UNITED STATES
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, 1996
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 04-655883
(State or other jurisdiction of incorporation) (IRS Employer Identification No.)
400 Centre Street, Newton, Massachusetts 02158
(Address of principal executive offices) (Zip Code)
617-332-3990
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Name of exchange on
Title of each class which registered
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Common Shares of Beneficial Interest New York Stock Exchange
Floating Rate Senior Notes, Series B, Due 1999 New York Stock Exchange
7.25% Convertible Subordinated Debentures due 2001 New York Stock Exchange
7.5% Convertible Subordinated Debentures due 2003, Series A New York Stock Exchange
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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. [ ]
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The aggregate market value of the voting stock of the registrant held
by non-affiliates was $1,716,775,380 based on the $18.875 closing price per
share for such stock on the New York Stock Exchange on March 25, 1997. For
purposes of this calculation, 3,859,722 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, 3,862,716
shares held by Government Properties Investors, Inc. subject to certain voting
agreements with the Company and an aggregate of 23,550 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 25, 1997: 98,700,975.
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 13, 1997. 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 January 3, 1997, 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 difference.
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
1996 FORM 10-K ANNUAL REPORT
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Table of Contents
Part I
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Page
Item 1. Business........................................................................ 1
................................................................................
Item 2. Properties...................................................................... 15
Item 3. Legal Proceedings............................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders............................. 17
Part II
Item 5. Market for the Registrant's Common Stock and Related Stockholders Matters....... 18
Item 6. Selected Financial Data......................................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations...................................................................... 19
Item 8. Financial Statements and Supplementary Data..................................... 19
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure...................................................................... 20
Part III
Incorporated by reference from the Company's Proxy Statement
for the Annual Meeting of Shareholders currently scheduled to
be held on May 13, 1997, to be filed pursuant to Regulation
14A.
Part IV
Item 14.Exhibits, Financial Statement Schedules and Report on Form 8-K.................. 20
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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 health care related real
estate. The facilities in which the Company has made investments by mortgage,
purchase lease or merger transactions shall hereinafter be referred to
individually as a "Property" and collectively as "Properties".
As of December 31, 1996, the Company directly owned 123 Properties for
an aggregate of $1.0 billion (at cost) and had mortgage investments in 52
Properties aggregating $150.2 million. The Company also has a 14.9% equity
investment in Hospitality Properties Trust ("HPT") of approximately $103.1
million (carrying value), for total real estate investments of approximately
$1.3 billion. The Properties are described in "Business Developments Since
January 1, 1996" and "Properties".
Number of Total Investment
State Properties at December 31, 1996
- ----- ---------- --------------------
(in thousands)
Arizona ................................ 6 $ 42,862
California ............................. 22 134,599
Colorado ............................... 11 37,422
Connecticut ............................ 9 94,244
District of Columbia ................... 1 25,181
Florida ................................ 7 147,886
Georgia ................................ 6 17,611
Illinois ............................... 3 101,454
Iowa ................................... 13 22,829
Kansas ................................. 9 13,136
Louisiana .............................. 1 19,358
Maryland ............................... 1 33,080
Massachusetts .......................... 9 148,978
Michigan ............................... 2 9,343
Missouri ............................... 3 5,877
Nebraska ............................... 16 16,496
New Hampshire .......................... 1 3,689
New Jersey ............................. 1 13,007
New York ............................... 3 30,599
North Carolina ......................... 9 22,710
Ohio ................................... 5 21,121
Pennsylvania ........................... 2 18,341
South Dakota ........................... 3 7,589
Texas .................................. 6 17,259
Vermont ................................ 8 29,766
Virginia ............................... 4 63,353
Washington ............................. 1 5,193
Wisconsin .............................. 9 44,063
Wyoming ................................ 4 8,898
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Total .................................. 175 $1,155,944
Investment in HPT ...................... 82 103,062
------ ----------
Total Investments ...................... 257 $1,259,006
====== ==========
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
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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 a facility for an amount which exceeds the
appraised value of such properties or, in certain cases, the Company's internal
appraisal. 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 investment concentrations based on
certain criteria. Among these are that no more than 40% of its investments be
operated by any single tenant or mortgagor, that investments in rehabilitation
treatment, acute care, medical office buildings, medical clinics and investments
in government office properties not exceed 40%, 15%, 30%, 25% and 40%,
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,
other than those in connection with the revolving credit facility, have been set
on the number of properties in which the Company will seek to invest, or on the
concentration of investments involving any one facility or geographical area;
however, the Trustees consider concentration of investments in determining
whether to make new or increase existing investments. The Company's Declaration
of Trust (the "Declaration") and operating policies provide that any investment
in facilities owned or operated by the Advisor, persons expressly permitted
under the Declaration to own more than 8.5% of the Company's shares, or any
company affiliated with any of the foregoing must, however, be approved by a
majority of the Trustees not affiliated with any of the foregoing (the
"Independent Trustees").
The Company has in the past and may in the future consider, from time
to time, the acquisition of or merger with other companies engaged in the same
Business as the Company; however, the Company has no present agreements or
understandings concerning any such acquisition or merger. The Company has no
intention of investing in the securities of others for the purpose of exercising
control.
Borrowing Policy. In addition to the use of equity, the Company
utilizes short-term and long-term borrowings to finance investments. During 1994
the Company issued $200 million of floating rate notes issued in two Series.
During the fourth quarter of 1996, the Series A notes, representing $75 million,
were prepaid in full through an in-substance defeasance. The Series B notes,
representing $125 million, which were issued at a discount, may be called, at
the Company's option, at par. The Series B notes bear interest at a spread over
LIBOR and mature in July 1999. In October 1996, the Company issued $200 million
of 7.5% and $40 million of 7.25% Convertible Subordinated Debentures (the
"Debentures") due 2003 and 2001, respectively. The Debentures are non-callable
for three years but are convertible at any time prior to maturity into common
shares of the Company at a price of $18 per share. As of March 7, 1997, $28.3
million of the Debentures had been converted. At December 31, 1996, the Company
had a revolving credit facility available to it totaling $250 million. As of
December 31, 1996, $140 million of this amount was outstanding, and $110 million
was available to be drawn. The Series B notes and the outstanding amounts on the
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revolving credit facility are at variable interest rates determined by formulae
based upon the London Interbank Offered Rate (LIBOR), 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 hedge agreements mature during 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, 1996 the Company's
debt to equity ratio was .70 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, 1996
During 1996, the Company acquired five nursing properties, three
retirement communities, twelve medical office buildings and invested in
capitalized improvements for existing properties for an aggregated amount of
approximately $225.4 million. In addition, the Company provided debt and
improvement financing totaling $17.2 million secured by a retirement community
and by properties under existing mortgages with the Company. These transactions
were funded by borrowing on the Company's revolving credit facility and
available cash. In addition, the Company received principal payments and
repayments on real estate mortgages of $10.2 million.
At December 31, 1996, the Company owned 4,000,000, or 14.9%, of the
common shares of beneficial interest of HPT with a carrying value of $103.1
million and market value of $116.0 million. During April 1996, HPT completed a
public stock offering of 14,250,000 common shares of beneficial interest at a
per share price of $26.625 for total consideration of approximately $379.4
million. As a result of this transaction, the Company's ownership percentage in
HPT was reduced from 31.8% to 14.9% and the Company realized a gain of $3.6
million. Although the Company did not sell any shares, pursuant to the Company's
accounting policy, gains and losses on the issuance of common shares of
beneficial interest by HPT are recognized in the Company's income statement.
In January 1996, the Company issued 475,000 common shares resulting in
net proceeds of approximately $7 million as a result of the underwriters'
exercise of the over-allotment option granted pursuant to the Company's equity
offering in December 1995.
In March 1996, the Company entered into a new credit facility to
refinance its $250 million unsecured revolving bank credit facility. The
restated credit facility matures in 2000 and bears interest at LIBOR plus 0.875%
per annum. In connection with the refinancing, the Company recognized an
extraordinary loss of $2.4 million from the early write-off of capitalized
expenses associated with the prior credit facility.
In April, 1996 the Company prepaid the outstanding secured Revenue
Refunding Bonds totaling $17.6 million by borrowing on the revolving bank credit
facility and from available cash.
In June, 1996 the Company filed a $750 million shelf registration
statement ("Shelf") that was declared effective by the Securities and Exchange
Commission. At December 31, 1996, $640 million was available to be drawn on the
Shelf.
In October 1996, the Company issued $200 million of 7.5% and $40
million of 7.25% Convertible Subordinated Debentures (the "Debentures") due 2003
and 2001, respectively. The Debentures are non-callable for three years, but are
convertible at any time prior to maturity into common shares of the Company at a
price of $18 per share. The net proceeds were used in part to repay the then
outstanding balance of $147 million on the Company's revolving bank credit
facility and $75.5 million was placed in an irrevocable trust to complete an
in-substance defeasance of the $75 million Floating Rate Senior Notes, Series A,
due 1999. The Company recognized an extraordinary loss of $1.5 million as a
result of the write-off of capitalized expenses associated with the debt prepaid
in the fourth quarter of 1996. At December 31, 1996, approximately $12.2 million
of the Debentures due 2003 had been converted into 679,441 common shares of the
Company. During January 1997, approximately an additional $16 million of the
Debentures due 2003 had been converted into 891,496 common shares of the
Company.
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In January 1997, the Company acquired a medical office building for
$5.4 million with available cash. In March 1997, the Company sold 27.0 million
shares in a public offering and received net proceeds of approximately $484.2
million. Proceeds were used, in part, to repay $140 million in outstanding
indebtedness under the revolving credit facility and to fund the acquisition of
the office buildings leased to the United States Government. Also in March 1997,
the Company acquired 25 office buildings which are leased to various agencies of
the United States Government. Consideration paid for this acquisition was
approximately $291 million in cash to retire certain assumed debt and to pay
certain other obligations of the seller, plus the assumption of approximately
$26 million of other debt and the issuance of approximately 3.9 million of
unregistered common shares of the Company. The Company has a commitment to
acquire an additional five office buildings leased to the United States
Government for approximately $55 million to be paid in cash to retire assumed
debt and unregistered common shares of the Company in addition to those
described above.
The Advisor
The Advisor is a Delaware corporation owned by Gerard M. Martin and
Barry M. Portnoy. The Advisor's principal executive offices are located at 400
Centre Street, Newton, Massachusetts 02158, 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 HPT and has other
business interest. 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, Ajay Saini, Treasurer, John A. Mannix, David A. Lepore and
Thomas M. O'Brien, Vice Presidents. Gerard M. Martin and Barry M. Portnoy are
also Managing Trustees of the Company and David J. Hegarty and Ajay Saini are
also officers of Company.
Employees
As of March 7, 1997, the Company had no employees. The Advisor, which
administers the day-to-day operations of the Company, has 47 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.
Certificates of Need. Certain of the Company's investments are in healthcare
properties which 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.
Federal Regulation. The Company's healthcare properties are affected by a number
of federal and state regulations including those related to reimbursement under
Medicare and Medicaid programs. Such regulations, among other things, limit
reimbursement for capital costs and in some circumstances for rental or lease
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expenses. Such regulations also include federal and state anti-fraud and
anti-kickback laws and regulations. An adverse determination concerning any
operator's licensure or eligibility for government reimbursement or its
compliance with applicable federal or state laws or regulations could materially
and adversely affect such operator and its affiliates.
A number of legislative proposals that would affect major reforms of the
health care system have been introduced in Congress. Such proposals include
universal health coverage, employer mandated 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, legislative proposals for more incremental reforms have also
been introduced, such as group health insurance plans for small businesses,
health insurance industry reforms, and Medicare and Medicaid reforms and cost
containment measures, including proposals that Medicaid be administered through
block grants to the states and per capita limits on state Medicaid spending. The
Company cannot predict whether any such legislative proposals will be adopted
or, if adopted, what effect, if any, such proposals would have on the business
of the Company or its lessees or mortgagors.
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.
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 1987, 1988, 1989, 1990, 1991, 1992, 1993, 1994, 1995
and 1996 taxable years, and that its current and anticipated investments and its
plan of operation will enable it to continue to meet the requirements for
qualification and taxation as a REIT under the Code. Actual qualification of the
Company as a REIT, however, will depend upon the Company's continued ability to
meet, and its meeting, through actual annual operating results, the various
qualification tests imposed under the Code. No assurance can be given that the
actual results of the Company's operations for any one taxable year will satisfy
such requirements.
Taxation of the Company. If the Company qualifies for taxation as a REIT and
distributes to its shareholders at least 95% of its "real estate investment
trust taxable income", it generally will not be subject to federal corporate
income taxes on the amount distributed. However, a REIT is subject to special
taxes on the net income derived from "prohibited transactions." In addition,
property acquired by the Company as the result of a default or imminent default
on a lease or mortgage is classified as "foreclosure property". Certain net
income from foreclosure property held by the Company for sale is taxable to it
at the highest corporate marginal tax rate then prevailing.
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Section 856(a) of the Code defines a REIT as a corporation, trust or
association: (1) which is managed by one or more trustees or directors; (2) the
beneficial ownership of which is evidenced by transferable shares or by
transferable certificates of beneficial interest; (3) which would be taxable,
but for Sections 856 through 859 of the Code, as a domestic corporation; (4)
which is neither a financial institution nor an insurance company subject to
certain provisions of the Code; (5) the beneficial ownership of which is held by
100 or more persons; (6) which is not closely held as determined under the
personal holding company stock ownership test (as applied with one modification)
; and (7) which meets certain other tests, described below. Section 856(b) of
the Code provides that conditions (1) to (4), inclusive, must be met during the
entire taxable year and that condition (5) must be met during at least 335 days
of a taxable year of 12 months, or during a proportionate part of a taxable year
of less than 12 months. By reason of condition (6) above, the Company will fail
to qualify as a REIT for a taxable year if at any time during the last half of
such year more than 50% in value of its outstanding Shares are owned directly or
indirectly by five or fewer individuals. To help maintain conformity with
condition (6), the Company's Declaration of Trust (the "Declaration") contains
certain provisions restricting share transfers and giving the Board of Trustees
power to redeem shares involuntarily.
It is the expectation of the Company that it will have at least 100
shareholders during the requisite period for each of its taxable years. There
can, however, be no assurance in this connection and, if the Company has fewer
than 100 shareholders during the requisite period, condition (5) described above
will not be satisfied, and the Company would not qualify as a REIT during such
taxable year.
For taxable years beginning after 1993, the rule that an entity will
fail to qualify as a REIT for a taxable year if at any time during the last half
of such year more than 50% in value of its outstanding shares is owned directly
or indirectly by five or fewer individuals has been liberalized in the case of a
qualified pension trust owning shares in a REIT. Under the liberalized 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
liberalized 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
which would not have qualified as a REIT but for the liberalization of the rule
as applied to qualified pension trusts, and 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 made such an 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.
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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 the new capital,
is qualifying income under the 75% test. Second, at least 95% of the Company's
gross income (excluding gross income from certain sales of property held
primarily for sale) must be derived from such real property investments,
dividends, interest, certain payments under interest rate swap or cap
agreements, and gain from the sale or disposition of stock, securities, or real
property or from any combination of the foregoing. Third, short-term gain from
the sale or other disposition of stock or securities, including, without
limitation, stock in other REITS, dispositions of interest rate swap or cap
agreements, and gain from certain prohibited transactions or other dispositions
of real property held for less than four years (apart from involuntary
conversions and sales of foreclosure property) must represent less than 30% of
the Company's gross income. (This rule does not apply for a year in which the
REIT is completely liquidated, as to dispositions occurring after the adoption
of a plan of complete liquidation.) For purposes of these rules, income derived
from a "shared appreciation provision" is treated as gain recognized on the sale
of the property to which it relates. Even though the Company's present mortgages
do not contain shared appreciation provisions, the Company may make mortgage
loans which include such provisions.
The Company temporarily invests working capital in short-term
investments, including shares in other REITS. Although the Company will use its
best efforts to ensure that its income generated by these investments will be of
a type which satisfies the 75% and 95% gross income tests, there can be no
assurance in this regard (see Discussion above of the "new capital" rule under
the 75% test). Moreover, the Company may realize short-term capital gain upon
sale or exchange of such investments, and such short-term capital gain would be
subject to the limitations imposed by the 30% gross income test.
In order to qualify as "rents from real property," the amount of rent
received generally must not be determined from the income or profits of any
person, but may be based on receipts or sales. The Code also provides that rents
will not qualify as "rents from real property," in satisfying the gross income
tests, if the REIT owns 10% or more of the tenant, whether directly or under
certain attribution rules. The Company intends not to lease property to any
party if rents from such property would not so qualify. Application of the 10%
ownership rule is, however, dependent upon complex attribution rules provided in
the Code and circumstances beyond the control of the Company. Ownership,
directly or by attribution, by an unaffiliated third party of more than 10% of
the Company's shares and more than 10% of the stock of a lessee would result in
lessee rents not qualifying as "rents from real property." The Declaration
provides that transfers or purported acquisitions, directly or by attribution,
of shares that could result in disqualification of the Company as a REIT are
null and void and permits the Trustees to repurchase shares to the extent
necessary to maintain the Company's status as a REIT. Nevertheless, there can be
no assurance such provisions in the Declaration will be effective to prevent the
Company's REIT status from being jeopardized under the 10% rule. Furthermore,
there can be no assurance that the Company will be able to monitor and enforce
such restrictions, nor will shareholders necessarily be aware of shareholdings
attributed to them under the attribution rules.
In addition, the Company must not manage 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."
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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 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.
Where a failure to satisfy the 25% asset test results from an
acquisition of securities or other property during a quarter, the failure can be
cured by disposition of sufficient nonqualifying assets within 30 days after the
close of such quarter. The Company intends to maintain adequate records of the
value of its assets to maintain compliance with the 25% asset test, and to take
such action as may be required to cure any failure to satisfy the test within 30
days after the close of any quarter.
The Company, in order to qualify as a REIT, is required to distribute
dividends (other than capital gain dividends) to its shareholders in an amount
equal to or greater than the excess of (A) the sum of (i) 95% of the Company's
"real estate investment trust taxable income" (computed without regard to the
dividends paid deduction and the Company's net capital gain) and (ii) 95% of the
net income, if any, (after tax) from foreclosure property, over (B) the sum of
certain non-cash income (from certain imputed rental income and income from
transactions inadvertently failing to qualify as like-kind exchanges). These
requirements may be waived by the IRS if the REIT establishes that it failed to
meet them by reason of distributions previously made to meet the requirements of
the 4% excise tax discussed below. To the extent that the Company does not
distribute all of its 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
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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.
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 and regulations proposed to be effective for "disqualified
leaseback agreements" entered into after June 3, 1996 adopt this rule, the
additional rent provisions of the leases should not cause the leases to be
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"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, and the proposed regulations mentioned
above permit a 10% fluctuation.
Depreciation of Properties. For tax purposes, the Company's real property
generally is depreciated on a straight-line basis over 40 years and personal
property owned by the Company generally is depreciated over 12 years.
Failure to Qualify. If the Company fails to qualify for taxation as a REIT in
any taxable year, and the relief provisions do not apply, the Company will be
subject to tax on its taxable income at regular corporate rates (plus any
applicable minimum tax). Distributions to shareholders in any year in which the
Company fails to qualify will not be deductible by the Company nor will they be
required to be made. In such event, to the extent of current and accumulated
earnings and profits, all distributions to shareholders will be taxable as
ordinary income and, subject to certain limitations in the Code, eligible for
the 70% dividends received deduction for corporations. Unless entitled to relief
under specific statutory provisions, the Company will also be disqualified from
taxation as a REIT for the following four taxable years. It is not possible to
state whether in all circumstances the Company would be entitled to statutory
relief from such disqualification. Failure to qualify for even one year could
result in the Company's incurring substantial indebtedness (to the extent
borrowings are feasible) or liquidating substantial investments in order to pay
the resulting taxes.
Taxation of United States Shareholders--Generally
As long as the Company qualifies as a REIT, distributions (including
reinvestments pursuant to the Company's dividend reinvestment plan) made to the
Company's shareholders out of current or accumulated earnings and profits will
be taken into account by them as ordinary income (which will not be eligible for
the 70% dividends received deduction for corporations). Distributions that are
designated as capital gain dividends will be taxed as long-term capital gains to
the extent they do not exceed the Company's actual net capital gain for the
taxable year, although corporate shareholders may be required to treat up to 20%
of any such capital gain dividend as ordinary income pursuant to Section 291 of
the Code. For purposes of computing the Company's earnings and profits,
depreciation on real estate is computed on a straight-line basis (over 40 years
for property acquired after 1986). Distributions in excess of current or
accumulated earnings and profits will not be taxable to a shareholder to the
extent that they do not exceed the adjusted basis of the shareholder's shares,
but will reduce the basis of the shareholder's shares. To the extent that such
distributions exceed the adjusted basis of a shareholder's shares they will be
included in income as long-term capital gain (or short-term capital gain if the
shares have been held for not more than one year, assuming the shares are a
capital asset in the hands of the shareholder. Shareholders may not include in
their individual income tax returns any net operating losses or capital losses
of the Company.
Dividends declared by the Company in October, November or December of a
taxable year to shareholders of record on a date in such month, will be deemed
to have been received by such shareholders on December 31, provided the Company
actually pays such dividends during the following January. The Company has,
however, generally declared dividends for the quarter ended December 31 in
January of the following year and paid these dividends in the following
February. As a result, for tax purposes, the dividend for any calendar year will
generally include the dividends for the first three quarters of that year plus
the dividend for the fourth quarter of the prior year. For tax purposes,
dividends paid in 1987, 1988, 1989, 1990, 1991, 1992, 1993, 1994, 1995 and 1996
aggregated $1.085, $.840, $1.13, $1.16, $1.22, $1.25, $1.29, $1.32, $1.37 and
$1.41 respectively, of which $.289, $.065, $.332, $.267, $.104, $.218, $.335,
$.081, $.161 and $.350, 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 six months (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
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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 distributions and,
if an appropriate election is made, the capital gain dividend distributions he
receives from the Company; however, distributions treated as a nontaxable return
of the shareholder's basis will not enter into the computation of net investment
income.
In Revenue Ruling 66-106, the IRS ruled that amounts distributed by a
real estate investment trust to a tax-exempt employee's pension trust did not
constitute "unrelated business taxable income". Revenue rulings are interpretive
in nature and subject to revocation or modification by the IRS. However, based
upon Revenue Ruling 66-106 and the analysis therein, the Company has received an
opinion of counsel that distributions by the Company to qualified pension plans
(including individual retirement accounts) and other tax-exempt entities should
not constitute "unrelated business taxable income," except as explained above in
the case of a pension trust which holds more than 10% by value of a
"pension-held REIT". This Revenue Ruling may not apply if a shareholder has
borrowed money to acquire shares.
Under Section 469 of the Code, taxpayers (other than certain
corporations) generally will not be entitled to deduct losses from so-called
passive activities except to the extent of their income from passive activities.
For purposes of these rules, distributions received by a shareholder from the
Company will not be treated as income from a passive activity and thus will not
be available to offset a shareholder's passive activity losses.
Tax preference and other items which are treated differently for
regular and alternative minimum tax purposes are to be allocated between a REIT
and its shareholders under regulations which are to be prescribed. It is likely
that these regulations would require tax preference items to be allocated to the
Company's shareholders with respect to any accelerated depreciation claimed by
the Company, but the Company has not claimed accelerated depreciation with
respect to its existing Properties.
Special Tax Considerations for Foreign Shareholders
The rules governing United States income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and foreign trusts and
estates (collectively, "Non-US Shareholders") are complex, and the following
discussion is intended only as a summary of such rules. Non-US Shareholders
should consult with their own tax advisors to determine the impact of Federal,
state, and local income tax laws on their 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 it is 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
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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
nonresident 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
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.
The United States Treasury issued proposed regulation on April 22, 1996
(the "Proposed regulations") which, if adopted, would affect the United States
taxation of dividends paid to a Non-US Shareholder. Under the Proposed
Regulations, to obtain a reduced rate of withholding under a treaty, a Non-US
Shareholder generally would be required to provide an Internal Revenue Service
Form W-8 certifying such Non-US Shareholder's entitlement to benefits under the
treaty. The Proposed Regulations also would provide special rules to determine
whether, for purposed of determining the applicability of a tax treaty,
dividends paid to a Non-US Shareholder that is an entity should be treated a
paid to the entity or to those holding an interest in the entity. The Proposed
Regulations are generally proposed to be effective with respect to dividends
paid after December 31, 1997, subject to certain transition rules. The foregoing
discussion is not intended to be a complete discussion of the provisions of the
Proposed Regulations, and Shareholders a re urged to consult their tax advisors
with respect to the effect the Proposed regulations would have if adopted.
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
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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 includable 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).
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.
As discussed above, the United States Treasury issued the Proposed
regulations which also would, if adopted, alter the information reporting and
backup withholding rules applicable to Non-US Shareholders. Among other things,
the Proposed Regulations would provide certain presumptions under which a Non-US
Shareholder would be subject to backup withholding and information reporting
until the Company receives certification from such shareholder of Non-US status.
As noted, the Proposed Regulations are generally proposed to be effective with
respect to dividends paid after December 31, 1997, subject to certain transition
rules. The foregoing discussion is not intended to be a complete discussion of
the provisions of the Proposed Regulations, and Shareholders are urged to
consult their tax advisors with respect to the effect that the Proposed
Regulations would have if adopted.
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.
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There may be other Federal, state, local or foreign income, or estate and
gift, tax considerations applicable to the circumstances of a particular
investor. Shareholders should consult their own tax advisors with respect to
such matters.
ERISA Plans, Keogh Plans and Individual Retirement Accounts
General Fiduciary Obligations. Fiduciaries of a pension, profit-sharing
or other employee benefit plan subject to Title I of the Employee Retirement
Income Security Act of 1974 ("ERISA") ("ERISA Plan") must consider whether their
investment in the Company's shares satisfies the diversification requirements of
ERISA, whether the investment is prudent in light of possible limitations on the
marketability of the shares, whether such fiduciaries have authority to acquire
such shares under the appropriate governing instrument and Title I of ERISA, and
whether such investment is otherwise consistent with their fiduciary
responsibilities. Any ERISA Plan fiduciary should also consider ERISA's
prohibition on improper delegation of control over or responsibility for "plan
assets." Trustees and other fiduciaries of an ERISA plan may incur personal
liability for any loss suffered by the plan on account of a violation of their
fiduciary responsibilities. In addition, such fiduciaries may be subject to a
civil penalty of up to 20% of any amount recovered by the plan on account of
such a violation (the "Fiduciary Penalty"). Also, fiduciaries of any Individual
Retirement Account ("IRA") Keogh Plan or other qualified retirement plan not
subject to Title I of ERISA because it does not cover common law employees
("Non-ERISA Plan") should consider that such an IRA or non-ERISA Plan may only
make investments that are authorized by the appropriate governing instrument.
Fiduciary shareholders should consult their own legal advisers if they have any
concern as to whether the investment is inconsistent with any of the foregoing
criteria.
Prohibited Transactions. Fiduciaries of ERISA Plans and persons making the
investment decision for an IRA or other Non-ERISA Plan should also consider the
application of the prohibited transaction provisions of ERISA and the Code in
making their investment decision. Sales and certain other transactions between
an ERISA Plan, IRA, or other Non-ERISA Plan and certain persons related to it
are prohibited transactions. The particular facts concerning the sponsorship,
operations and other investments of an ERISA Plan, IRA, or other Non-ERISA Plan
may cause a wide range of other persons to be treated as disqualified persons or
parties in interest with respect to it. A prohibited transaction, in addition to
imposing potential personal liability upon fiduciaries of ERISA Plans, may also
result in the imposition of an excise tax under the Code or a penalty under
ERISA upon the disqualified person or party in interest with respect to the
ERISA or Non-ERISA Plan or IRA. If the disqualified person who engages in the
transaction is the individual on behalf of whom an IRA is maintained (or his
beneficiary), the IRA may lose its tax-exempt status and its assets may be
deemed to have been distributed to such individual in a taxable distribution
(and no excise tax will be imposed) on account of the prohibited transaction.
Fiduciary shareholders should consult their own legal advisers if they have any
concern as to whether the investment is a prohibited transaction.
Special Fiduciary and Prohibited Transactions Considerations. On November
13, 1986 the Department of Labor ("DOL"), which has certain administrative
responsibility over ERISA Plans as well as over IRAs and other Non- ERISA Plans,
issued a final regulation defining "plan assets." The regulation generally
provides that when an ERISA or Non-ERISA Plan or IRA acquires a security that is
an equity interest in an entity and that security is neither a "publicly offered
security nor a security issued by an investment company registered under the
Investment Company Act of 1940, the ERISA or Non-ERISA Plan's or IRA's assets
include both the equity interest and an undivided interest in each of the
underlying assets of the entity, unless it is established either that the entity
is an operating company or that equity participation in the entity by benefit
plan investors is not significant.
The regulation defines a publicly offered security as a security that is
"widely held," "freely transferable" and either part of a class of securities
registered under the Securities Exchange Act of 1934, or sold pursuant to an
effective registration statement under the Securities Act of 1933 (provided the
securities are registered under the Securities Exchange Act of 1934 within 120
days after the end of the fiscal year of the issuer during which the offering
occurred). The Company's shares have been registered under the Securities
Exchange Act of 1934.
The regulation provides that a security is "widely held" only if it is part
of a class of securities that is owned by 100 or more investors independent of
14
<PAGE>
the issuer and of one another. However, a security will not fail to be "widely
held" because the number of independent investors falls below 100 subsequent to
the initial public offering as a result of events beyond the issuer's control.
The regulation provides that whether a security is "freely transferable" is
a factual question to be determined on the basis of all relevant facts and
circumstances. The regulation further provides that, where a security is part of
an offering in which the minimum investment is $10,000 or less, certain
restrictions ordinarily will not, alone or in combination, affect a finding that
such securities are freely transferable. The restrictions on transfer enumerated
in the regulation as not affecting that finding include: any restriction on or
prohibition against any transfer or assignment which would result in a
termination or reclassification of the Company for Federal or state tax
purposes, or would otherwise violate any state or Federal law or court order;
any requirement that advance notice of a transfer or assignment be given to the
Company and any requirement that either the transferor or transferee, or both,
execute documentation setting forth representations as to compliance with any
restrictions on transfer which are among those enumerated in the regulation as
not affecting free transferability, including those described in the preceding
clause of this sentence; any administrative procedure which establishes an
effective date, or an event prior to which a transfer or assignment will not be
effective; and any limitation or restriction on transfer or assignment which is
not imposed by the issuer or a person acting on behalf of the issuer. The
Company believes that the restrictions imposed under the Declaration on the
transfer of shares do not result in the failure of the shares to be "freely
transferable." Furthermore, the Company believes that at present there exist no
other facts or circumstances limiting the transferability of the shares which
are not included among those enumerated as not affecting their free
transferability under the regulation, and the Company does not expect or intend
to impose in the future (or to permit any person to impose on its behalf) any
limitations or restrictions on transfer which would not be among the enumerated
permissible limitations or restrictions. However, the final regulation only
establishes a presumption in favor of a finding of free transferability, and no
guarantee can be given that the DOL or the Treasury Department will not reach
a contrary conclusion.
Assuming that the shares will be "widely held" and that no other facts
and circumstances exist which restrict transferability of the shares, the
Company has received an opinion of counsel that the shares should not fail to be
"freely transferable" for purposes of the regulation due to the restrictions on
transfer of the shares under the Declaration and that under the regulation the
shares are publicly offered securities and the assets of the Company will not be
deemed to be "plan assets" of any ERISA Plan, IRA or other Non-ERISA Plan that
invests in the shares.
If the assets of the Company are deemed to be plan assets under ERISA,
(i) the prudence standards and other provisions of Part 4 of Title I of ERISA
would be applicable to investments made by the Company; (ii) the person or
persons having investment discretion over the assets of ERISA Plans which invest
in the Company would be liable under the aforementioned Part 4 of Title I of
ERISA for investments made by the Company which do not conform to such ERISA
standards unless the Advisor registers as an investment adviser under the
Investment Advisers Act of 1940 and certain other conditions are satisfied; and
(iii) certain transactions that the Company might enter into in the ordinary
course of its business and operation might constitute "prohibited transactions"
under ERISA and the Code.
Item 2. Properties
General. At December 31, 1996, approximately 35% of the Company's total
investments were in retirement and assisted living communities, 29% were in
long-term care facilities, 14% were in long-term care facilities with subacute
services, 14% were in medical office buildings and clinics, and 8% were in
hotels through the Company's 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 and any currently proposed uses. At
December 31, 1996, the Company had direct and indirect real estate investments
totaling $1.3 billion in 257 properties that were leased to or operated by over
30 separate companies.
15
<PAGE>
Item 2. Properties continued
The following table summarizes certain information about the Properties as of
December 31, 1996. All dollar figures are in thousands.
<TABLE>
<CAPTION>
REAL ESTATE OWNED:
Number of Number of Investment Minimum
Location Facilities Beds/Units Amount Rent
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Retirement and Assisted Living Facilities:
Arizona 3 481 $ 36,642 $ 3,061
California 1 402 31,791 3,319
Florida 5 1,527 131,989 9,986
Illinois 2 704 98,743 7,490
Maryland 1 351 33,080 4,054
New York 1 103 10,700 1,017
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 4,688
Colorado 6 731 21,978 3,118
Connecticut 5 867 42,821 4,926
Georgia 5 531 15,874 1,738
Illinois 1 230 2,711 452
Iowa 13 862 22,829 2,308
Kansas 7 526 10,673 1,267
Missouri 3 305 5,877 851
Nebraska 1 80 1,800 208
New Hampshire 1 108 3,689 430
New Jersey 1 140 13,007 1,418
Ohio 2 400 9,872 1,177
South Dakota 2 322 6,575 854
Vermont 8 808 29,766 3,316
Washington 1 143 5,193 626
Wisconsin 7 920 31,680 5,074
Wyoming 4 295 8,898 1,062
Long-Term Care Facilities with Subacute Services:
Connecticut 4 660 49,058 6,097
Massachusetts 5 762 82,059 10,044
Pennsylvania 1 120 15,598 1,951
Medical Office Buildings and Clinics:
California 8 -- 60,734 6,707
District of Columbia 1 -- 25,181 3,652
Massachusetts 4 -- 66,919 8,482
New York 2 -- 19,899 1,999
Virginia 1 -- 5,691 945
---------------------------------------------------------------
Total Real Estate 123 14,890 $1,005,739 $ 110,284
---------------------------------------------------------------
</TABLE>
16
<PAGE>
Item 2. Properties continued
<TABLE>
<CAPTION>
MORTGAGE AND NOTE INVESTMENTS:
Number of Number of Investment Minimum
Location Facilities Beds/Units Amount Rent
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Retirement and Assisted Living Facilities:
California 3 389 $ 8,390 $ 880
Florida 1 248 5,000 525
North Carolina 3 345 11,500 1,206
Long-Term Care Facilities:
California 1 299 6,329 712
Colorado 5 389 15,444 1,703
Florida 1 58 10,897 1,185
Georgia 1 124 1,737 170
Kansas 2 120 2,463 264
Michigan 1 153 4,274 493
Nebraska 15 1,032 14,696 1,396
North Carolina 6 677 11,210 1,186
Ohio* 3 507 11,249 1,133
Pennsylvania 1 120 2,743 251
Texas 5 496 4,848 478
Wisconsin 2 339 12,383 1,444
Long-Term Care Facilities with Subacute Services:
Connecticut -- -- 2,365 134
Louisiana 1 118 19,358 2,140
Michigan 1 189 5,069 585
Medical Office Buildings:
California* -- -- 250 --
---------------------------------------------------------------
Total Mortgages and Notes 52 5,603 $150,205 $ 15,885
---------------------------------------------------------------
<FN>
* Amounts represent or include notes receivable related to improvements to real
estate owned.
</FN>
</TABLE>
Item 3. Legal Proceedings
The information required by this item is incorporated by reference
Current Report on Form 8-K dated February 13, 1997, Item 5, Other Events, in the
section entitled "Legal Proceedings".
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.
17
<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
1996
First Quarter 17 3/8 16
Second Quarter 17 7/8 16 3/8
Third Quarter 18 1/8 16 3/8
Fourth Quarter 19 1/4 17 3/4
The closing price of the Shares on the New York Stock Exchange on March
21, 1997 was $18.875.
As of March 21, 1997, there were approximately 4,786 holders of record of the
Shares and the Company estimates that as of such date there were in excess of
110,000 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
1996
First Quarter .35 1.40
Second Quarter .35 1.40
Third Quarter .36 1.44
Fourth Quarter .36 1.44
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.
18
<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>
Income Statement Data: Year Ended December 31,
-------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------- --------------- --------------- ---------------- -----------
<S> <C> <C> <C> <C> <C>
Total revenues $120,183 $113,322 $ 86,683 $ 56,485 $ 48,735
Income before gain (loss) on sale of
properties and extraordinary item 77,164 61,760 57,878 37,738 27,243
Income before extraordinary items 77,164 64,236 51,872 37,738 27,243
Net income 73,254 64,236 49,919 33,417 27,243
Fund from operations (1) 99,106 84,638 71,851 46,566 35,365
Dividends declared (2) 94,299 83,954 76,317 44,869 33,079
Per share amounts:
Income before gain (loss) on sale of
properties and extraordinary items 1.16 1.04 1.10 1.10 1.02
Income before extraordinary items 1.16 1.08 .98 1.10 1.02
Net income 1.11 1.08 .95 .97 1.02
Funds from operations (1) 1.50 1.43 1.36 1.35 1.32
Dividends declared (2) 1.42 1.38 1.33 1.30 1.26
Average shares outstanding 66,255 59,277 52,738 34,407 26,760
<CAPTION>
Balance Sheet Data: At December 31,
-------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------- --------------- --------------- ---------------- -----------
<S> <C> <C> <C> <C> <C>
Real estate properties at cost $1,005,739 $ 778,211 $ 673,083 $ 384,811 $ 337,076
Real estate mortgages and notes 150,205 141,307 133,477 157,281 47,173
Investment in HPT 103,062 99,959 -- -- --
Total assets 1,229,522 999,677 840,206 527,662 374,468
Total indebtedness 492,175 269,759 216,513 73,000 138,500
Total shareholders' equity 708,048 685,592 602,039 441,135 228,301
<FN>
(1) Funds from operations is net income before gain (loss) on sale of
properties and extraordinary items plus depreciation, 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>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required by this item is incorporated by reference to
the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the current Report on form 8-K dated
February 17, 1997.
Item 8. Financial Statements and Supplementary Data
The information required by this item is incorporated herein by
reference to the "Consolidated Financial Statements of Health and Retirement
Properties Trust" in the Current Report on Form 8-K dated February 17, 1997. The
19
<PAGE>
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 January 3, 1997, 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 will be filed not
later than 120 days after the end of the Company's fiscal year.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Index to Financial Statements and Financial Statement Schedules
<TABLE>
<CAPTION>
HEALTH AND RETIREMENT PROPERTIES TRUST
Page
<S> <C>
1) The following consolidated financial statements of Health and Retirement
Properties Trust are incorporated by reference in to the Company's Current
Report on Form 8-K dated February 17, 1997, page references are to such
Current Report:
Balance Sheets as of December 31, 1995 and 1996 F-4
Statements of Income for the years ended December 31, 1994, 1995 and 1996 F-5
Statements of Shareholders' Equity for the years ended December 31, 1994, 1995, and 1996 F-6
Statements of Cash Flows for the years ended December 31, 1994, 1995, and 1996 F-7
Notes to Financial Statements F-8
2) The following schedules are filed herewith:
III -- Real Estate and Accumulated Depreciation S-1
IV -- Mortgage Loans on Real Estate S-6
</TABLE>
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.
3) Exhibits:
3.1 Conformed copy of Amended and Restated Declaration of Trust as amended by
the amendment approved by the shareholders June 28, 1996 and filed with
the Maryland Department of Assessments and Taxation on July 9, 1996. (1)
3.2 Amendment, effective March 3, 1997, Amended and Restated Declaration of
Trust providing for an increase in the authorized common shares of
beneficial interest, $.01 par value per share, from 100,000,000 to
125,000,000. (2)
3.3 Amended and Restated Bylaws (3)
4.1 Form of Series B Notes (4)
4.2 Supplemental Indenture, dated as of June 29, 1994, between the Company and
Shawmut Bank, N.A. (4)
4.3 Indenture, dated as of June 1, 1994, between the Company and Shawmut Bank,
N.A. (4)
4.4 First Supplemental Indenture, dated as of October 7, 1996, between the
Company and Fleet National Bank ("Fleet"), as trustee, relating to the
Company's 7.5% Convertible Subordinated Debentures, due 2003, Series A,
including form thereof. (5)
20
<PAGE>
4.5 Second Supplemental Indenture, dated as of October 7, 1996, between the
Company and Fleet, as trustee, relating to the Company's 7.5% Convertible
Subordinated Debentures, due 2003, Series B, including form thereof. (5)
4.6 Third Supplemental Indenture, dated as of October 7, 1996, between the
Company and Fleet, as trustee, relating to the Company's 7.25%
Convertible Subordinated Debentures, due 2001, including form thereof.
(5)
4.7 Indenture, dated as of September 20, 1996, between the Company and Fleet,
as trustee. (6)
8.1 Opinion of Sullivan & Worcester, LLP as to certain tax matters (filed
herewith) 9.1 Amended and Restated AMS Voting Trust Agreement (7)
10.1 Advisory Agreement, as amended (8) (+)
10.2 Second Amendment to Advisory Agreement (9) (+)
10.3 Incentive Share Award Plan (7) (+)
10.4 Master Lease Document (10)
10.5 AMS Properties Security Agreement (10)
10.6 AMS Subordination Agreement (10)
10.7 AMS Guaranty (10)
10.8 AMS Pledge Agreement (10)
10.9 AMS Holding Co. Pledge Agreement (10)
10.10 Amended and Restated Renovation Funding Agreement (10)
10.11 Amendment to AMS Transaction Documents (10)
10.12 GCI Master Lease Document (7)
10.13 Amended and Restated HRP Shares Pledge Agreement (7)
10.14 Guaranty, Cross-Default and Cross-Collateralization Agreement (7)
10.15 Marriott Senior Living Series Purchase and Sale Agreement (9)
10.16 Connecticut Subacute Corporation II Lease Document Waterbury (3)
10.17 Connecticut Subacute Corporation II Lease Document Cheshire (3)
10.18 Connecticut Subacute Corporation II Lease Document New Haven (3)
10.19 Vermont Subacute/New Hampshire Subacute Corporation Mater Lease Agreement
(Chapple) (3)
10.20 Amended and Restated Agreement and Plan of Reorganization (Chapple) (3)
10.21 Purchase Option Agreement (3) 10.22 Amended and Restated Promissory Note,
dated July 29, 1996, from Connecticut Subacute Corporation to the
Company. (11)
10.23 Third Amended and Restated Revolving Loan Agreement, dated as of March
15, 1996, among Health and Retirement Properties Trust, as a borrower,
the lenders named therein, Klweinwort Benson Limited, as agent, Wells
Fargo Bank, National Association, as administrative agent, Natwest Bank,
N.A., as co-agent, et al. (12)
10.24 Letter Agreement, dated as of October 21, 1996, among Health and
Retirement Properties Trust, as borrower, Kleinwort Benson Limited, as
agent, and the Majority Lenders (12)
10.25 First Amendment, dated as of December 15, 1996, to Third Amended and
Restated Revolving Loan Agreement, dated as of March 15, 1996, among
Health and Retirement Properties Trust, as borrower, Kleinwort Benson
Limited as agent, Wells Fargo Bank, National Association, as
administrative agent, Natwest Bank, N.A., as co-agent, et al. (12)
10.26 Second Amendment and Waiver, dated as of March 19, 1997, to Third Amended
and Restated Revolving Loan Agreement, dated as of March 15, 1996, among
Health and Retirement Properties Trust, as borrower, the lenders named
therein, Dresdner Kleinwort Benson North American LLC (as successor to
Kleinwort Benson Limited), as agent, Wells Fargo Bank, National
Association, as administrative agent, Fleet National Bank (as successor
to Fleet Bank of Massachusetts), as co-agent, et al. (13)
10.27 Merger Agreement dated February 17, 1997 between Health and Retirement
Properties Trust and Government Property Investors, Inc. including forms
of Escrow Agreement, Investment and Registration Rights Agreement, Voting
Agreement, Information Access Agreement, Indemnification Agreement,
Service Contract, Non-Solicitation Agreement and Second Closing Escrow
Agreement. (12)
12.1 Earnings to Fixed Charges (filed herewith)
21.1 Subsidiaries of the Registrant (filed herewith)
23.1 Consent of Ernst & Young LLP (filed herewith)
21
<PAGE>
23.2 Consents of Arthur Andersen (filed herewith)
23.3 Consent of Sullivan & Worcester LLP (included as part of Exhibit 8.1
hereto)
(+) Management contract or compensatory plan or arrangement.
(1) Incorporated by reference to the Company's Current Report on Form 8-K,
dated July 10, 1996.
(2) Incorporated by reference to the Company's Current Report on Form 8-K,
dated March 3, 1997.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
(4) Incorporated by reference to the Company's Registration Statement on Form
8-A dated July 11, 1994.
(5) Incorporated by reference to the Company's Current Report on Form 8-K
dated October 7, 1996.
(6) Incorporated by reference to the Company's Registration Statement on Form
S-3, File No. 333-02863.
(7) Incorporated by reference to the Company's Registration Statement on Form
S-11, File No. 33-55684, dated December 23, 1992, and amendments thereto.
(8) Incorporated by reference to the Company's Registration Statement on Form
S-11, File No. 33-16799, dated August 27, 1987, and amendments thereto.
(9) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1993.
(10) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1991.
(11) Incorporated by reference to the Company's Current Report on Form 8-K
dated October 1, 1996.
(12) Incorporated by reference to the Company's Current Report on Form 8-K,
dated February 17, 1997.
(13) Incorporated by reference to the Company's Current Report on Form 8-K
dated March 20, 1997.
(b) During the fourth quarter of 1996, the Company filed the following
Current Reports on Form 8-K:
(i) Current Report on Form 8-K dated October 1, 1996 related to the Company's
offering of its 7.5% Convertible Subordinated Debentures, due 2003,
Series A and B and 7.25% Convertible Subordinated Debentures, due 2001.
(ii) Current Report on Form 8-K dated October 7, 1996 related to the Company's
offering of its 7.5% Convertible Subordinated Debentures, due 2003,
Series A and B and 7.25% Convertible Subordinated Debentures, due 2001.
(iii) Current Report on Form 8-K dated October 23, 1996 relating to the
redemption of the Company's Floating Rate Senior Notes, due 1999, Series
A.
22
<PAGE>
<TABLE>
<CAPTION>
HEALTH AND RETIREMENT PROPERTIES TRUST
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996
(Dollars in thousands)
Initial Cost to Gross Amount Carried at
Company Close of Period 12/31/96
---------------------- -----------------------------
Cost Accumu-
Capitalized lated Original
Building & Subsequent to Building & Depreci- Date Construction
Location State Land Equipment Acquisition Land Equipment Total (1) ation(2) Acquired Date
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Retirement and Assisted Living Communities:
Scottsdale AZ $ 979 $ 8,807 $ 140 $ 990 $ 8,936 $ 9,926 $ 586 $ 5/16/94 1990
Sun City AZ 1,174 10,569 173 1,189 10,727 11,916 681 6/17/94 1990
Mesa AZ 1,480 13,320 -- 1,480 13,320 14,800 14 12/27/96 1985
Laguna Hills CA 3,132 28,184 475 3,172 28,619 31,791 1,641 9/9/94 1975
Boca Raton FL 4,404 39,633 799 4,474 40,362 44,836 2,646 5/20/94 1994
Deerfield Beach FL 1,664 14,972 298 1,690 15,244 16,934 999 5/16/94 1986
Ft. Myers FL 2,349 21,137 419 2,385 21,520 23,905 1,278 8/16/94 1984
Palm Harbor FL 3,327 29,945 591 3,379 30,484 33,863 1,999 5/16/94 1992
Port St. Lucie FL 1,223 11,009 219 1,242 11,209 12,451 735 5/20/94 1993
Chicago IL 6,200 55,800 -- 6,200 55,800 62,000 58 12/27/96 1990
Arlington Heights IL 3,621 32,587 535 3,665 33,078 36,743 1,896 9/9/94 1986
Silver Spring MD 3,229 29,065 786 3,301 29,779 33,080 1,830 7/25/94 1992
Rochester NY 1,070 9,630 -- 1,070 9,630 10,700 10 12/27/96 1988
Huron SD 45 968 1 44 970 1,014 122 6/30/92 1968
Bellaire TX 1,223 11,010 178 1,238 11,173 12,411 732 5/16/94 1991
Arlington VA 1,859 16,734 295 1,885 17,003 18,888 1,045 7/25/94 1992
Charlottesville VA 2,936 26,422 472 2,976 26,854 29,830 1,705 6/17/94 1991
Virginia Beach VA 881 7,926 137 890 8,054 8,944 528 5/16/94 1990
-------- --------- ------- -------- -------- -------- -------
Subtotal 40,796 367,718 5,518 41,270 372,762 414,032 18,505
-------- --------- ------- -------- -------- -------- -------
Long-Term Care Facilities:
Phoenix AZ 655 2,525 5 655 2,530 3,185 326 6/30/92 1963
Yuma AZ 223 2,100 4 223 2,104 2,327 267 6/30/92 1984
Yuma AZ 103 604 1 103 605 708 77 6/30/92 1984
Fresno CA 738 2,577 188 738 2,765 3,503 483 12/28/90 1968
Lancaster CA 601 1,859 1,029 601 2,888 3,489 439 12/28/90 1963
Newport Beach CA 1,176 1,729 1,223 1,176 2,952 4,128 424 12/28/90 1962
Palm Springs CA 103 1,264 982 103 2,246 2,349 307 12/28/90 1969
San Diego CA 1,114 1,073 480 1,114 1,553 2,667 272 12/28/90 1969
Stockton CA 382 2,750 4 382 2,754 3,136 351 6/30/92 1968
Tarzana CA 1,277 977 806 1,278 1,782 3,060 298 12/28/90 1969
Thousand Oaks CA 622 2,522 310 622 2,832 3,454 476 12/28/90 1965
Van Nuys CA 716 378 225 718 601 1,319 113 12/28/90 1969
S-1
<PAGE>
<CAPTION>
HEALTH AND RETIREMENT PROPERTIES TRUST
SCHEDULE III-continued
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996
(Dollars in thousands)
Initial Cost to Gross Amount Carried at
Company Close of Period 12/31/96
---------------------- -----------------------------
Cost Accumu-
Capitalized lated Original
Building & Subsequent to Building & Depreci- Date Construction
Location State Land Equipment Acquisition Land Equipment Total (1) ation(2) Acquired Date
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Long-Term Care Facilities - continued
Colorado Springs CO 23 777 209 26 983 1,009 72 11/1/94 1960
Grand Junction CO 6 2,583 1,313 136 3,766 3,902 291 12/30/93 1978
Grand Junction CO 204 3,875 322 204 4,197 4,401 387 12/30/93 1968
Lakewood CO 232 3,766 724 232 4,490 4,722 722 12/28/90 1972
Littleton CO 185 5,043 349 185 5,392 5,577 914 12/28/90 1965
Paonia CO 115 2,179 73 115 2,252 2,367 209 12/30/93 1981
Cheshire CT 520 7,380 1,559 520 8,939 9,459 2,003 11/1/87 1963
Killingly CT 240 5,360 460 240 5,820 6,060 1,627 5/15/87 1972
New Haven CT 1,681 14,953 1,236 1,681 16,189 17,870 2,226 5/11/92 1971
Waterford CT 86 4,714 453 86 5,167 5,253 1,498 5/15/87 1965
Willimantic CT 134 3,566 479 166 4,013 4,179 1,077 5/15/87 1965
College Park GA 300 2,702 19 300 2,721 3,021 52 5/15/96 1985
Glenwood GA 174 1,564 3 174 1,567 1,741 28 5/15/96 1972
Dublin GA 442 3,982 41 442 4,023 4,465 73 5/15/96 1968
Macon GA 363 3,271 -- 363 3,271 3,634 62 5/15/96 1969
Marrietta GA 300 2,702 11 300 2,713 3,013 50 5/15/96 1969
Clarinda IA 77 1,453 228 77 1,681 1,758 146 12/30/93 1968
Council Bluffs IA 50 467 84 50 551 601 44 6/4/93 1970
Council Bluffs IA 225 2,125 90 225 2,215 2,440 93 4/1/95 1963
Glenwood IA 45 2,155 24 45 2,179 2,224 93 4/1/95 1964
Mediapolis IA 94 1,776 236 94 2,012 2,106 179 12/30/93 1973
Muscatine IA 246 4,683 2,268 246 6,951 7,197 475 12/30/93 1964
Pacific Junction IA 32 368 5 32 373 405 16 4/1/95 1978
Toledo IA 153 2,907 337 153 3,244 3,397 294 12/30/93 1975
Winterset IA 111 2,099 491 111 2,590 2,701 218 12/30/93 1973
Nashville IL 75 2,556 80 75 2,636 2,711 454 12/28/90 1964
Arma KS 47 1,953 103 47 2,056 2,103 86 4/1/95 1970
Ellinwood KS 130 1,420 38 130 1,458 1,588 61 4/1/95 1972
Smith Center KS 111 2,099 145 111 2,244 2,355 205 12/30/93 1971
Topeka KS 110 890 24 110 914 1,024 38 4/1/95 1963
Topeka KS 137 913 47 137 960 1,097 38 4/1/95 1970
Topeka KS 18 232 156 18 388 406 11 4/1/95 1968
Wichita KS 105 1,995 -- 105 1,995 2,100 42 10/1/96 1973
Oak Grove MO 119 1,831 233 119 2,064 2,183 82 4/1/95 1976
St. Joseph MO 111 1,027 135 111 1,162 1,273 93 6/4/93 1976
S-2
<PAGE>
<CAPTION>
HEALTH AND RETIREMENT PROPERTIES TRUST
SCHEDULE III-continued
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996
(Dollars in thousands)
Initial Cost to Gross Amount Carried at
Company Close of Period 12/31/96
---------------------- -----------------------------
Cost Accumu-
Capitalized lated Original
Building & Subsequent to Building & Depreci- Date Construction
Location State Land Equipment Acquisition Land Equipment Total (1) ation(2) Acquired Date
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Long-Term Care Facilities - continued
Tarkio MO 102 1,938 381 102 2,319 2,421 193 12/30/93 1970
Grand Island NE 119 1,331 350 119 1,681 1,800 62 4/1/95 1963
Rochester NH 466 3,219 4 466 3,223 3,689 158 1/30/95 1972
Burlington NJ 1,300 11,700 7 1,300 11,707 13,007 367 9/28/95 1994
Akron OH 330 5,370 727 330 6,097 6,427 1,743 5/15/87 1971
Grove City OH 332 3,081 32 332 3,113 3,445 275 6/4/93 1965
Huron SD 144 3,108 4 144 3,112 3,256 393 6/30/92 1968
Sioux Falls SD 253 3,062 4 253 3,066 3,319 388 6/30/92 1960
Barre VT 261 4,530 133 389 4,535 4,924 222 1/30/95 1979
Barre VT 129 3,825 4 129 3,829 3,958 187 1/30/95 1972
Bennington VT 160 4,385 5 160 4,390 4,550 215 1/30/95 1971
Burlington VT 791 5,985 410 872 6,314 7,186 307 1/30/95 1968
Springfield VT 50 747 1 50 748 798 37 1/30/95 1976
Springfield VT 89 3,724 157 242 3,728 3,970 183 1/30/95 1971
St. Albans VT 154 710 1 154 711 865 35 1/30/95 1900
St. Johnsbury VT 95 3,416 4 95 3,420 3,515 167 1/30/95 1978
Seattle WA 256 4,869 68 256 4,937 5,193 478 11/1/93 1972
Brookfield WI 834 3,849 8,014 834 11,863 12,697 1,231 12/28/90 1954
Clintonville WI 49 1,625 88 30 1,732 1,762 290 12/28/90 1965
Clintonville WI 14 1,695 37 14 1,732 1,746 292 12/28/90 1960
Madison WI 144 1,633 109 144 1,742 1,886 292 12/28/90 1920
Milwaukee WI 277 3,883 -- 277 3,883 4,160 541 3/27/92 1969
Milwaukee WI 116 3,438 123 116 3,561 3,677 597 12/28/90 1960
Waukesha WI 68 3,452 2,232 68 5,684 5,752 730 12/28/90 1958
Laramie WY 191 3,632 190 191 3,822 4,013 355 12/30/93 1964
Saratoga WY 13 1,487 185 14 1,671 1,685 124 11/1/94 1974
Worland WY 132 2,503 565 132 3,068 3,200 246 12/30/93 1970
-------- --------- ------- -------- -------- -------- -------
Subtotal 21,580 213,921 31,067 22,092 244,476 266,568 27,900
-------- --------- ------- -------- -------- -------- -------
Long-Term Care Facilities with Subacute Services:
Wallingford CT 557 11,043 1,921 557 12,964 13,521 3,466 12/23/86 1974
Waterbury CT 514 10,186 1,114 630 11,184 11,814 3,165 12/23/86 1971
Forestville CT 465 9,235 3,083 478 12,305 12,783 2,972 12/23/86 1972
Waterbury CT 1,003 9,023 914 1,003 9,937 10,940 1,356 5/11/92 1974
Boston MA 2,164 20,836 1,978 2,164 22,814 24,978 5,117 5/1/89 1968
S-3
<PAGE>
<CAPTION>
HEALTH AND RETIREMENT PROPERTIES TRUST
SCHEDULE III-continued
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996
(Dollars in thousands)
Initial Cost to Gross Amount Carried at
Company Close of Period 12/31/96
---------------------- -----------------------------
Cost Accumu-
Capitalized lated Original
Building & Subsequent to Building & Depreci- Date Construction
Location State Land Equipment Acquisition Land Equipment Total (1) ation(2) Acquired Date
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Long-Term Care Facilities with Subacute Services - continued
Worcester MA 1,829 15,071 1,869 1,829 16,940 18,769 4,259 5/1/88 1970
Hyannis MA 829 7,463 -- 829 7,463 8,292 1,115 5/11/92 1972
Middleboro MA 1,771 15,752 -- 1,771 15,752 17,523 2,328 5/11/92 1975
North Andover MA 1,448 11,049 -- 1,448 11,049 12,497 1,651 5/11/92 1985
Canonsburg PA 1,499 13,493 606 1,518 14,080 15,598 2,565 3/1/91
-------- --------- ------- -------- -------- -------- -------
Subtotal 12,079 123,151 11,485 12,227 134,488 146,715 27,994
-------- --------- ------- -------- -------- -------- -------
Medical Office Buildings and Clinics:
San Diego CA 1,425 12,842 -- 1,425 12,842 14,267 13 12/31/96 1985
San Diego CA 4,205 38,335 -- 4,206 38,334 42,540 40 12/5/96 1985
Sacramento CA 644 3,206 77 644 3,283 3,927 194 12/18/95 1988
Washington DC 2,485 22,696 -- 2,485 22,696 25,181 165 9/3/96 1976
Boston MA 3,378 30,397 381 3,379 30,777 34,156 985 9/28/95 1985
Boston MA 1,447 13,028 39 1,447 13,067 14,514 422 9/28/95 1993
Boston MA 1,500 13,500 206 1,500 13,706 15,206 356 12/18/95 1988
Westwood MA 303 2,740 -- 303 2,740 3,043 9 11/26/96 1980
Brooklyn NY 775 7,054 -- 775 7,054 7,829 95 6/6/96 1982
White Plains NY 1,200 10,870 -- 1,200 10,870 12,070 238 2/6/96 1995
Fairfax VA 569 5,122 -- 569 5,122 5,691 5 12/3/96 1990
-------- --------- ------- -------- -------- -------- -------
Subtotal 17,931 159,790 703 17,933 160,491 178,424 2,522
-------- --------- ------- -------- -------- -------- -------
Total Real Estate $92,386 $864,580 $48,773 $93,522 $912,217 $1,005,739 $76,921
======== ========= ======= ======== ======== ========== =======
<FN>
(1) Aggregate cost for federal income tax purposes is approximately $979,802.
(2) Depreciation is provided for on buildings and improvements for periods ranging up to 40 years and on equipment up to 12
years.
</FN>
</TABLE>
S-4
<PAGE>
<TABLE>
<CAPTION>
HEALTH AND RETIREMENT PROPERTIES TRUST
SCHEDULE III - continued
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996
(Dollars in thousands)
Real Estate and Accumulated
Equipment Depreciation
---------------- ----------------
<S> <C> <C>
Balance at January 1, 1994 $ 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
Additions 227,528 21,066
----------- -----------
Balance at December 31, 1996 $ 1,005,739 $ 76,921
=========== ===========
</TABLE>
S-5
<PAGE>
<TABLE>
<CAPTION>
HEALTH AND RETIREMENT PROPERTIES TRUST
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
December 31, 1996
(Dollars in thousands)
Principal
Amount of
Loans
Subject to
Final Face (1) 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 Principal and interest, payable $ 4,274 $4,274 $ --
monthly in arrears. $4.1 million
due at maturity.
Jacksonville, FL 10.50% 3/31/06 Interest only, payable monthly 5,000 5,000 --
in arrears. $5.0 million due
at maturity.
Howell, MI 11.50% 12/31/00 Principal and interest, payable 5,069 5,069 --
monthly in arrears. $4.9 million
due at maturity.
Medina, OH 8.25% 2/1/98 Principal and interest, payable 5,854 5,539 --
monthly in arrears. $5.8 million
due maturity.
Ainsworth, NE 9.00% 12/31/16 Interest only, payable in arrears; 5,967 5,967 --
Ashland, NE principal and interest starting
Blue Hill, NE 1998. $2.9 million due at
Central City, NE maturity.
Gretna, NE
Sutherland, NE
Waverly, NE
Aberdeen, NC 11.35% 4/30/07 Interest only, payable in arrears; 11,500 11,500 --
King, NC principal and interest starting
New Bern, NC 1997. $9.6 million due at
maturity.
Milwaukee, WI 11.50% 12/31/10 Interest only, payable in arrears; 11,500 11,500 --
Pewaukee, WI principal and interest starting 1997.
$9.6 million due at maturity.
Torrance, CA 11.25% 12/31/02 Interest only, payable in arrears; 12,309 12,309 --
Torrance, CA principal and interest starting 1997.
Anaheim, CA $11.5 million due at maturity.
S-6
<PAGE>
<CAPTION>
HEALTH AND RETIREMENT PROPERTIES TRUST
SCHEDULE IV-continued
MORTGAGE LOANS ON REAL ESTATE
December 31, 1996
(Dollars in thousands)
Principal
Amount of
Loans
Subject to
Final Face (1) 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>
Canon City, CO 11.50% 12/31/16 Interest only, payable in arrears; 13,551 13,551 --
Colorado Springs, CO principal and interest starting
Delta, CO in 1998. $7.6 million due at
maturity.
Slidell, LA 11.00% 12/31/10 Principal and interest, payable 19,358 19,358 --
monthly in arrears. $13.9 million
due at maturity.
22 Mortgages 7.37% - 13.75% 4/97-12/16 Interest only or principal and
interest, payable monthly in arrears. 46,180 43,178 --
----------------------------------------------
$ 140,562 $ 137,245 $ --
==============================================
<FN>
(1) Also represent 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, 1996
(Dollars in thousands)
Reconciliation of the carrying amount of mortgage loans at the
beginning of the period:
Balance at January 1, 1994 $ 148,250
New mortgage loans 11,772
Collections of principal, net of discounts (44,178)
Reclassification of real estate investment 9,947
---------
Balance at December 31, 1994 125,791
New mortgage loans 40,064
Collections of principal, net of discounts (26,607)
---------
Balance at December 31, 1995 139,248
New mortgage loans 5,918
Collections of principal, net of discounts (7,921)
---------
Balance at December 31, 1996 $ 137,245
=========
S-8
<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 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons, or by their
attorney-in-fact, in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/David J. Hegarty President and Chief Operating Officer March 28, 1997
David J. Hegarty
/s/Ajay Saini Treasurer and Chief Financial Officer March 28, 1997
Ajay Saini
/s/Bruce M. Gans, M.D. Trustee March 28, 1997
Bruce M. Gans, M.D.
_________________________ Trustee
Ralph J. Watts
____________________________ Trustee
Rev. Justinian Manning, C.P.
/s/ Gerard M. Martin Trustee March 28, 1997
Gerard M. Martin
/s/Barry M. Portnoy Trustee March 28, 1997
Barry M. Portnoy
</TABLE>
SULLIVAN & WORCESTER LLP
One Post Office Square
Boston, Massachusetts 02109
March 28, 1997
Health and Retirement Properties Trust
400 Centre Street
Newton, Massachusetts 02158
Ladies and Gentlemen:
In connection with the filing of its Annual Report on Form 10-K for the
year ended December 31, 1996 (the "Annual Report") by Health and Retirement
Properties Trust, a Maryland real estate investment trust (the "Company"), the
following opinion is furnished to you to be filed with the Securities and
Exchange Commission (the "SEC") as Exhibit 8.1 to the Annual Report, to be filed
within one week of the date hereof, under the Securities Exchange Act of 1934,
as amended (the "Exchange Act").
We have acted as counsel for the Company in connection with the
preparation of the Annual Report, and we have examined originals or copies,
certified or otherwise identified to our satisfaction, of the Annual Report,
corporate records, certificates and statements of officers and accountants of
the Company and of public officials, and such other documents as we have
considered relevant and necessary in order to furnish the opinion hereinafter
set forth. Specifically, and without limiting the generality of the foregoing,
we have reviewed: the declaration of trust, as amended and restated, and the
by-laws of the Company and the Annual Report. We have reviewed the sections in
the Annual Report captioned "Federal Income Tax Considerations" and "ERISA
Plans, Keogh Plans and Individual Retirement Accounts." With respect to all
questions of fact on which such opinions are based, we have assumed the accuracy
and completeness of and have relied on the information set forth in the Annual
Report and on representations made to us by the officers of the Company. We have
not independently verified such information; nothing has come to our attention,
however, which would lead us to believe that we are not entitled to rely on such
information.
The opinion set forth below is based upon the Internal Revenue Code of
1986, as amended, the Treasury Regulations issued thereunder, published
administrative interpretations thereof, and judicial decisions with respect
thereto, all as of the date hereof (collectively the "Tax Laws"), and upon the
Employee Retirement Income Security Act of
<PAGE>
Health and Retirement Properties Trust
March 28, 1997
Page 2
1974, as amended, the Department of Labor regulations issued thereunder,
published administrative interpretations thereof, and judicial decisions with
respect thereto, all as of the date hereof (collectively, the "ERISA Laws"). No
assurance can be given that the Tax Laws or the ERISA Laws will not change. In
preparing the discussions with respect to federal income tax and ERISA Laws
matters in the sections of the Annual Report captioned "Federal Income Tax
Considerations" and "ERISA Plans, Keogh Plans and Individual Retirement
Accounts," we have made certain assumptions and expressed certain conditions and
qualifications therein, all of which assumptions, conditions and qualifications
are incorporated herein by reference.
Based upon and subject to the foregoing, we are of the opinion that the
discussions with respect to federal income tax and ERISA Laws matters in the
sections of the Annual Report captioned "Federal Income Tax Considerations" and
"ERISA Plans, Keogh Plans and Individual Retirement Accounts," in all material
respects are accurate and fairly summarize the federal income tax issues and
ERISA Laws issues addressed therein, and hereby confirm that the opinions of
counsel referred to in said sections represent our opinions on the subject
matter thereof.
We hereby consent to the incorporation of this opinion by reference as
an exhibit to the Company's Registration Statements on Form S-3, No. 333-02863
and 33-62135 and to any references to our firm therein. In giving such consent,
we do not thereby admit that we come within the category of persons whose
consent is required under Section 7 of the Act or under the rules and
regulations of the SEC promulgated thereunder.
Very truly yours,
/s/ SULLIVAN & WORCESTER LLP
SULLIVAN & WORCESTER LLP
<TABLE>
<CAPTION>
HEALTH AND RETIREMENT PROPERTIES TRUST
Exhibit 12.1
Computation of Earnings to Fixed Charges
(dollars in thousands)
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
EARNINGS:
INCOME BEFORE GAIN ON SALE OF
PROPERTIES AND
EXTRAORDINARY ITEMS $22,079 $27,243 $37,738 $57,578 $61,760 $ 77,164
ADJUSTMENT FOR FIXED CHARGES 12,305 10,419 66,529 10,096 26,218 23,279
-------- -------- -------- -------- -------- ---------
TOTAL EARNINGS $34,384 $37,662 $44,267 $67,974 $87,978 $100,443
FIXED CHARGES:
INTEREST EXPENSE $11,741 $ 9,466 $6,217 $ 8,965 $24,274 $22,545
AMORTIZATION 564 953 312 1,131 1,944 734
--------- --------- -------- -------- -------- ---------
TOTAL FIXED CHARGES $12,305 $10,419 $6,529 $10,096 $26,218 $23,279
RATIO OF EARNINGS TO FIXED CHARGES 2.8 3.6 6.8 6.7 3.4 4.3
</TABLE>
Exhibit 21.1
Subsidiaries of Health and Retirement Property Trust
Causeway Holdings, Inc., a Massachusetts Corporation
Church Creek Corporation, a Massachusetts Corporation
Health and Retirement Properties International, Inc., a Delaware Corporation
Hub Acquisition Trust, a Maryland Real Estate Investment Trust
Hub Properties Trust, a Maryland Real Estate Investment Trust
SJO Corporation, a Massachusetts Corporation
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in Posteffective Amendment No. 1 to
the Registration Statement (Form S-3 No. 62135) of Health and Retirement
Properties Trust and in the related Prospectus and in the Registration Statement
(Form S-3 No. 333-02863) of Health and Retirement Properties Trust and in the
related Prospectus of our report dated February 6, 1997, with respect to the
consolidated financial statements of Health and Retirement Properties Trust
included in the Company's Form 8-K dated February 17, 1997 and incorporated by
reference in this Annual Report (Form 10-K) for the year ended December 31,
1996.
Our audits also included the financial statement schedules of Health and
Retirement Properties Trust listed in Item 14(a). These schedules are the
responsibility of Health and Retirement Properties Trust's management. Our
responsibility is to express an opinion based on our audits. In our opinion, the
financial statement schedules referred to above, when considered in relation to
the basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Boston, Masschusetts
March 27, 1997
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated February 24, 1997 included in Marriott
International, Inc.'s Form 10-K for the year ended January 3, 1997 (File No.
1-12188) into Health and Retirement Properties Trust's Form 10-K for the year
ended December 31, 1996, and into Health and Retirement Properties Trust's
previously filed Registration Statements File Nos. 333-02863 and 33- 62135.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Washington, D.C.
March 26, 1997
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated January 10, 1997 on Hospitality Properties Trust incorporated by
reference in Health and Retirement Properties Trust's Form 10-K, into Health and
Retirement Properties Trust's previously filed Registration Statements File No.
333-02863 and No. 33-62135.
/s/ Arthur Andersen LLP
Washington, D.C.
March 27, 1997
