SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[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, 1995
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 RETIREMENT PROPERTIES TRUST
(Exact name of registrant as specified in its charter)
Maryland 04-6558834
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(State or other jurisdiction (IRS Employer Identification No.)
of incorporation)
400 Centre Street, Newton, Massachusetts 02158
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(Address of principal executive offices) (Zip Code)
617-332-3990
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(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
Floating Rate Senior Notes, Series A, Due 1999 New York Stock Exchange
Floating Rate Senior Notes, Series B, Due 1999 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 $1,067,850,542 based on the $17.125 closing price per
share for such stock on the New York Stock Exchange on March 22, 1996. For
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purposes of this calculation, 3,791,416 shares held by HRPT Advisors, Inc. (the
"Advisor"), including a total of 2,777,766 shares held by the Advisor solely in
its capacity as voting Trustee under certain voting Trust agreements, and an
aggregate of 17,514 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 22, 1996: 66,165,166.
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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 14, 1996. The financial
statements and financial statement schedules for Marriott International, Inc.
("Marriott") are incorporated herein by reference to Marriott's Annual Report on
Form 10-K for the year ended December 29, 1995, Commission File No. 1-12188.
CERTAIN IMPORTANT FACTORS
The Company's Annual Report on Form 10-K contains statements which
constitute forward looking statements within the meaning of the Securities
Litigation Reform Act of 1995. Those statements appear in a number of places in
this Form 10-K and include statements regarding the intent, belief or
expectations of the Company, its Trustees or its officers with respect to
expansion of the Company's portfolio, its ability to pay dividends, its tax
status as a real estate investment trust and the Company's access to debt or
equity capital markets or to other sources of funds and statements of
assumptions underlying such statements as to intent, belief or expectations.
Readers are cautioned that any such forward looking statements are not
guarantees of future performance and involve risks and uncertainties and that
actual results may differ materially from those contained in the forward looking
statement as a result of various factors. Such factors include the status of the
economy, compliance with and changes to regulations and payment and
reimbursement policies within the health care industry, competition within the
health care industry, and changes to federal, state and local legislation. The
accompanying information contained in this Form 10-K, including under the
headings "Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations", identifies other important factors that
could cause such differences.
THE AMENDED AND RESTATED DECLARATION OF TRUST OF THE COMPANY, DATED JULY 1,
1994, 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 RETIREMENT PROPERTIES
TRUST" REFERS TO THE TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS TRUSTEES,
BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER,
EMPLOYEE OR AGENT OF THE COMPANY SHALL BE HELD TO ANY PERSONAL LIABILITY,
JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, THE COMPANY. ALL
PERSONS DEALING WITH THE COMPANY, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF
THE COMPANY FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.
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HEALTH AND RETIREMENT PROPERTIES TRUST
1995 FORM 10-K ANNUAL REPORT
Table of Contents
Part I
Page
Item 1. Business................................................... 1
Item 2. Properties................................................. 16
Item 3. Legal Proceedings.......................................... 18
Item 4. Submission of Matters to a Vote of Security Holders........ 19
Part II
Item 5. Market for the Registrant's Common Stock and
Related Stockholders Matters ........................... 20
Item 6. Selected Financial Data................................... 21
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 22
Item 8. Financial Statements and Supplementary Data............... 25
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................... 25
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 14 , 1996, which is
expected to 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
Report on Form 8-K..................................... 26
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PART I
Item 1. Business.
The Company. Health and Retirement Properties Trust (the "Company") was
organized on October 9, 1986, as a Maryland real estate investment trust. The
Company primarily invests in retirement communities, assisted living centers,
long-term care facilities and other income producing healthcare related
properties. The facilities in which the Company has made investments by
mortgage, purchase lease or merger transactions are hereinafter referred to
individually as a "Property" and collectively as "Properties".
As of December 31, 1995, the Company owned 102 Properties acquired for an
aggregate of $778.2 million and had mortgage investments in 57 Properties
aggregating $141.3 million. The Company also has a 32% equity investment in
Hospitality Properties Trust ("HPT") of approximately $100 million, for total
real estate investments of approximately $1 billion. The Properties are
described in "Business Developments Since January 1, 1995" and "Properties".
Number of Total Investment
State Properties at December 31, 1995
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(in thousands)
Arizona ............................ 5 $ 28,062
California ......................... 15 77,262
Colorado ........................... 11 36,419
Connecticut ........................ 9 86,929
Florida ............................ 6 132,939
Georgia ............................ 1 1,830
Illinois ........................... 2 39,453
Iowa ............................... 13 20,428
Kansas ............................. 9 13,133
Kentucky ........................... 1 1,344
Louisiana .......................... 1 19,500
Maryland ........................... 1 33,080
Massachusetts ...................... 8 145,531
Michigan ........................... 2 9,400
Missouri ........................... 3 5,269
Nebraska ........................... 16 15,263
New Hampshire ...................... 1 3,689
New Jersey ......................... 1 13,001
North Carolina ..................... 11 24,187
Ohio ............................... 7 25,087
Pennsylvania ....................... 2 18,394
South Dakota ....................... 3 7,589
Texas .............................. 6 16,864
Vermont ............................ 8 29,763
Virginia ........................... 3 57,662
Washington ......................... 1 5,193
Wisconsin .......................... 9 43,901
Wyoming ............................ 4 8,346
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Total Health Care Related Properties 159 $ 919,518
Investment in HPT .................. 37 99,959
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Total All Properties ............... 196 $1,019,477
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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 "Advisor"), the Company's investment 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.
The Trustees have established a policy that the Company will not purchase
or mortgage finance properties for an amount which exceeds the appraised value
of such properties. 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. From time to time, the Trustees have made exception to, and may in
the future modify or rescind, this policy when they have determined it to be in
the best interests of the Company and its shareholders.
The Company's investments may be structured using leases with minimum and
additional rent and escalation 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.
In connection with its revolving credit facility, the Company has agreed to
obtain bank 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, that investment in rehabilitation treatment, acute care,
medical office buildings, medical clinics and properties in the United Kingdom
not exceed 40%, 15%, 15%, 25% and 10%, respectively, of total investments and
that no new psychiatric care or hotel investments be made. 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 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. During 1994 the
Company issued $200 million of floating rate notes. The notes were issued in two
Series. The Series A notes may be called, at the Company's option, beginning in
April 1995. The Series B notes, which were issued at a discount, may be called,
at the Company's option, beginning in July 1996. The notes bear interest at a
spread over LIBOR and mature in July 1999. At December 31, 1995, the Company had
a revolving credit facility available to it totaling $250 million. As of March
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25, 1996, $70 million of this amount was outstanding, and $180 million was
available to be drawn. All but $17.6 million of outstanding indebtedness is at
variable interest rates based upon the London Interbank Offered Rate (LIBOR)
plus a premium, 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 average rates payable
on $200 million of indebtedness is 6.24% per annum. The current hedge agreements
mature in 1997.
The Company's borrowing guidelines established by its Trustees and
covenants in various debt agreements prohibit the Company from maintaining a
debt to equity ratio of greater than 1 to 1. At December 31, 1995, the Company's
debt to equity ratio was .39 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. 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, 1995
In January 1995, the Company purchased nine nursing homes located in
Vermont and New Hampshire. The purchase price was approximately $31.9 million;
of this amount approximately $24.4 million was paid with 1,777,766 Shares of the
Company's stock. These nursing facility Properties were leased to an affiliate
of the Company on terms generally similar to the Company's other existing
leases.
In January 1995, the Company provided $11.5 million of first mortgage
financing due in 2007 , secured by four assisted living facilities located in
North Carolina.
In March 1995, the Company's then wholly owned subsidiary, HPT, acquired 21
Courtyard by Marriott(R) hotels for approximately $179.4 million. HPT's
acquisition of these properties was funded by the Company under a demand loan
(the "HRP Loan") of approximately $163.3 million. The Company funded this
transaction with cash and by drawing $140 million on its revolving credit
facility. In August, 1995, HPT completed its initial public offering (the "HPT
IPO") of 8,350,000 shares at an offering price to the public of $25.00 per
share. HPT used proceeds from the HPT IPO, in part, to repay amounts outstanding
on the HRP Loan. Prior to the HPT IPO, the Company's investment in HPT was $1
million, representing 40,000 shares. Concurrent with the completion of the HPT
IPO, the Company acquired an additional 3,960,000 shares of HPT at a per share
price of $25.00 by canceling $99 million of the HRP Loan. The remaining balance
of the HRP Loan was repaid to the Company during the fourth quarter of 1995. At
December 31, 1995, the Company owned an aggregate of 4,000,000 shares of HPT,
representing an equity interest in HPT of approximately 32%.
In April 1995, the Company purchased or debt financed 14 nursing facility
Properties located in Nebraska, Iowa, Kansas and Missouri for approximately $20
million. These Properties are leased to or mortgaged with Community Care of
America, Inc., an existing tenant of the Company.
In September 1995, the Company purchased two health care related office
buildings for $48.3 million. The buildings are managed by M&P Partners Limited
Partnership ("M&P"), an affiliate of the Company.
In September 1995, the Company purchased a nursing facility Property
located in New Jersey for $13 million. This Property is leased for 15 years to a
New York Stock Exchange listed health care operator.
In November 1995, the Company sold its only two psychiatric properties for
approximately $12 million in cash. At December 31, 1994, the Company reserved
$10 million for the loss on the sale of the properties. The realized loss on the
disposition was $8.5 million.
In December 1995, the Company acquired for $15 million a medical clinic,
which is leased to the U.S. Department of Veterans' Affairs. This building is
managed by M&P.
In December 1995, the Company sold 6,500,000 Shares in a public offering
and received net proceeds of approximately $97.9 million. The proceeds were
used, in part, to prepay $96 million in outstanding indebtedness under the
revolving credit facility. In January, 1996, the Company received additional net
proceeds of approximately $7.2 million resulting from the underwriters' exercise
of their overallotment option as to 475,000 Shares.
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In February 1996, the Company purchased a medical building located in New
York which is leased to Health Insurance Plan of New York for 20 years.
In the ordinary course of its business the Company occasionally provides
financing to tenants or mortgagors for improvements to properties owned or
mortgaged by the Company. From January 1, 1995 through December 31, 1995, such
financings aggregated approximately $7.6 million. When such financing is
provided, the rent or interest payable to the Company is correspondingly
increased.
The Company receives regularly scheduled principal payments and occasional
prepayments of its mortgage receivables. For the year ended December 31, 1995,
these principal repayments and prepayments totaled $24.4 million.
In January 1995, Horizon/CMS Healthcare Corporation ("Horizon/CMS"), one of
the Company's tenants, exercised its purchase option affecting one of the
healthcare facilities which it leased from the Company. The sale price was $24.5
million with $5 million paid in cash and the balance in a purchase money note
secured by a first mortgage on this facility due in 2000; the Company recognized
a gain of $2.5 million on this sale.
During 1995, the Company increased its revolving bank credit facility to
$250 million. The current facility matures in 1998, and funds may be drawn and
repaid periodically during the term. The funding is provided by a bank
syndicate, and borrowings under this credit facility are unsecured and bear
interest, at the Company's option, at prime or a spread over LIBOR.
The Company has plans to restructure its current revolving credit facility.
In connection with the restructuring, the Company expects to recognize a loss on
the early extinguishment of debt of approximately $3.0 million.
In the ordinary course of its business, the Company regularly evaluates
investment opportunities and enters into contracts to purchase and lease or
mortgage finance health care related real estate. Several such possible
investments are currently under consideration and at various stages of the
contractual process. Similarly, the Company is regularly engaged in discussions
with its existing tenants and mortgagors concerning lease and loan extensions
and other modifications of the terms of existing leases and mortgages. The
Company does not believe the consummation of any one or all of these various
transactions is reasonably likely to have a material impact upon its financial
condition or operations.
During 1995, Mark J. Finkelstein resigned as President of the Company to
form a company which leases certain nursing homes from the Company. David J.
Hegarty, formerly Executive Vice President, was promoted to replace Mr.
Finkelstein as President and Chief Operating Officer. Upon consummation of the
initial public offering for HPT, John Murray resigned as the Company's Chief
Financial Officer to assume a comparable position at HPT, and two Trustees of
the Company, Arthur Koumantzelis and John Harrington, resigned to become
Trustees of HPT. Mr. Murray was replaced as Chief Financial Officer of the
Company by Ajay Saini, who had previously served as the Company's Chief
Accounting Officer. Messrs. Koumantzelis and Harrington have been replaced on
the Company's Board of Trustees by Bruce M. Gans, M.D. and Ralph J. Watts; Dr.
Gans is President of the Detroit Rehabilitation Institute and Mr. Watts is
President and Chief Executive Officer of Cardiovascular Ventures, Inc.
The Advisor.
The Advisor is a Delaware corporation owned by Barry M. Portnoy and Gerard
M. Martin. The Advisor's principal place of business is 400 Centre Street,
Newton, Massachusetts and its telephone number is (617) 332-3990. The Advisor
provides management services and investment advice to the Company. The Advisor
also acts as the investment advisor to HRP and has other business interests. The
Directors of the Advisor are Gerard M. Martin, Barry M. Portnoy and David J.
Hegarty. The officers of the Advisor are David J. Hegarty, President and
Secretary, John G. Murray, Executive Vice President and Chief Financial Officer,
John A. Mannix, Vice President, Adam D. Portnoy, Vice President and Ajay Saini,
Treasurer. Effective April 1, 1995, Mark J. Finkelstein resigned as President
and Director to pursue his interests in operating nursing homes and became
president of Subacute Management Corporation of America, Inc. Messrs. Hegarty
and Saini are also officers of the Company.
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Employees.
As of March 29, 1996, the Company had no employees. The Advisor, which
administers the day-to-day operations of the Company, has twenty five full-time
employees and three active directors.
Regulation and Reimbursement.
Compliance with federal, state and local statutes and regulations governing
health care facilities is a prerequisite to continuation of the Company's
business. 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 may from time to time receive notices of
non-compliance with certain standards, and certain facilities in Connecticut and
Massachusetts are subject to provisional or probationary licenses, the Company
believes that such actions have not, in fiscal year 1995 and through the date
hereof, had any material adverse effect on the operations of the Company.
Horizon/CMS Healthcare Corp.'s ("Horizon/CMS) licenses to operate the
Massachusetts facilities leased to it are probationary subject to certain
conditions.
Federal Regulation. A number of legislative proposals that would effect major
reforms of the health care system have been introduced in Congress. Such
proposals include universal health coverage, employer mandated health insurance,
and a single government health insurance plan. Following the failure of the
Clinton administration's proposed Health Security Act or other major health care
reform legislation to become law in 1994 or 1995, legislative proposals for more
incremental reforms have also been introduced, such as group health insurance
plans for small businesses, health insurance industry reforms, health care
anti-fraud legislation, and Medicare and Medicaid reforms and cost containment
measures, including proposals that Medicaid be administered through block grants
to the states. 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 Company or its lessees or mortgagors. New regulations
adopted by the Health Care Finance Administration governing Medicare and
Medicaid nursing facility surveys, certification, and enforcement became
effective on July 1, 1995. Under the regulations states have begun to implement
a wide range of enforcement remedies, and penalties for noncompliance with
Medicare/Medicaid standards may increase in the future. An adverse determination
concerning any operator's licensure or eligibility for government reimbursement
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.
Enforcement proceedings under such laws and regulations have increased.
Horizon/CMS, one of the Company's tenants and manager of three facilities leased
to an affiliate of the Advisor, has recently disclosed that it is being
investigated for possible Medicare billing fraud by the U.S. Justice Department
and the U.S. Department of Health and Human Services, in connection with
Medicare related co-insurance billings submitted by Horizon/CMS retroactively
for services provided by Greenery Rehabilitation Group, Inc. If any operator of
the Company's Properties were found to have violated such laws or regulations,
it, and therefore the Company, could be materially adversely affected unless and
until any such Property or Properties were returned to compliance or 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 form
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,
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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 state and federal budget shortfalls and funding restrictions 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. Such appeals, if
decided adversely, could have a material effect upon the respective financial
positions of the operators and the Company.
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 in October of 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 in October of 1992, DHHS issued final regulations which limit the
amount of Medicare reimbursement available to a facility for rental or lease
expenses paid after a sale-leaseback 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 to provide financing to facility
operators and others in the health care industry.
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 believes that it is and it 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") . These Code provisions
are highly technical and complex. 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 taxable years 1987 through 1995 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
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operating results, the various qualification tests imposed under the Code. No
assurance can be given that the actual results of the Company's operation for
any one taxable year will satisfy such requirements. See "-- Failure to
Qualify".
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 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.
Income Tests. 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 such new
capital, is qualifying income under the 75% test. There can be no assurance that
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the Company will be able to find sufficient qualifying investments for all
proceeds of such offerings. 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). 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 could 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 share holdings
attributed to them under the attribution rules.
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 to
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
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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 non-qualified income.
Asset Tests. 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. The Company's investment
in HPT is subject to an exception from this provision of the Code.
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 non-qualifying 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. There can be no assurance
that such borrowing or financing would be available on favorable terms.
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.
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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
is depreciated on a straight-line basis over periods ranging up to 40 years and
personal property owned by the Company generally is depreciated over periods
ranging up to 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.
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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 per share paid in 1987, 1988, 1989, 1990, 1991, 1992, 1993, 1994 and
1995 aggregated $1.085, $.840, $1.13, $1.16, $1.22, $1.25, $1.29, $1.32 and
$1.37 respectively, of which $.289, $.065, $.332, $.267, $.104, $.218, $.335,
$.081 and $.161 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.
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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-US Shareholders") are complex, and the following
discussion is intended only as a summary of such rules. Prospective Non-US
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-US 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-US Shareholder's conduct of a trade or
business in the United States, or if the Non-US 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-US Shareholder that receives income that is
(or is treated as) effectively connected with a US 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-US 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-US. 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-US 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-US 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-US 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-US
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-US Shareholder in
accordance with the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, such distributions are taxed to a Non-US Shareholder
as if such distributions were gains "effectively connected" with a United States
trade or business. Accordingly, a Non-US Shareholder will be taxed at the normal
capital gain rates applicable to a US 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-US Shareholders, and remit to the
IRS, 35% of the amount of any distribution that could be designated as capital
gain dividends to the extent such dividends are attributable to the sale or
exchange by the Company of United States real property interests.
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-US
Shareholder exceeds the shareholder's United States liability with respect to
such distribution, the Non-US Shareholder may file for a refund of such excess
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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-US Shareholder
generally will not be subject to United States taxation unless (i) investment in
the Shares is effectively connected with the Non-US Shareholder's United States
trade or Business, in which case, as discussed above, the Non-US Shareholder
would be subject to the same treatment as US Shareholders on such gain or (ii)
the Non-US 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-US 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-US 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-US Shareholder would be subject to the same treatment as a
US 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-US
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 included 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-US 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-US 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-US 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-US Shareholder, or
otherwise establishes an exemption. The payment of the proceeds from the
disposition of Shares to or through a non-US 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-US office of a US
broker or paid to or through a non-US office of a non-US 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-US Shareholder, and (b) information
reporting will not apply if the broker has documentary evidence in its files
that the owner is a Non-US Shareholder (unless the broker has actual knowledge
to the contrary).
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Any amounts withheld under the backup withholding rules from a payment to a
Non-US Shareholder will be refunded (or credited against the Non-US
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 or an 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 or an 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.
-14-
<PAGE>
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 issuer for Federal or state tax purposes,
or would otherwise violate any state or Federal law or court order; any
requirement that advance notice of a transfer or assignment be given to the
issuer and any requirement that either the transferor or transferee, or both,
execute documentation setting forth representations as to compliance with any
restrictions on transfer which are among those enumerated in the regulation as
not affecting free transferability, including those described in the preceding
clause of this sentence; any administrative procedure which establishes an
effective date, or an event prior to which a transfer or assignment will not be
effective; and any limitation or restriction on transfer or assignment which is
not imposed by the issuer or a person acting on behalf of the issuer. 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 or an 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.
-15-
<PAGE>
Item 2. Properties
General. Approximately 50% of the Company's total investments are in long
term care facilities, including 17% in nursing facilities with subacute
services; 34% are in retirement and assisted living communities; 6% are in
health care related office buildings, ambulatory health care facilities and
related real estate and 10% is an equity investment in HPT. The Company believes
that the physical plant of each of the facilities in which it has invested is
suitable and adequate for its present use and any currently proposed uses. At
December 31, 1995, the Company had real estate investments, at cost, totaling
over $1 billion leased to or operated by over 30 separate companies.
In September 1994, the Company purchased 14 retirement communities
containing 3,952 residences or beds for $320 million. These communities are
triple net leased through December 31, 2013 to a wholly owned subsidiary of
Marriott International, Inc. ("Marriott"). The leases provide for fixed rent and
additional rentals equal to a percentage 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 are guaranteed by Marriott.
The following table summarizes certain information about the Properties as
of December 31, 1995. All dollar figures are in thousands.
INVESTMENT IN OWNED REAL ESTATE:
<TABLE>
<CAPTION>
Number of Number of Investment Minimum
Location Facilities Beds/Units Amount Rent
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Skilled Nursing Facilities with
Subacute Services:
Connecticut 4 660 $ 45,133 $ 5,709
Massachusetts 5 762 82,058 10,044
Pennsylvania 1 120 15,598 1,951
Retirement and Assisted Living Facilities:
Arizona 2 296 21,842 1,655
California 1 402 31,789 3,319
Florida 5 1,522 131,991 9,986
Illinois 1 363 36,742 1,600
Maryland 1 351 33,080 4,054
South Dakota 1 59 1,014 127
Texas 1 145 12,411 1,213
Virginia 3 848 57,662 5,817
Long Term Care Facilities:
Arizona 3 320 6,220 810
California 9 1,140 27,105 4,677
Colorado 6 756 21,837 2,942
Connecticut 5 867 40,231 4,779
Illinois 1 230 2,711 452
Iowa 13 862 20,428 2,226
Kansas 6 411 8,250 905
Missouri 3 305 5,269 774
Nebraska 1 80 1,483 165
</TABLE>
-16-
<PAGE>
<TABLE>
<CAPTION>
Number of Number of Investment Minimum
Location Facilities Beds/Units Amount Rent
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
New Hampshire 1 108 3,689 430
New Jersey 1 140 13,001 1,418
Ohio 2 400 9,872 1,183
South Dakota 2 322 6,575 854
Vermont 8 808 29,763 3,317
Washington 1 143 5,193 611
Wisconsin 7 1,026 31,518 4,676
Wyoming 4 295 8,346 920
Health Care Related Office Buildings,
Ambulatory Health Care Facilities and
Related Real Estate:
California 1 -- 3,927 516
Massachusetts 3 -- 63,473 6,958
------------------------------------------------
Total Owned Real Estate 102 13,741 $778,211 $84,088
------------------------------------------------
</TABLE>
-17-
<PAGE>
<TABLE>
<CAPTION>
INVESTMENTS IN MORTGAGES AND NOTES:
Number of Number of Investment Minimum
Location Facilities Beds/Units Amount Interest
<S> <C> <C> <C> <C>
Skilled Nursing Facilities with
Subacute Services:
Connecticut -- -- $ 1,565 $ 149
Louisiana 1 118 19,500 2,145
Michigan 1 189 5,100 587
Retirement and Assisted Living Facilities:
California 3 110 12,309 1,385
North Carolina 4 405 11,500 1,305
Long Term Care Facilities:
California 1 578 2,132 250
Colorado 5 389 14,582 1,564
Florida 1 58 948 121
Georgia 1 124 1,830 214
Kansas 3 346 4,883 731
Kentucky 1 90 1,344 180
Michigan 1 153 4,300 494
Nebraska 15 1,032 13,780 1,234
North Carolina 7 675 12,687 1,468
Ohio 5 719 15,215 2,042
Pennsylvania 1 120 2,796 313
Texas 5 496 4,453 544
Wisconsin 2 366 12,383 1,444
---------------------------------------------------------------------------------
Total Mortgages 57 5,968 $141,307 $16,170
---------------------------------------------------------------------------------
Investment in HPT 37 -- $ 99,959 --
---------------------------------------------------------------------------------
Total 196 19,709 $ 1,019,477 $100,258
---------------------------------------------------------------------------------
</TABLE>
Item 3. Legal Proceedings
Early in 1995, the Company commenced a foreclosure action to enforce
indemnities given in connection with the surrender of certain leaseholds to, and
the purchase of certain properties by, the Company in 1992. In May 1995, the
defendants in the foreclosure action and parties related to the Company's former
tenants and sellers asserted claims against the Company, HRPT Advisors, Inc.
("Advisors"), two Trustees of the Company, Messrs. Portnoy and Martin and
others. In November 1995, the Florida court dismissed the foreclosure
defendants' counterclaims and third party complaints against all parties, except
the Company, for lack of jurisdiction. At this time, the only matter pending in
the Florida court appears to be the original foreclosure action by the Company.
The Company and certain parties brought a declaratory judgment action in
the Massachusetts Superior Court to have all matters raised in the counterclaims
and third party complaints referred to arbitration. On December 4, 1995, an
order was entered by the Massachusetts Superior Court granting the Company's
motion for summary judgment and directing arbitration. On December 19, 1995, the
foreclosure defendants and related parties filed a new complaint in the United
States District Court for the District of Massachusetts realleging many of the
same allegations made in the counterclaims and third-party complaints previously
brought by them in response to the Company's original foreclosure action, and
adding allegations of violations of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and violations of
-18-
<PAGE>
RICO. Although the outcomes of the new litigation and the arbitration proceeding
are currently indeterminable, the Company and, to the Company's knowledge, each
other defendant named in the new action believes the claims which have been
asserted against it are without merit and intends to defend and deny the
allegations therein, and the Company intends to pursue the original foreclosure
action.
In addition to this action, the Company may be subject to routine
litigation in the ordinary course of business. It is not presently subject to
any other 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.
-19-
<PAGE>
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.
High Low
---- ---
1995
First Quarter $ 15 1/4 $ 13 1/4
Second Quarter 15 3/8 14 5/8
Third Quarter 16 3/8 14 7/8
Fourth Quarter 16 7/8 15 1/2
1994
First Quarter 16 3/8 14 3/8
Second Quarter 15 3/8 14
Third Quarter 15 3/4 14 1/4
Fourth Quarter 14 7/8 13
The closing price of the Shares on the New York Stock Exchange on March
22, 1996 was $17.125.
As of March 25, 1996, there were 4,329 holders of record of the Shares
and the Company estimates that as of such date there were in excess of 65,000
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.
Dividend Annualized
Per Share Dividend Rate
--------- -------------
1995
First Quarter $.34 $1.36
Second Quarter .34 1.36
Third Quarter .35 1.40
Fourth Quarter .35 1.40
1994
First Quarter .33 1.32
Second Quarter .33 1.32
Third Quarter .33 1.32
Fourth Quarter .34 1.36
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.
-20-
<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,
-------------------------------------------------------------
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Operating Statement Data:
Total revenues $112,678 $ 86,683 $ 56,485 $ 48,735 $ 43,835
Income before gain (loss)
on sale of properties and
extraordinary items 61,760 57,878 37,738 27,243 22,079
Income before
extraordinary items 64,236 51,872 37,738 27,423 22,079
Net income 64,236 49,919 33,417 27,243 22,079
Funds from operations (1) 87,967 73,846 47,578 36,853 30,059
Dividends declared 83,954 76,317 44,869 33,079 27,179
Per share amounts:
Income before gain (loss)
on sale of properties and
extraordinary items $ 1.04 $ 1.10 $ 1.10 $ 1.02 $ 1.01
Income before
extraordinary items 1.08 .98 1.10 1.02 1.01
Net income 1.08 .95 .97 1.02 1.01
Funds from operations (1) 1.49 1.40 1.38 1.38 1.38
Dividends declared (2) 1.38 1.33 1.30 1.26 1.23
Average shares outstanding 59,227 52,738 34,407 26,760 21,834
Balance Sheet Data:
Real estate properties at cost $778,211 $673,083 $384,881 $337,076 $281,766
Real estate mortgages 141,307 133,477 157,281 47,173 31,760
Investment in HPT 99,959 --- --- --- ---
Total assets 999,677 840,206 527,662 374,468 340,718
Total indebtedness 269,759 216,513 73,000 138,500 103,000
Total shareholders' equity 685,592 602,039 441,135 228,301 234,427
- ---------------------
<FN>
(1) Funds from operations is net income before gain (loss) on sale of properties
and extraordinary items plus depreciation, amortization, other non-cash items
and the Company's equity in funds from operations of HPT.
(2) Distributions in excess of net income generally constitute a return of
capital.
</FN>
</TABLE>
-21-
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
Year Ended December 31, 1995 compared to Year Ended December 31, 1994
Total revenues for the year ended December 31, 1995 were $112.7
million, an increase of $26 million or 30% over the year ended December 31,
1994. Rental income increased to $89.6 million from $63.9 million and interest
income increased to $23.1 million from $22.8 million. Rental income increased as
a result of new purchase and lease investments during 1995 and from a full
year's results on investments made during 1994. Interest income increased
slightly due to interest income from new investments in mortgages and notes,
offset by a reduction in interest income resulting from repayments of existing
mortgages and notes.
Total expenses for 1995 increased to $54 million, from $28.8 million,
for the comparable 1994 period. The increase of $25.2 million was due primarily
to increases in interest expense of $15.3 million, general and administrative
expense of $1.8 million, and depreciation and amortization expense of $8.1
million. The increases in general and administrative and depreciation and
amortization expenses are directly related to the Company's increased real
estate investments whereas interest expense increased primarily due to higher
amounts outstanding under the revolving credit facility and a full year of
interest expense on $200 million senior notes issued in July 1994.
Income before gain (loss) on sale of properties and extraordinary items
for 1995 increased to $61.8 million, or $1.04 per share, from $57.9 million, or
$1.10 per share, in 1994. Per share amounts decreased reflecting the issuance of
9 million new shares of the Company's stock in December 1994 and 6.5 million new
shares issued in December 1995.
Net income in 1995 and 1994 was $64.2 million or $1.08 per share and
$49.9 million or $.95 per share, respectively.
The Company's business plan is to maximize funds from operations rather
than net income. The Company's Board of Trustees considers funds from
operations, among other factors, when determining dividends to be paid to
shareholders. Funds from operations means net income excluding gains or losses
from debt restructuring and sales of property, plus depreciation, amortization
and the Company's equity in funds from operations of HPT. Cash flow provided by
operating activities may not necessarily equal funds from operations as the cash
flow of the Company is affected by other factors not included in the funds from
operations calculation such as changes in assets and liabilities. Funds from
operations for the year ended December 31, 1995, was $88 million, or $1.49 per
share, versus $73.9 million, or $1.40 per share, in 1994. Funds from operations
for 1995 increased $14.1 million or 19.1% over the prior year. The increase is
the result of new investments in 1995. Dividends declared for the years ended
December 31, 1995 and 1994 were $1.38 per share and $1.33 per share,
respectively. Dividends in excess of net income constitute a return of capital.
For 1995, the return of capital portion reported was 11.8% of dividends and 5.9%
of dividends was considered a long term capital gain.
Cash flow provided by (used for) operating, investing and financing
activities were $81.3 million, ($189.3 million) and $68.8 million, respectively,
for the year ended December 31, 1995 and $76.4 million, ($261.8 million) and
$229.4 million, respectively, for 1994.
Year Ended December 31, 1994 compared to Year Ended December 31, 1993
Total revenues for the year ended December 31, 1994 were $86.7 million,
an increase of $30.2 million or 53% over the year ended December 31, 1993.
Rental income increased to $63.9 million from $46.1 million and interest income
increased to $22.8 million from $10.4 million. Rental income increased as a
result of new purchase and lease investments, primarily $33.4 million
transaction in December 1993 and the $320 million retirement community
transaction with Marriott International, Inc. in 1994. The growth in interest
income is primarily the result of the full-year impact of three loan pool
acquisitions in 1993 and a mortgage transaction of $26.6 million in December
1993.
-22-
<PAGE>
Total expenses for 1994 increased to $28.8 million, from $18.7 million,
in the comparable 1993 period. The increase of $10.1 million was due primarily
to increases in interest expense of $2.7 million, general and administrative
expense of $1.7 million, and depreciation and amortization expense of $5.6
million. The increases in general and administrative and depreciation and
amortization expenses are directly related to the Company's increased
investments whereas interest expense increased due to both higher interest rates
during the second half of 1994 and the issuance of $200 million senior notes in
July 1994 to fund the Marriott transaction.
Income before gain (loss) on sale of properties and extraordinary items
for 1994 increased to $57.9 million, or $1.10 per share, from $37.7 million, or
$1.10 per share, in 1993. Per share amounts remained flat reflecting the
issuance of nine million new shares of the Company's stock in December 1993 and
13.3 million new shares in 1994, as well as negative interest arbitrage
resulting from unusually high cash balances caused by timing differences between
receipt of proceeds from the note offering and the investment of those proceeds
in real estate.
Income before extraordinary items and net income in 1994 was $51.9
million or $.98 per share and $49.9 million or $.95 per share, respectively,
versus $37.7 million or $1.10 per share and $33.4 million or $.97 per share,
respectively, in 1993. On a per share basis, income before extraordinary items
and net income decreased during 1994 primarily as a result of the new share
issuance and negative arbitrage noted above and the $10 million provision for
the potential loss on the sale of two psychiatric hospitals. These two hospitals
were HRP's only investments in the psychiatric industry and the loss is due to
the general decline in the value of this type of property.
Funds from operations for the year ended December 31, 1994, was $73.9
million, or $1.40 per share, versus $47.6 million, or $1.38 per share, in 1993.
Funds from operations for 1994 increased $26.3 million or 55% over the prior
year. However, funds from operations per share increased only slightly as a
result of nine million new shares of the Company's stock issued in December 1993
and 13.3 million new shares issued in 1994 and the negative arbitrage from large
cash balances previously discussed. Dividends declared for the years ended
December 31, 1994 and 1993 were $1.33 per share and $1.30 per share,
respectively. Dividends in excess of net income constitute a return of capital.
For 1994, the return of capital portion was 6.1% of dividends and 12.6% of
dividends was considered a long term capital gain.
Cash flow provided by (used for) operations, investing and financing
activities were $76.4 million, ($261.8 million) and $229.4 million,
respectively, for the year ended December 31, 1994, and $47.2 million, ($175.4
million) and $128.0 million, respectively, in 1993.
Liquidity and Capital Resources
Assets increased to $999.7 million as of December 31, 1995 from $840.2
million as of December 31, 1994. The increase of $159.5 million or 19% is
primarily attributable to increases in the Company's real estate investments and
the equity investment in HPT.
On March 24, 1995, the Company's then wholly owned subsidiary, HPT,
acquired 21 Courtyard by Marriott(R) hotels for approximately $179.4 million.
HPT's acquisition of these properties was principally funded by the Company
under a demand loan (the "HRP Loan") of approximately $163.3 million. The
Company funded this transaction with cash and by drawing $140 million on its
revolving credit facility. In August 1995, HPT completed its initial public
offering (the "IPO") of 8,350,000 shares. HPT used proceeds from the IPO, in
part, to repay amounts outstanding on the HRP Loan. Prior to the IPO, the
Company's investment in HPT was $1 million, representing 40,000 shares.
Concurrent with the completion of the IPO, the Company acquired an additional
3,960,000 shares of HPT at a per share price of $25.00 by canceling $99 million
of the HRP Loan. The remaining balance of the HRP Loan was repaid to the Company
during the fourth quarter of 1995. At December 31, 1995 the Company owned
4,000,000 shares of HPT, representing an equity interest in HPT of approximately
32%. Since the IPO, the Company's investment in HPT has been accounted for using
the equity method. Prior to the IPO, operating results of HPT were included in
the Company's results of operations. Most recently, HPT has entered into letters
of intent to acquire 45 hotels for approximately $485 million. The Company does
not expect to provide any of the funding required by HPT for these transactions.
-23-
<PAGE>
During the year ended December 31, 1995, the Company acquired 20
nursing properties and three medical office buildings for a purchase price of
approximately of $123.6 million in five separate transactions. In addition, the
Company provided improvement financing at existing owned properties of
approximately $5.9 million. Nine of the nursing properties were acquired, in
part, by the issuance of 1,777,766 shares of the Company's stock. Lease
obligations on eleven of the nursing properties recently acquired are secured by
a $3.6 million cash security deposit.
The Company sold one nursing property for $24.5 million and realized a
gain of approximately $2.5 million. The company received cash of $5 million and
a mortgage note of $19.5 million.
The Company provided debt financing totaling $17.4 million secured by
mortgages on four assisted living and three nursing properties. Existing
mortgages secured by six nursing properties were refinanced for a net new
investment of $5.4 million. The Company also provided improvement financing for
existing mortgage facilities of $1.6 million and a loan to an affiliate of $1.6
million.
During 1995, the Company received regular principal payments on real
estate mortgages of $1.5 million and proceeds of $24.6 million, net of
discounts, from the prepayment of mortgage loans.
The Company sold two properties for approximately $12 million in cash.
At December 31, 1994, the Company reserved $10 million for the loss on the sale
of the properties.
During December 1995, the Company issued 6,500,000 common shares of
beneficial interest and received net proceeds of approximately $97.9 million.
The proceeds were used to repay $96 million on the Company's revolving credit
facility. In January 1996, the underwriters exercised a portion of the
over-allotment option for 475,000 shares resulting in additional net proceeds of
approximately $7.2 million.
At December 31, 1995, the Company had $18.6 million of cash and cash
equivalents. The Company had drawn $53 million of the $250 million revolving
credit facility at December 31, 1995. The facility matures in 1998 and bears
interest at a spread over LIBOR. At December 31, 1995, interest rates on of the
Company's outstanding debt were capped by the use of interest rate cap
agreements. The interest rate cap agreements provide for maximum weighted
average interest rates of approximately 6.24% on $200 million of its variable
rate debt though 1997.
The Company has plans to restructure its current revolving credit
facility. In connection with the restructuring, the Company expects to recognize
a loss on the early extinguishment of debt of approximately $3.0 million.
As of December 31, 1995, the Company had commitments to provide
financing totaling approximately $17.8 million. The Company intends to fund
these commitments with a combination of cash on hand, amounts available under
its existing credit facilities and/or proceeds of mortgage prepayments, if any.
In February 1996, the Company acquired a medical office building for $12 million
by drawing on its existing credit facility.
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 improve the security of
its future cash flow and dividends. 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, 1995, the Company's debt as a percentage of total market
capitalization was approximately 20%.
Impact of Inflation
Management believes that the Company is not adversely affected by
inflation. In the real estate market, inflation tends to increase the value of
the Company's underlying real estate which may be realized at the end of the
lessees' fixed rent terms. In the health care industry inflation increases the
lessees' and mortgagors' revenues, thereby increasing the Company's additional
rent or interest.
-24-
<PAGE>
Certain Considerations
The discussion and analysis of the Company's financial condition and
results of operations requires the Company to make certain estimates and
assumptions and contains certain statements of the Company's beliefs, intent or
expectations concerning projections, plans, future events and performance. The
estimates, assumptions and statements, such as those relating to the Company's
ability to expand its portfolio, performance of its assets, the ability to pay
dividends from FFO, its tax status as a "real estate investment trust", the
ability to appropriately balance the use of debt and equity and to access the
capital markets, depend upon various factors, over which, the Company and/or the
Company's lessors and mortgagors have or may have limited or no control. Those
factors include, without limitation, the status of the economy, capital markets
(including prevailing interest rates), compliance with and changes to
regulations within the health care industry, competition, changes to federal,
state and local legislation and other factors described in this report. The
Company cannot presently predict the impact of these factors, if any. However,
these factors could cause the Company's actual results for subsequent periods to
be different from those stated, estimated or assumed in this discussion and
analysis of the Company's financial condition and results of operations. The
Company believes that these estimates and assumptions are reasonable and
prudent.
Item 8. Financial Statements and Supplementary Data
The financial statements and related notes and report of independent
auditors for the Company are included following Part IV, beginning on page F-1,
and identified in the index appearing at Item 14(a). The financial statements
and financial statement schedules for Marriott are incorporated by reference to
Marriott's Annual Report on Form 10-K for the year ended December 29, 1995,
Commission File No. 1-12188.
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure
Not applicable
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 is expected to
be filed not later than 120 days after the end of the Company's fiscal year.
-25-
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Index to Financial Statements and Financial Statement Schedules
HEALTH AND RETIREMENT PROPERTIES TRUST
Page
Report of Independent Auditors F-1
Balance Sheets as of December 31, 1995 and 1994 F-2
Statements of Income for the years ended
December 31, 1995, 1994 and 1993 F-3
Statements of Shareholders' Equity for the years ended
December 31, 1995, 1994, and 1993 F-4
Statements of Cash Flows for the years ended
December 31, 1995, 1994, and 1993 F-5
Notes to Financial Statements F-6
The following schedules are included:
III -- Real Estate and Accumulated Depreciation S-1
IV -- Mortgage Loans on Real Estate S-6
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.
Exhibits:
3.1 -July 1994 Amended and Restated Declaration of Trust (3)
3.2 -Amended and Restated By-Laws (11)
4.1 -Form of Series A Note (2)
4.2 -Form of Series B Note (2)
4.3 -Shawmut Bank, N.A. Indenture dated as of June 1, 1994 (2)
4.4 -Supplemental Shawmut Bank, N.A., Indenture dated as of June 29, 1994(2)
9.1 -AMS Voting Trust Agreement (9)
9.2 -Amended and Restated AMS Voting Trust Agreement (4)
10.1 -Advisory Agreement, as amended.(10) (+)
10.2 -Second Amendment to Advisory Agreement.(5) (+)
10.3 -Incentive Share Award Plan.(6)(+)
10.4 -Master Lease Document (8)
10.5 -HRPT Shares Pledge Agreement (8)
10.6 -AMS Properties Security Agreement (8)
10.7 -AMS Subordination Agreement (8)
10.8 -AMS Guaranty (8)
10.9 -AMS Pledge Agreement (pledging shares of AMSP) (8)
10.10 -AMS Holding Co. Pledge Agreement (pledging shares of AMS) (7)
10.11 -Amended and Restated Renovation Funding Agreement (7)
10.12 -Amendment to AMS Transaction Documents (7)
10.13 -GCI Master Lease Document (6)
10.14 -Amended and Restated HRP Shares Pledge Agreement (6)
10.15 -Guaranty, Cross-Default and Cross-Collateralization Agreement (6)
10.16 -CSC $8,000,000 Working Capital Promissory Note (6)
10.17 -Marriott Senior Living Services Purchase and Sale Agreement (5)
10.18 -Connecticut Subacute Corporation II Lease Document Waterbury (11)
10.19 -Connecticut Subacute Corporation II Lease Document Cheshire (11)
10.20 -Connecticut Subacute Corporation II Lease Document New Haven (11)
10.21 -Vermont Subacute/New Hampshire Subacute Corporation Master Lease A
greement (Chapple) (11)
10.22 -Amended and Restated Agreement and Plan of Reorganization (Chapple) (11)
10.23 -March 1995 Second Amended and Restated Revolving Loan Agreement (11)
10.24 -Courtyard by Marriott Purchase and Option Agreement(12)
12.1 -Earnings to Fixed Charges (1)
21.1 -Subsidiaries of the Registrant (1)
23.1 -Consent of Ernst & Young (1)
24.1 -Powers of Attorney(1)
27.1 -Financial Data Schedule (1)
-26-
<PAGE>
(+) Management contract or compensatory plan or arrangement.
(1) Filed herewith
(2) Incorporated by reference to the Company's Registration Statement on
Form 8-A dated July 11, 1994.
(3) Incorporated by reference to the Company's Current Report on Form 8-K
dated July 1, 1994 and- amendments thereto.
(4) Incorporated by reference to the Company's Registration Statement No.
33-53173 on Form S-3 dated June 2, 1994.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K
for its fiscal year ended December 31, 1993.
(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 Annual Report on Form 10-K
for its fiscal year ended December 31, 1991.
(8) Incorporated by reference to the Company's Current Report on Form 8-K
dated December 28, 1990 and amendments thereto.
(9) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the Quarter ended September 30, 1990 and amendments thereto.
(10) Incorporated by reference to the Company's Registration Statement No.
33-16799 on Form S-11 dated August 27, 1987 and amendments thereto.
(11) Incorporated by reference to the Company's Annual Report on Form 10-K
for its fiscal year ended December 31, 1994.
(12) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the Quarter ended March 31, 1995
(b) Reports on Form 8-K
(i) The Company filed a current report on Form 8-K, dated December 18,
1995, relating to consents in connection with the sale of 6.5
million shares of the Company's stock and legal proceedings
arising in the course of the Company's business.
(ii) The Company filed a current report on Form 8-K, dated December 20,
1995, relating to the underwriting agreement in connection with
the sale of 6.5 million shares of the Company's stock and legal
proceedings arising in the course of the Company's business.
-27-
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Trustees and Shareholders
Health and Retirement Properties Trust
We have audited the accompanying balance sheets of Health and Retirement
Properties Trust as of December 31, 1995 and 1994, and the related statements of
income, shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 1995. 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 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 Retirement
Properties Trust at December 31, 1995 and 1994, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, 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 LLP
Boston, Massachusetts
February 9, 1996
F-1
<PAGE>
HEALTH AND RETIREMENT PROPERTIES TRUST
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
ASSETS
Real estate properties, at cost (including properties leased to affiliates with
a cost of $103,324 and $69,545, respectively):
Land $ 72,124 $ 63,186
Buildings and improvements 706,087 609,897
--------------------------------------
778,211 673,083
Less accumulated depreciation 55,855 39,570
--------------------------------------
722,356 633,513
Real estate mortgages and notes, net (including note to affiliate
of $1,565 in 1995) 141,307 133,477
Investment in Hospitality Properties Trust 99,959 -
Cash and cash equivalents 18,640 57,877
Interest and rents receivable 7,895 4,712
Deferred interest and finance costs, net, and other assets 9,520 10,627
----------------------------------------
$999,677 $840,206
========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank notes payable $ 53,000 $ -
Senior notes and bonds payable, net 216,759 216,513
Accounts payable and accrued expenses 11,597 16,107
Security deposits 7,386 3,800
Due to affiliate 2,351 1,747
Dividends payable 22,992 -
Commitments and contingencies - -
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, 65,690,166 shares and
57,385,000 shares issued and outstanding, respectively 657 574
Additional paid-in capital 775,688 652,989
Cumulative net income 233,044 168,808
Dividends (323,797) (220,332)
----------------------------------------
Total shareholders' equity 685,592 602,039
---------------------------------------
$999,677 $840,206
=======================================
</TABLE>
See accompanying notes
F-2
<PAGE>
HEALTH AND RETIREMENT PROPERTIES TRUST
STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Revenues:
Rental income $ 89,602 $ 63,856 $ 46,069
Interest income 23,076 22,827 10,416
------------------------------------------
Total revenues 112,678 86,683 56,485
-----------------------------------------
Expenses:
Interest 24,274 8,965 6,217
Depreciation and amortization 22,849 14,724 9,087
General and administrative 6,914 5,116 3,443
------------------------------------------
Total expenses 54,037 28,805 18,747
-----------------------------------------
Income before equity in earnings of Hospitality Properties Trust,
gain (loss) on sale of properties and extraordinary items 58,641 57,878 37,738
Equity in earnings of Hospitality Properties Trust 3,119 - -
------------------------------------------
Income before gain (loss) on sale of properties and
extraordinary item 61,760 57,878 37,738
Provision for loss on sale of properties - (10,000) -
Gain on sale of properties 2,476 3,994 -
------------------------------------------
Income before extraordinary items 64,236 51,872 37,738
Extraordinary items - early extinguishment of debt - (1,953) (4,321)
------------------------------------------
Net income $ 64,236 $ 49,919 $ 33,417
=========================================
Weighted average shares outstanding 59,227 52,738 34,407
=========================================
Per share amounts:
Income before gain (loss) on sale of properties and
extraordinary items $ 1.04 $ 1.10 $ 1.10
=========================================
Income before extraordinary items $ 1.08 $ .98 $ 1.10
=========================================
Net income $ 1.08 $ .95 $ .97
=========================================
</TABLE>
See accompanying notes
F-3
<PAGE>
HEALTH AND RETIREMENT PROPERTIES TRUST
STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Additional Cumulative
Number of Common Paid-in Net
Shares Shares Capital Income Dividends Total
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 26,763,500 $ 268 $ 246,459 $ 85,472 $ (103,898) $228,301
Redemption of shares (2,000,000) (20) (20,580) - - (20,600)
Issuance of shares 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
Issuance of shares 13,251,500 133 182,233 - - 182,366
Stock grants 12,500 - 184 - - 184
Net income - - - 49,919 - 49,919
Dividends - - - (71,565) (71,565)
--------------------------------------------------------------------------------------
Balance at December 31, 1994 57,385,000 574 652,989 168,808 (220,332) 602,039
Issuance of shares to
acquire real estate 1,777,766 18 24,426 - - 24,444
Issuance of shares 6,500,000 65 97,879 - - 97,944
Stock grants 27,400 - 394 - - 394
Net income - - - 64,236 - 64,236
Dividends - - - (103,465) (103,465)
--------------------------------------------------------------------------------------
Balance at December 31, 1995 65,690,166 $ 657 $ 775,688 $ 233,044 $ (323,797) $685,592
=====================================================================================
</TABLE>
See accompanying notes
F-4
<PAGE>
HEALTH AND RETIREMENT PROPERTIES TRUST
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Net income $ 64,236 $ 49,919 $ 33,417
Adjustments to reconcile net income to cash
provided by operating activities:
Gain on sale of properties (2,476) (3,994) -
Equity in earnings of Hospitality Properties Trust (3,119) - -
Extraordinary items - 1,953 4,321
Depreciation and amortization 22,849 14,724 9,087
Provision for loss on real estate - 10,000 -
Amortization of deferred interest costs 1,529 864 700
Change in assets and liabilities:
Increase in interest and rents receivable and other assets (1,639) (5,148) (6,156)
Increase (decrease) in security deposits 3,586 (4,500) 3,800
Increase (decrease) in accounts payable and
accrued expenses (4,508) 11,828 1,554
Increase in due to affiliate 843 799 506
------------------------------------------------
Cash provided by operating activities 81,301 76,445 47,229
------------------------------------------------
Cash flows from investing activities:
Real estate acquisitions (267,470) (324,554) (47,735)
Investments in mortgage loans (24,375) (9,372) (143,935)
Proceeds from repayment of notes and mortgage loans 38,107 48,762 16,227
Proceeds from sale of real estate 5,000 23,318 -
Proceeds from Hospitality Properties Trust
initial public offering 60,000 - -
Dividend from Hospitality Properties Trust 960 - -
Loans to affiliate (1,565) - -
------------------------------------------------
Cash used for investing activities (189,343) (261,846) (175,443)
------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common shares 97,944 182,366 244,792
Proceeds from borrowings 219,000 333,770 98,700
Payments on borrowings (166,000) (208,000) (164,200)
Deferred finance costs (1,666) (7,180) (583)
Termination costs of debt and interest rate
hedging arrangements - - (2,843)
Payment related to stock surrender - - (3,000)
Dividends paid (80,473) (71,565) (44,869)
------------------------------------------------
Cash provided by financing activities 68,805 229,391 127,997
------------------------------------------------
Increase (decrease) in cash (39,237) 43,990 (217)
Cash and cash equivalents at beginning of period 57,877 13,887 14,104
------------------------------------------------
Cash and cash equivalents at end of period $ 18,640 $ 57,877 $ 13,887
================================================
Supplemental cash flow information:
Interest paid $ 22,783 $ 5,677 $ 6,522
===============================================
Non-cash investing and financing activities:
Exchange of real estate mortgages $ - $ - $ 17,600
Investment in real estate mortgages (19,500) (5,100) -
Exchange of common shares - - (17,600)
Assumption of bonds payable - 17,620 -
Real estate acquisitions (24,444) (17,620) -
Sale of real estate 19,500 5,100 -
Issuance of common shares 24,444 - -
Investment in Hospitality Properties Trust (100,000) - -
</TABLE>
See accompanying notes
F-5
<PAGE>
HEALTH AND RETIREMENT PROPERTIES TRUST
NOTES TO FINANCIAL STATEMENTS
(Dollars in Thousands, except per share amounts)
Note 1. Organization
Health and Retirement Properties Trust (formerly known as 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 real estate, primarily retirement housing and health care
related properties. As of December 31, 1995, the Company has investments in 159
properties located in 28 states. The properties include 121 long-term care
facilities, 22 retirement and assisted living communities, 12 nursing homes with
subacute services and four medical office buildings and clinics. In addition, at
December 31, 1995, the Company had a 32% equity investment in Hospitality
Properties Trust ("HPT"). HPT owns 37 hotels in 20 states.
The Company is dependent upon its lessees' and mortgagors' compliance with
regulations within the health care industry. Future changes to these regulations
may affect the health care industry, the Company's lessees and mortgagors and as
a result the Company.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation. The Company's investment in 50% or less owned
companies is accounted for using the equity method.
Real Estate Properties and Mortgages. Real estate properties and mortgages
are recorded at cost. Depreciation is provided for on a straight-line basis over
the estimated useful lives ranging up to 40 years. If the estimated net
realizable value of an investment is less than the carrying value, an allowance
for possible investment loss is established. The determination of net realizable
value includes consideration of many factors including income to be earned from
the investment, holding costs, estimated selling prices, and prevailing economic
conditions. In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long Lived Assets. The Company has adopted this statement and the
effect of adoption is not material.
Cash and Cash Equivalents. Cash, over-night repurchase agreements and
short-term investments with maturities of three months or less at the date of
purchase are carried at cost plus accrued interest.
Deferred Interest and Finance Costs. Costs incurred to secure certain
borrowings are capitalized and amortized over the terms of their respective
loans.
Interest Rate Hedging Arrangements. The Company enters into interest rate
hedging arrangements to limit its exposure to increasing interest rates with
respect to its bank borrowings and notes payable. Their cost is included in
interest expense ratably over the terms of the respective agreements. Amounts
receivable from hedging arrangements are accrued as an adjustment to interest
expense. The unamortized cost of these agreements is included in other assets.
Revenue Recognition. Rental income from operating leases is recognized on a
straight line basis over the life of the lease agreements. Interest income is
recognized as earned over the terms of the real estate mortgages. Additional
rent and interest revenue is recognized as earned.
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, 1995 and 1994, was $1.11 and $.93,
respectively, based on the assumption that the issuance of shares in the
Company's public offerings during 1995 and 1994, and the related repayment of
outstanding bank borrowings, took place at the beginning of each year.
F-6
<PAGE>
HEALTH AND RETIREMENT PROPERTIES TRUST
NOTES TO FINANCIAL STATEMENTS
(Dollars in Thousands, except per share amounts)
Reclassifications. Certain reclassifications have been made to the prior
years' financial statements to conform with the current year's presentation.
Federal Income Taxes. 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.
Use of Estimates. Preparation of these financial statements in conformity
with generally accepted accounting principles requires management to make
certain estimates and assumptions that may affect the amounts reported in these
financial statements and related notes. The actual results could differ from
these estimates.
Note 3. Real Estate Properties
During the year ended December 31, 1995, the Company acquired 20 nursing
properties and three medical office buildings for purchase prices aggregating
approximately of $123,558, in five separate transactions. In addition, the
Company provided improvement financing at existing properties of approximately
$5,946. Nine of the nursing properties are leased to an affiliate and were
acquired by the issuance of 1,777,766 shares of the Company's stock and cash.
Lease obligations on eleven of the nursing properties acquired are secured by a
$3,586 cash security deposit. The three medical office buildings are managed by
M&P Partners Limited Partnership ("M&P"), an affiliate of the Company. In
February 1996, the Company acquired a medical clinic for $12,000.
The Company sold one nursing property for $24,500 and realized a gain of
approximately $2,476. The Company received cash of $5,000 and a mortgage note of
$19,500.
The Company's real estate properties are leased pursuant to noncancellable,
fixed term operating leases expiring from 1997 to 2013. Generally, the Company's
leases to a single tenant are cross-collateralized, cross-defaulted and
cross-guaranteed. The leases generally provide for renewal terms at existing
rates followed by several market rate renewal terms. The majority of the leases
are triple net leases and generally require the lessee to pay minimum rent,
additional rent based upon increases in net patient revenues, real estate taxes,
and all operating costs associated with the leased property. Additional rent and
interest for the years ended December 31, 1995, 1994 and 1993 were $3,768,
$2,768 and $2,312, respectively.
The future minimum lease payments to be received by the Company during the
current terms of the leases as of December 31, 1995, are approximately $85,228
in 1996, $83,836 in 1997, $83,332 in 1998, $78,876 in 1999, $77,883 in 2000 and
$642,592 thereafter.
Note 4. Investment in Hospitality Properties Trust
On March 24, 1995, the Company's then wholly owned subsidiary, HPT, acquired
21 Courtyard by Marriott(R) hotels for approximately $179,400. HPT's acquisition
of these properties was principally funded by the Company under a demand loan
(the "HRP Loan") for approximately $163,300. The Company funded this transaction
with cash on hand and by drawing $140,000 on its revolving credit facility. In
August 1995, HPT completed its initial public offering (the "IPO") of 8,350,000
shares at $25 per share. HPT used proceeds from the IPO, in part, to repay
amounts outstanding on the HRP Loan. Prior to the IPO, the Company's investment
in HPT was $1,000, representing 40,000 shares. Concurrent with the completion of
the IPO, the Company acquired an additional 3,960,000 shares of HPT at a per
share price of $25 by cancelling $99,000 of the HRP Loan. The remaining balance
of the HRP Loan was repaid to the Company during the fourth quarter of 1995.
At December 31, 1995, the Company owned 4,000,000 shares of HPT,
representing an equity interest in HPT of approximately 32% and a market value
of $107,000. Since the IPO, the Company's investment in HPT has been accounted
for using the equity method. Prior to the IPO, operating results of HPT were
included in the Company's results of operations.
Summarized financial data of HPT is as follows:
F-7
<PAGE>
HEALTH AND RETIREMENT PROPERTIES TRUST
NOTES TO FINANCIAL STATEMENTS
(Dollars in Thousands, except per share amounts)
<TABLE>
<CAPTION>
February 7, 1995
(inception) to
December 31, 1995 December 31, 1995
----------------- -----------------
<S> <C> <C> <C>
Real estate properties, net $ 326,752 Revenues $ 23,642
Other assets, net 12,195 Expenses 12,293
--------- ------
$ 338,947 Net Income $ 11,349
========= ========
Security deposit $ 32,900 Average shares 4,515
-----
Other liabilities 8,096 Net income per share $ 2.51
=========
Shareholders' equity 297,951
---------
$ 338,947
Note 5. Real Estate Mortgages and Notes Receivable, Net
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------
1995 1994
---- ----
<S> <C> <C>
Mortgage notes receivable, net of discounts of $3,875 and
$5,817, respectively, and net of reserves of $1,550 in
1995, due January 1996 through December 2016 $ 62,065 $ 87,443
Mortgage note receivable due December 2010 19,500 --
Mortgage notes receivable due December 2016 14,582 13,600
Mortgage note receivable due December 2002 12,309 --
Mortgage note receivable due December 2010 11,500 8,800
Mortgage note receivable due April 2007 11,500 --
Mortgage note receivable due December 2016 7,792 6,000
Investment held for sale, sold November 1995 -- 9,947
Collateralized note receivable due December 2016 -- 7,000
Other collateralized notes receivable due July 1998 494 687
Loan to an affiliate due June 1996 1,565 --
--------- ---------
$ 141,307 $ 133,477
======== ========
</TABLE>
At December 31, 1995, the interest rates on the mortgages and notes
receivable ranged from 8.1% to 13.75% per annum.
During 1995, the Company provided debt financing totaling $17,357 secured by
mortgages on four assisted living and three nursing properties. Existing
mortgages secured by six nursing properties were refinanced for a net new
investment of $5,404. The Company also provided improvement financing for
existing facilities of $1,614 and a loan to an affiliate of $1,565.
During 1995, the Company received principal payments on real estate
mortgages of $1,510 and proceeds of $24,597, net of discounts, from the
prepayment of mortgage loans.
The Company sold two properties for approximately $12,000 in cash. At
December 31, 1994, these properties were classified as mortgages and the Company
reserved $10,000 for the loss on the sale of the properties. The realized loss
on the disposition was $8,450.
F-8
<PAGE>
HEALTH AND RETIREMENT PROPERTIES TRUST
NOTES TO FINANCIAL STATEMENTS
(Dollars in Thousands, except per share amounts)
Note 6. Shareholders' Equity
During December 1995, the Company issued 6,500,000 common shares of
beneficial interest and received net proceeds of approximately $97,944. In
January 1996, the underwriters exercised the over-allotment option for 475,000
shares resulting in additional net proceeds of approximately $7,196.
Dividends per share paid by the Company for 1995, 1994 and 1993 were $1.37,
$1.32 and $1.29, respectively.
The Company has reserved 1,000,000 shares of the Company's stock, under the
terms of the 1992 Incentive Share Award Plan (the "Award Plan"). During 1995,
1994 and 1993, 8,500, 11,000 and 6,000 shares, respectively, were granted to
officers of the Company and certain employees of HRPT Advisors, Inc. (the
"Advisor"), an affiliate. The three independent Trustees, as part of their
annual fee, are each granted 500 common shares annually. The shares granted to
the Trustees vest immediately. The shares granted to the officers and certain
employees of the Advisor vest over a three year period. At December 31, 1995,
945,100 shares of the Company's shares remain reserved for issuance under the
Award Plan.
Note 7. Commitments and Contingencies
At December 31, 1995, the Company had total commitments aggregating $17,833
to finance improvements to certain properties leased or mortgaged by the Company
and to purchase a medical clinic. The medical clinic was purchased in February
1996.
Note 8. Transactions with Affiliates
The Company has an 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, who also serve as Managing
Trustees of the Company. Messrs. Martin and Portnoy are directors of Horizon/CMS
Healthcare Corporation ("Horizon"), principal shareholders of Connecticut
Subacute Corporation ("CSC"), Connecticut Subacute Corporation II, New Hampshire
Subacute Corporation and Vermont Subacute Corporation (collectively the
"Subacute Entities") and were formerly directors of Greenery Rehabilitation
Group, Inc. ("Greenery"), which merged with Horizon in 1994. Horizon and the
Subacute Entities are lessees of the Company. The Company has extended a $4,000
line of credit to CSC until June 30, 1996. At December 31, 1995, there was
$1,565 outstanding under this agreement. The lease and mortgage transactions
with the Subacute Entities and Horizon are based on market terms and are
generally similar to the Company's lease and mortgage agreements with
unaffiliated companies. The former president of the Company is the president of
the Subacute Entities. Mr. Portnoy is a partner in the law firm which provides
legal services to the Company. The Advisor is the general partner of M&P, which
provides management services for the Company's recently acquired medical office
buildings.
The Advisor is compensated at an annual rate equal to .7% of the Company's
real estate investments up to $250 million and .5% of such investments
thereafter. The Advisor is entitled to an incentive fee comprised of restricted
shares of the Company's common stock based on a formula. Advisory fees for the
years ended December 31, 1995, 1994 and 1993 were $5,183, $3,839 and $2,591,
respectively. Incentive fees for the years ended December 31, 1995 and 1994 were
$580 and $239, which represent approximately 35,560 and 17,400 common shares
respectively. At December 31, 1995, the Advisor owned 1,013,650 common shares.
Amounts resulting from transactions with affiliates included in the
accompanying statements of income, shareholders' equity and cash flows are as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Dividends paid to the Advisor $ 1,383 $ 1,315 $ 1,285
Rent from Greenery -- 2,689 22,527
Rent and interest income from Subacute Entities 12,015 8,481 4,483
Interest expense paid to Greenery -- -- 270
Management fee paid to M&P 17 -- --
</TABLE>
F-9
<PAGE>
HEALTH AND RETIREMENT PROPERTIES TRUST
NOTES TO FINANCIAL STATEMENTS
(Dollars in Thousands, except per share amounts)
Note 9. Indebtedness
<TABLE>
<CAPTION>
December 31,
-----------------------------
1995 1994
---- ----
<S> <C> <C>
$250,000 unsecured revolving bank credit facility, due March 1998, at
LIBOR plus a premium $ 53,000 $ -
Senior Notes, Series A, due July 1999 at LIBOR plus a premium 75,000 75,000
Senior Notes, Series B, due July 1999 at LIBOR plus a premium 125,000 125,000
Revenue Refunding Bonds, Series 1991A, due August 2010 at 7.75% 13,950 13,950
Revenue Refunding Bonds, Series 1991B, due August 2009 at 7.75% 3,670 3,670
-------------- --------------
270,620 217,620
Less unamortized discount (861) (1,107)
============== ==============
$269,759 $216,513
============== ==============
</TABLE>
The Revenue Refunding Bonds are secured by a $17,802 letter of credit. The
letter of credit is secured by a first mortgage lien on one property with a net
book value of $35,673. The Senior Notes Series A and Series B may be called at
the Company's option beginning in April 1995 and July 1996, respectively.
During 1995, the Company increased its revolving bank credit facility (the
"Credit Facility") to $250,000. The premiums on LIBOR borrowings range from .72%
to 1.25%. At December 31, 1995, the Company had interest rate hedging agreements
which cap interest rates on a maximum of $200,000 of borrowings under the Senior
Notes through 1997. The maximum average rates payable on such borrowings under
these arrangements is 6.24% per annum. The required principal payments for the
next five years of $200,000 are due in 1999.
The Company has plans to restructure its current Credit Facility. In
connection with the restructuring, the Company expects to recognize a loss on
the early extinguishment of debt of approximately $3,000.
Note 10. Fair Value of Financial Instruments
The Company's financial instruments include cash and cash equivalents,
mortgage notes receivable, rents receivable, an equity investment, interest rate
hedging agreements, notes and bonds payable, accounts payable and other accrued
expenses, and security deposits. Except as follows, the fair value of the
financial instruments were not materially different from their carrying values
at December 31, 1995.
<TABLE>
<CAPTION>
Carrying Amount Fair Value
<S> <C> <C>
Real estate mortgages and notes $ 141,307 $ 142,153
Investment in HPT 99,959 107,000
Interest rate hedging agreements 2,265 1,144
Notes and bonds payable 216,759 217,826
Letter of credit - 267
Commitments - 17,833
</TABLE>
F-10
<PAGE>
The fair values of the real estate mortgages and notes and the notes and
bonds payable are based on estimates using discounted cash flow analysis and
currently prevailing rates. The fair value of the investment in HPT is based on
the per share price of $26.75 at December 31, 1995. Interest rate hedging
agreements are based on quoted market prices. The fair value of the letter of
credit is based on fees currently charged to enter into similar agreements
taking into account the remaining term and the counter party's credit standing.
The fair value of commitment represents actual amount committed.
Note 11. Concentration of Credit Risk
The Company's assets are primarily invested in income producing health care
related real estate located throughout the United States. At December 31, 1995,
the Company's significant lessees, mortgagors and equity investment are as
follows:
<TABLE>
<CAPTION>
Equity Investment, Notes, Mortgages and 1995 Equity Earnings, Rent and
Real Estate Properties, Net Mortgage Interest Revenue
------------------------------------------- ---------------------------------
Amount % of Total Amount % of Total
<S> <C> <C> <C> <C>
Marriott International, Inc. $ 314,544 33% $ 29,482 26%
Horizon/CMS Healthcare Corporation 117,698 12 16,149 14
Equity investment in HPT 99,959 10 12,445 11
GranCare, Inc. 89,180 9 15,408 14
Other 342,241 36 40,005 35
------- ---- ------ --
$963,622 100% $113,489 100%
======== === ======== ===
</TABLE>
Note 12. Selected Quarterly Financial Data (Unaudited)
The following is a summary of the unaudited quarterly results of operations
of the Company for 1995 and 1994. The amounts are in thousands except for the
per share amounts.
<TABLE>
<CAPTION>
1995
-------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Revenues $ 25,992 $ 30,498 $ 28,959 $ 27,229
Income before equity in earnings of HPT and
gain (loss) on sale of property 15,832 15,668 15,154 11,987
Equity in earnings of HPT -- -- 898 2,221
Income before gain (loss) on sale of property 15,832 15,668 16,052 14,208
Net income 18,308 15,668 16,052 14,208
Per share data:
Income before equity earnings and gain
(loss) on sale of property .27 .26 .26 .20
Income before gain (loss) on sale of property .27 .26 .27 .25
Net income .31 .26 .27 .25
</TABLE>
F-11
<PAGE>
HEALTH AND RETIREMENT PROPERTIES TRUST
NOTES TO FINANCIAL STATEMENTS
(Dollars in Thousands, except per share amounts)
Note 13. Selected Quarterly Financial Data (Unaudited) - continued
<TABLE>
<CAPTION>
1994
-------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Revenues $ 17,547 $ 19,916 $ 23,816 $ 25,404
Income before gain (loss) on sale of
properties and extraordinary items 12,650 14,334 15,588 15,306
Income before extraordinary items 16,644 14,334 15,588 5,306
Extraordinary items -- (1,953) -- --
Net income 16,644 12,381 15,588 5,306
Per share data:
Income before gain (loss) on sale of
properties and extraordinary items .28 .28 .27 .27
Income before extraordinary items .37 .28 .27 .09
Net income .37 .24 .27 .09
</TABLE>
Note 14. Pro Forma Information (Unaudited)
The following unaudited condensed Pro Forma Statements of Income assumes the
transactions described in Notes 3, 4, 5 and 6 had occurred on January 1, 1994
and give effect to the Company's borrowing rate throughout the periods
indicated.
The condensed Pro Forma Balance Sheet is intended to present the financial
position of the Company as if the transactions subsequent to December 31, 1995,
described in Notes 3 and 6 had occurred on December 31, 1995.
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.
<TABLE>
<CAPTION>
Condensed Pro Forma Statements of Income (unaudited)
Years Ended December 31,
--------------------------------------
1995 1994
---- ----
<S> <C> <C>
Total revenues $ 109,038 $ 110,575
Total expenses 49,342 45,736
-------- ------
Income before equity earnings 59,696 64,839
Equity in earnings of HPT 8,938 8,938
-------- -----
Net income $ 68,634 $ 73,777
======== =======
Weighted average shares outstanding 66,165 66,165
Net income per share $ 1.04 $ 1.12
======== ========
</TABLE>
<TABLE>
<CAPTION>
Condensed Pro Forma Balance Sheet (unaudited)
December 31, 1995,
<S> <C>
Real estate properties, net $ 734,356
Real estate mortgages and notes, net 141,307
Investments in HPT 99,959
Other assets 43,251
---------
Total assets $ 1,018,873
=========
Indebtedness $ 281,759
Other liabilities 44,326
Shareholders' equity 692,788
---------
Total liabilities and shareholders' equity $ 1,018,873
=========
</TABLE>
F-12
<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 RETIREMENT PROPERTIES TRUST
By:/s/ David J. Hegarty
David J. Hegarty
President and Chief Operating Officer
Dated: March 29, 1996
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.
Signature Title Date
/s/ David J. Hegarty President and March 29, 1996
David J. Hegarty Chief Operating Officer
/s/ Ajay Saini Treasurer and March 29, 1996
Ajay Saini Chief Financial Officer
/s/Bruce M. Gans, M.D.* Trustee March 29, 1996
Bruce M. Gans, M.D.
Trustee
Ralph J. Watts
/s/ Justinian Manning, C.P.* Trustee March 29, 1996
Rev. Justinian Manning,C.P.
Trustee
Gerard M. Martin
/s/ Barry M. Portnoy* Trustee March 29 ,1996
Barry M. Portnoy
*By: /s/David J. Hegarty
Attorney-in-fact
F-13
<PAGE>
HEALTH AND RETIREMENT PROPERTIES TRUST
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
Gross Amount
Initial Cost to Carried at Close of
Company Period 12/31/95
---------------- ---------------------------
Cost
Capitalized Accumulated Original
Building & Subsequent to Building & Deprecia- Date Construction
Location State Land Equipment Acquisition Land Equipment Total (1) tion (2) Acquired Date
- ------------------------- ---------------------------------------------------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Long-Term Care Facilities:
Phoenix AZ $655 $2,525 $5 $655 $2,530 $3,185 $254 6/30/92 1963
Yuma AZ 223 2,100 4 223 2,104 2,327 208 6/30/92 1984
Yuma AZ 103 604 1 103 605 708 60 6/30/92 1984
Fresno CA 738 2,577 188 738 2,765 3,503 401 12/28/90 1968
Lancaster CA 601 1,859 1,029 601 2,888 3,489 353 12/28/90 1963
Newport Beach CA 1,176 1,729 1,223 1,176 2,952 4,128 340 12/28/90 1962
Palm Springs CA 103 1,264 982 103 2,246 2,349 245 12/28/90 1969
San Diego CA 1,114 1,073 480 1,114 1,553 2,667 224 12/28/90 1969
Stockton CA 382 2,750 4 382 2,754 3,136 273 6/30/92 1968
Tarzana CA 1,277 977 806 1,278 1,782 3,060 246 12/28/90 1969
Thousand Oaks CA 622 2,522 310 622 2,832 3,454 394 12/28/90 1965
Van Nuys CA 716 378 225 718 601 1,319 92 12/28/90 1969
Colorado Springs CO 23 777 184 26 958 984 39 11/1/94 1960
Grand Junction CO 6 2,583 1,253 136 3,706 3,842 181 12/30/93 1978
Grand Junction CO 204 3,875 279 204 4,154 4,358 256 12/30/93 1968
Lakewood CO 232 3,766 724 232 4,490 4,722 598 12/28/90 1972
Littleton CO 185 5,043 349 185 5,392 5,577 760 12/28/90 1965
Paonia CO 115 2,179 60 115 2,239 2,354 140 12/30/93 1981
Cheshire CT 520 7,380 111 520 7,491 8,011 1,723 11/1/87 1963
Killingly CT 240 5,360 460 240 5,820 6,060 1,455 5/15/87 1972
New Haven CT 1,681 14,953 94 1,681 15,047 16,728 1,657 5/11/92 1971
Waterford CT 86 4,714 453 87 5,166 5,253 1,339 5/15/87 1965
Willimantic CT 134 3,566 479 166 4,013 4,179 962 5/15/87 1965
Clarinda IA 77 1,453 82 77 1,535 1,612 96 12/30/93 1968
Council Bluffs IA 50 467 40 50 507 557 31 6/4/93 1970
Council Bluffs IA 225 2,125 16 225 2,141 2,366 37 4/1/95 1963
Glenwood IA 45 2,155 10 45 2,165 2,210 38 4/1/95 1964
Mediapolis IA 94 1,776 175 94 1,951 2,045 117 12/30/93 1973
S-1
<PAGE>
<CAPTION>
HEALTH AND RETIREMENT PROPERTIES TRUST
SCHEDULE III- continued
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1995
(Dollars in thousands)
Gross Amount
Initial Cost to Carried at Close of
Company Period 12/31/95
---------------- ---------------------------
Cost
Capitalized Accumulated Original
Building & Subsequent to Building & Deprecia- Date Construction
Location State Land Equipment Acquisition Land Equipment Total (1) tion (2) Acquired Date
- ------------------------- ---------------------------------------------------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Long-Term Care Facilities-continued
Muscatine IA 246 4,683 348 245 5,032 5,277 307 12/30/93 1964
Pacific Junction IA 32 368 1 32 369 401 7 04/01/95 1978
Toledo IA 153 2,907 246 153 3,153 3,306 193 12/30/93 1975
Winterset IA 111 2,099 444 111 2,543 2,654 140 12/30/93 1973
Nashville IL 75 2,556 80 75 2,636 2,711 377 12/28/90 1964
Arma KS 47 1,953 69 47 2,022 2,069 35 04/01/95 1970
Ellinwood KS 130 1,420 4 130 1,424 1,554 25 04/01/95 1972
Smith Center KS 111 2,099 86 111 2,185 2,296 136 12/30/95 1971
Topeka KS 110 890 8 110 898 1,008 16 04/01/95 1963
Topeka KS 137 913 16 137 929 1,066 16 4/1/95 1970
Topeka KS 18 232 7 18 239 257 4 4/1/95 1968
Oak Grove MO 119 1,831 1 119 1,832 1,951 32 4/1/95 1976
St. Joseph MO 111 1,027 32 111 1,059 1,170 67 6/4/93 1976
Tarkio MO 102 1,938 108 102 2,046 2,148 126 12/30/93 1970
Grand Island NE 119 1,331 33 119 1,364 1,483 24 4/1/95 1963
Rochester NH 466 3,219 4 466 3,223 3,689 77 1/30/95 1972
Burlington NJ 1,300 11,700 1 1,300 11,701 13,001 74 9/28/95 1994
Akron OH 330 5,370 727 330 6,097 6,427 1,536 5/15/87 1971
Grove City OH 332 3,081 32 332 3,113 3,445 197 6/4/93 1965
Huron SD 144 3,108 4 144 3,112 3,256 305 6/30/92 1968
Sioux Falls SD 253 3,062 4 253 3,066 3,319 302 6/30/92 1960
Barre VT 261 4,530 133 389 4,535 4,924 109 1/30/95 1979
Barre VT 129 3,825 3 129 3,828 3,957 91 1/30/95 1972
Bennington VT 160 4,385 4 160 4,389 4,549 105 1/30/95 1971
Burlington VT 791 5,985 409 872 6,313 7,185 148 1/30/95 1968
Springfield VT 50 747 1 50 748 798 18 1/30/95 1976
Springfield VT 89 3,724 157 242 3,728 3,970 89 1/30/95 1971
St. Albans VT 154 710 1 154 711 865 17 1/30/95 1900
S-2
<PAGE>
<CAPTION>
HEALTH AND RETIREMENT PROPERTIES TRUST
.SCHEDULE III - continued
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1995
(Dollars in thousands)
Gross Amount
Initial Cost to Carried at Close of
Company Period 12/31/95
---------------- ---------------------------
Cost
Capitalized Accumulated Original
Building & Subsequent to Building & Deprecia- Date Construction
Location State Land Equipment Acquisition Land Equipment Total (1) tion (2) Acquired Date
- ------------------------- ---------------------------------------------------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Long-Term Care Facilities-continued
St. Johnsbury VT 95 3,416 4 95 3,420 3,515 82 1/30/95 1978
Seattle WA 256 4,869 68 256 4,937 5,193 325 11/1/93 1972
Brookfield WI 834 3,849 7,852 834 11,701 12,535 885 12/28/90 1954
Clintonville WI 49 1,625 88 30 1,732 1,762 244 12/28/90 1965
Clintonville WI 14 1,695 37 14 1,732 1,746 243 12/28/90 1960
Madison WI 144 1,633 109 144 1,742 1,886 243 12/28/90 1920
Milwaukee WI 277 3,883 0 277 3,883 4,160 427 3/27/92 1969
Milwaukee WI 116 3,438 123 116 3,561 3,677 498 12/28/90 1960
Waukesha WI 68 3,452 2,232 68 5,684 5,752 578 12/28/90 1958
Laramie WY 191 3,632 131 191 3,763 3,954 236 12/30/93 1964
Saratoga WY 13 1,487 150 14 1,636 1,650 67 11/1/94 1974
Worland WY 132 2,503 107 132 2,610 2,742 162 12/30/93 1970
---------------- ---------- ------------------------------- -----------
Subtotal 19,896 197,705 23,890 20,408 221,083 241,491 21,082
---------------- ---------- ------------------------------- -----------
Retirement and Assited Living Facilities:
Scottsdale AZ 979 8,807 140 990 8,936 9,926 362 5/16/94 1990
Sun City AZ 1,174 10,569 173 1,189 10,727 11,916 413 6/17/94 1990
Laguna Hills CA 3,132 28,184 473 3,172 28,617 31,789 926 9/9/94 1975
Boca Raton FL 4,404 39,633 797 4,474 40,360 44,834 1,637 5/20/94 1994
Deerfield Beach FL 1,664 14,972 298 1,690 15,244 16,934 618 5/16/94 1986
Ft. Myers FL 2,349 21,137 419 2,385 21,520 23,905 740 8/16/94 1984
Palm Harbor FL 3,327 29,945 595 3,379 30,488 33,867 1,236 5/16/94 1992
Port St. Lucie FL 1,223 11,009 219 1,242 11,209 12,451 455 5/20/94 1993
Arlington Heights IL 3,621 32,587 534 3,665 33,077 36,742 1,070 9/9/94 1986
Silver Spring MD 3,229 29,065 786 3,301 29,779 33,080 1,085 7/25/94 1992
Huron SD 45 968 1 44 970 1,014 95 6/30/92 1968
Bellaire TX 1,223 11,010 178 1,238 11,173 12,411 453 5/16/94 1991
Arlington VA 1,859 16,734 295 1,885 17,003 18,888 620 7/25/94 1992
Charlottesville VA 2,936 26,422 472 2,976 26,854 29,830 1,034 6/17/94 1991
Virginia Beach VA 881 7,926 137 893 8,051 8,944 327 5/16/94 1990
---------------- ---------- ------------------------------- -----------
Subtotal 32,046 288,968 5,517 32,523 294,008 326,531 11,071
---------------- ---------- ------------------------------- -----------
S-3
<PAGE>
<CAPTION>
HEALTH AND RETIREMENT PROPERTIES TRUST
SCHEDULE III - continued
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1995
(Dollars in thousands)
Gross Amount
Initial Cost to Carried at Close of
Company Period 12/31/95
---------------- ---------------------------
Cost
Capitalized Accumulated Original
Building & Subsequent to Building & Deprecia- Date Construction
Location State Land Equipment Acquisition Land Equipment Total (1) tion (2) Acquired Date
- ------------------------- ---------------------------------------------------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Nursing Homes with Subacute Services:
Wallingford CT 557 11,043 1,023 557 12,066 12,623 3,074 12/23/86 1974
Waterbury CT 514 10,186 742 630 10,812 11,442 2,814 12/23/86 1971
Forestville CT 465 9,235 1,342 476 10,566 11,042 2,613 12/23/86 1972
Waterbury CT 1,003 9,023 0 1,003 9,023 10,026 1,008 5/11/92 1974
Boston MA 2,164 20,836 1,977 2,163 22,814 24,977 4,278 5/1/89 1968
Worchester MA 1,829 15,071 1,869 1,829 16,940 18,769 3,626 5/1/88 1970
Hyannis MA 829 7,463 0 829 7,463 8,292 834 5/11/92 1972
Middleboro MA 1,771 15,752 0 1,771 15,752 17,523 1,741 5/11/92 1975
North Andover MA 1,448 11,049 0 1,448 11,049 12,497 1,234 5/11/92 1985
Canonsburg PA 1,499 13,493 606 1,518 14,080 15,598 2,037 3/1/91
---------------- ---------- ------------------------------- -----------
Subtotal 12,079 123,151 7,559 12,224 130,565 142,789 23,259 1985
---------------- ---------- ------------------------------- -----------
Medical Office Buildings and Clinics:
Boston MA 3,378 30,397 42 3,378 30,439 33,817 222 9/28/95 1985
Boston MA 1,447 13,028 17 1,447 13,045 14,492 95 9/28/95 1993
Boston MA 1,500 13,500 164 1,500 13,664 15,164 14 12/18/95 1988
Sacramento CA 644 3,206 77 644 3,283 3,927 112 8/30/94 1984
---------------- ---------- ------------------------------- ----------
Subtotal 6,969 60,131 300 6,969 60,431 67,400 443
---------------- ---------- ------------------------------- ----------
Total Real Estate $70,990 $669,955 $37,266 $72,124 $706,087 $778,211 $55,855
================ ========== =============================== ==========
<FN>
(1) Aggregate cost for federal income tax purposes is approximately $751,965.
(2) Depreciation is provided for on buildings and improvements ranging up to 40
years, equipment ranging up to 12 years.
<FN>
</TABLE>
S-4
<PAGE>
HEALTH AND RETIREMENT PROPERTIES TRUST
SCHEDULE III - continued
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
Real Estate and Accumulated
Equipment Depreciation
-------------- ------------
<S> <C> <C>
Balance at January 1, 1993 $337,076 $26,194
Additions 47,735 8,775
---------- ---------
Balance at December 31, 1993 384,811 34,969
Additions 341,610 13,594
Disposals (53,338) (8,993)
---------- ---------
Balance at December 31, 1994 673,083 39,570
Additions 309,853 21,047
Disposals (24,376) (2,352)
Real estate investments of Hospitality Properties Trust (180,349) (2,410)
---------- ---------
Balance at December 31, 1995 $778,211 $55,855
========== =========
</TABLE>
S-5
<PAGE>
HEALTH AND RETIREMENT PROPERTIES TRUST
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
December 31, 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
Principal Amount of
(1) Loans Subject to
Final Face Carry Delinquent
Interest Maturity Value of Value of Principal
Location Rate Date Periodic Payment Terms Mortgage Mortgage or Interest
-------- --------- ----------- ---------------------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
FARMINGTON, MI 11.50% 12/31/00 Interest only, principal and $4,300 $4,300
interest starting in 1996, --
payable monthly in arrears. $4.1
million due at maturity
HOWELL, MI 11.50% 12/31/00 Interest only, principal and 5,100 5,100
interest starting in 1996, --
payable monthly in arrears. $4.9
million due at maturity
MEDINA, OH 10.13% 2/1/98 Principal & interest payable 5,942 5,675 --
monthly in arrears. $5.7
million due at maturity.
AINSWORTH, NE 9.00% 12/31/16 Interest only, principal and 7,792 7,792
ASHLAND, NE interest starting in 1996,
GRETNA, NE payable monthly in arrears. $2.0
WAVERLY, NE million due at maturity.
SUTHERLAND, NE
BLUE HILL, NE
CENTRAL CITY, NE
MILWAUKEE, WI 11.50% 12/31/10 Interest only, principal and 11,500 11,500 --
PEWAUKEE, WI interest starting in 1997,
payable monthly in arrears.
$9.6 million due at maturity.
S-6
<PAGE>
<CAPTION>
HEALTH AND RETIREMENT PROPERTIES TRUST
SCHEDULE IV - continued
MORTGAGE LOANS ON REAL ESTATE
December 31, 1995
(Dollars in thousands)
Principal Amount of
(1) Loans Subject to
Final Face Carry Delinquent
Interest Maturity Value of Value of Principal
Location Rate Date Periodic Payment Terms Mortgage Mortgage or Interest
-------- --------- ----------- ---------------------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
MARION, NC 11.35% 4/30/07 Interest only, principal and 11,500 11,500
KING, NC interest starting in 1997, --
ABERDEEN, NC payable monthly in arrears.
NEW BERN, NC $9.6 million due at maturity.
TORRANCE, CA 10.00% 12/31/02 Interest only, principal and 12,309 12,309
TORRANCE, CA interest starting in 1997, --
ANAHEIM, CA payable monthly in arrears.
$11.5 million due at maturity
CANON CITY, CO 11.50% 12/31/16 Interest only, principal and 14,582 14,582 --
COLORADO SPRINGS, CO interest starting in 1996,
DELTA, CO payable monthly in arrears. $5.4
million due at maturity.
SLIDELL, LA 11.00% 12/31/10 Interest only, principal and 19,500 19,500 --
interest starting in 1996,
payable monthly in arrears.
$13.8 million due at maturity.
30 MORTGAGES 8.10%-13.75% 4/96-12/16 Interest only or principal and 52,148 46,990 4,105
interest payable monthly in
arrears
------------------------------------------------
TOTAL $ 144,673 $ 139,248 $ 4,105
================================================
<FN>
(1) Also represents cost for federal income tax purposes.
</FN>
</TABLE>
S-7
<PAGE>
HEALTH AND RETIREMENT PROPERTIES TRUST
SCHEDULE IV- continued
MORTGAGE LOANS ON REAL ESTATE
December 31, 1995
(Dollars in thousands)
Reconciliation of the carrying amount of mortgage loans at the beginning of the
period:
Balance at January 1, 1993 $ 47,173
New mortgage loans................................. 133,939
Collections of principal........................... (33,827)
Amortization of discounts.......................... 965
-------------------
Balance at December 31, 1993............................ 148,250
New mortgage loans................................. 11,772
Collections of principal........................... (48,775)
Amortization of discounts.......................... 4,597
Reclassification of real estate investment......... 9,947
-------------------
Balance at December 31, 1994............................ 125,791
New mortgage loans................................. 40,064
Collection of principal............................ (28,560)
Amortization of discounts.......................... 1,953
===================
Balance at December 31, 1995............................ $ 139,248
S-8
HEALTH AND RETIREMENT PROPERTIES TRUST
EXHIBIT 12.1
Computation of Earnings to Fixed Charges
(dollars in thousands)
Years Ended December 31,
----------------------------
Earnings 1991 1992 1993 1994 1995
---- ---- ---- ---- ----
Income before gain on
sale of properties and
extraordinary items $22,079 $27,243 $37,738 $57,878 $61,760
Adjustment for fixed charges 12,305 10,419 6,529 10,096 26,218
------- ------- ------- ------- -------
Total Earnings $34,384 $37,662 $44,267 $67,974 $87,978
Fixed Charges:
Interest expense $11,741 $ 9,466 $ 6,217 $ 8,965 $24,274
Amortization 564 953 312 1,131 1,944
------- ------- ------- ------- -------
Total Fixed Charges $12,305 $10,419 $ 6,529 $10,096 $26,218
Ratio of Earnings to
Fixed Charges 2.8x 3.6x 6.8x 6.7x 3.4x
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated February 16, 1996 included in Marriott
International, Inc.'s annual report on Form 10-K for the year ended December 29,
1995 (File No. 1-12188) in Health and Retirement Properties Trust's Form 10-K,
and into Health and Retirement Properties Trust's previously filed Registration
Statements File Nos. 33-53173 and 33-62135, and to all references to our Firm
included in these registration statements.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Washington, D.C.
March 29, 1996
Exhibit 23.2
Consent of Independent Auditors
We consent to the incorporation by reference in Amendment No. 1 to the
Registration Statement (Form S-3 No. 33-53173) of Health and Retirement
Properties Trust and in the related Prospectus and in Posteffective Amendment
No. 1 to the Registration Statement (Form S-3 No. 33-62135) of Health and
Retirement Properties Trust and in the related Prospectus of our report dated
February 9, 1996, with respect to the financial statements and schedules of
Health and Retirement Properties Trust included in this Annual Report (Form
10-K) for the year ended December 31, 1995.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Boston, Massachusetts
March 26, 1996
Exhibit 24.1
POWER OF ATTORNEY
The undersigned Officers and Trustees of Health and Retirement Properties
Trust hereby severally constitute David J. Hegarty, Ajay Saini, Gerard M. Martin
and Barry M. Portnoy, and each of them, to sign for us and in our names in the
capacities indicated below, the Annual Report on Form 10-K herewith filed with
the Securities and Exchange Commission, and any and all amendments thereto,
hereby ratifying and confirming our signatures as they may be signed by our said
attorneys to the Annual Report on Form 10-K and any and all amendments to the
Annual Report on Form 10-K.
Witness our hands and seals on the dates set forth below.
Signature Title Date
- --------- ----- ----
/s/David J. Hegarty President and Chief March 29, 1996
David J. Hegarty Operating Officer
/s/Ajay Saini Treasurer and March 29, 1996
Ajay Saini Financial Officer
/s/Bruce M. Gans, M.D. Trustee March 27, 1996
Bruce M. Gans, M.D.
/s/Justinian Manning, C.P. Trustee March 27, 1996
Rev. Justinian Manning,
C.P.
Trustee March 29, 1996
Ralph J. Watts
Trustee March 29, 1996
Gerard M. Martin
/s/ Barry M. Portnoy Trustee March 29, 1996
Barry M. Portnoy
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Health and Retirement Properties Trust for the years
ended December 31, 1995 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 18,640
<SECURITIES> 0
<RECEIVABLES> 7,895
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 778,211
<DEPRECIATION> 55,855
<TOTAL-ASSETS> 999,677
<CURRENT-LIABILITIES> 0
<BONDS> 269,759
0
0
<COMMON> 657
<OTHER-SE> 684,935
<TOTAL-LIABILITY-AND-EQUITY> 999,677
<SALES> 0
<TOTAL-REVENUES> 112,678
<CGS> 0
<TOTAL-COSTS> 54,037
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,274
<INCOME-PRETAX> 64,236
<INCOME-TAX> 0
<INCOME-CONTINUING> 64,236
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 64,236
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.08
</TABLE>
