Filed Pursuant to Rule 424(b)(5)
Registration #333-02863
PROSPECTUS SUPPLEMENT
(To Prospectus dated June 25, 1996)
March 14, 1997
23,500,000 Shares
Health and Retirement Properties Trust
Common Shares of Beneficial Interest
-------------------------
Health and Retirement Properties Trust (the "Company" or "HRP") is a real
estate investment trust (a "REIT") which invests primarily in healthcare related
real estate. In February 1997 the Company announced that it had entered an
agreement to acquire 30 office buildings which are leased to various agencies of
the United States Government. The Company's common shares of beneficial interest
(the "Shares") offered hereby are being issued and sold by the Company. The
Shares are traded on the New York Stock Exchange (the "NYSE") under the symbol
"HRP." On March 13, 1997 the last reported sale price for the Shares on the NYSE
was $18 7/8 per Share.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT
RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Price Underwriting Proceeds
to the Discounts and to the
Public Commissions (1) Company (2)
--------------- ------------------ --------------
<S> <C> <C> <C>
Per Share ...... $18.875 $0.96 $17.915
Total (3) ...... $443,562,500 $22,560,000 $421,002,500
</TABLE>
(1) See "Underwriting" for indemnification arrangements with the Underwriters.
(2) Before deducting expenses payable by the Company estimated at $850,000.
(3) The Company has granted the underwriters a 30-day option to purchase up to
an aggregate of 3,525,000 additional Shares at the Price to the Public, less
Underwriting Discounts and Commissions, solely to cover over-allotments, if
any. If such option is exercised in full, the total Price to the Public,
Underwriting Discounts and Commissions and Proceeds to the Company will be
$510,096,875, $25,944,000 and $484,152,875, respectively. See "Underwriting."
-------------------------
The Shares offered hereby are offered by the several Underwriters, subject to
prior sale, when, as and if issued to and accepted by them, subject to approval
of certain legal matters by counsel to the Underwriters and certain other
conditions. The Underwriters reserve the right to reject orders in whole or in
part. It is expected that delivery of the Shares will be made against payment
therefor in New York, New York on or about March 19, 1997.
Donaldson, Lufkin & Jenrette
Securities Corporation
Dean Witter Reynolds Inc.
A.G. Edwards & Sons, Inc.
Merrill Lynch & Co.
NatWest Securities Limited
PaineWebber Incorporated
Prudential Securities Incorporated
Salomon Brothers Inc
Smith Barney Inc.
<PAGE>
The inside front cover contains color pictures of five Government Office
Properties captioned as follows:
Internal Revenue Service
Oxon Hill, MD
122,042 Square Feet, Built 1992
U.S. Department of Agriculture
College Park, MD
324,415 Square Feet, Built 1994
National Institute of Standards and Technology
Gaithersburg, MD
137,087 Square Feet, Built 1995
U.S. Department of Energy
Germantown, MD
80,629 Square Feet, Built 1995
U.S. Defense Information Systems Agency
Falls Church, VA
160,870 Square Feet, Renovated 1993
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SHARES.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES IN THE OPEN MARKET. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the detailed
information and financial statements appearing elsewhere or incorporated by
reference in this Prospectus Supplement and the accompanying Prospectus dated
June 25, 1996 (the "Prospectus"). References in this Prospectus Supplement to
the "Company" or "HRP" include consolidated subsidiaries. Unless otherwise
noted, the information contained in this Prospectus Supplement assumes that (i)
the Underwriters' over-allotment option is not exercised and (ii) the
transaction described below in "Recent Developments--Investments--Government
Office Properties" has been completed. The offering of the Shares contemplated
hereby (the "Offering") is not contingent upon the consummation of that
transaction, and there can be no assurance that it will be consummated.
THE COMPANY
The Company is one of the largest publicly traded REITs and had an equity
market capitalization of over $1.25 billion at March 13, 1997. The Company has
investments in 175 healthcare related properties located in 28 states which are
operated by over 30 separate companies. In February 1997 the Company entered an
agreement to acquire 30 office buildings for $447 million which are leased to
various agencies of the U.S. Government (the "Government Office Properties").
These leases are general obligations of the U.S. Government. Upon completion of
the Government Office Properties acquisition, the Company's investments, at
cost, will total approximately $1.7 billion and will be 68% in healthcare
related properties, 26% in U.S. Government leased office buildings and 6% in an
equity investment in Hospitality Properties Trust ("HPT"), a NYSE-listed REIT
founded by the Company which invests in hotels.
HRP Portfolio by Type of Property
(dollars in millions)
Pie chart showing HRP's portfolio by type, including value in millions and
percent of total portfolio by type for each such type as follows:
Long Term Care, $360, 21%;
Retirement/Assisted Living, $439, 26%;
U.S. Government Leased Offices, $447, 26%;
Medical Office/Clinic Buildings, $184, 11%;
Specialty Health Services, $174, 10%;
Equity Investment in HPT, $100, 6%
During the past ten years, the Company has paid 40 consecutive quarterly
dividends and has increased its dividend rate 11 times. The current quarterly
dividend rate is $.36 per Share or $1.44 per Share on an annualized basis. The
next quarterly dividend for the period ending March 31, 1997 will be declared in
March or April 1997. Investors who purchase Shares in this Offering and hold
through the record date for the next dividend will receive a full $.36 quarterly
dividend for the quarter ended March 31, 1997.
HRP Dividend Growth
Vertical Bar Chart showing HRP
Dividends as follows: 1987 - $1.06;
1988 - $1.12; 1989 - $1.14; 1990 - $1.17;
1991 - $1.23; 1992 - $1.26; 1993 - $1.30;
1994 - $1.33; 1995 - $1.38; 1996 - $1.42
Quarter ended December 31, 1996 Annualized - $1.44.
S-3
<PAGE>
The Company's ability to pay and increase its dividends depends upon the
Company's receipt of rents from its tenants. The Company believes that it has
one of the financially strongest groupings of tenants among all REITs.
Approximately half, at cost, of the Company's properties are leased to
investment grade rated tenants, including the U.S. Government, Marriott
International, Inc. ("Marriott") and several large not-for-profit healthcare
providers. Due in part to the financial stability of its tenants, the Company's
unsecured senior debt is rated investment grade by Standard & Poor's Ratings
Services, Moody's Investors Services, Inc. and Fitch Investors Service, L.P.
HRP Tenants
(dollars in millions)
Pie chart showing HRP's tenants (individually or by type), including value in
millions and the percent of total properties for each such tenant as follows:
Marriott International, $326, 19%;
U.S. Government,* $462, 27%;
Investment Grade Not-for-Profits, $68, 4%;
Hospitality Properties Trust, $100, 6%;
Private companies, $252, 15%;
Other Public Companies:
Horizon/CMS, GranCare, Community Care of America, Sun Healthcare, Alliance
Pharmaceutical, Multicare Companies, Neurocrine Biosciences, Behring
Diagnostics,** Corvas International, Lab Corp of America, Canji,** ARV
Assisted Living, Unilab, Integrated Health Services, and Vencor, $496, 29%.
- ------------
* Includes the Government Office Properties plus one VA Clinic owned by the
Company.
** Behring Diagnostics, Inc. is a subsidiary of Hoechst AG; Canji, Inc. is a
subsidiary of Schering-Plough Corporation.
Since the Company's initial public offering in December 1986, an investment
in the Shares has provided shareholders an average total return, assuming
reinvestment of dividends when paid and including share price appreciation, of
approximately 19.0% per annum. The following table shows how $100 invested in
Shares at December 31, 1986 would have grown to $584 as of February 28, 1997, as
compared with the return an investor would have realized from a $100 investment
in the equity securities represented by the Standard & Poor's 500 Index or the
National Association of Real Estate Investment Trusts ("NAREIT") Index.
<TABLE>
<CAPTION>
Value at February 28, 1997
Average Annual of a $100 Investment
Return on December 31, 1986
----------------- ----------------------------
<S> <C> <C>
HRP ............... 19.0% $584
S&P Index ......... 15.8% $444
NAREIT Index ...... 8.9% $239
</TABLE>
<TABLE>
<S> <C>
THE OFFERING
Shares to be offered by the Company ............... 23,500,000
Shares to be outstanding after the Offering ...... 94,540,961
Use of Proceeds ................................. Partially to fund the purchase
of the Government Office
Properties, to repay debt and
for general business purposes.
See "Use of Proceeds".
NYSE symbol ....................................... HRP
</TABLE>
S-4
<PAGE>
SUMMARY HISTORICAL AND ADJUSTED PRO FORMA FINANCIAL INFORMATION
The following table sets forth certain financial information with respect
to the Company which is derived from the audited and unaudited financial
statements of the Company incorporated herein by reference or in the Unaudited
Adjusted Pro Forma Financial Statements included elsewhere in this Prospectus
Supplement and should be read in conjunction with those financial statements and
the accompanying footnotes.
<TABLE>
<CAPTION>
Adjusted
Year Ended December 31, Pro Forma(1)
--------------------------------------------------------------------------- --------------
1992 1993 1994 1995 1996 1996
----------- --------------- --------------- --------------- --------------- --------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Operating Data:
Rental income $43,029 $ 46,069 $ 63,856 $ 90,246 $ 98,039 $ 178,407
Interest income 5,706 10,416 22,827 23,076 22,144 22,528
Total revenues 48,735 56,485 86,683 113,322 120,183 200,935
Net income 27,243 33,417(2) 49,919(3) 64,236(4) 73,254(5) 112,090
Dividends(6) 33,079 44,869 76,317 83,954 94,299 --
Per Share:
Net income 1.02 .97(2) .95(3) 1.08(4) 1.11(5) 1.19
Dividends(6) 1.26 1.30 1.33 1.38 1.42 --
Average Shares outstanding 26,760 34,407 52,738 59,227 66,255 94,540
Other Data:(7)
Funds From Operations $35,365 $ 46,566 $ 71,851 $ 84,638 $ 99,106 $ 151,372
FFO per share 1.32 1.35 1.36 1.43 1.50 1.60
FFO per share, fully diluted 1.32 1.35 1.36 1.43 1.49 1.57
Balance Sheet Data:
Real estate properties, net $310,882 $ 349,842 $ 633,513 $ 722,356 $ 928,818 $1,375,174
Real estate mortgages, net 47,173 157,281 133,477 141,307 150,205 150,205
Total assets 374,468 527,662 840,206 999,677 1,229,522 1,686,000
Total borrowings 138,500 73,000 216,513 269,759 492,175 433,058
Total shareholders' equity 228,301 441,135 602,039 685,592 708,048 1,210,724
</TABLE>
- ----------
(1) Adjusted pro forma data is presented at or for the year ended December 31,
1996, giving effect to the transactions described in "Recent Developments"
and to this Offering, and includes adjustments for certain Government Office
Properties under development, all as further described in the Unaudited
Adjusted Pro Forma Financial Statements included elsewhere in this
Prospectus Supplement.
(2) Includes, as an extraordinary charge, the write-off of $4.3 million in
deferred finance charges ($.13 per share) resulting from prepayment of debt.
(3) Includes a gain on sale of property of $4.0 million ($.08 per share), a
provision for loss on sale of properties of $10.0 million ($.19 per share)
and, as an extraordinary charge, the write-off of deferred finance charges
of $2.0 million ($.04 per share) resulting from the prepayment of debt.
(4) Includes a gain on sale of property of $2.5 million ($.04 per share).
(5) Includes, as an extraordinary charge, the write-off of $3.9 million of
deferred finance charges ($.05 per share) resulting from the prepayment of
debt.
(6) Amounts represent dividends declared with respect to the periods shown.
(7) The Company's "Funds From Operations" represents net income (computed in
accordance with GAAP), before gain or loss on sale of properties and
extraordinary items, depreciation and other non-cash items and includes
HRP's pro rata share of HPT's Funds From Operations. Management considers
Funds From Operations to be a measure of the financial performance of an
equity REIT that provides a relevant basis for comparison among REITs. Funds
From Operations does not represent cash flow from operating activities (as
determined in accordance with GAAP) and should not be considered as an
alternative to net income as an indicator of the Company's financial
performance or to cash flows as a measure of liquidity.
S-5
<PAGE>
RECENT DEVELOPMENTS
From January 1, 1996 through the date hereof, the Company engaged in the
following significant activities:
Investments
Government Office Properties. In February 1997 the Company entered into an
agreement to acquire 30 office buildings containing approximately 3.4 million
square feet, substantially all of which is leased to various agencies of the
United States Government. The Company's purchase price for these properties will
be approximately $447 million, payable as follows: approximately 4.2 million
Shares (which would have an aggregate value of approximately $83 million based
on a per Share price of $19 7/8), approximately $47 million by the Company's
assuming mortgages secured by four properties, and approximately $317 million in
cash applied to repay certain debt and other obligations of the seller assumed
by the Company. The average remaining lease term for the Government Office
Properties is eight years. Most of these leases include tenant renewal options
for extended periods. The current rents payable to the Company under these
leases are approximately $61 million per year and most of the rental rates are
subject to annual adjustments based upon increasing operating expenses as
measured by Consumer Price Index increases. Generally, the leases are so called
"modified gross leases" under which the Company will be required to provide
certain property management services. The net operating income which the Company
will receive from these leases, before depreciation, amortization and interest
costs, and before management and home office costs, will depend upon the
efficiency with which the Company is able to provide these services, but the
Company estimates that such net operating income will be approximately $45
million per annum. Five of the 30 Government Office Properties are currently
under contract for acquisition and/or development and will not produce rental
income until their acquisition or development is completed. The seller of the
Government Office Properties ("Seller") has the option to sell one property in
return for a $5.7 million reduction in the purchase price. This transaction is
expected to close, at least with regard to 24 Government Office Properties with
a value of approximately $387 million (based on the $19 7/8 price per Share), on
or about March 31, 1997. In addition, the Company will have the option to pursue
the acquisition of several additional office properties leased to various
Government agencies where negotiations were commenced by the Seller. There can
be no assurance that the acquisition of the Government Office Properties will be
completed, that the net operating income set forth herein will be achieved or
that the Company will acquire any additional Government Office Properties.
Medical Office Buildings. Since January 1, 1996 the Company has purchased
11 medical office and pharmaceutical laboratory buildings. These 11 buildings
contain approximately 601,248 rentable square feet and were purchased for total
consideration of $96.1 million. Seven of these buildings are located in the area
of San Diego, CA and are leased to several different medical and pharmaceutical
companies, including Laboratory Corporation of America, Inc., Alliance
Pharmaceutical Corp., Signal Pharmaceutical, Inc., Neurocrine Bioscience, Inc.,
Canji, Inc. and Corvas International, Inc. Two buildings are located in a suburb
of Boston, MA and are leased to Behring Diagnostics, Inc., a subsidiary of the
German pharmaceutical company Hoechst AG. Two buildings are multi-tenant medical
office buildings located in Washington, DC and Fairfax, VA, a Washington suburb;
these two buildings are leased to approximately 75 different tenants, primarily
medical practice groups and clinics.
Prime Group Retirement Communities. On December 27, 1996 the Company
purchased three retirement housing communities for $87.5 million. These
communities contain 629 living units and are located in Chicago, IL (341 units),
Rochester, NY (103 units) and East Mesa, AZ (185 units). All of these projects
were built since 1984 and are generally considered high end communities, with
monthly occupancy charges ranging up to $4,000 per unit. These communities are
leased to an affiliate of The Prime Group, Inc. of Chicago, IL. The initial
lease term is for 23 years and the tenant has renewal options totaling an
additional 50 years. The rent is comprised of minimum base rents and percentage
rents which increase as gross revenues increase at the properties. The rent is
unconditionally guaranteed by The Prime Group, Inc. and various of its
affiliates until the tenant entity raises equity capital of at least $35
million. At December 31, 1996 the occupancy at these communities was
approximately 100% and all of the revenues from these properties were derived
from sources other than Medicare and Medicaid.
Additional Nursing Homes. On May 15, 1996 the Company purchased 5 nursing
homes (531 beds) for $15.9 million. All of these nursing homes were leased to
Community Care of America, Inc. ("CCA") for an initial term ending in 2010 plus
renewal options. During 1996 the Company also advanced $10 million to CCA under
a secured credit facility established in 1993. All obligations of CCA under this
lease and secured credit facility are
S-6
<PAGE>
cross-collateralized, cross-guaranteed and subject to all-or-none renewal and
extension options together with CCA's existing obligations to the Company
affecting a total of 54 nursing homes (3,944 beds).
Health Insurance Plan of Greater New York. In February and June, 1996 the
Company purchased two health clinics for $19.9 million. These clinics are leased
to and operated by Health Insurance Plan of Greater New York, a not-for-profit
health maintenance organization which reported annual revenues of approximately
$1.8 billion and net worth of $156 million at December 31, 1995. One of these
properties is located in Brooklyn, NY and contains 71,500 square feet of medical
office and clinic space. The second property is located in White Plains, NY and
contains 50,000 square feet of medical office and clinic space plus a structured
parking garage.
ARV Assisted Living, Inc. In February 1996 the Company made a $5.0 million
mortgage loan to ARV Assisted Living, Inc. ("ARV"). This loan is secured by a
248 unit independent living and assisted living property located in
Jacksonville, FL. ARV completed its initial public offering of common stock in
1995, and has been rapidly expanding its assisted living business since that
time. Substantially all of the revenues at this facility are derived from
sources other than Medicare and Medicaid.
Property Improvements. In the ordinary course of business the Company
regularly provides funding for improvements to its owned properties. Some of
these improvements are purchased directly by the Company and some are purchased
by tenants and reimbursed by the Company. Generally, as such funding is advanced
the rents payable to the Company are correspondingly adjusted upward to reflect
a yield on the Company's investment at rates negotiated between the Company and
its tenants. From January 1, 1996 through March 13, 1997 the Company provided
approximately $14.4 million of improvement funding.
Mortgage Repayments. In the ordinary course of business the Company
receives regular payments and occasional prepayments of principal which reduce
the outstanding balances of its owned mortgages. From January 1, 1996 through
March 13, 1997 these repayments and prepayments totaled approximately $14.5
million.
Financing
Convertible Debentures. In October 1996 the Company sold three tranches of
convertible subordinated debentures totaling $240 million. One tranche of $130
million was sold to investors outside of the United States, bears interest at
7.5% per annum and matures on September 30, 2003. A second tranche of $70
million has identical terms to the first tranche but was sold to investors
located in the United States. A third tranche of $40 million was sold as a
registered placement to a single institutional investor, bears interest at 7.25%
per annum and matures on October 1, 2001. All of these debentures are
convertible into Shares at the rate of $18 per Share and all of these debentures
are callable at par by the Company at any time on or after October 1, 1999.
Through March 13, 1997 $28.3 million of these debentures have been converted
into 1.6 million Shares. The proceeds of these debentures were used by the
Company principally to refinance previously outstanding debt.
Bank Credit Facility. The Company maintains a $250 million unsecured
revolving credit facility with a syndicate of banks (the "Bank Credit
Facility"). The Bank Credit Facility is used for interim acquisition funding
until equity or long term debt is raised, and for working capital and general
business purposes. At January 1, 1996 the Bank Credit Facility was scheduled to
mature in 1998 and drawings bore interest at LIBOR plus 125 basis points. During
March 1996 the Bank Credit Facility was amended to extend the maturity until
2000 and to lower the spread for LIBOR-based borrowings to 87.5 basis points.
Aggregate borrowings under the Bank Credit Facility at March 13, 1997 were $140
million. Some of the proceeds of this Offering will be used to repay
indebtedness outstanding under the Bank Credit Facility. The Company is in the
process of negotiating amendments to the Bank Credit Facility to permit the
Company to consummate the purchase of the Government Office Properties and to
extend the maturity until 2001.
Secured Indebtedness. At January 1, 1996 the Company's only outstanding
secured indebtedness was a $17.6 million mortgage on one retirement living
center in Arlington Heights, IL. This mortgage was in effect at the time the
Company acquired this property. In April 1996 the Company retired this debt and
the mortgage was released. Today, none of the assets of the Company or its
subsidiaries are encumbered by secured indebtedness. However, as part of the
purchase price for the Government Office Properties, the Company will assume
mortgages on four properties totalling approximately $46.6 million.
S-7
<PAGE>
Other Developments
Horizon/CMS Healthcare Corporation. The Company has invested approximately
$174 million, at cost, in healthcare properties operated by Horizon/CMS
Healthcare Corporation ("HHC"). During 1996 HHC encountered several operating
and legal difficulties. On December 31, 1996 HHC announced that it had entered
an agreement to pay a total of $5.8 million to settle allegations of Medicare
and Medicaid billing improprieties, some of which allegedly arose from HHC
services at properties owned by the Company. On February 13, 1997 HHC announced
that it had reached an agreement to settle shareholder litigation regarding
alleged inadequate disclosure of material information for payment of between $17
and $20 million. Certain other legal issues, including a Securities and Exchange
Commission investigation of alleged insider trading by certain HHC officers and
directors remain unresolved at this time. During 1995 HHC announced that it
intended to discontinue operations at several facilities, including eight owned
by the Company. Since that time the Company has had occasional discussions with
HHC and with other parties concerning the possibility that such other parties
might assume HHC's obligations to the Company with respect to some or all of
these eight properties. HHC is currently obligated for the lease of three of
these properties through 1998 and for the other five properties through 2006.
Through March 13, 1997 no agreements for a substitute tenant/obligor for any of
these properties have been concluded. On February 18, 1997 HHC announced that it
had entered an agreement to be acquired by HealthSouth Corp. in a
stock-for-stock merger. The details of this merger transaction are not fully
known to the Company, but the Company believes that its consent will be required
for HealthSouth to assume the lease, management or mortgage obligations of HHC
to the Company. According to HHC's Quarterly Report on Form 10-Q for the period
ending November 30, 1996, HHC had a net worth of $649 million and earnings after
rent and interest but before depreciation, amortization, special charges,
minority interests, income taxes and extraordinary items for the 12 months then
ended of $158 million. According to HealthSouth's Quarterly Report on Form 10-Q
for the period ending September 30, 1996, HealthSouth had a net worth of $1.4
billion and earnings after rent and interest but before depreciation,
amortization, special charges, minority interests, income taxes and
extraordinary items for the 12 months then ended of $457 million. The Company
believes that HHC, and any successor to HHC if the merger is consummated, will
continue to meet its financial obligations to the Company.
Community Care of America, Inc. The Company has invested $111 million, at
cost, in nursing homes and other properties operated by CCA. During 1996 CCA
suffered a series of financial setbacks principally related to certain failed,
attempted acquisitions. In September 1996 the Company announced that it would
defer rent and interest payments due from CCA on or about September 1 and
October 1, 1996 until November and that the Company had agreed temporarily to
waive a violation of CCA's working capital covenants to the Company. The
deferred amounts due from CCA were paid as scheduled in November 1996. In
December 1996 CCA refinanced its working capital credit facilities and by
December 31, 1996 CCA was in compliance with its working capital covenants to
the Company. In February 1997 CCA again requested that the Company consider a
deferral of monthly payments due to the Company as a result of a delay in
certain third party payments. The Company recently agreed to defer two monthly
payments until May 1, 1997. The Company currently holds a cash security deposit
of over $6 million to secure CCA's obligations and based upon information
provided to the Company, the Company believes that its owned and mortgaged
properties operated by CCA produced operating cash flow of approximately 1.5
times the rents and mortgage payments due to the Company for the twelve months
ended September 30, 1996.
GranCare, Inc. The Company has invested $98 million, at cost, in properties
leased to or mortgaged by GranCare, Inc. ("GC"). In February 1997 GC spun off to
its shareholders all of its nursing home operations and merged its pharmacy
operations with Vitalink, Inc., another public company. Under the terms of the
GC/Vitalink agreement the GC nursing home operations became a new public company
("New GC"), and certain subsidiaries of New GC remained tenants of and
mortgagors to the Company. The Company consented to this transaction on certain
terms and conditions, including: (i) all of the leases and mortgages between the
Company and the New GC's subsidiaries being cross defaulted, cross
collateralized, cross secured and unconditionally guaranteed by New GC; (ii)
Vitalink, Inc. providing a $15 million unconditional guarantee of obligations
due the Company; and (iii) GC's paying an amendment fee to the Company.
Other Transactions. In the ordinary course of business, the Company
regularly evaluates investment opportunities and enters into contracts to
purchase and lease or mortgage finance real estate. Similarly, the Company is
regularly engaged in discussions concerning lease and loan extensions and other
modifications of the terms of existing leases and mortgages.
S-8
<PAGE>
DISTRIBUTIONS AND PRICE RANGE OF SHARES
The Company has paid 40 consecutive quarterly dividends since its initial
public offering in December 1986. The Company's current dividend rate is
$.36/Share per quarter, or $1.44/Share per year. The next quarterly dividend for
the period ending March 31, 1997 is expected to be declared in late March or
April 1997, and it will be paid to shareholders of record at that time.
Purchasers of Shares in this Offering who hold their Shares through the record
date for the next dividend will receive a full $.36 per Share dividend for the
quarter ended March 31, 1997.
The Company intends to continue to declare and pay future dividends in cash
on a quarterly basis, but may, from time to time, declare and pay special
dividends. Payment of dividends by the Company is subject to continued
compliance with certain restrictions contained in the Company's loan agreements.
In the past, the Company's dividends have been based upon Funds From Operations,
which has exceeded earnings. Cash available for distribution may not necessarily
equal Funds From Operations as the cash flow of the Company is affected by other
factors not included in the Funds From Operations calculation. Management
expects that the Company will continue to pay dividends based upon Funds From
Operations and that such dividends may exceed earnings. Accordingly, the Company
expects a portion of the Company's dividends on Shares to be considered a return
of capital which may not be subject to income tax until the shares are sold.
There can be no assurance that the Company will be able to increase its
quarterly dividend or maintain it at the current level. Information about
dividends on a quarterly basis is summarized in the following table:
HRP Declared Dividends Per Share(1)
<TABLE>
<CAPTION>
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
-------------- ------- ------- ------- ------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter ...... $ .275(2) $.28 $.28 $.29 $.30 $.31 $.32 $.33 $.34 $.35
Second Quarter ...... .26 .28 .28 .29 .31 .31 .32 .33 .34 .35
Third Quarter ...... .27 .28 .29 .29 .31 .32 .33 .33 .35 .36
Fourth Quarter ...... .28 .28 .29 .30 .31 .32 .33 .34 .35 .36
--------- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total 1.085 1.12 1.14 1.17 1.23 1.26 1.30 1.33 1.38 1.42
</TABLE>
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(1) Dividends are generally paid in the quarter following the quarter to which
they relate. With respect to dividends paid in 1987 through 1996, $.289,
$.065, $.332, $.267, $.104, $.218, $.335, $.081, $.161 and $.350,
respectively, represent return of capital.
(2) Includes $.025 for the period from December 23, 1986 (commencement of the
Company's operations) through December 31, 1986.
The Shares are listed on the NYSE under the symbol "HRP." The following
table sets forth the range of high and low sale prices on the NYSE from the
first quarter of 1995 through March 13, 1997 with respect to the periods
indicated:
<TABLE>
<CAPTION>
High Low
--------- --------
<S> <C> <C>
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
1997
First Quarter (through March 13, 1997) ...... 20 5/8 18 5/8
</TABLE>
S-9
<PAGE>
CAPITALIZATION
The following table shows the capitalization of the Company as of December
31, 1996 and on an adjusted pro forma basis to give effect to the completion of
this Offering and the Government Office Properties acquisition. See "Unaudited
Adjusted Pro Forma Financial Statements."
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------
(dollars in thousands)
Adjusted
Actual Pro Forma(1)
------------ --------------
<S> <C> <C>
Bank Credit Facility ............................................. $ 140,000 $ 34,189
Mortgage debt payable ............................................. -- 46,694
Senior notes and bonds payable, net .............................. 124,385 124,385
7.25% Convertible Subordinated Debentures due 2001 ............... 40,000 40,000
7.5% Convertible Subordinated Debentures due 2003 ............... 187,790 187,790
--------- ---------
Total indebtedness ............................................. 492,175 433,058
Shareholders' equity:
Preferred Shares of Beneficial Interest, par value $.01 per share;
50,000,000 authorized, none issued .............................. -- --
Common Shares of Beneficial Interest, par value $.01 per share;
100,000,000 and 125,000,000 shares authorized and pro forma;
66,888,917 and 94,540,961 shares issued and outstanding and
pro forma ...................................................... 669 945
Additional paid-in capital ....................................... 795,263 1,297,663
Cumulative net income .......................................... 306,298 306,298
Dividends ...................................................... (394,182) (394,182)
--------- ---------
Total shareholders' equity .................................... 708,048 1,210,724
--------- ---------
Total capitalization ............................................. $1,200,223 $1,643,782
========= =========
</TABLE>
- ----------
(1) If the Government Office Properties acquisition is not consummated, the Bank
Credit Facility will be zero, mortgage debt payable will be zero, the number
of Common Shares of Beneficial Interest outstanding will be 90,388,917,
total shareholders' equity will be $1,128,201 and total capitalization will
be $1,480,376.
USE OF PROCEEDS
The net proceeds to the Company from this Offering are estimated to be
approximately $420 million ($483 million if the Underwriters over-allotment
option is exercised in full). A portion of the net proceeds from this Offering
will be used to repay in full all amounts outstanding under the Company's Bank
Credit Facility ($140 million). The remaining net proceeds plus new borrowings
under the Bank Credit Facility will be used to fund partially the Government
Office Properties acquisition. In the event that the Government Office
Properties acquisition is not consummated, net proceeds of this Offering
remaining after repayment of the Bank Credit Facility will be used for general
business purposes including debt repayment and new acquisitions. Outstanding
amounts under the Company's Bank Credit Facility bear interest, at the Company's
option, at LIBOR plus 87.5 basis points or prime, and the Bank Credit Facility
expires in 2000. At March 13, 1997 the interest rate applicable to the Bank
Credit Facility was 6.2813% per annum.
S-10
<PAGE>
THE COMPANY
After the Government Office Properties acquisition, the Company will have
investments in over 200 properties located in 32 states and the District of
Columbia.
Location of HRP Properties
A map of the United States showing states where the Company owns properties
shaded in gray.
<TABLE>
<CAPTION>
Total Total
Number of Investment Number of Investment
State Properties (in thousands) State Properties (in thousands)
- ----------------------------- ------------- ----------------- ------------------------------ ------------- ----------------
<S> <C> <C> <C> <C> <C>
Alaska ..................... 1 $ 3,935 New Hampshire ............ 1 $ 3,689
Arizona .................. 9 62,364 New Jersey ............... 1 13,007
California ............... 26 196,179 New Mexico ............... 2 10,507
Colorado .................. 13 60,106 New York .................. 4 53,292
Connecticut ............... 9 94,244 North Carolina ............ 9 22,710
District of Columbia ...... 3 125,386 Ohio ..................... 4 17,519
Florida .................. 7 147,886 Oklahoma .................. 1 23,678
Georgia .................. 7 20,373 Pennsylvania ............... 2 18,341
Illinois .................. 3 101,453 South Dakota ............... 3 7,589
Iowa ..................... 13 22,828 Texas ..................... 8 31,978
Kansas ..................... 10 19,321 Vermont .................. 8 29,767
Louisiana .................. 1 19,358 Virginia .................. 5 81,160
Maryland .................. 5 131,545 Washington ............... 3 25,647
Massachusetts ............ 10 154,353 West Virginia ............ 1 4,666
Michigan .................. 2 9,343 Wisconsin .................. 9 44,063
Missouri .................. 4 13,313 Wyoming .................. 5 18,350
Nebraska .................. 16 16,496 ---- ----------
Total properties ......... 205 1,604,446
Hospitality
Properties Trust (83
hotels in 27 states) ...... 100,000
----------
Total investments ......... $1,704,446
==========
</TABLE>
S-11
<PAGE>
Healthcare Properties
The population of the United States is aging. According to information from
the U.S. Census Bureau, the segment of the U.S. population age 65 and over is
increasing and is expected to increase sharply through the year 2020. The
Company believes that the demand for services provided at retirement
communities, assisted living centers and nursing homes should increase as the
population ages. Currently proposed federal legislation seeks to limit the
amount of growth in government expenditures for Medicare and Medicaid. These
limitations, if enacted, may adversely affect the profitability of health care
operating companies and might, in certain circumstances, affect their ability to
pay rent or service debt. These government funding limitations will likely also
make it less profitable to construct new health care facilities and thus may
increase the value of existing facilities. The Company believes that the net
effect of these demographic and legislative changes will be to make it less
profitable to provide services and facilities for government funded patients and
more profitable to provide services and facilities for non-
government supported patients. The Company intends to respond to these changes
in three ways: (i) by focusing new investments in properties that are not
directly dependent upon a high percentage of Medicaid or Medicare revenues,
including retirement housing, assisted living facilities, medical office
buildings and nursing homes with a high percentage of private pay revenues; (ii)
by encouraging and making funding available to the operators of the Company's
properties to improve these proprieties in order to attract a greater amount of
non-government revenues and (iii) whenever possible, by making new investments
in properties leased to well capitalized operators.
Government Office Properties
Most U.S. Government office space requirements are managed by the General
Services Administration ("GSA"). Most large GSA leases are written for initial
terms of 10 to 20 years plus tenant renewal options totalling an additional 5 to
20 years. Many GSA leases, including leases for some of the Government Office
Properties, permit the Government to terminate the lease by notices given any
time after a so called "firm term." The weighted average remaining firm term for
the Government Office Properties to be acquired by the Company is approximately
eight years. From 1980 to September 1996 the amount of space leased by the GSA
increased from 90 million square feet to 140 million square feet; during the
same period the amount of GSA owned spaced increased from 139 million square
feet to 146 million square feet. This increase in U.S. Government leased space
occurred despite a declining civilian government work force, as federal civilian
employment decreased approximately 9% from 2.2 million employees in 1980 to 2.0
million employees in 1995. The Company believes that the GSA's long term demand
for leased space will continue to be strong as a result of federal budget
pressures to limit capital expenditures and the need to use funds available for
capital expenditures to modernize the GSA inventory of owned buildings, over
half of which exceed 50 years of age. Based upon the Government's investments in
tenant improvements to the Government Office Properties, the high cost of
relocation and the stability of the missions and space requirements of the
Government agencies which occupy these properties, the Company believes that
there is a high probability of lease renewals for the Government Office
Properties through their renewal options, and in many cases beyond those
periods. Moreover, because of the locations of many of these properties and the
high standards to which they have been developed, the Company believes it may be
able to lease or sell most of these properties to commercial users in the event
the Government terminates or fails to renew a lease. For all of these reasons
the Company believes that its investment in the Government Office Properties and
its possible investment in additional properties leased to Government agencies
will be an appropriate diversification which will enable it to grow and
stabilize its income.
Equity Investment In HPT
The Company has invested $100 million and owns four million shares of HPT,
which constitutes approximately 15% of the total HPT shares outstanding. HPT is
a REIT in the business of owning hotels and leasing them to independent hotel
operating companies. HPT was organized by the Company in February 1995 as an
outgrowth of the Company's relationship with Host Marriott Corporation and
Marriott, which arose from the Company's investment in retirement communities
which are leased to Marriott. In August 1995 HPT completed an initial public
offering of shares and in April 1996 it completed a follow-on offering, raising
a total of $593 million in gross equity capital in addition to the equity
capital invested by the Company. HPT currently owns 53 Courtyard by
Marriott[RegTM] hotels, 12 Wyndham Garden[RegTM] hotels and 18 Residence Inn by
Marriott[RegTM] hotels. The HPT hotels are located in 27 states and contain
12,109 rooms. The Company receives dividends on its HPT shares at the current
annual rate of $2.36 per share. The Company's financial reports include its
share of HPT's operating results under the equity method of accounting. HPT
shares are listed on the NYSE and, on March 13, 1997 the last reported sale
price for HPT shares was $32 5/8 per share.
S-12
<PAGE>
INVESTMENT POLICY
In order to benefit from potential property appreciation, the Company
prefers to own and lease properties rather than make mortgage investments.
Approximately 91% of the Company's investments are in owned properties.
HRP Type of Investment
(dollars in millions)
Pie chart showing HRP properties by type of investment as follows (dollars in
millions):
Owned and Leased* $1,558, 91% and Mortgages, $146, 9%.
- ----------
*Owned properties include the Company's equity investment in HPT. HPT owns all
83 of its hotels.
Additional Security. In addition to ownership of leased properties and
mortgage liens on mortgaged properties, certain of the Company's leases and
mortgages contain additional security features. Generally, with respect to
investments originated by the Company, each obligation to the Company of a
tenant or mortgagor (other than the U.S. Government) is subject to cross default
provisions with respect to all other obligations of that tenant or mortgagor to
the Company and any collateral pledged by the tenant or mortgagor to the Company
constitutes collateral for all obligations of that operator. Certain
tenants/mortgagors have pledged additional collateral or provided corporate
guarantees, security deposits and, in some cases, personal guarantees.
FINANCING POLICY
The Company considers equity offerings when, in the Company's judgment,
doing so will improve the Company's capital structure, while not materially
adversely affecting the market value of its Shares or impeding the Company's
ability to increase regularly its per share dividend rate. In addition to the
use of equity, the Company utilizes short term and long term borrowings to
finance investments and to pay operating expenses. The Company's unsecured
senior indebtedness has been rated "investment grade" by Standard & Poor's
Rating Services (BBB-), Moody's Investors Service, Inc. (Baa3) and Fitch
Investors Service, L.P. (BBB+). When variable rate debt is used, the Company
regularly purchases interest rate futures contracts to hedge against changes in
interest rates. The Company's borrowing guidelines established in the Bank
Credit Facility and by its Board of Trustees prohibit the Company from
maintaining a debt to book capitalization ratio of greater than .50 to 1, except
in certain limited circumstances. On March 13, 1997 the Company's debt to book
capitalization ratio was .40 to 1. After completion of this Offering and the
Government Office Properties acquisition, the Company estimates that its debt to
book capitalization ratio will be approximately .25 to 1. As of March 13, 1997
approximately $211.7 million of the Company's total debt outstanding is
represented by subordinated convertible debentures, convertible into Shares at
$18.00 per Share. Upon conversion of these debentures, completion of this
Offering and the acquisition of the Government Office Properties, the Company's
adjusted pro forma debt to book capitalization ratio would be approximately .12
to 1. The Company may in the future choose to modify its debt to book
capitalization guidelines. There can be no assurance that any debentures will be
converted or that equity or debt capital will be available in the future on
reasonable terms to fund the Company's operations or growth.
S-13
<PAGE>
LEASE EXPIRATIONS AND MORTGAGE MATURITIES
The following table sets forth the Company's revenues and percentage of
total revenues from investments represented by leases and mortgages which expire
or mature in the years 1997 through 2006 and thereafter for the Company's
current investment portfolio, for the Government Office Properties and on a
combined basis. All dollar amounts are in thousands.
<TABLE>
<CAPTION>
Current Portfolio Government Office Percent of
Year Revenues Properties Revenues(1) Total Revenues Total Revenues
- ------------------------------- -------------------- ------------------------- ----------------- ----------------
<S> <C> <C> <C> <C>
1997 ........................ $ 3,318 $ -- $ 3,318 1.7%
1998 ........................ 7,311 2,702 10,013 5.0
1999 ........................ 2,652 -- 2,652 1.3
2000 ........................ 4,481 6,142 10,623 5.3
2001 ........................ 8,661 12,886 21,547 10.8
2002 ........................ 4,231 3,468 7,699 3.9
2003 ........................ 2,557 -- 2,557 1.3
2004 ........................ 367 3,423 3,790 1.9
2005 ........................ 16,062 12,163 28,225 14.2
2006 and thereafter(2) ...... 89,060 19,785 108,845 54.6
-------- ------- -------- -----
Totals ..................... $138,700 $60,569 $199,269 100%
======== ======= ======== =====
</TABLE>
- ----------
(1) The Government Office Properties are leased on a modified gross lease basis.
Most of the Company's other properties are leased on a net lease basis.
Accordingly, the revenues received by the Company from the Government Office
Properties are not necessarily indicative of the net operating income from
those properties and the combined revenues and combined percentage of total
revenues are not necessarily indicative of the combined net operating income
or Funds From Operations likely to be realized by the Company.
(2) Includes the Company's pro rata share of revenues of HPT. All of HPT's
current leases expire after 2006. The Company reports income and funds from
operations derived from its investment in HPT using the equity method of
accounting. The Company believes its pro rata share of HPT's revenues
included above is an appropriate means to reflect the lease expirations in
the Company's current investment portfolio.
S-14
<PAGE>
THE LESSEES AND MORTGAGORS
The Company's financial condition depends in large part upon the financial
condition of its tenants and mortgagors. After the acquisition of the Government
Office Properties, 85.2% of the Company's investments and 86.0% of the Company's
revenues will be derived from properties leased or operated by the U.S.
Government, publicly owned companies or investment grade rated not-for-profit
entities.
HRP's Tenants
<TABLE>
<CAPTION>
Adjusted Pro Forma Adjusted Pro Forma
Tenant Operator Investment Portfolio Annual Revenues(1)
- ------------------------------------------------- ------------------------------- -----------------------------
Investment % of Total Revenues % of Total
------------- ------------- ----------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Government
--30 office buildings
--1 VA clinic $ 461,934 27.1% $62,926 31.6%
Marriott
--14 retirement communities
with 3,932 units 325,521 19.1 27,644 13.9
Investment Grade Not-for-Profit Entities
--2 medical office buildings
--2 medical clinics 68,569 4.0 7,810 3.9
Other Public Companies(2)
--104 nursing homes
--1 retirement/assisted living facility
--10 medical office buildings and laboratories
--HPT investment 596,120 35.0 73,024 36.6
---------- ------ -------- ------
Total Investment Grade and Other
Public Companies 1,452,144 85.2 171,404 86.0
Other Tenant/Operators
--30 nursing homes
--2 multi-tenant medical office buildings
--9 retirement/assisted living facilities 252,302 14.8 27,864 14.0
---------- ------ -------- ------
Totals $1,704,446 100% $199,268 100%
========== ====== ======== ======
</TABLE>
- ----------
(1) Adjusted pro forma annual revenues are for the year ended December 31, 1996
and assume all acquisitions described in "Recent Developments," including
with respect to certain Government Office Properties under development, all
as described in the Unaudited Adjusted Pro Forma Financial Statements
included elsewhere in this Prospectus Supplement, occurred on January 1,
1996. The Government Office Properties are leased on a modified gross lease
basis. Most of the Company's other properties are leased on a net lease
basis. Accordingly, the revenues received by the Company from the Government
Office Properties are not necessarily indicative of the net operating income
from those properties and the combined revenues and combined percentage of
total revenues are not necessarily indicative of the combined net operating
income or Funds From Operations likely to be realized by the Company.
(2) Includes the Company's $100 million investment in HPT and the Company's pro
rata share of HPT revenues. The Company reports income and funds from
operations derived from its investment in HPT using the equity method of
accounting. The Company believes its pro rata share of HPT revenues included
here is an appropriate means to reflect its percentage of revenues derived
from public companies as all of HPT's hotels are currently operated by
affiliates of publicly-owned companies.
S-15
<PAGE>
U.S. Government. The Company's investment in properties leased to the U.S.
Government include the Government Office Properties to be acquired in part with
the proceeds of this Offering plus one medical clinic in Boston, MA which is
currently owned by the Company and leased to the U.S. Department of Veterans
Affairs. Most of the Government Office Properties leases were undertaken by the
GSA and assigned to other Government agencies including the Internal Revenue
Service, the U.S. Department of Agriculture, the National Institute of Standards
and Technology, U.S. Defense Information Systems, and the U.S. Department of
Energy. All of these leases are general obligations of the U.S. Government.
Marriott International. Marriott is a NYSE-listed company with an equity market
capitalization on March 13, 1997 of $6.5 billion. In addition to its retirement
housing and assisted living properties, some of which are leased from the
Company, Marriott owns and operates hotels and other business on a worldwide
basis and has announced 1996 revenues of approximately $10.2 billion. Marriott
has unconditionally guaranteed its lease obligations to the Company. Marriott's
senior credit obligations are rated investment grade by Standard & Poors Ratings
Services (A-) and Moody's Investors Services, Inc. (Baa1).
Investment Grade Not-For-Profit Entities. The Company leases two medical clinic
buildings to Health Insurance Plan of Greater New York, a not-for-profit health
maintenance organization. The Company also owns two medical office buildings in
Boston, MA which are principally leased to affiliates of Boston's Beth Israel
Hospital, Boston's Children's Medical Center and Harvard Community Health Plan,
a Boston area not-for-profit health maintenance organization.
Other Public Companies. The Company's other publicly owned tenants and the
principal stock exchanges on which their securities are traded are as follows:
Horizon/CMS Healthcare Corp. (NYSE: HHC); GranCare, Inc. (NYSE: GC); Community
Care of America, Inc. (NASDAQ: CCAI); Sun Healthcare Group, Inc. (NYSE: SHG);
Multicare Companies (NYSE: MUL); ARV Assisted Living, Inc. (NASD: ARVI);
Integrated Health Services, Inc. (NYSE: IHS); Vencor, Inc. (NYSE: VC); Alliance
Pharmaceutical Corp. (NASD: ALLP); Corvas International, Inc. (NASD: CVAS);
Neurocrine Biosciences, Inc. (NASD: NBIX); Laboratory Corp. of America Holdings
(NYSE: LH) and Unilab Corp. (AMEX: ULB). Also included in this category are the
Company's investment in two laboratory and office buildings which are leased to
Behring Diagnostics, Inc. which is a subsidiary of Hoechst AG, a German public
company, and one medical office building which is leased to Canji, Inc., a
subsidiary of Schering-
Plough Corporation (NYSE: SGP).
Other Tenant Operators. The Company's other tenants include 20 privately held
nursing home and assisted living companies, and approximately 75 tenants
including medical practice groups, clinics and pharmacies which lease space in
multi-tenant medical office buildings.
S-16
<PAGE>
MANAGEMENT
The Trustees and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ------------------------------ ------
<S> <C> <C>
Barry M. Portnoy 51 Managing Trustee
Gerard M. Martin 62 Managing Trustee
Bruce M. Gans, M.D. 50 Trustee
Rev. Justinian Manning, C.P. 70 Trustee
Ralph J. Watts 50 Trustee
David J. Hegarty 40 President, Chief Operating Officer and Secretary
Ajay Saini 37 Treasurer and Chief Financial Officer
</TABLE>
Barry M. Portnoy was a founder and has been a Trustee of the Company since
its organization in 1986. Mr. Portnoy also serves as a Managing Trustee of HPT.
Mr. Portnoy has been a partner in the law firm of Sullivan & Worcester LLP since
1978.
Gerard M. Martin was a founder and has been a Trustee of the Company since
its organization in 1986. Mr. Martin also serves as a Managing Trustee of HPT.
Bruce M. Gans, M.D. is president of the Rehabilitation Institute of
Michigan, a speciality hospital affiliated with Wayne State University School of
Medicine. Dr. Gans is also a Professor and Chairman of the Department of
Physical Medicine and Rehabilitation at Wayne State University School of
Medicine and a Senior Vice President of the Detroit Medical Center.
The Reverend Justinian Manning, C.P. has been, since September 1990, the
pastor of St. Gabriel's parish in Brighton, MA. From 1984 until September 1990,
he was the Treasurer of the Provincial Council of Passionist Provincialate. He
is also on the Board of Directors of Charlesview, a low and moderate income
housing program, and St. Elizabeth's Hospital Foundation. He is a past Treasurer
and a former Director of St. Paul's Benevolent, Educational and Missionary
Institute, a New Jersey corporation, which oversees foundations in
Massachusetts, Connecticut, New York, Pennsylvania, Maryland, Florida and the
Institute's Overseas Missions.
Ralph J. Watts is President and Chief Executive Officer of Cardiovascular
Ventures, Inc., a privately held company which develops, owns and operates
outpatient cardiac catheterization laboratories and is engaged in physician
practice management. Mr. Watts has held this position since 1992. From 1988 to
1992, Mr. Watts was President and Chief Executive Officer of Ramsay Health Care,
Inc., a publicly owned company which owned and operated 18 hospitals in 13
states and had approximately 2,000 employees.
David J. Hegarty is the President, Chief Operating Officer and Secretary of
the Company. He has been employed by the Company in various capacities since
1987, prior to which he was an audit manager with Ernst & Young LLP. Mr. Hegarty
is a certified public accountant.
Ajay Saini is the Treasurer and Chief Financial Officer of the Company. Mr.
Saini has been employed by the Company in various capacities since June 1990,
prior to which he was a senior accountant with Ernst & Young LLP. Mr. Saini is a
certified public accountant.
S-17
<PAGE>
Dr. Gans, Mr. Watts and Fr. Manning are the Company's Independent Trustees,
that is Trustees who are not affiliated with any of the Company's lessees or
mortgagors or with HRPT Advisors, Inc. (the "Advisor"). Under the Company's
Declaration of Trust, a majority of the Company's Trustees will at all times
consist of Independent Trustees. All major investment and policy decisions
affecting the Company are made by the Board of Trustees. All day to day
operations of the Company are conducted by the Advisor pursuant to an investment
advisory contract. The Advisor is owned by Messrs. Portnoy and Martin. Messrs.
Hegarty and Saini, as well as all other personnel involved in the Company's
operations, are employees of the Advisor. The Advisor is paid an annual advisory
fee calculated on the basis of total assets under management (.7% of the first
$250 million, plus .5% of additional assets), and an annual incentive fee
calculated on the basis of increases in operating cash flow per Share but not
more than $.01 per Share times the weighted average Shares outstanding for the
year. With respect to properties which are gross leased and/or occupied by
multiple tenants, certain property management services, which are beyond the
scope of the investment advisory contract, are provided under property
management contracts by an affiliate of the Advisor. The Company believes that
the fees paid for property management services (approximately 3% of gross
revenues from the affected properties) are at or below the levels the Company
would pay on an arms' length basis for similar services in the market generally.
The advisory contract and the various property management contracts have all
been approved on behalf of the Company by the Independent Trustees, and those
contracts are subject to periodic review by the Independent Trustees. The
Advisor currently owns approximately one million Shares, most of which were
purchased in 1989. All incentive fees earned by the Advisor are paid in Shares.
The Company believes that its total administrative costs are at or about
industry averages.
FEDERAL INCOME TAX AND ERISA CONSIDERATIONS
The following description of certain Federal income tax matters and
Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
considerations relating to the Company is qualified in its entirety by reference
to the more detailed description thereof contained in the Company's Annual
Report on Form 10-K (the "Form 10-K"), which is incorporated herein by
reference. Sullivan & Worcester LLP, Boston, MA, has rendered its opinion that
the discussion in this section and in the Form 10-K in the sections captioned
"Federal Income Tax Considerations" and "ERISA Plans, Keogh Plans and Individual
Retirement Accounts" in all material respects is accurate and fairly summarizes
the federal income tax and ERISA issues which are material to an investment in
the Shares and the opinions of counsel referred to in those sections represent
Sullivan & Worcester LLP's opinions on those subjects. Specifically, subject to
qualifications and assumptions contained in its opinion and in the Form 10-K,
Sullivan & Worcester LLP has opined to the effect (a) that the Company has been
organized in conformity with the requirements for federal tax qualification as a
REIT, has qualified as a REIT for its taxable years 1987 through 1996, and that
the Company's current and currently anticipated investments and its current plan
of operation will enable it to continue to meet the requirements for federal tax
qualification and taxation as a REIT and (b) that, under the "plan assets"
regulations promulgated by the Department of Labor under ERISA, the Shares are
publicly offered securities and the assets of the Company will not be deemed to
be "plan assets" under ERISA.
The Company is and intends to remain qualified as a REIT under the Internal
Revenue Code of 1986, as amended (the "Code"). As a REIT, the Company's net
income which is distributed as dividends to shareholders will be exempt from
Federal taxation. Distributions to the Company's shareholders generally will be
includable in their income; however, dividends distributed which are in excess
of current or accumulated earnings will be treated for tax purposes as a return
of capital to the extent of a shareholder's basis, and will reduce the basis of
such shareholder's Shares. Approximately 24% of dividends distributed in
calendar 1996 are expected to be treated as a return of capital.
Shareholders should be aware that proposed United States Treasury
Regulations were issued on April 22, 1996 (the "Proposed Regulations") which, if
adopted, would affect the United States taxation of dividends paid to a Non-
U.S. Shareholder (as defined in the Form 10-K in the section captioned "Federal
Income Tax Considerations").
Under the Proposed Regulations, to obtain a reduced rate of withholding
under a treaty, a Non-U.S. Shareholder generally would be required to provide an
Internal Revenue Service Form W-8 certifying such Non-U.S. Shareholder's
entitlement to benefits under the treaty. The Proposed Regulations also would
provide special rules to determine whether, for purposes of determining the
applicability of a tax treaty, dividends paid to a Non-U.S. Shareholder that is
an entity should be treated as paid to the entity or to those holding an
interest in that entity.
S-18
<PAGE>
The Proposed Regulations also would, if adopted, alter the information
reporting and backup withholding rules applicable to Non-U.S. Shareholders.
Among other things, the Proposed Regulations would provide certain presumptions
under which a Non-U.S. Shareholder would be subject to backup withholding and
information reporting until the Company receives certification from such
shareholder of non-U.S. status.
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 prospective investors are urged
to consult their tax advisors with respect to the effect the Proposed
Regulations would have if adopted.
The Company intends to conduct its affairs so that the assets of the
Company will not be deemed to be "plan assets" of any individual retirement
account, employee benefit plan subject to Title 1 of ERISA, or other qualified
retirement plan subject to Section 4975 of the Code which acquires its Shares.
The Company believes that, under present law, its distributions do not create so
called "unrelated business taxable income" to tax-exempt entities such as
pension trusts, subject, however, to certain rules which may apply to a pension
trust holding more than 10% of the Shares.
EACH PROSPECTIVE PURCHASER OF THE SHARES OFFERED HEREBY IS ADVISED TO
CONSULT HIS OR HER OWN PROFESSIONAL ADVISOR REGARDING THE SPECIFIC FEDERAL,
STATE, LOCAL, FOREIGN AND OTHER TAX AND ERISA CONSEQUENCES TO HIM OR HER OF THE
PURCHASE, OWNERSHIP AND SALE OF THE SHARES OFFERED HEREBY.
SPECIAL NOTE FOR UNITED KINGDOM PURCHASERS
The Shares may not be offered or sold in the United Kingdom except (i) to
persons whose ordinary activities involve them in acquiring, holding, managing
or disposing of investments (as principal or agent) for the purposes of their
business or otherwise in circumstances which have not resulted and will not
result in an offer to the public in the United Kingdom within the meaning of the
Public Offers of Securities Regulations 1995 and (ii) in compliance with all
applicable provisions of the Financial Services Act 1986 with respect to offers
and sales of the Shares in, from or otherwise involving the United Kingdom. In
addition, this Prospectus Supplement and the Prospectus to which it relates may
only be issued or passed on to any person in the United Kingdom if that person
is of a kind described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisement) (Exemptions) Order 1996, as amended, or is a person
to whom such document may otherwise lawfully be issued or passed on.
S-19
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below have severally agreed to purchase from the Company, and
the Company has agreed to sell to them, the following respective number of
Shares at the offering price less the underwriting discounts and commissions set
forth on the cover of this Prospectus Supplement.
<TABLE>
<CAPTION>
Number of Shares
Underwriter to be Purchased
- ------------------------------------------------------------ ------------------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation ...... 2,021,000
Dean Witter Reynolds Inc. ................................. 2,021,000
A.G. Edwards & Sons, Inc. ................................. 2,021,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated ............................................. 2,021,000
NatWest Securities Limited .............................. 2,021,000
PaineWebber Incorporated ................................. 2,021,000
Prudential Securities Incorporated ........................ 2,021,000
Salomon Brothers Inc .................................... 2,021,000
Smith Barney Inc. ....................................... 2,021,000
Lehman Brothers .......................................... 663,875
Arnhold and S. Bleichroeder, Inc. ........................ 663,875
Cruttenden Roth Incorporated .............................. 663,875
D.A. Davidson & Co. ....................................... 663,875
Legg Mason Wood Walker Incorporated ..................... 663,875
McDonald & Company Securities, Inc. ..................... 663,875
Nesbitt Burns Securities Inc. ........................... 663,875
Sands Brothers & Co., Ltd. .............................. 663,875
-----------
Total ................................................... 23,500,000
===========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Shares offered hereby are
subject to approval of certain legal matters by their counsel and to certain
other conditions. The Underwriters are obligated to take and pay for all the
Shares offered hereby (other than those covered by the over-allotment option
described below) if any of such Shares are taken.
The Company has been advised by the Underwriters that they propose to offer
the Shares to the public at the offering price set forth on the cover of this
Prospectus Supplement and to certain dealers at such price, less a concession
not in excess of $.55 per Share. The Underwriters may allow, and such dealers
may re-allow, a concession not in excess of $.10 per Share to certain other
dealers. After the Offering, the offering price and other selling terms may be
changed by the Underwriters. The Company has granted to the Underwriters an
option, exercisable not later than 30 calendar days from the date of this
Prospectus Supplement, to purchase up to 3,525,000 additional Shares at the same
price per Share as the Company receives for the other Shares that the
Underwriters have agreed to purchase.
To the extent that the Underwriters exercise such option to purchase up to
a total of 3,525,000 Shares, each of the Underwriters will have a firm
commitment to purchase approximately the same percentage thereof that the number
of Shares to be purchased by it shown in the above table bears to the total
number of Shares shown in the above table, and the Company will be obligated,
pursuant to the option, to sell such Shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of the Shares offered hereby. If purchased, the
Underwriters will sell such additional Shares on the same terms as those on
which the Shares are being offered.
In connection with the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Shares. Specifically, the Underwriters may overallot the Offering, creating a
syndicate short position. In addition, the Underwriters may bid for, and
purchase, Shares in the open market to cover syndicate shorts or to stabilize
the price of the Shares. Finally, the underwriting syndicate may reclaim selling
concessions allowed for distributing the Shares in the Offering if the syndicate
repurchases previously distributed
S-20
<PAGE>
Shares in syndicate covering transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the Shares above independent
market levels. The Underwriters are not required to engage in these activities,
and may end any of these activities at any time.
NatWest Securities Limited, a United Kingdom broker-dealer and a member of
the Securities and Futures Authority Limited, has agreed that, as part of the
distribution of the Shares offered hereby and subject to certain exceptions, it
will not offer any Shares within the United States, its territories or
possessions, or to persons who are citizens thereof or residents therein. The
Underwriting Agreement does not limit sale of the Shares offered hereby outside
the United States. NatWest Securities Limited has further represented and agreed
that: (a) it has not offered or sold and will not offer or sell any Shares to
persons in the United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments
(whether as principal or agent) for the purposes of their business or otherwise
in circumstances which have not resulted and will not result in an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995 or the Financial Services Act 1986; (b) it has
complied and will comply with all applicable provisions of the Financial
Services Act 1986 with respect to anything done by it in relation to the Shares
in, from or otherwise involving the United Kingdom; and (c) it has only issued
or passed on and will only issue and pass on, in the United Kingdom, any
document that consists of or any part of listing particulars, supplementary
listing particulars, or any other document required or permitted to be published
by listing rules under Part IV of the Financial Services Act 1986, to any person
of a kind described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisement) (Exemptions) Order 1996, as amended, or is a person
to whom such document may otherwise lawfully be issued or passed on.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act.
The Company has agreed that it will not, and shall cause each of its
Trustees, executive officers and affiliates (including the Advisor) to agree
that such person will not, without the prior written consent of Donaldson,
Lufkin & Jenrette Securities Corporation, register, offer, sell, contract to
sell, grant any option to purchase or otherwise dispose of any Shares or any
securities convertible into or exercisable or exchangeable for Shares, or
warrants to purchase Shares, for a period of 90 days after the date of the
Underwriting Agreement, other than (i) the Shares offered hereby, (ii) Shares to
be issued pursuant to the Company's Incentive Share Award Plan, (iii) Shares to
be issued in connection with the Government Office Properties acquisition and
(iv) Shares to be issued upon conversion of the Company's outstanding
convertible debentures.
Donaldson, Lufkin & Jenrette Securities Corporation and Merrill Lynch & Co.
have acted and are acting as financial advisors to the Seller in connection with
the Government Office Properties acquisition and upon completion of the
acquisition will be entitled to customary fees from the Seller.
LEGAL MATTERS
Certain legal matters with respect to the Shares offered by the Company
have been passed upon for the Company by Sullivan & Worcester LLP, Boston, MA
and will be passed upon for the Underwriters by Willkie Farr & Gallagher, New
York, NY. Sullivan & Worcester LLP has relied and Willkie Farr & Gallagher will
rely, as to all matters of Maryland law, upon the opinion of Piper & Marbury
L.L.P., Baltimore, MD. Sullivan & Worcester LLP has also given its opinion as to
certain Federal income tax matters and certain ERISA considerations relating to
the Company. See "Federal Income Tax and ERISA Considerations." Barry M.
Portnoy, a partner in the firm of Sullivan & Worcester LLP, is a Managing
Trustee of the Company and of HPT, a director and 50% shareholder of the Advisor
and a director and/or significant shareholder of certain lessees of the Company.
Sullivan & Worcester LLP represents the Advisor, such lessees and certain of
their affiliates on various matters. Willkie Farr & Gallagher is acting as
counsel to the Seller in connection with the Government Office Properties
acquisition.
EXPERTS
The consolidated financial statements of Health and Retirement Properties
Trust for the year ended December 31, 1996 and the consolidated financial
statements of Government Properties Investors, Inc. for the year ended December
31, 1996 appearing in the Company's Current Report on Form 8-K dated February
17, 1997, have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon included therein and
S-21
<PAGE>
incorporated herein by reference. Such consolidated financial statements are
incorporated herein by reference in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the Commission. In addition
to the places identified in the Prospectus under "Available Information" at
which the registration statement with respect to the Shares offered hereby, the
exhibits and schedules forming a part thereof and the reports, proxy statements
and other information filed by the Company with the Commission can be inspected
and copies obtained, the Commission maintains a web site where such reports,
proxy statements and other information may be obtained at http://www.sec.gov.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
In addition to the documents incorporated by reference or deemed
incorporated by reference into the accompanying Prospectus, which Prospectus is
supplemented by this Prospectus Supplement, the following documents, which have
been filed with the Commission pursuant to the Exchange Act, are hereby
incorporated in this Prospectus Supplement and specifically made a part hereof
by reference: (i) the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996 as amended by the Company's Form 10-QA filed August 15,
1996; (ii) the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996; (iii) the Company's Current Reports on Form 8-K dated
October 2, October 22 and November 1, 1996 and February 13, February 17, March 3
and March 14, 1997 and (iv) the consolidated financial statements of Marriott
International, Inc. ("Marriott"), Commission File No. 1-12188, at and for the
fiscal quarters ended March 22, 1996, June 14, 1996 and September 6, 1996
incorporated herein by reference from Marriott's Reports on Form 10-Q for the
quarters ended March 22, 1996, June 14, 1996 and September 6, 1996. All
documents filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act subsequent to the date of this Prospectus Supplement and prior
to the termination of the offering of the Shares offered by the Company shall be
deemed to be incorporated by reference into this Prospectus Supplement and to be
a part hereof from the respective dates of filing of such documents. Any
statement contained herein or in a document incorporated or deemed to be
incorporated herein by reference shall be deemed to be modified or superseded
for purposes of this Prospectus Supplement to the extent that a statement
contained herein, or in any other subsequently filed document that also is or is
deemed to be incorporated herein by reference, modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus
Supplement.
The Company will provide without charge to each person to whom this
Prospectus Supplement is delivered, upon the written or oral request of such
person, a copy of any and all of the information that has been incorporated by
reference in this Prospectus Supplement (excluding exhibits unless such exhibits
are specifically requested or such exhibits are specifically incorporated by
reference into the information that this Prospectus Supplement incorporates).
Requests for such copies should be made to the Company at its principal
executive offices, 400 Centre Street, Newton, MA 02158, Attention: Investor
Relations, telephone (617) 332-3990.
S-22
<PAGE>
FORWARD LOOKING STATEMENTS
THIS PROSPECTUS SUPPLEMENT CONTAINS FORWARD-LOOKING STATEMENTS. SUCH
STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES WHICH COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED OR PROJECTED.
PROSPECTIVE PURCHASERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE
FORWARD-LOOKING STATEMENTS WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY
UNDERTAKES NO OBLIGATION TO PUBLISH REVISED FORWARD-LOOKING STATEMENTS TO
REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE
OCCURRENCE OF PRESENTLY UNANTICIPATED EVENTS.
------------
THE AMENDED AND RESTATED DECLARATION OF TRUST ESTABLISHING 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.
S-23
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
HEALTH AND RETIREMENT PROPERTIES TRUST
Unaudited Adjusted Pro Forma Financial Statements
The following unaudited adjusted pro forma balance sheet at December 31,
1996 and unaudited adjusted pro forma statement of income for the year ended
December 31, 1996 are intended to present the financial position and results of
operations of the Company as if the transactions described in the Notes were
consummated on December 31, 1996 and January 1, 1996, respectively. These
unaudited adjusted pro forma financial statements should be read in connection
with, and are qualified in their entirety by reference to, the separate
financial statements of the Company and of the Seller of the Government Office
Properties, each for the year ended December 31, 1996, incorporated herein by
reference to the Company's Current Report on Form 8-K dated February 17, 1997
and the unaudited pro forma financial statements and other data of the Company
for the year ended December 31, 1996, incorporated herein by reference to the
Company's Current Report on Form 8-K dated March 14, 1997. These unaudited
adjusted pro forma financial statements include adjustments for the results of
certain properties which were being developed during 1996. See Notes J and M. No
assurance can be given that these adjusted pro forma financial statements
reflect the financial results which would have been realized if the development
of these properties was completed as of December 31, 1996 or January 1, 1996.
These unaudited adjusted pro forma financial statements are not necessarily
indicative of the expected financial position or results of operations of the
Company for any future period. Differences would result from, among other
considerations, future changes in the Company's portfolio of investments,
changes in interest rates, changes in the capital structure of the Company,
delays in the acquisition of certain properties and changes in property level
operating expenses.
F-1
<PAGE>
Health and Retirement Properties Trust
Unaudited Adjusted Pro Forma Balance Sheet
(dollars in thousands)
<TABLE>
<CAPTION>
Adjusted
Pro forma
December 31, December 31,
1996(A) Adjustments 1996
--------------- ------------------ --------------
<S> <C> <C> <C>
ASSETS
Real estate properties, at cost:
Land ......................................................... $ 93,522 $ 83,928 $ 177,450
Buildings and improvements .................................... 912,217 362,428 1,274,645
--------- ------------ ---------
1,005,739 446,356 1,452,095
Less accumulated depreciation ................................. 76,921 -- 76,921
--------- ------------ ---------
928,818 446,356 (B) 1,375,174
Real estate mortgages receivable .............................. 150,205 -- 150,205
Investment in HPT ............................................. 103,062 -- 103,062
Cash and cash equivalents ....................................... 21,853 (9,811)(C) 12,042
Interest and rent receivables ................................. 11,612 4,436 (D) 16,048
Deferred interest and finance costs, net and other assets ...... 13,972 15,497 (E) 29,469
--------- ----------------- ---------
$1,229,522 $ 456,478 $1,686,000
========= ============ =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank credit facility payable .................................... $ 140,000 $(105,811)(F) $ 34,189
Mortgage debt payable .......................................... -- 46,694 (G) 46,694
Senior notes and bonds payable, net ........................... 124,385 -- 124,385
Convertible subordinated debentures ........................... 227,790 -- 227,790
Accounts payable and accrued expenses ........................... 18,319 12,919 (H) 31,238
Security deposits ............................................. 8,387 -- 8,387
Due to affiliates ............................................. 2,593 -- 2,593
Shareholders' equity:
Preferred shares, par value $.01 per share; 50,000,000
shares authorized; none issued ............................... -- -- --
Common shares of beneficial interest, par value $.01
per share; 100,000,000 and 125,000,000 shares
authorized and pro forma; 66,888,917 and 94,540,961
shares issued and outstanding and pro forma ................... 669 276 (I) 945
Additional paid-in capital .................................... 795,263 502,400 (I) 1,297,663
Cumulative net income .......................................... 306,298 -- 306,298
Dividends paid ................................................ (394,182) -- (394,182)
--------- ------------ ---------
Total shareholders' equity ................................. 708,048 502,676 1,210,724
--------- ------------ ---------
$1,229,522 $ 456,478 $1,686,000
========= ============ =========
</TABLE>
F-2
<PAGE>
Health and Retirement Properties Trust
Unaudited Adjusted Pro Forma Statement of Income
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Adjusted
Historical Pro forma
1996 Adjustments 1996
------------- -------------- -----------
<S> <C> <C> <C>
Revenues:
Rental income .......................................... $98,039 $ 80,368(J) $178,407
Interest income ....................................... 22,144 384(K) 22,528
------- ----------- --------
Total revenues ....................................... 120,183 80,752 200,935
------- ----------- --------
Expenses:
Interest ............................................. 22,545 8,509(L) 31,054
Operating expenses .................................... 3,776 16,770(M) 20,546
Depreciation and amortization ........................ 22,106 13,462(N) 35,568
General and administrative ........................... 7,055 3,175(O) 10,230
------- ----------- --------
Total expenses ....................................... 55,482 41,916 97,398
------- ----------- --------
Income before equity income and extraordinary item ...... 64,701 38,836 103,537
HPT equity income ....................................... 8,860 -- 8,860
Gain on HPT equity transaction ........................... 3,603 -- 3,603
------- ----------- --------
Income before extraordinary item ........................ 77,164 38,836 116,000
Extraordinary item (early extinguishment of debt) ...... (3,910) -- (3,910)
------- ----------- --------
Net income ............................................. 73,254 38,836 112,090
Add interest expense related to convertible bonds ...... 4,159 12,477(P) 16,636
------- ----------- --------
Fully diluted net income ................................. $77,413 $ 51,313 $128,726
======= =========== ========
Funds from operations .................................... $99,106 $ 52,266 $151,372
======= =========== ========
Fully diluted FFO ....................................... $103,265 $ 64,743 $168,008
======= =========== ========
Average Shares outstanding .............................. 66,255 28,285(Q) 94,540
======= =========== ========
Fully diluted average Shares outstanding ............... 69,124 38,071(Q) 107,195
======= =========== ========
Per Share data:
Net income ............................................. $ 1.11 $ 0.08 $ 1.19
Net income--fully diluted .............................. 1.12 0.08 1.20
FFO--primary ............................................. 1.50 0.10 1.60
FFO--fully diluted ....................................... 1.49 0.08 1.57
</TABLE>
F-3
<PAGE>
Health and Retirement Properties Trust
Notes to Unaudited Adjusted Pro Forma Financial Statements
(dollars in thousands, except per share data)
Balance Sheet Adjustments
A. Represents the historical balance of the Company on December 31, 1996.
B. The merger transaction by which the Company expects to acquire the
Government Office Properties (the "Transaction") will be accounted for as a
purchase of assets. This adjustment represents the costs to acquire the
Government Office Properties (excluding the property held for future
disposition referred to in Note E below) and payment of costs to acquire one
medical office building for $5,375 in 1997 as follows:
<TABLE>
<S> <C>
Cash paid ..................................................... $317,139
Debt assumed by the Company ............................,,,,,,, 46,694
4.2 million Shares issued to the sellers .................. 82,523
--------
$446,356
========
</TABLE>
Included in the Government Office Properties are (i) two properties the
Company expects to purchase from third parties simultaneously with the
consummation of the Transaction for an aggregate purchase price of
approximately $22,515 and (ii) four properties currently under development
(including three properties the Company expects to purchase subsequent to the
closing of the Transaction), with respect to which the Company expects to
spend approximately $31,172.
C. Represents net cash on hand expected to be used in connection with the
Transaction and the costs to acquire one medical office building in 1997.
D. Represents accounts receivable for rent relating to the Government Office
Properties to be acquired as part of the Transaction.
E. Represents other assets expected to be acquired as part of the Transaction
including prepaid expenses ($1,750), minimum payment due to the Seller with
respect to certain potential acquisitions ($8,000) and the value of one
property held for future disposition ($5,747).
F. Represents proposed net borrowings under the Bank Credit Facility as follows:
<TABLE>
<S> <C>
Repayment with proceeds from Offering ............ $ (140,000)
Drawings to partially fund the Transaction ...... 34,189
----------
$ (105,811)
==========
</TABLE>
G. Represents financing secured by four of the Government Office Properties that
is not expected to be paid at the closing of the Transaction.
H. Represents accounts payable, accrued expenses and deferred minimum
acquisition fees assumed by the Company as part of the Transaction.
I. Represents the following:
<TABLE>
<S> <C>
Gross proceeds from the Offering (23,500,000 Shares at $18.875/Share) $ 443,563
Estimated expenses of the Offering ................................. (23,410)
---------
420,153
Value of Transaction Shares (4,152,044 shares at $19.875/Share) ...... 82,523
---------
$ 502,676
=========
Par value of Shares ................................................ $ 276
Additional paid-in capital .......................................... 502,400
---------
$ 502,676
=========
</TABLE>
F-4
<PAGE>
Health and Retirement Properties Trust
Notes to Unaudited Adjusted Pro Forma Financial Statements--(Continued)
(dollars in thousands, except per share amounts)
<TABLE>
<S> <C>
Statement of Income Adjustments
J. Rent from Government Office Properties ...... $59,969
Rent from 1996 acquisitions ............... 20,399
--------
$80,368
========
</TABLE>
The Rent adjustments arising from the Government Office Properties
acquisition and from the 1996 acquisitions assumes that all of these
properties were acquired and that current contractual rents were in effect on
January 1, 1996. Certain of the Government Office Properties were purchased
by the Seller during 1996 and others are currently under development or
contract. See Note B. For those properties, revenues represent annual
contractual rent.
K. Represents interest income related to the Company's 1996 investments in
mortgage loans plus historical interest income of the Seller offset by
reduction in interest income related to the Company's 1996 real estate
investments funded by cash on hand.
L. Represents interest expense related to that portion of the 1996 acquisitions
financed with the Company's credit facility, and the Transaction related
assumption of debt and net borrowings under the Bank Credit Facility. The
assumed debt carries its contractual weighted average fixed rate of 7.76%
and the Bank Credit Facility carries a rate based on LIBOR plus a spread
equal to the rate which would have been payable during 1996 under current
contract terms.
M. Certain of the Government Office Properties were purchased by the Seller
during 1996 and others are currently under development or contract. See Note
B. The property level operating expenses for such properties are established
for purposes of this adjusted pro forma presentation as equal to the
percentage of rents which is the same percentage of rents as was represented
by property level operating expenses for the Government Office Properties
which were owned and operated by the Seller during 1996. Moreover, during
1996 the Seller of the Government Office Properties had employed separate
property management companies for certain of the Government Office
Properties under separate fee arrangements; the Company expects to engage an
affiliate of the Advisor to provide property management services for the
Government Office Properties for a fee equal to three percent of rents from
such properties; and accordingly operating expenses have been adjusted to
reflect this change.
N. Represents the full year effect of the 1996 acquisitions and the Government
Office Properties on depreciation expense:
<TABLE>
<S> <C>
1996 acquisitions .................. $4,402
Government Office Properties ...... 9,060
-------
$13,462
=======
</TABLE>
O. Represents contractual full year increases in General and Administrative
expenses which would arise from the Government Office Properties and the
1996 acquisitions as if they had occurred on January 1, 1996.
P. Represents difference between the net income for primary earnings per share
calculation and the net income for fully diluted earnings per share
calculation arising from interest expense and amortization of deferred
financing costs related to the Company's subordinated convertible debentures.
Q. With regard to primary Shares, this adjustment represents the impact of this
Offering, Shares issued partially to fund the Transaction and convertible
debentures converted during 1996, all as if such Shares were issued on
January 1, 1996. With regard to fully diluted Shares, this adjustment also
reflects the impact of the Company's issuance of convertible subordinated
debentures as were outstanding on December 31, 1996 as if such subordinated
convertible debentures were issued on January 1, 1996.
F-5
<PAGE>
IBC
The inside back cover contains color pictures of five Company properties
captioned as follows:
Marriott International, Inc. Torrey Pines Science Center
Stratford Court of Boca Raton San Diego, CA
Boca Raton, FL 163,057 Square Feet, Built 1985/86
349 Senior Living Units, Built 1994 Major Tenants:
Alliance Pharmaceutical Corporation
Neurocrine Biosciences Incorporated
Corvas International
Canji, Inc.
The Prime Group, Inc.
The Hallmark
Chicago, IL
1295 Boylston Street 341 Senior Living Units, Built 1990
Boston, MA
99,021 Square Feet, Built 1993 GranCare, Inc.
Major Tenants: La Mesa Care Center
Children's Medical Center Yuma, AZ
Beth Israel Hospital 128 Skilled Nursing Beds, Built 1985
<PAGE>
===============================================================================
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus Supplement or the Prospectus in connection with the offer made by
this Prospectus Supplement and the Prospectus and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or any of the Underwriters. Neither this Prospectus Supplement
nor the Prospectus constitutes an offer to sell or the solicitation of an offer
to buy the Shares by anyone in any jurisdiction in which such offer or
solicitation is not authorized, or in which the person making such offer or
solicitation is not qualified to do so, or to any person to whom it is unlawful
to make such offer or solicitation. Neither the delivery of this Prospectus
Supplement and the Prospectus nor any sale made hereunder shall, under any
circumstances, create an implication that the information contained herein is
correct as of any time subsequent to the date hereof.
---------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
------
<S> <C>
Prospectus Supplement
Summary ............................................. S-3
Recent Developments ................................. S-6
Distributions and Price Range of Shares ............ S-9
Capitalization .................................... S-10
Use of Proceeds .................................... S-10
The Company ....................................... S-11
Investment Policy .................................... S-13
Financing Policy .................................... S-13
Lease Expirations and Mortgage Maturities ............ S-14
The Lessees and Mortgagors ........................... S-15
Management .......................................... S-17
Federal Income Tax and ERISA Considerations .......... S-18
Special Note for United Kingdom Purchasers ........... S-19
Underwriting ....................................... S-20
Legal Matters ....................................... S-21
Experts ............................................. S-21
Available Information .............................. S-22
Incorporation of Certain Information by
Reference .......................................... S-22
Forward Looking Statements ........................ S-23
Unaudited Adjusted Pro Forma Financial
Statements .......................................... F-1
Prospectus
Available Information .............................. ii
Incorporation of Certain Documents by
Reference .......................................... iii
The Company ....................................... 1
Use of Proceeds .................................... 1
Ratio of Earnings to Fixed Changes .................. 1
Description of Debt Securities ..................... 1
Description of Shares .............................. 12
Description of Preferred Shares ..................... 12
Description of Depository Shares ..................... 18
Description and Warrants ........................... 21
Limitation of Liability; Shareholder Liability ...... 22
Redemption; Business Combinations and
Control Share Acquisitions ........................ 22
Plan of Distribution ................................. 25
Legal Matters ....................................... 26
Experts ............................................. 26
</TABLE>
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23,500,000 Shares
HEALTH AND RETIREMENT
PROPERTIES TRUST
Common Shares of
Beneficial Interest
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P R O S P E C T U S S U P P L E M E N T
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Donaldson, Lufkin & Jenrette
Securities Corporation
Dean Witter Reynolds Inc.
A.G. Edwards & Sons, Inc.
Merrill Lynch & Co.
NatWest Securities Limited
PaineWebber Incorporated
Prudential Securities Incorporated
Salomon Brothers Inc
Smith Barney Inc.
March 14, 1997
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