Filed Pursuant to Rule 424(b)(5)
Registration #333-02863
Information contained in this Prospectus Supplement is subject to
completion or amendment. A registration statement relating to these
securities has been declared effective by the Securities and Exchange
Commission pursuant to Rule 415 under the Securities Act of 1933. These
securities may not be sold nor may offers to buy be accepted without the
delivery of a final Prospectus Supplement and Prospectus.
SUBJECT TO COMPLETION, DATED FEBRUARY 28, 1997
PROSPECTUS SUPPLEMENT
(To Prospectus dated June 25, 1996)
March , 1997
18,000,000 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 February 25, 1997 the last reported
sale price for the Shares on the NYSE was $20-1/4 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 $ $ $
Total (3) $ $ $
- --------------------------------------------------------------------------------
</TABLE>
(1) See "Underwriting" for indemnification arrangements with the Underwriters.
(2) Before deducting expenses payable by the Company estimated at
$ .
(3) The Company has granted the underwriters a 30-day option to purchase up
to an aggregate of 2,700,000 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 $ , $ and $ , 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 , 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
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SHARES AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NYSE OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<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 has an equity
market capitalization of over $1.3 billion. The Company has investments in
176 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 $448 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 Government 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, $365, 21%;
Retirement/Assisted Living, $439, 26%;
U.S. Government Offices, $448, 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;
Quarter ending 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,* $464, 27%;
Investment Grade Not-for-Profits, $68, 4%;
Hospitality Properties Trust (equity investment), $100, 6%;
Private companies, $256, 15%;
Other Public Companies:
Horizon/CMS, GranCare, Community Care of America, Sun Healthcare, Alliance
Pharmaceuticals, Multicare Companies, Neurocrine Biosciences, Behring
Diagnostics,** Corvas International, Lab Corp of America, Canji, Inc.,** 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 Diagnostic is a subsidiary of Hoechst AG; Canji, Inc. is a
subsidiary of Schering-Plough Corp.
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 and including share price appreciation, of
approximately 18.1% per annum. The following table shows how $100 invested in
Shares at December 31, 1986 would have grown to $537 as of January 31, 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 January 31, 1997
Average Annual of a $100 Investment
Return on December 31, 1986
<S> <C> <C>
HRP .......................................... 18.1% $537
S&P Index .................................... 15.8% $440
NAREIT Index ................................. 9.0% $238
</TABLE>
The Offering
<TABLE>
<S> <C>
Shares to be offered by the Company ........... 18,000,000
Shares to be outstanding after the Offering ... 89,040,961
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
-------------- -------------- -------------- -------------- -------------- ---------------
(dollars 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) 107,321
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) 1.21
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 89,040
Other Data:(7)
Funds From Operations $ 35,365 $ 46,566 $ 71,851 $ 84,638 $ 99,106 $ 146,061
FFO per share 1.32 1.35 1.36 1.43 1.50 1.64
FFO per share, fully diluted 1.32 1.35 1.36 1.43 1.49 1.60
Balance Sheet Data:
Real estate properties, net $310,882 $349,842 $633,513 $722,356 $ 928,818 $1,376,623
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 1,687,558
Total borrowings 138,500 73,000 216,513 269,759 492,175 507,391
Total shareholders' equity 228,301 441,135 602,039 685,592 708,048 1,136,579
</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 (assuming an offering price per Share
of $20-1/4) 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 $448 million, payable as follows: approximately 4.2
million Shares (which would have an aggregate value of approximately $84
million based on the $201/4 closing price per Share on February 25, 1997),
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 $5.9 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 $389 million (based on the
February 25, 1997 closing 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 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
February 26, 1997 the Company provided approximately $11.9 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 February 26, 1997 these repayments and prepayments totaled
approximately $10.5 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 September 30, 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 February 26, 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 February 26,
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 February 26, 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>
- ----------
(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 February 25, 1997 with respect to the periods
indicated:
High Low
------- -------
1995
First Quarter ....................................... $15 1/4 $13 1/4
Second Quarter ...................................... 15 3/8 14 5/8
Third Quarter ....................................... 16 3/8 14 7/8
Fourth Quarter ...................................... 16 7/8 15 1/2
1996
First Quarter ....................................... 17 3/8 16
Second Quarter ...................................... 17 7/8 16 3/8
Third Quarter ....................................... 18 1/8 16 3/8
Fourth Quarter ...................................... 19 1/4 17 3/4
1997
First Quarter (through February 25, 1997) ........... 20 5/8 18 5/8
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."
December 31, 1996
-----------------------------------
(dollars in thousands)
Adjusted
Actual Pro Forma(1)
Bank Credit Facility ............................ $ 140,000 $ 108,522
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 ............................ 492,175 507,391
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 shares
authorized; 66,888,917 and 89,040,961
shares issued and outstanding and pro
forma ......................................... 669 890
Additional paid-in capital .................... 795,263 1,223,573
Cumulative net income .......................... 306,298 306,298
Dividends ..................................... (394,182) (394,182)
---------- ----------
Total shareholders' equity .................... 708,048 1,136,579
---------- ----------
Total capitalization ............................ $1,200,223 $1,643,970
========== ==========
- ----------
(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
84,888,917, total shareholders' equity will be $1,052,500 and total
capitalization will be $1,404,675.
USE OF PROCEEDS
The net proceeds to the Company from this Offering, assuming an Offering
price per Share of $201/4, are estimated to be approximately $344 million
($396 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 February 26, 1997 the interest rate applicable
to the Bank Credit Facility was 6.3125% 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 $ 3,954 New Hampshire ............ 1 $ 3,689
Arizona ................... 9 62,457 New Jersey ............... 1 13,007
California ................ 26 196,474 New Mexico ............... 2 10,558
Colorado ................. 13 60,217 New York .................. 4 53,400
Connecticut .............. 9 94,244 North Carolina ............ 9 22,710
District of Columbia ...... 3 125,869 Ohio ..................... 5 21,121
Florida ................... 7 147,886 Oklahoma .................. 1 23,792
Georgia ................... 7 20,386 Pennsylvania .............. 2 18,341
Illinois ................. 3 101,453 South Dakota .............. 3 7,589
Iowa ...................... 13 22,828 Texas ..................... 8 31,455
Kansas ................... 10 19,350 Vermont .................. 8 29,767
Louisiana ................. 1 19,358 Virginia .................. 5 81,246
Maryland ................. 5 132,018 Washington ............... 3 25,745
Massachusetts ............. 10 154,353 West Virginia ............ 1 4,689
Michigan ................. 2 9,343 Wisconsin ................. 9 44,063
Missouri ................. 4 13,349 Wyoming .................. 5 18,396
Nebraska ................. 16 16,496 --- -----------
Total properties ......... 206 1,609,603
Hospitality
Properties Trust (83
hotels in 27 states) ...... 100,000
-----------
Total investments ......... $1,709,603
===========
</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
Government 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(R) hotels, 12 Wyndham Garden(R) hotels and 18 Residence
Inn by Marriott(R) 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 February 25, 1997 the
last reported sale price for HPT shares was $31 1/2 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* $1,559, 91% and Mortgages, $150, 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 judgement,
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 February 26, 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
.30 to 1. As of February 26, 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 .17 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>
Government
Current Office
Portfolio Properties Percent of
Year Revenues 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 ..................................... 3,039 -- 3,039 1.5
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 14.1
2006 and thereafter(2) ................... 89,060 19,785 108,845 54.5
-------- ------- -------- ----
Totals .................................. $139,087 $60,569 $199,656 100%
======== ======= ======== ====
</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, 85.0% of the Company's investments and 85.9% 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 Investment % of Total
------------- ------------- ------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Government
--30 office buildings
--1 VA clinic $ 463,490 27.1% $ 62,926 31.5%
Marriott
--14 retirement communities
with 3,932 units 325,521 19.0 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 34.9 73,024 36.6
---------- ---- -------- ----
Total Investment Grade and Other
Public Companies 1,453,700 85.0 171,404 85.9
Other Tenant/Operators
--31 nursing homes
--2 multi-tenant medical office buildings
--9 retirement/assisted living facilities 255,903 15.0 28,252 14.1
---------- ---- -------- ----
Totals $1,709,603 100% $199,656 100%
========== ==== ======== ====
</TABLE>
- ----------
(1) Adjusted Pro forma annual revenues are for the year ended December 31,
1996 and assume all acquisitions described in "Recent Developments"
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 February 26, 1997 of $6.8 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 had 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 21 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:
Name Age Position
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 36 Treasurer and Chief Financial Officer
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.
Number of Shares
Underwriter to be Purchased
- -------------------------------------------- ---------------------
Donaldson, Lufkin & Jenrette Securities
Corporation ....................................
Dean Witter Reynolds Inc. ........................
A.G. Edwards & Sons, Inc. ........................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated ........................
NatWest Securities Limited .......................
PaineWebber Incorporated ........................
Prudential Securities Incorporated ...............
Salomon Brothers Inc .............................
Smith Barney Inc. ................................
----------
Total ............................................ 18,000,000
==========
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 $ per Share. The Underwriters may allow,
and such dealers may re-allow, a concession not in excess of $ 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 2,700,000
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 2,700,000 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.
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
S-20
<PAGE>
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 and 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
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.
S-21
<PAGE>
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 and
February 17, 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.
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 JUNE 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-22
<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 the separate financial statements of the Company and of the
Seller of the Government Office Properties and the unaudited pro forma
financial statements and other data of the Company, all 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. 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 $ 84,202 $ 177,724
Buildings and improvements .................... 912,217 363,603 1,275,820
---------- --------- ----------
1,005,739 447,805 1,453,544
Less accumulated depreciation ................. 76,921 -- 76,921
---------- --------- ----------
928,818 447,805(B) 1,376,623
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 15,606(E) 29,578
---------- --------- ----------
$1,229,522 $ 458,036 $1,687,558
=========== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank credit facility payable .................... $ 140,000 $ (31,478)(F) $ 108,522
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 14,289(H) 32,608
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
shares authorized; 66,888,917 and
89,040,961 shares issued and
outstanding and pro forma ................... 669 221(I) 890
Additional paid-in capital ..................... 795,263 428,310(I) 1,223,573
Cumulative net income ........................... 306,298 -- 306,298
Dividends paid .................................. (394,182) -- (394,182)
---------- --------- ----------
Total shareholders' equity .................. 708,048 428,531 1,136,579
---------- --------- ----------
$1,229,522 $ 458,036 $1,687,558
========== ========= ==========
</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 13,241(L) 35,786
Operating expenses ...................... 3,776 16,770(M) 20,546
Depreciation and amortization ........... 22,106 13,492(N) 35,598
General and administrative .............. 7,055 3,182(O) 10,237
--------- --------- ---------
Total expenses ........................ 55,482 46,685 102,167
--------- --------- ---------
Income before equity income and
extraordinary item ...................... 64,701 34,067 98,768
HPT equity income ......................... 8,860 -- 8,860
Gain on HPT equity transaction ............ 3,603 -- 3,603
--------- --------- ---------
Income before extraordinary item .......... 77,164 34,067 111,231
Extraordinary item (early extinguishment of
debt) ................................... (3,910) -- (3,910)
Net income ................................ 73,254 34,067 107,321
Add interest expense related to convertible
bonds ................................... 4,159 12,477(P) 16,636
--------- --------- ---------
Fully diluted net income .................. $ 77,413 $ 46,544 $ 123,957
========= ========= =========
Funds from operations ..................... $ 99,106 $ 46,955 $ 146,061
========= ========= =========
Fully diluted FFO ......................... $ 103,265 $ 59,432 $ 162,697
========= ========= =========
Average Shares outstanding ................ 66,255 22,785(Q) 89,040
========= ========= =========
Fully diluted average Shares outstanding .. 69,124 32,571(Q) 101,695
========= ========= =========
Per Share data:
Net income ................................ $ 1.11 $ 0.10 $ 1.21
Net income--fully diluted ................. 1.12 0.10 1.22
FFO per Share ............................. 1.50 0.14 1.64
FFO--fully diluted ........................ 1.49 0.11 1.60
</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 payment of costs to
acquire one medical office building in 1997 and the costs to acquire the
Government Office Properties as follows:
Cash paid to retire mortgage debt and
other obligations on the Government
Office Properties ............................. $317,032
Debt assumed by the Company .................... 46,694
4.2 million Shares issued to the Seller ......... 84,079
--------
$447,805
========
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 $22,558 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 $31,206.
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 ($5,856).
F. Represents proposed net borrowings under the Bank Credit Facility as
follows:
Repayment with proceeds from Offering ........ $(140,000)
Drawings to partially fund the Transaction ... 171,478
---------
$ 31,478
=========
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:
Gross proceeds from the Offering (18,000,000 Shares at
$20.25/Share) ............................................... $364,500
Estimated expenses of the Offering ............................ (20,048)
-------
344,452
Value of Transaction Shares (4,152,044 shares at
$20.25/Share) ............................................... 84,079
--------
$428,531
========
Par value of Shares .............................................. $ 221
Additional paid-in capital ...................................... 428,310
========
$428,531
========
F-4
<PAGE>
Health and Retirement Properties Trust
Notes to Unaudited Adjusted Pro Forma Financial Statements-(Continued)
(dollars in thousands, except per share amounts)
Statement of Income Adjustments
J. Rent from Government Office Properties .................. $59,969
Rent from 1996 acquisitions .............................. 20,399
-------
$80,368
=======
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:
1996 acquisitions ................................... $ 4,402
Government Office Properties ........................ 9,090
-------
$13,492
=======
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 1995
<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 or 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
Page
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-21
Incorporation of Certain Information by Reference ................... S-22
Forward Looking Statements .......................................... S-22
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
================================================================================
================================================================================
18,000,000 Shares
HEALTH AND RETIREMENT
PROPERTIES TRUST
Common Shares of
Beneficial Interest
---------------------
PROSPECTUS SUPPLEMENT
---------------------
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 , 1997
================================================================================
