.6 million
were used to repay borrowings under the Company's repurchase
facility and to fund the Community Care transaction described
above. On January 19, 1994, the underwriters exercised their
over-allotment option for 601,500 additional shares, resulting in
the Company's receipt of additional net proceeds of approximately
$8.3 million. Earlier in the year, the Company raised
approximately $123.0 million by the issuance of 10,350,000 shares
of the Company's stock. The proceeds were used, in part, to
repay borrowings outstanding under two term loans of $70.0
million and $18.5 million outstanding under the Company's
revolving line of credit.
As of December 31, 1993, the Company had extended
commitments to provide financing totalling approximately $43.2
million. On March 17, 1994, the Company entered into an
agreement with affiliates of Host Marriott Corporation to acquire
14 retirement complexes for $320 million, subject to adjustment.
The 14 complexes are leased to a wholly owned subsidiary of
Marriott International, Inc. ("Marriott") for initial terms
expiring on December 31, 2013 plus renewal options extending for
an additional 20 years. The complexes will be acquired subject
to the existing leases and the obligations to pay rent to the
Company under the leases are and will continue to be fully
guaranteed by Marriott. At the conclusion of the transaction,
Marriott will become the Company's largest single tenant,
constituting approximately 38% of the Company's total investment
portfolio. The Company intends to fund these commitments with a
combination of cash on hand, amounts available under its existing
credit facilities, amounts advanced under new interim credit
facilities and/or proceeds of other financings. Although no
assurance can be given that the Marriott transaction will be
consummated, the Company presently anticipates the transaction
will close in June 1994.
The Company continues to seek new investments to expand and
diversify its portfolio of leased and mortgaged health care
related real estate. The Company believes that the transactions
described above will substantially improve the diversity of
lessees and mortgagors in its existing portfolio and also improve
the credit worthiness of its operators as a group. The Company
intends to balance the use of debt and equity in such a manner
that the long term cost of funds borrowed to acquire or mortgage
finance facilities is appropriately matched, to the extent
practicable, with the terms of the investments made with such
borrowed funds. As of December 31, 1993, the Company's debt as a
percentage of total capitalization was approximately 14%.
Impact of Inflation
Management believes that the Company is not adversely
affected by inflation. In the real estate market, inflation
would tend to increase the value of the Company's underlying real
estate which would be realized at the end of the lessees' fixed
terms. In the health care industry, inflation would increase the
lessees' and mortgagors' revenues, thereby increasing the
Company's additional rent or interest. At December 31, 1993, all
of the Company's outstanding debt was protected to a degree if
interest rates rise by the use of interest hedging agreements.
The Company has interest rate collar agreements which provide for
maximum interest rates of approximately 5.5%.
Item 8. Financial Statements and Supplementary Data
The financial statements and related notes and reports of
independent auditors for the Company are included following Part
IV, beginning at page F-1, and identified in the index appearing
at Item 14(a). The financial statements and financial statement
schedules for Greenery are incorporated by reference to
Greenery's Annual Report on Form 10-K for the year ended
September 30, 1993, Commission File No. 1-10577. The financial
statements and financial statement schedules for GranCare are
incorporated by reference to GranCare's Annual Report on Form 10-
K for the year ended December 31, 1993, Commission File No. 0-
19571.
Item 9. Changes in and Disagreements on Accounting and
Financial Disclosure
Not applicable.<PAGE>
PART III
The information in Part III (Items, 10, 11, 12 and 13) is
incorporated by reference to the Company's definitive Proxy
Statement, which will be filed not later than 120 days after the
end of the Company's fiscal year.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
(a) Index to Financial Statements and Financial Statement
Schedules
Page
----
HEALTH AND REHABILITATION PROPERTIES TRUST
Report of Ernst & Young, Independent Auditors......... F-1
Balance Sheets as of December 31, 1992 and 1993...... F-2
Statements of Income for the years ended
December 31, 1991, 1992 and 1993...................... F-3
Statements of Shareholders' Equity for the
years ended December 31, 1991, 1992 and 1993........... F-4
Statements of Cash Flows for the years ended
December 31, 1991, 1992 and 1993...................... F-5
Notes to Financial Statements ........................ F-6
The following financial schedules are included:
XI -- Real Estate and Accumulated Depreciation...... F-16
XII -- Mortgage Loans on Real Estate.................. F-18
All other schedules for which provision is made in the
applicable accounting regulations of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable, and therefore have been
omitted.
GREENERY REHABILITATION GROUP, INC. AND SUBSIDIARIES
The following financial statements for Greenery are
incorporated by reference from Greenery's Annual Report on Form
10-K for the year ended September 30, 1993, Commission File No.
1-10577.
Report of Independent Auditors
Consolidated Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statement of Changes in
Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
GRANCARE, INC. AND SUBSIDIARIES
The following financial statements for GranCare are
incorporated by reference from GranCare's Annual Report on Form
10-K for the year ended December 31, 1993, Commission File No.
0-19571.
Report of Independent Auditors
Consolidated Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statement of Shareholders'
Equity (Capital Deficiency)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Exhibits:
3.1 - Declaration of Trust, as amended.(2)
3.2 - July, 1992 Amendment to Declaration of Trust.(6)
3.3 - July 1993 Amendment to Declaration of Trust.(7)
3.4 - By-Laws.(1)
10.1 - Advisory Agreement, as amended.(2)(+)
10.2 - Second Amendment to Advisory Agreement.(*)(+)
10.3 - Incentive Share Award Plan.(6)(+)
10.4 - $33 Million Senior Term Loan Agreement.(3)
10.5 - Promissory Note related to the Senior
Term Loan.(3)
10.6 - Open-End Deed Mortgage and Security Agreement
related to the Senior Term Loan.(3)
10.7 - Assignment of Leases and Tents related to the
Senior Term Loan.(3)
10.8 - Subordination Agreement related to the Senior Term
Loan.(3)
10.9 - Master Lease Document.(4)
10.10 - Mortgage and Security Agreement with respect to
River Hills East Healthcare Center.(4)
10.11 - Mortgage and Security Agreement with respect to
River Hills West Healthcare Center.(4)
10.12 - Mortgage and Security Agreement with respect to
Northwest Healthcare Center.(4)
10.13 - Promissory Note.(4)
10.14 - HRPT Shares Pledge Agreement.(4)
10.15 - Voting Trust Agreement.(4)
10.16 - AMS Properties Security Agreement.(4)
10.17 - AMS Subordination Agreement.(4)
10.18 - AMS Guaranty.(4)
10.19 - AMS Pledge Agreement (pledging shares
of AMSP).(4)
10.20 - AMS Holding Co. Pledge Agreement (pledging shares
of AMS).(5)
10.21 - Amended and Restated Renovation Funding
Agreement.(5)
10.22 - Amendment to AMS Transaction Documents.(5)
10.23 - Indemnification Agreement.(6)
10.24 - Mortgage and Security Agreement --
Wauchula, FL.(6)
10.25 - Deed of Trust -- CRS/Texas.(6)
10.26 - GCI Master Lease Document.(6)
10.27 - Amended and Restated Voting Trust Agreement.(6)
10.28 - Amended and Restated HRP Shares Pledge
Agreement.(6)
10.29 - Guaranty, Cross-Default and Cross-
Collateralization Agreement.(6)
10.30 - CSC $8,000,000 Working Capital Promissory Note.(6)
10.31 - February 1994 Revolving Credit Facility.(*)
10.32 - Marriott Senior Living Services Purchase and Sale
Agreement.(*)
25 - Powers of Attorney (*)
- --------------------
(*) Previously filed.
(+) Management contract or compensatory plan or arrangement.
(1) Incorporated by reference to the Company's Registration
Statement No. 33-9412 on Form S-11 dated October 10, 1986 and
amendments thereto.
(2) Incorporated by reference to the Company's Registration
Statement No. 33-16799 on Form S-11 dated August 27, 1987 and
amendments thereto.
(3) Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1990 and
amendments thereto.
(4) Incorporated by reference to the Company's Current
Report on Form 8-K dated December 28, 1990 and amendments
thereto.
(5) Incorporated by reference to the Company's Annual
Report on Form 10-K for its fiscal year ended December 31, 1991.
(6) Incorporated by reference to the Company's Registration
Statement No. 33-55684 on Form S-11 dated December 23, 1992 and
amendments thereto.
(7) Incorporated by reference to the Company's Registration
Statement No. 33-71422 on Form S-3 dated November 1, 1993 and
amendments thereto.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of
the period covered by this report.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Trustees and Shareholders
Health and Rehabilitation Properties Trust
We have audited the accompanying balance sheets of Health
and Rehabilitation Properties Trust as of December 31, 1993 and
1992, and the related statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended
December 31, 1993. Our audits also included the financial
statement schedules listed in the Index at Item 14(a). 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 financial position
of Health and Rehabilitation Properties Trust at December 31,
1993 and 1992, and the results of its operations and its cash
flows for each of the three years in the period ended December
31, 1993, 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.
ERNST & YOUNG
Boston, Massachusetts
February 11, 1994
<PAGE>
<TABLE>
<CAPTION>
HEALTH AND REHABILITATION PROPERTIES TRUST
BALANCE SHEETS
(dollars in thousands, except share amounts)
December 31,
1992 1993
ASSETS
<S> <C> <C>
Real estate properties, at cost
(including properties leased to
affiliates with a cost of
$217,443 and $217,947, respectively):
Land $ 31,016 $ 33,450
Buildings and improvements 289,578 330,988
Equipment 16,482 20,373
337,076 384,811
Less accumulated depreciation 26,194 34,969
310,882 349,842
Real estate mortgages and notes, net
(including amounts due from
affiliates of $17,600 and $1,215,
respectively) 47,173 157,281
Cash and cash equivalents 14,104 13,887
Interest and rent receivable 1,088 3,039
Deferred interest and finance costs,
net, and other assets 1,221 3,613
$374,468 $527,662
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings $138,500 $ 73,000
Security deposits 4,500 8,300
Due to affiliate 203 709
Accounts payable and accrued expenses 2,964 4,518
Shareholders' equity:
Preferred shares of beneficial interest,
$.01 par value, 50,000,000 shares
authorized, none issued
Common shares of beneficial interest,
$.01 par value, 100,000,000 shares
authorized, 26,763,500 shares and
44,121,000 shares issued and
outstanding, respectively 268 441
Additional paid-in capital 246,459 470,572
Cumulative net income 85,472 118,889
Distributions of cash flow available
from operations ( 103,898 ) ( 148,767 )
Total shareholders' equity 228,301 441,135
$374,468 $527,662
</TABLE>
See accompanying notes<PAGE>
<TABLE>
<CAPTION>
HEALTH AND REHABILITATION PROPERTIES TRUST
STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
Year Ended December 31,
1991 1992 1993
<S> <C> <C> <C>
Revenues:
Rental income $36,806 $43,029 $46,069
Interest income 7,029 5,706 10,416
Total revenues 43,835 48,735 56,485
Expenses:
Interest 11,741 9,466 6,217
Advisory fees 2,030 2,231 2,591
Depreciation and amortization 7,286 9,076 9,087
General and administrative 699 719 852
Total expenses 21,756 21,492 18,747
Income before extraordinary item 22,079 27,243 37,738
Extraordinary item - early
extinguishment of debt and
termination costs of interest
rate hedging arrangements - - (4,321)
Net income $22,079 $27,243 $33,417
Weighted average shares
outstanding 21,834 26,760 34,407
Per share amounts:
Income before extaordinary item $ 1.01 $ 1.02 $ 1.10
Net income $ 1.01 $ 1.02 $ .97
</TABLE>
See accompanying notes<PAGE>
<TABLE>
<CAPTION>
HEALTH AND REHABILITATION PROPERTIES TRUST
STATEMENTS OF SHAREHOLDERS' EQUITY
(dollars in thousands)
Distributions
AdditionalCumulativeof Cash Flow
Number ofCommon Paid-in Net Available From
Shares Shares Capital Income Operations Total
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1991 18,997,500$ 190 $ 161,653 $ 36,150$ (50,233)$ 147,760
Issuance of common
shares of beneficial
interest for
acquisition of
real estate 1,320,000 13 10,547 - - 10,560
Issuance of common
shares of beneficial
interest, net 6,435,500 65 74,162 - - 74,227
Exercise of
stock options 2,000 - 16 - - 16
Net income - - - 22,079 - 22,079
Dividends - - - - ( 20,215) ( 20,215)
Balance at December 31,
1991 26,755,000 268 246,378 58,229 (70,448) 234,427
Expenses related to the
issuance of common shares
of beneficial interest - - (15) - - (15)
Exercise of stock
options 1,000 - 8 - - 8
Stock grants 7,500 - 88 - - 88
Net income - - - 27,243 - 27,243
Dividends - - - - ( 33,450) ( 33,450)
Balance at December 31,
1992 26,763,500 268 246,459 85,472 (103,898) 228,301
Redemption of common
shares of beneficial
interest (2,000,000) (20) ( 20,580) - - (20,600)
Issuance of common
shares of
beneficial interest,
net 19,350,000 193 244,599 - - 244,792
Stock grants 7,500 - 94 - - 94
Net income - - - 33,417 - 33,417
Dividends - - - - (44,869) (44,869)
Balance at December 31,
1993 44,121,000 $441 $470,572 $118,889 $(148,767) $441,135
</TABLE>
See accompanying notes<PAGE>
<TABLE>
<CAPTION> HEALTH AND REHABILITATION PROPERTIES TRUST
STATEMENTS OF CASH FLOWS
(dollars in thousands)
Year Ended December 31,
1991 1992 1993
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 22,079 $ 27,243$ 33,417
Adjustments to reconcile net income to cash
provided by operating activities:
Loss on early extinguishment of debt - - 4,321
Depreciation and amortization 7,286 9,076 9,087
Amortization of deferred interest costs 694 534 700
(Decrease) increase in security deposits (7,280) 4,500 3,800
Deferred finance costs (502) (126) (583)
Change in assets and liabilities:
(Increase) decrease in interest and rent
receivable and other assets (106) 735 (6,156)
Increase (decrease) in accounts payable
and accrued expenses (2,683) 1,219 1,554
Increase (decrease) in deferred income
and due to affiliate 94 (1,343) 506
Cash provided by operating activities 19,582 41,838 46,646
Cash flows from investing activities:
Investments in mortgage loans (500) (19,573)(142,475)
Repayment of mortgage loans 840 - 15,982
Real estate acquisitions (15,406) (52,287) (47,735)
Loans to affiliates - (2,476) (1,460)
Repayment of loans to affiliates - 2,476 245
Cash used for investing activities (15,066) (71,860)(175,443)
Cash flows from financing activities:
Proceeds from (cost of) issuance of
common shares 74,243 (7) 244,792
Proceeds from borrowings 14,000 35,500 98,700
Payments on borrowings (36,500) -(164,200)
Termination costs of debt and interest
rate hedging arrangements - - (2,843)
Payment related to stock surrender - - (3,000)
Dividends paid (23,894) (33,450) (44,869)
Cash provided by financing activities 27,849 2,043 128,580
Increase (decrease) in cash
and cash equivalents 32,365 (27,979) (217)
Cash and cash equivalents at
beginning of period 9,718 42,083 14,104
Cash and cash equivalents at
end of period $ 42,083 $ 14,104 $ 13,887
Supplemental cash flow information:
Interest paid $ 11,522 $ 7,330 $ 6,522
Supplement non-cash investing and financing activities:
Repayment of mortgage loans $ 54,961 $ 4,160 $ 17,600
Issuance (redemption) of common shares 10,560 - (20,600)
Real estate acquisitions (72,321) (68,378) -
Real estate exchanged - 34,000 -
Cash paid $ (6,800) $(30,218)$ (3,000)
</TABLE>
See accompanying notes<PAGE>
Note 1. Organization
Health and Rehabilitation Properties Trust, a Maryland real
estate investment trust (the Company), was organized on October
9, 1986. The Company invests in income-producing health care
related real estate.
Note 2. Summary of Significant Accounting Policies
Real estate properties and mortgages. Real estate
properties and mortgages are recorded at original cost.
Depreciation is provided for on a straight-line basis over the
following estimated useful lives:
Buildings and improvements 40 years
Equipment 12 years
Cash and cash equivalents. Cash, over-night repurchase
agreements and short-term investments with maturities of three
months or less at date of purchase are carried at cost plus
accrued interest, which approximate market value.
Deferred interest and finance costs. Costs incurred to
secure certain borrowings and related interest rate hedge
agreements are capitalized and amortized over the terms of their
respective loans. At December 31, 1993, the Company's interest
rate hedge arrangements are carried at cost of $2,989 and have an
estimated fair market value of approximately $3,208, based on
quoted market prices.
Revenue recognition. Rental income from operating leases is
recognized as earned over the life of the lease agreements.
Interest income is recognized as earned over the terms of the
real estate mortgages. Additional rent and interest revenues are
recognized as earned. Additional rent and interest for the years
ended December 31, 1991, 1992 and 1993 were $1,786, $1,809, and
$2,312, respectively.
Net income per share. Net income per share is computed
using the weighted average number of shares outstanding during
the period. Supplemental earnings per share for the years ended
December 31, 1991 and 1993 were $.99 and $.91, respectively,
based on the assumption that the issuance of shares in the
Company's public offerings in September 1991, January 1993 and
December 1993, and the related repayment of outstanding bank
borrowings took place at the beginning of each year.
Tax status. The Company is a real estate investment trust
under the Internal Revenue Code of 1986, as amended.
Accordingly, the Company expects not to be subject to federal
income taxes on amounts distributed to shareholders provided it
distributes at least 95% of its real estate investment trust
taxable income and meets certain other requirements for
qualifying as a real estate investment trust.
Note 3. Leases
The Company's real estate properties are leased pursuant to
noncancellable, fixed term operating leases expiring from 1994 to
2013. The leases generally provide for renewal terms at existing
rates followed by several market rate renewal terms. Each lease
is a triple net lease and generally requires the lessee to pay
minimum rent, additional rent based upon increases in net patient
revenues and all operating costs associated with the leased
property.
On June 4, 1993, the Company acquired for cash, three long-
term care facilities and related improvement loans for $5,778.
The facilities are subject to existing leases with terms expiring
between 1995 and 2001.
On November 1, 1993, the Company purchased a 143 bed long-term
care facility in Seattle, Washington for $5.1 million from
Greenery Rehabilitation Group, Inc. (Greenery) and simultaneously
leased it to Sun Healthcare Group, Inc. (Sun). In addition, the
Company and Sun agreed to extend the lease arrangements on three
nursing facilities that had been scheduled to expire in May,
1997, through December, 2005.
On December 30, 1993, the Company acquired 12 nursing homes
and five retirement apartment complexes for $33,400 from
subsidiaries of Community Care of America, Inc. (together with
its subsidiaries, CCA). In addition, the Company has agreed to
provide improvement financing of $7,300 to CCA. The acquired
facilities have been leased on a triple net basis. The minimum
annual rent from this transaction will be approximately $3,814.
On February 11, 1994, in connection with the merger of
Greenery into Horizon Healthcare Corporation (Horizon) the
Company sold to Horizon for $28,400, three facilities that had
been leased to Greenery. The Company realized a capital gain of
approximately $3,906 on the sale of these properties. In
addition, Horizon has leased seven facilities previously leased
to Greenery, on substantially similar terms with the leases
extended through 2005. The Company has also granted Horizon a
ten year option to buy, at the rate of no more than one facility
per year, the seven leased facilities.
Also, in connection with the Horizon-Greenery merger, the
Company leased the three remaining Greenery facilities to a newly
formed corporation, Connecticut Subacute Corporation II (CSCII),
an affiliate of HRPT Advisors, Inc. (Advisor). These facilities
are being managed by and the lease payments are guaranteed by
Horizon for a term of up to five years. The terms of these lease
arrangements are substantially similar to the original lease
arrangements.
Future minimum lease payments to be received by the Company
during the current terms of the leases are as follows:
Twelve months ended December 31,
1994 $ 46,813
1995 40,084
1996 37,065
1997 32,248
1998 20,127
Thereafter 71,388
$247,725
<TABLE>
<CAPTION>
Note 4. Real Estate Mortgages and Notes Receivable
December 31,
1992 1993
<S> <C> <C>
Mortgage notes receivable from an
affiliate, repaid in 1993 $ 17,600 $ -
Mortgage notes receivable, net of
discounts of $3,437 and $11,951,
respectively, due March 1994
through March 2001 18,726 118,367
Mortgage notes receivable due
December 2016 - 19,600
Mortgage notes receivable due
December 2000 10,847 10,283
Secured note receivable due 2016 - 7,000
Note receivable from an affiliate
due June, 1995 - 1,215
Other secured notes receivable - 816
$ 47,173 $157,281
</TABLE>
The average minimum interest rates on the mortgages range
from 8.8% to 13.75%.
On January 2, 1993, $17,600 of mortgage notes were prepaid
to the Company by the surrender of two million shares of the
Company's stock owned by the mortgagee and its affiliates.
Concurrently, the Company waived all prepayment penalties under
the mortgage investments and paid $3,000 in cash.
On May 20, 1993, the Company acquired a portfolio of
mortgage loans from the Resolution Trust Corporation (RTC) for
$72,411. The loans, which are secured by first mortgages on 27
nursing homes, had a face value of approximately $79,883 and have
maturities ranging from 1996 to 2001. The acquisition was funded
using approximately $18,411 of cash with the balance from a
$54,000 borrowing under a repurchase facility. The repurchase
facility accrued interest at a floating rate based on LIBOR plus
a premium and was repaid in full on December 27, 1993.
On September 27, 1993, the Company acquired a portfolio of
mortgage loans from a group of institutional investors for
$16,000. The loans, which are secured by first mortgages on six
nursing homes, had a face value of approximately $18,200 and have
maturities ranging from 1994 to 1997. The acquisition was funded
using approximately $4,100 of cash with the balance borrowed
under the repurchase facility referred to above.
On December, 10, 1993, the Company acquired for $26,600, a
portfolio of mortgage loans secured by first mortgages on 17
nursing homes. These loans have a combined principal balance of
approximately $27,900 and mature between 1994 and 1999. The
acquisition was primarily funded by borrowing $23,000 on the
Company's revolving credit facility and the balance from the
repurchase facility referred to above.
In connection with the CCA purchase-lease transaction
described in Note 3, the Company provided first mortgage
financing on 14 nursing homes and one retirement apartment
complex for $19,600 and a $7,000 note secured by a first lien on
substantially all of the assets of the borrower at a weighted
average interest rate of 10.9%. The notes mature in December
2016. Minimum annual interest from this transaction will be
$2,909.
On February 11, 1994, in connection with the Horizon-
Greenery merger discussed in Note 3, the Company provided Horizon
with $9,400 first mortgage financing for two facilities. One of
the facilities previously was owned by the Company and leased to
Greenery. The mortgage notes bear interest at 11.5% per annum
and will mature on December 31, 2000.
At December 31, 1993, the estimated aggregate fair market
value of the Company's mortgages and notes receivable was
$170,063 based on estimates using discounted cash flow analyses
and rates currently prevailing for comparable mortgages and
notes.
Note 5. Common Shares of Beneficial Interest
On January 20, 1993, the Company received approximately
$107,315 net proceeds from the public offering of 9,000,000
shares of the Company's stock. The proceeds were used, in part,
to repay outstanding borrowings of $70,000 under the Company's
term loans and $18,500 under the Company's revolving line of
credit. On February 17, 1993, the Company received additional
net proceeds of approximately $15,822 and issued 1,350,000 shares
of the Company's stock in connection with the exercise of the
underwriters' over-allotment option.
On December 27, 1993 the Company received approximately
$121,655 net proceeds from the public offering of 9,000,000
shares of the Company's stock. The proceeds were used to repay
$63,871 of borrowings outstanding under the repurchase facility
and to fund the CCA purchase-lease and mortgage transactions
described in Notes 3 and 4. On January 19, 1994, the Company
received additional net proceeds of approximately $8,301 and
issued 601,500 shares of the Company's stock in connection with
the exercise of the underwriters' over-allotment option.
In connection with the prepayment of the loans in January
and December 1993, the Company terminated certain interest rate
hedge arrangements, wrote off certain deferred costs related to
the prepayment and recorded extraordinary charges of
approximately $4,321.
Note 6. Financing Commitments
At December 31, 1993, the Company had total financing
commitments aggregating $43,236 of which $33,836 is committed for
improvements to certain properties owned and leased or mortgage
financed by the Company. During the twelve months ended December
31, 1993, the Company provided improvement financing at existing
properties aggregating $3,682.
At December 31, 1993, the Company's financing commitments
approximate fair market values. On February 11, 1994, in
connection with the Horizon-Greenery merger, $13,000 of financing
commitments were terminated.
Note 7. Pro Forma Information (Unaudited)
The following summarized Pro Forma Statements of Income
assume that all of the Company's real estate financing
transactions during 1992 and 1993, both 1993 stock offerings, the
January 19, 1994 over-allotment option exercise described in Note
5 and the Horizon-Greenery merger described in Notes 3 and 4 had
occurred on January 1, 1992 and give effect to the Company's
borrowing rates throughout the periods indicated.
The summarized Pro Forma Balance Sheet is intended to present
the financial position of the Company as if the January 19, 1994
over-allotment option exercise described in Note 5 and the
Horizon-Greenery merger described in Notes 3 and 4, had occurred
on December 31, 1993.
These pro forma statements are not necessarily indicative of
the expected results of operations or the Company's financial
position for any future period. Differences could result from,
but are not limited to, additional property investments, changes
in interest rates and changes in the debt and/or equity structure
of the Company.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
Pro Forma Statements of Income 1992 1993
(Unaudited)
<S> <C> <C>
Total revenues $66,669 $67,980
Total expenses 19,399 16,656
Net income $47,270 $51,324
Weighted average shares
outstanding (in thousands) 44,723 44,723
Net income per share $ 1.06 $ 1.15
</TABLE>
<TABLE>
<CAPTION>
December 31,
Pro Forma Balance Sheet 1993
(Unaudited)
<S> <C>
Real estate properties, net $325,348
Real estate mortgages and notes, net 166,681
Other assets 28,737
Total assets $520,766
Borrowings $ 58,500
Other liabilities 9,027
Shareholders' equity 453,239
Total liabilities and
shareholders' equity $520,766
</TABLE>
Note 8. Transactions With Affiliates
The Company has an advisory agreement with the Advisor
whereby the Advisor provides investment, management and
administrative services to the Company. The Advisor is owned by
Gerard M. Martin and Barry M. Portnoy. Messrs Martin and Portnoy
are shareholders of CSCII and Connecticut Subacute Corporation
(CSC), lessees of the Company, directors of Horizon and serve as
Trustees of the Company. Mr. Portnoy is a partner in a law firm
which provides legal services to the Company and was a minority
shareholder of the owner of Continuing Healthcare Corporation
(Continuing Health). The Advisor is compensated monthly at an
annual rate equal to .7% of the Company's real estate investments
up to $250 million and .5% of such investments thereafter and,
beginning in 1994, will be entitled to an annual incentive fee
comprised of shares of the Company's stock based upon a formula.
Advisory fees for the years ended December 31, 1991, 1992 and
1993 were $2,030, $2,231 and $2,591, respectively. Certain
officers of the Company are also officers of the Advisor.
At December 31, 1993, the Advisor owned 996,250 shares which
represented a 2.3% interest in the Company.
Amounts resulting from transactions with affiliates included
in the accompanying statements of income, shareholders' equity
and cash flows are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1991 1992 1993
<S> <C> <C> <C>
Dividends paid to the Advisor $ 1,215 $ 1,245 $ 1,325
Dividends paid to Continuing
Health and affiliates 2,044 2,500 -
Rent from Greenery 9,050 17,531 22,527
Rent and interest income
from CSC - 929 4,483
Rent and interest income from
Continuing Health and affiliates 17,341 10,218 -
Interest expense paid to Greenery - 31 270
</TABLE>
Note 9. Additional Security
The obligations of GranCare, Inc. (together with its
subsidiaries, GranCare) under various leases and mortgages are
secured by 1,000,000 shares of the Company's stock and
substantially all the assets of the special operating
subsidiaries. All obligations of GranCare are cross defaulted,
cross guaranteed and cross secured.
The obligations of the CCA leases, mortgages and note due to
the Company are secured by a $3,800 cash security deposit and
substantially all the assets of certain of the special operating
CCA subsidiaries and by CCA's parent. Substantially all of the
obligations are cross defaulted, cross guaranteed and cross
secured.
The Company has also obtained a $3,000 letter of credit,
from another tenant, to secure its annual lease obligations of
approximately $3,377.
On February 11, 1994, in connection with to the Horizon-
Greenery merger, the $4,500 cash security deposit held to secure
Greenery's lease obligations was returned.
At December 31, 1993, the Company's carrying value of the
security deposits approximate fair value.
<TABLE>
<CAPTION>
Note 10. Borrowings December 31,
1992 1993
<C> <C> <C>
Term loan payable, repaid in January 1993 $ 45,000 $ -
Term loan payable, repaid in January 1993 25,000
Term loan payable, due June 1995,
interest only at LIBOR plus a premium 33,000 33,000
$40,000 revolving line of credit, repaid
in February 1994 35,500 40,000
$138,500 $73,000
</TABLE>
The term loan outstanding at December 31, 1993 is secured by
first mortgage liens on three properties having an aggregate net
book value of $40,568. Substantially all of the Company's assets
are pledged to secure the revolving line of credit.
At year end, the Company had commitments totalling $110
million from a syndicate of banks to provide a new revolving
credit facility. The new facility will replace the existing
revolver and will mature in 1997, unless extended. This new
revolver will bear interest at a spread over LIBOR.
At December 31, 1993, the Company had interest rate hedge
agreements which cap interest rates on up to $100,000 of
borrowings. The maximum rates payable on such borrowings under
these arrangements is 5.5% per annum over the terms of the loans.
The maturities of the hedge agreements range from 1995 through
1998.
The required principal payments on the borrowings during the
five years subsequent to December 31, 1993 are $73,000, due in
1995.
At December 31, 1993, the estimated fair market value of the
Company's borrowings was $72,185 based on estimates using
discounted cash flow analyses and current rates offered to the
Company for comparable debt.
Note 11. Concentration of Credit Risk
Substantially all of the Company's assets are invested in
income producing health care related real estate. At December
31, 1993, 49% of the Company's real estate mortgages and net real
estate properties were subject to leases and mortgages with
Greenery and GranCare as indicated in the following table.
<TABLE>
<CAPTION>
Notes,
Mortgages and
Real Estate Rent and Mortgage
Properties, Net Interest Revenue
%of %of
Amount Total Amount Total
<S> <C> <C> <C> <C>
Greenery $169,121 33% $ 22,527 40%
GranCare 82,111 16 13,657 25
Other 255,891 51 19,458 35
$507,123 100% $ 55,642 100%
</TABLE>
In connection with the merger discussed in Notes 3 and 4, on
February 11, 1994, the Company's investments with Greenery were
terminated and the Company's net investments with Horizon
increased to $129,850.
Note 12. Long-term Incentive Plans
On May 12, 1992, the Company adopted the 1992 Incentive
Share Award Plan (the Plan). A total of 1,000,000 shares of the
Company's stock are reserved for issuance under the Plan. The
Plan provides for the grant, by the Board of Trustees, of the
Company's shares to selected officers and Trustees of the
Company, the Company's investment advisor and others rendering
valuable services to the Company. The Plan also provides for
annual grants of 500 shares to each Independent Trustee, as part
of their annual fee. On each of July 10, 1992 and June 29, 1993,
7,500 shares were issued under this plan of which 6,000 shares
were granted to officers of the Company and certain employees of
the Advisor and 1,500 shares were granted to the Independent
Trustees. The shares granted to officers of the Company and
employees of the Advisor vest over a three year period, with one-
third of the shares vesting immediately. At December 31, 1993,
985,000 shares of the Company remain reserved for issuance under
the Plan.
Note 13. Selected Quarterly Financial Data (Unaudited)
The following is a summary of the unaudited quarterly
results of operations of the Company for 1992 and 1993.
<TABLE>
<CAPTION>
1992
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Total revenues $11,539 $11,858 $12,414 $12,924
Net income 6,495 6,562 6,812 7,374
Net income per share .24 .25 .25 .28
</TABLE>
<TABLE>
<CAPTION>
1993
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Total revenues $12,650 $13,763 $14,727 $15,345
Income before extraordinary
item 8,409 9,536 9,739 10,054
Extraordinary item (3,392) - - (929)
Net income 5,017 9,536 9,739 9,125
Per share data:
Income before extraordinary
item .27 .27 .28 .28
Net income .16 .27 .28 .26
</TABLE>
Note 14. Events Occurring Subsequent to Independent Auditors'
Report (Unaudited)
On March 17, 1994, the Company entered into an agreement
with Host Marriott Corporation to acquire 14 retirement complexes
containing 3,932 residences or beds for $320,000, subject to
adjustment. The complexes are triple net leased through December
31, 2013 to a wholly owned subsidiary of Marriott International,
Inc. (Marriott). Minimum annual rent is approximately $28,000
with additional rent equal to 4.5% of revenues in excess of a
base amount. The leases are cross-defaulted and guaranteed by
Marriott. The acquisition is expected to close in June 1994.<PAGE>
<TABLE>
<CAPTION> HEALTH AND REHABILITATION PROPERTIES TRUST
SCHEDULE XI
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1993
(Dollars in thousands)
COSTS GROSS AMOUNT AT
REAL ESTATE PROPERTIES INITIAL COST TO COMPANY CAPITALIZED WHICH CARRIED AT (2) ORIGINAL
ENCUM- -------------------------- SUBSEQUENT TO --- CLOSE OF PERIOD --- (1) ACCUM. DATE CONST.
LOCATION STATE BRANCE LAND BUILDING EQUIPMENT ACQUISITION LAND BUILDING EQUIPMENT TOTAL DEPRN. ACQUIRED DATE
- ---------- ----- ------ ---- --------- --------- ----------- ------ -------- --------- ------ ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BEVERLY MA $864 $10,530 $305 $233 $864 $10,763 $305 $11,932 $1,803 11/01/87 1973
BROOKFIELD WI 834 3,615 234 1,276 834 4,891 234 5,959 347 12/28/90 1954
CHESHIRE CT 520 7,110 270 111 520 7,221 270 8,011 1,249 11/01/87 1963
CLINTONVILLE WI 14 1,610 85 37 14 1,640 92 1,746 145 12/28/90 1960
CLINTONVILLE WI 49 1,542 83 105 49 1,639 91 1,779 144 12/28/90 1965
DANVERS MA 838 8,460 282 255 838 8,715 282 9,835 1,471 11/01/87 1972
FAIRLAWN OH 330 4,970 400 727 330 5,697 400 6,427 1,126 05/15/87 1971
FRESNO CA 738 2,411 166 188 738 2,554 211 3,503 238 12/28/90 1968
HURON SD 144 2,945 163 4 144 2,949 163 3,256 131 06/30/92 1968
HURON SD 45 917 51 1 45 918 51 1,014 41 06/30/92 1968
KILLINGLY CT 240 4,910 450 460 240 5,370 449 6,059 1,112 05/15/87 1972
LAKEWOOD CO 232 3,566 200 724 232 4,285 205 4,722 349 12/28/90 1972
LANCASTER CA 601 1,736 123 804 601 2,462 201 3,264 186 12/28/90 1963
LITTLETON CO 185 4,782 261 348 185 5,050 341 5,576 450 12/28/90 1965
MADISON WI 144 1,544 89 109 144 1,651 91 1,886 145 12/28/90 1920
MILWAUKEE WI 116 3,260 178 123 116 3,379 182 3,677 298 12/28/90 1960
MILWAUKEE WI 277 3,594 289 0 277 3,594 289 4,160 199 03/27/92 1969
NASHVILLE IL 75 2,424 132 80 75 2,458 178 2,711 225 12/28/90 1964
NEWPORT BEACH CA 1,176 1,584 145 1,173 1,176 2,734 167 4,077 172 12/28/90 1962
NEW HAVEN CT 1,681 14,201 752 0 1,681 14,201 752 16,634 678 05/11/92 1971
PALM SPRINGS CA 103 1,196 68 702 103 1,866 99 2,068 123 12/28/90 1969
PHOENIX AZ 655 2,366 159 4 655 2,370 159 3,184 108 06/30/92 1963
SAN DIEGO CA 1,114 964 109 480 1,114 1,402 151 2,667 129 12/28/90 1969
SOUIX FALLS SD 253 2,896 166 4 253 2,900 166 3,319 129 06/30/92 1960
STOCKTON CA 382 2,593 157 4 382 2,597 157 3,136 117 06/30/92 1968
TARZANA CA 1,277 864 113 804 1,277 1,647 134 3,058 141 12/28/90 1969
THOUSAND OAKS CA 622 2,365 157 310 622 2,647 185 3,454 231 12/28/90 1965
VAN NUYS CA 716 322 56 225 716 505 98 1,319 51 12/28/90 1969
WATERFORD CT 86 4,214 500 453 86 4,667 499 5,252 1,023 05/15/87 1965
WAUKESHA WI 68 3,276 176 251 68 3,524 179 3,771 301 12/28/90 1958
WILLIMANTIC CT 134 3,316 250 479 166 3,763 250 4,179 732 05/15/87 1965
YUMA AZ 223 1,984 116 4 223 1,988 116 2,327 89 06/30/92 1984
YUMA AZ 103 569 35 1 103 570 35 708 26 06/30/92 1984
CLARINDA IA 77 1,300 153 0 77 1,300 153 1,530 2 12/30/93 1968
GRAND JUNCTION CO 136 2,311 272 0 136 2,311 272 2,719 3 12/30/93 1978
LARAMIE WY 191 3,250 382 0 191 3,250 382 3,823 5 12/30/93 1964
MEDIAPOLIS IA 94 1,589 187 0 94 1,589 187 1,870 2 12/30/93 1973
MUSCATINE IA 246 4,190 493 0 246 4,190 492 4,928 6 12/30/93 1964
PAONIA CO 115 1,950 229 0 115 1,950 229 2,294 3 12/30/93 1981
SMITH CENTER KS 111 1,878 221 0 111 1,878 221 2,210 3 12/30/93 1971
TARKIO MO 102 1,734 204 0 102 1,734 204 2,040 3 12/30/93 1970
TOLEDO IA 153 2,601 306 0 153 2,601 306 3,060 4 12/30/93 1975
WINTERSET IA 111 1,878 221 0 111 1,878 221 2,210 3 12/30/93 1973
WORLAND WY 132 2,239 264 0 132 2,239 264 2,635 3 12/30/93 1970
/TABLE
<PAGE>
<TABLE>
<CAPTION>
HEALTH AND REHABILITATION PROPERTIES TRUST
SCHEDULE XI - Continued
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1993
(Dollars in thousands)
COSTS GROSS AMOUNT AT
REAL ESTATE PROPERTIES INITIAL COST TO COMPANY CAPITALIZED WHICH CARRIED AT (2) ORIGINAL
ENCUM- -------------------------- SUBSEQUENT TO --- CLOSE OF PERIOD --- (1) ACCUM. DATE CONST.
LOCATION STATE BRANCE LAND BUILDING EQUIPMENT ACQUISITION LAND BUILDING EQUIPMENT TOTAL DEPRN. ACQUIRED DATE
- ---------- ----- ------ ---- --------- --------- ----------- ------ -------- --------- ------ ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GRAND JUNCTION CO 204 3,467 408 0 204 3,467 408 4,079 5 12/30/93 1975
COUNCIL BLUFFS IA 50 467 0 0 50 467 0 517 6 06/04/93 1970
GROVE CITY OH 332 3,081 0 0 332 3,081 0 3,413 41 06/04/93 1965
SEATTLE WA 256 4,356 513 0 256 4,356 513 5,125 19 11/01/93
ST JOSEPH MO 111 1,027 0 0 111 1,027 0 1,138 14 06/04/93 1976
------ ------- ------ ------- --------- ------- --------- -------- ------
LONG TERM CARE FACILITIES 17,260 149,954 10,573 10,479 17,292 159,935 11,035 188,262 13,831
------ ------- ------ ------ ------ ------- ------ ------- ------
BOSTON MA (3) 2,164 19,836 1,000 1,978 2,164 21,816 1,000 24,980 2,811 05/01/89 1968
BRISTOL CT 465 8,905 330 283 465 9,188 330 9,983 1,763 12/23/86 1972
HOWELL MI 80 4,110 260 2,601 103 6,090 858 7,051 1,051 06/05/87 1966
HYANNIS MA 829 7,048 415 0 829 7,048 415 8,292 342 05/11/92 1972
MIDDLEBOROUGH MA 1,771 14,961 791 0 1,771 14,961 791 17,523 714 05/11/92 1975
N. ANDOVER MA 1,448 10,435 614 0 1,448 10,435 614 12,497 507 05/11/92 1985
N. STRABANE PA 1,499 12,743 750 606 1,518 13,320 760 15,598 1,112 03/01/91 1985
SLIDELL LA 2,323 19,745 1,161 1,147 2,353 20,848 1,176 24,377 1,733 03/01/91 1984
WALLINGFORD CT (3) 557 10,649 394 73 557 10,722 394 11,673 2,101 12/23/86 1974
WATERBURY CT (3) 514 9,822 364 68 514 9,890 364 10,768 1,939 12/23/86 1971
WATERBURY CT 1,003 8,522 501 0 1,003 8,522 501 10,026 414 05/11/92 1974
WORCESTER MA 1,829 14,186 885 1,870 1,829 16,058 885 18,772 2,517 05/01/88 1970
------ ------- ----- ------ ------ ------- ------ -------- -------
REHABILITATION FACILITIES 14,482 140,962 7,465 8,626 14,554 148,898 8,088 171,540 17,004
------ ------- ------ ------ ------ ------- ------ ------- ------
HICKORY NC 454 5,703 324 155 454 5,858 324 6,636 1,086 10/02/87 1938
LOUISVILLE KY 1,150 16,297 926 0 1,150 16,297 926 18,373 3,048 10/02/87 1835
------ ------- ------ ------ --------- ------- --------- -------- -------
PSYCHIATRIC FACILITIES 1,604 22,000 1,250 155 1,604 22,155 1,250 25,009 4,134
------ ------- ------ ------ --------- ------- --------- -------- -------
TOTAL REAL ESTATE $33,346 $312,915 $19,288 $19,260 $33,450 $330,988 $20,373 $384,811 $34,969
========= ========= ========= ========= ========= ======== ======== ======== =======
- ------------------
</TABLE>
<TABLE>
<CAPTION>
(1) Aggregate cost for federal income tax purposes is approximately $348,155.
(2) Depreciation is provided for on buildings and improvements over 40 years, equipment over 12 years.
(3) Encumbered by a $33,000 five year term loan due in 1995.
Reconciliation of the carrying amount of real estate at the beginning of the period:
Real Estate and Equipment Accumulated Depreciation
<S> <C> <C>
Balance at January 1, 1991$200,839 $12,487
Additions 80,927 6,722
Balance at December 31, 1991281,766 19,209
Additions 56,447 8,122
Adjustments to Exchange Contract (1,137) (1,137)
Balance at December 31, 1992 337,076 26,194
Additions 47,735 8,775
Balance at December 31, 1993 $384,811 $34,969
/TABLE
<PAGE>
<TABLE>
<CAPTION>
HEALTH AND REHABILITATION PROPERTIES TRUST
SCHEDULE XII
MORTGAGE LOANS ON REAL ESTATE
December 31, 1993 Principal
(Dollars in thousands) Amount of
Loans Subject
Final Face Carrying to Delinquent
Interest Maturity Value of Value of Principal or
Location Rate Date Periodic Payment Terms Mortgage Mortgage(1) Interest
- ------------ -------- --------- ---------------------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
CONNORSVILLE, 6.25% 07/01/98 Principal and interest $ 5,795 $ 4,974 -
IN payable monthly in
arrears. $5.3 million
due at maturity.
ELKHART, IN 9.875% 05/01/97 Principal and interest 8,057 7,963 -
payable monthly in
arrears. $7.5 million
due at maturity.
MEDINA, OH 6.75% 02/01/98 Principal and interest 6,151 5,373 -
payable monthly in
arrears. $6.5 million
due at maturity.
TORRANCE, CA 10.46% 01/01/97 Principal and interest 5,114 4,911 -
payable monthly in
arrears. $4.9 million
due at maturity.
CARROLLTON, 9.50% 08/10/95 Principal and interest 5,311 5,116 -
GA payable monthly in
arrears. $5.2 million
due at maturity.
MILWAUKEE, WI 13.75% 12/28/00 Principal and interest 9,400 9,400 -
PEWAUKEE, WI payable monthly in
advance. $5.7 million
due at maturity.
CANON CITY, CO 11.5% 12/31/16 Principal and interest 13,600 13,600
SPRING VILLAGE, payable monthly in
CO arrears.
DELTA, CO
AINSWORTH, NE 9.00% 12/31/16 Principal and interest 6,000 6,000 -
ASHLAND, NE payable monthly in
BLUE HILL, NE arrears.
CENTRAL CITY,
NE
GRETNA, NE
SUTHERLAND, NE
WAVERLY, NE
56 MORTGAGES 0% 03/94 N/A 100,773 90,913 -
-12.50% -08/08
-------- -------- -------
TOTAL $160,201 $148,250 $0
======== ======== =======
</TABLE>-----------------
(1) Also represents cost for federal income tax purposes.
<TABLE>
<CAPTION>
Reconciliation of the carrying amount of mortgage loans at the beginning of the period:
<S> <C>
Balance at January 1, 1991$ 87,061
New Mortgage Loans 500
Collections of Principal (55,801)
Balance at December 31, 1991 31,760
New Mortgage Loans 19,573
Collections of Principal (4,160)
Balance at December 31, 1992 47,173
New Mortgage Loans 133,939
Amortization of discount 965
Collections of principal (33,827)
Balance at December 31, 1993$148,250<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
HEALTH AND REHABILITATION PROPERTIES TRUST
By:/S/ David J. Hegarty
David J. Hegarty
Executive Vice President and
Chief Financial Officer
Dated: March 29, 1994
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons, or by their attorney-in-fact, in the capacities and on
the dates indicated.
</TABLE>
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
Mark J. Finkelstein* President and Chief March 29, 1994
Mark J. Finkelstein Executive Officer
David J. Hegarty* Executive Vice March 29, 1994
David J. Hegarty President and Chief
Financial Officer
John L. Harrington* Trustee March 29, 1994
John L. Harrington
Arthur G. Koumantzelis*Trustee March 29, 1994
Arthur G. Koumantzelis
Justinian Manning, C.P.*Trustee March 29, 1994
Rev. Justinian Manning,
C.P.
Gerard M. Martin* Trustee March 29, 1994
Gerard M. Martin
/s/ Barry M. Portnoy Trustee March 29, 1994
Barry M. Portnoy
*By: /s/ Barry M. Portnoy
Barry M. Portnoy
Attorny-in-fact
/TABLE
<PAGE>
