SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 27, 1998
HEALTH AND RETIREMENT PROPERTIES TRUST
(Exact name of registrant as specified in its charter)
Maryland 1-9317 04-6558834
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
400 Centre Street, Newton, MA 02158
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 617-332-3990
<PAGE>
THIS CURRENT REPORT 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. INVESTORS ARE CAUTIONED
NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS WHICH SPEAK ONLY
AS OF THE DATE HEREOF. THE REGISTRANT UNDERTAKES NO OBLIGATION TO PUBLISH
REVISED FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE
DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
Item 5. Other Events
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following information is provided in connection with the financial
statements filed as Item 7 to this Current Report and should be read in
conjunction with the financial statements and notes thereto included elsewhere
herein.
Results of Operations
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Total revenues for the year ended December 31, 1997 increased to $208.9
million from $120.2 million for the year ended December 31, 1996. Rental income
increased by $90.0 million and interest and other income decreased by $1.3
million. Rental income increased because of new real estate investments in 1997,
and partly as a result of the Company's increased investments in "gross leased"
real estate assets as compared to "net leased" assets during the 1997 period as
compared to the 1996 period. As the Company's investment in such "gross leased"
assets increases, the Company anticipates rental income and the corresponding
operating expenses from such leases to increase during subsequent periods.
Interest and other income decreased primarily as a result of prepayments and
repayments of mortgage investments, which was offset, in part, by an increase in
earnings on the Company's short-term investments in the 1997 period compared to
the 1996 period.
Total expenses for the year ended December 31, 1997 increased to $114.5
million from $55.5 million for the year ended December 31, 1996. Operating
expenses increased by $23.0 million as a result of the Company's increased
investment in "gross leased" real estate assets during the 1997 period as
compared to the 1996 period. Interest expense increased by $14.2 million due to
higher borrowings during the 1997 period. Depreciation and amortization, and
general and administrative expenses increased by $17.2 million and $4.6 million,
respectively, primarily as a result of new real estate investments in 1997 and
1996.
Net income increased to $114.0 million, or $1.24 per basic share for the
1997 period, from $73.3 million, or $1.11 per basic share for the 1996 period.
Net income increased primarily as a result of new investments in 1997 and 1996.
In addition, net income increased as a result of a $2.9 million gain on sale of
properties, the recognition of a $9.3 million gain on equity transaction of the
Company's formerly wholly owned subsidiary Hospitality Properties Trust ("HPT")
during the 1997 period compared to a $3.6 million gain in the 1996 period, and
by an extraordinary loss of $1.1 million during the 1997 period compared to a
$3.9 million extraordinary loss during the 1996 period, both resulting from the
early extinguishment of debt. HPT is a real estate investment trust investing
principally in income producing hotel real estate. The Company's investment in
HPT is accounted for using the equity method.
The Company's business goal is to maximize funds from operations ("FFO")
rather than net income. The Company's Board of Trustees considers FFO, among
other factors, when determining dividends to be paid to shareholders. The
Company has adopted the National Association of Real Estate Investment Trust's
("NAREIT") definition of FFO as income before equity in earnings of HPT, gain
(loss) on HPT's equity transaction, gain (loss) on sale of real estate and
extraordinary items, plus depreciation, other non-cash items and the Company's
proportionate share of HPT's FFO. Funds from operations for the year ended
December 31, 1997, were $146.3 million, or $1.59 per basic share, versus $99.1
million, or $1.50 per basic share, in 1996. Funds from operations for 1997
increased $47.2 million, or 47.6%, over the prior year. The increase is the
result of new investments in 1997 and 1996. Dividends declared for the years
ended December 31, 1997 and 1996 were $144.3 million, or $1.46 per basic share,
and $94.3 million, or $1.42 per basic share, respectively. Dividends in excess
of net income constitute a return of capital. For 1997, the return of capital
portion reported was 17.4% of dividends and the long-term capital gain portion
was 1.7% of dividends. Cash flow provided by operating activities and 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, such as changes in assets and liabilities.
1
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HEALTH AND RETIREMENT PROPERTIES TRUST
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Cash flows provided by (used for) operating, investing and financing
activities were $185.7 million, ($815.2) million and $630.0 million,
respectively, for the year ended December 31, 1997 and $98.3 million, ($235.3)
million and $140.2 million, respectively, for the year ended December 31, 1996.
The increases in all three categories are primarily the result of new real
estate investments in 1997.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Total revenues for the year ended December 31, 1996 were $120.2 million, an
increase of $6.9 million over the year ended December 31, 1995. Rental income
increased to $98.0 million from $90.2 million and interest and other income
decreased to $22.1 million from $23.1 million. Rental income increased as a net
result of new real estate investments during 1996, offset by the exclusion of
rental revenue from HPT. During 1995, HPT completed its initial public offering
and the Company's investment in HPT is accounted for using the equity method and
the 1996 period does not include revenue and expenses of HPT. Interest and other
income decreased as a net result of the scheduled and early repayment of
mortgage loans acquired from the Resolution Trust Company in 1992 and 1993. The
Company anticipates that such prepayments will continue and consequently
interest income will decline in the future. This interest income decline was
partially offset in 1996 by short-term investment income on excess cash which
resulted from the Company's issuance of convertible debentures during the fourth
quarter of 1996.
Total expenses for 1996 increased to $55.5 million from $54.7 million in
1995. The increase of $0.8 million is the net result of higher operating,
general and administrative expenses during the 1996 period. Interest expense
declined due to lower borrowings and lower interest rates during 1996 as
compared to 1995. Depreciation expense was essentially unchanged as the net
result of new real estate investments during 1996 which was offset by the HPT
transaction described above. Amortization expense declined due to the write-off
of deferred finance fees in March 1996 and October 1996.
Net income for 1996 increased to $73.3 million, or $1.11 per basic share,
from $64.2 million, or $1.08 per basic share, in 1995. These increases are
primarily the result of net new real estate investments and the recognition of
the gain on the equity transaction of HPT.
Cash flows provided by (used for) operating, investing and financing
activities were $98.3 million, ($235.3) million and $140.2 million, respectively
for the year ended December 31, 1996 and $82.3 million, ($190.3) million and
$68.8 million, respectively, for the year ended December 31, 1995.
Liquidity and Capital Resources
Total assets of the Company increased to $2.1 billion at December 31, 1997
from $1.2 billion as of December 31, 1996. The increase is primarily
attributable to the Company's new real estate investments during 1997.
During 1997, the Company acquired three nursing properties, one retirement
community, 22 medical and other office buildings and 20 medical clinics for an
aggregated amount of $554.8 million and provided debt financing and improvement
funding totaling $4.8 million to its existing properties. These transactions
were funded by borrowing on the Company's revolving credit facility and
available cash. In addition, the Company sold 14 nursing properties for $33.5
million, which resulted in a gain of $2.9 million. During 1997, the Company
received regularly scheduled principal payments and prepayment on real estate
mortgages of approximately $49.5 million.
In February 1997, the Company agreed to acquire 30 office buildings (the
"Government Properties") leased to various agencies of the United States
Government. As of December 31, 1997, the Company had completed the purchase of
29 of the Government Properties for $439.5 million and elected not to acquire
one of the Government Properties under development. The acquisition of the
Government Properties was funded, in part, with the proceeds from the issuance
of the Company's common shares pursuant to a public offering, the issuance of
4,019,429 common shares of the Company in a private placement and the assumption
of $27.6 million of debt. Subsequently, in January 1998, the Company sold one of
the Government Properties for $5.7 million; no gain or loss was recognized on
the sale of this property.
2
<PAGE>
HEALTH AND RETIREMENT PROPERTIES TRUST
Management's Discussion and Analysis of Financial Condition and Results of
Operations
At December 31, 1997, the Company owned 4.0 million, or 10.3%, of the
common shares of beneficial interest of HPT with a carrying value of $111.1
million and a market value of $131.5 million. During December 1997, HPT
completed a public stock offering of 12.0 million common shares of beneficial
interest at a per share price of $33.0625 for total consideration of
approximately $396.8 million. As a result of this transaction, the Company's
ownership percentage in HPT was reduced from 14.9% to 10.3% and the Company
realized a gain of $9.3 million. Although the Company did not sell any shares,
pursuant to the Company's accounting policy, gains and losses on the issuance of
common shares of beneficial interest by HPT are recognized in the Company's
income statement. These amounts are not included in the Company's calculation of
FFO.
In March 1997, the Company issued 27,025,000 common shares and received net
proceeds of $483.2 million. The proceeds were used to acquire the Government
Properties.
In March 1997, the Company extended and modified its $250.0 million
unsecured revolving bank credit facility. Subsequently, in July 1997, the
Company expanded the credit facility to $450.0 million. The revolving bank
credit facility matures in 2001 and bears interest at LIBOR plus a premium.
During July 1997, the Company issued senior unsecured Remarketed Reset
Notes (the "Notes") totaling $200.0 million. The Notes are due in 2007 and the
initial interest rate is LIBOR plus a premium, reset quarterly. In July 1998,
these Notes may be prepaid without a premium, or the interest rate and interest
period on these Notes may be fixed for the balance of the term or a lesser
period at the Company's option and the Notes will be remarketed. Proceeds from
the issuance of the Notes were used to prepay $125.0 million of the Company's
Floating Rate Senior Notes, Series B, due 1999 and $75.0 million outstanding
under the Company's revolving bank credit facility. In connection with this
refinancing, the Company recognized an extraordinary loss of $1.1 million from
the write-off of unamortized deferred financing costs.
In December 1997, the Company issued unsecured Senior Notes totaling $150.0
million. The notes bear interest at 6.75% and mature in 2002. Net proceeds from
the notes were used for general business purposes and to repay $140.0 million
then outstanding under the Company's revolving bank credit facility.
At December 31, 1997, the Company had $22.4 million of cash and cash
equivalents and had drawn $200.0 million of the $450.0 million revolving bank
credit facility. In addition, in May 1997, the Company filed a $1.0 billion
Shelf Registration Statement (the "Shelf") that has been declared effective by
the Securities and Exchange Commission. At December 31, 1997, $800.0 million was
available to be drawn on the Shelf.
As of December 31, 1997, the Company had commitments to provide improvement
financing to existing properties and to purchase ten medical and other office
buildings totaling approximately $92.1 million. The Company intends to fund
these commitments with a combination of cash on hand, amounts available under
its existing credit facility, proceeds of mortgage prepayments, if any, and/or
proceeds of other financings such as the possible issuance of additional
securities. In January and February 1998, the Company acquired ten medical and
other office buildings for $81.6 million with available cash and by borrowing on
the Company's revolving bank credit facility.
During February 1998, the Company issued 5,495,776 common shares, issued
additional Notes totaling $50.0 million and issued 6.7% unsecured Senior Notes
due 2005 totaling $100.0 million. Net proceeds of $253.3 million were used to
repay amounts outstanding under the Company's revolving credit facility and for
general business purposes.
The Company continues to seek new investments to expand and diversify its
portfolio of real estate. The Company believes that the transactions described
above will improve the security of its future funds from operations, cash
available for distribution, and dividends. As of December 31, 1997, the
Company's debt as a percentage of total book capitalization was approximately
38%. There can be no assurances that debt or equity financing will be available
to fund the Company's existing commitments or its future growth, but the Company
expects such financing will be available.
3
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HEALTH AND RETIREMENT PROPERTIES TRUST
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Impact of Inflation
Management believes that the Company may not be adversely affected by
modest inflation. In the real estate market, inflation tends to increase the
value of the Company's underlying real estate which may be realized at the end
of fixed rent terms. In the health care and hotel industries, inflation usually
increases the lessees' revenues, thereby increasing the Company's additional
rent or interest.
Certain Considerations
The discussion and analysis of the Company's financial condition and
results of operations requires the Company to make certain estimates and
assumptions and contains certain statements of the Company's beliefs, intent or
expectation concerning projections, plans, future events and performance. The
estimates, assumptions and statements, such as those relating to the Company's
ability to expand its portfolio, performance of its assets, the ability to pay
dividends from FFO, its tax status as a "real estate investment trust" and the
ability to access capital markets depends upon various factors over which the
Company and/or the Company's lessees have or may have limited or no control.
Those factors include, without limitation, the status of the economy, capital
markets (including prevailing interest rates) compliance with and changes to
regulations within the health care industry, competition, changes in federal,
state and local legislation and other factors. The Company cannot predict the
impact of these factors, if any. However, these factors could cause the
Company's actual results for subsequent periods to be different from those
stated, estimated or assumed in this discussion and analysis of the Company's
financial condition and results of operations. The Company believes that its
estimates and assumptions are reasonable and prudent at this time.
The Company's Year 2000 initiative is being managed by the Company to
minimize any adverse effect on the Company's business operations and is
scheduled to be completed in 1999. While the Company believes its planning
efforts are adequate to address its Year 2000 concerns, there can be no
guarantee that the systems of other companies on which the Company's systems and
operations rely will be converted on a timely basis and will not have a material
effect on the Company. The cost of the Year 2000 initiatives is not expected to
be material to the Company's results of operations or financial position.
4
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HEALTH AND RETIREMENT PROPERTIES TRUST
<TABLE>
<CAPTION>
Item 7. Financial Statements and Exhibits
(a) Financial Statements
<S> <C>
Report of Ernst & Young LLP, Independent Auditors...............................................F-1
Report of Arthur Andersen LLP, Independent Public Accountants...................................F-2
Consolidated Balance Sheets for the years ended December 31, 1997 and 1996......................F-3
Consolidated Statements of Income for each of the three years in the
period ended December 31, 1997..............................................................F-4
Consolidated Statements of Shareholders_ Equity for each of the three years in the
period ended December 31, 1997..............................................................F-5
Consolidated Statements of Cash Flows for each of the three years in the period
ended December 31, 1997.....................................................................F-6
Notes to Consolidated Financial Statements......................................................F-8
</TABLE>
(c) Exhibits
10.1 Master Management Agreement by and between Health and
Retirement Properties Trust and REIT Management and Research,
Inc., dated as of January 1, 1998
10.2 Parking Operation Management Agreement by and between HUB
Properties Trust, a subsidiary of Health and Retirement
Properties Trust, and REIT Management and Research, Inc.,
dated as of January 1, 1998
23. Consent of Ernst & Young LLP
27. Financial Data Schedule
5
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Trustees and Shareholders of Health and Retirement Properties Trust
We have audited the accompanying consolidated balance sheets of Health and
Retirement Properties Trust as of December 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The financial statements of Hospitality Properties Trust (a real
estate investment trust in which the Company has a 10.3% and 14.9% interest as
of December 31, 1997 and 1996, respectively) have been audited by other auditors
whose report has been furnished to us; insofar as our opinion on the
consolidated financial statements relates to data included for Hospitality
Properties Trust, it is based solely on their report.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Health and Retirement Properties
Trust at December 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Boston, Massachusetts
February 9, 1998
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Trustees and Shareholders of
Hospitality Properties Trust
We have audited the consolidated balance sheet of Hospitality Properties
Trust (the "Company") as of December 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity and cash flows (not
separately presented herein) for the years ended December 31, 1997, 1996 and the
period from February 7, 1995 (inception) to December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Hospitality
Properties Trust as of December 31, 1997 and 1996 and the results of its
operations and its cash flows for the years ended December 31, 1997 and 1996,
and for the period from February 7, 1995 (inception) to December 31, 1995, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Washington, D.C.
January 16, 1998
F-2
<PAGE>
<TABLE>
<CAPTION>
HEALTH AND RETIREMENT PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
December 31,
-------------------------------------
1997 1996
-------------------------------------
<S> <C> <C>
ASSETS
Real estate properties, at cost (including properties leased to
affiliates with a cost of $112,075 and $109,843, respectively):
Land $ 256,582 $ 93,522
Buildings and improvements 1,712,441 912,217
----------- -----------
1,969,023 1,005,739
Less accumulated depreciation 111,669 76,921
----------- -----------
1,857,354 928,818
Real estate mortgages and notes, net (including note from an affiliate
of $2,365) 104,288 150,205
Investment in Hospitality Properties Trust 111,134 103,062
Cash and cash equivalents 22,355 21,853
Interest and rents receivable 20,455 11,612
Deferred interest and finance costs, net, and other assets 20,377 13,972
----------- -----------
$ 2,135,963 $ 1,229,522
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank notes payable $ 200,000 $ 140,000
Senior notes payable, net 349,900 124,385
Mortgage notes payable 26,329 --
Convertible subordinated debentures 211,650 227,790
Accounts payable and accrued expenses 27,865 10,711
Deferred rents 30,089 7,608
Security deposits 18,767 8,387
Due to affiliates 5,103 2,593
Commitments and contingencies -- --
Shareholders' equity:
Preferred shares of beneficial interest, $.01 par value:
50,000,000 shares authorized, none issued -- --
Common shares of beneficial interest, $.01 par value:
125,000,000 shares and 100,000,000 shares authorized,
respectively, 98,853,170 shares and 66,888,917 shares
issued and outstanding, respectively 988 669
Additional paidin capital 1,371,236 795,263
Cumulative net income 420,298 306,298
Dividends (526,262) (394,182)
----------- -----------
Total shareholders' equity 1,266,260 708,048
----------- -----------
$ 2,135,963 $ 1,229,522
=========== ===========
</TABLE>
See accompanying notes
F-3
<PAGE>
<TABLE>
<CAPTION>
HEALTH AND RETIREMENT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31,
-----------------------------------
1997 1996 1995
--------- ---------- ---------
<S> <C> <C> <C>
Revenues:
Rental income $ 188,000 $ 98,039 $ 90,246
Interest and other income 20,863 22,144 23,076
--------- --------- ---------
Total revenues 208,863 120,183 113,322
--------- --------- ---------
Expenses:
Operating expenses 26,765 3,776 644
Interest 36,766 22,545 24,274
Depreciation and amortization 39,330 22,106 22,849
General and administrative 11,670 7,055 6,914
--------- --------- ---------
Total expenses 114,531 55,482 54,681
--------- --------- ---------
Income before equity in earnings of Hospitality Properties Trust,
gain on sale of properties and extraordinary items 94,332 64,701 58,641
Equity in earnings of Hospitality Properties Trust 8,590 8,860 3,119
Gain on equity transaction of Hospitality Properties Trust 9,282 3,603 --
--------- --------- ---------
Income before gain on sale of properties and
extraordinary items 112,204 77,164 61,760
Gain on sale of properties, net 2,898 -- 2,476
--------- --------- ---------
Income before extraordinary items 115,102 77,164 64,236
Extraordinary items - early extinguishment of debt (1,102) (3,910) --
--------- --------- ---------
Net income $ 114,000 $ 73,254 $ 64,236
========= ========= =========
Weighted average shares outstanding 92,168 66,255 59,227
========= ========= =========
Basic and diluted earnings per common share:
Income before gain on sale of properties and
extraordinary items $1.22 $1.16 $1.04
===== ===== =====
Income before extraordinary items $1.25 $1.16 $1.08
===== ===== =====
Net income $1.24 $1.11 $1.08
===== ===== =====
</TABLE>
See accompanying notes
F-4
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<TABLE>
<CAPTION>
HEALTH AND RETIREMENT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
Additional Cumulative
Number of Common Paid-in Net
Shares Shares Capital Income Dividends Total
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 57,385,000 $ 574 $ 652,989 $ 168,808 $ (220,332) $ 602,039
Issuance of shares to
acquire real estate 1,777,766 18 24,426 -- -- 24,444
Issuance of shares 6,500,000 65 97,879 -- -- 97,944
Stock grants 27,400 -- 394 -- -- 394
Net income -- -- -- 64,236 -- 64,236
Dividends -- -- -- -- (103,465) (103,465)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1995 65,690,166 657 775,688 233,044 (323,797) 685,592
Issuance of shares 475,000 5 6,985 -- -- 6,990
Conversion of convertible
subordinated debentures 679,441 7 11,860 -- -- 11,867
Stock grants 44,310 -- 730 -- -- 730
Net income -- -- -- 73,254 -- 73,254
Dividends -- -- -- -- (70,385) (70,385)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1996 66,888,917 669 795,263 306,298 (394,182) 708,048
Issuance of shares to
acquire real estate 3,985,028 40 76,521 -- -- 76,561
Issuance of shares 27,025,000 270 482,883 -- -- 483,153
Conversion of convertible
subordinated debentures 910,379 9 15,756 -- -- 15,765
Stock grants 43,846 -- 813 -- -- 813
Net income -- -- -- 114,000 -- 114,000
Dividends -- -- -- -- (132,080) (132,080)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 98,853,170 $ 988 $ 1,371,236 $ 420,298 $ (526,262) $ 1,266,260
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes
F-5
<PAGE>
<TABLE>
<CAPTION>
HEALTH AND RETIREMENT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Year Ended December 31,
-----------------------------------
1997 1996 1995
-----------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 114,000 $ 73,254 $ 64,236
Adjustments to reconcile net income to cash
provided by operating activities:
Gain on sale of properties (2,898) -- (2,476)
Equity in earnings of Hospitality Properties Trust (8,590) (8,860) (3,119)
Gain on equity transaction of Hospitality Properties Trust (9,282) (3,603) --
Dividends from Hospitality Properties Trust 9,800 9,360 960
Extraordinary items 1,102 3,910 --
Depreciation 37,619 21,265 21,048
Amortization 1,711 841 1,801
Amortization of deferred interest costs 699 1,444 1,529
Change in assets and liabilities:
Increase in interest and rents receivable and other assets (5,273) (7,839) (1,639)
Increase (decrease) in accounts payable and
accrued expenses 10,832 6,033 (11,427)
Increase in deferred rents 22,481 689 6,919
Increase in security deposits 10,380 1,001 3,586
Increase in due to affiliates 3,119 823 843
--------- --------- ---------
Cash provided by operating activities 185,700 98,318 82,261
--------- --------- ---------
Cash flows from investing activities:
Real estate acquisitions and improvements (548,465) (225,428) (267,470)
Acquisition of business, less cash acquired (337,400) -- --
Investments in mortgage loans (520) (17,191) (24,375)
Proceeds from repayment of notes and mortgage loans, net of discounts 48,245 8,091 38,107
Proceeds from sale of real estate 22,898 -- 5,000
Proceeds from Hospitality Properties Trust
initial public offering -- -- 60,000
Loans to affiliate -- (800) (1,565)
--------- --------- ---------
Cash used for investing activities (815,242) (235,328) (190,303)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common shares 483,153 6,990 97,944
Proceeds from borrowings 784,900 481,000 219,000
Payments on borrowings (501,261) (247,070) (166,000)
Deferred finance costs incurred (4,668) (7,320) (1,666)
Dividends paid (132,080) (93,377) (80,473)
--------- --------- ---------
Cash provided by financing activities 630,044 140,223 68,805
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 502 3,213 (39,237)
Cash and cash equivalents at beginning of period 21,853 18,640 57,877
--------- --------- ---------
Cash and cash equivalents at end of period $ 22,355 $ 21,853 $ 18,640
========= ========= =========
Supplemental cash flow information:
Interest paid $ 34,425 $ 19,662 $ 22,783
========= ========= =========
</TABLE>
See accompanying notes
F-6
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<TABLE>
<CAPTION>
HEALTH AND RETIREMENT PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Year Ended December 31,
----------------------------------------------------
1997 1996 1995
----------------------------------------------------
<S> <C> <C> <C>
Non-cash investing activities:
Real estate acquisitions $ (11,616) $ -- $ (24,444)
Exchange of real estate 11,616 -- --
Acquisition of business, less cash acquired:
Real estate acquisitions $ 439,498 $ -- $ --
Working capital, other than cash 2,051 -- --
Liabilities assumed (27,588) -- --
Net cash used to acquire business (337,400) -- --
----------------------------------------------------
Issuance of shares $ 76,561 $ -- $ --
====================================================
Sale of real estate -- -- 19,500
Investment in real estate mortgages -- -- (19,500)
Investment in Hospitality Properties Trust -- -- (100,000)
Non-cash financing activities:
Issuance of common shares $ 16,578 $ 12,597 $ 24,838
Conversion of convertible subordinated debentures, net (15,765) (11,867) --
</TABLE>
See accompanying notes
F-7
<PAGE>
HEALTH AND RETIREMENT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization
Health and Retirement Properties Trust, a Maryland real estate investment
trust (the "Company"), was organized on October 9, 1986. As of December 31,
1997, the Company had investments in 217 properties located in 33 states and the
District of Columbia. The properties include 92 long-term care facilities, 58
medical office and other office buildings and clinics, 29 government office
buildings, 26 retirement and assisted living communities and 12 nursing homes
with subacute services. In addition, at December 31, 1997, the Company had a
10.3% equity investment in Hospitality Properties Trust ("HPT"). At December 31,
1997, HPT owned 119 hotels in 30 states.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation. The consolidated financial statements include the
Company's investment in 100% owned subsidiaries. The Company's investment in 50%
or less owned companies is accounted for using the equity method. All
inter-company transactions have been eliminated. The Company uses the income
statement method to account for issuance of common shares of beneficial interest
by HPT. Under this method, gains and losses reflecting changes in the value of
the Company's ownership stake on issuance of stock by HPT are recognized in the
Company's income statement.
Real Estate Property and Mortgage Investments. Real estate properties and
mortgages are recorded at cost. Depreciation on real estate investments is
provided for on a straight-line basis over the estimated useful lives ranging up
to 40 years. Impairment losses on investments are recognized where indicators of
impairment are present and the undiscounted cash flow (net realizable value)
estimated to be generated by the Company's investments are less than the
carrying amount of such investments. The determination of net realizable value
includes consideration of many factors including income to be earned from the
investment, holding costs (exclusive of interest), estimated selling prices, and
prevailing economic and market conditions.
Cash and Cash Equivalents. Cash, over-night repurchase agreements and short
term investments with maturities of three months or less at the date of purchase
are carried at cost plus accrued interest.
Deferred Interest and Finance Costs. Costs incurred to secure certain
borrowings are capitalized and amortized over the terms of the respective loans.
Accumulated amortization at December 31, 1997 and 1996 was $1.8 million and $1.2
million, respectively.
Revenue Recognition. Rental income from operating leases is recognized on a
straight line basis over the life of the lease agreements. Interest income is
recognized as earned over the terms of the real estate mortgages. Additional
rent and interest revenue is recognized as earned.
Earnings Per Common Share. Basic earnings per common share is computed
using the weighted average number of shares outstanding during the period. At
December 31, 1997 and 1996, $211.7 million and $227.8 million of convertible
securities were convertible into 11.8 million and 12.7 million shares of the
Company, respectively. Basic earnings per share equals diluted earnings per
share as the effect of these convertible securities is anti-dilutive to diluted
earnings per share. Supplemental income per share for the years ended December
31, 1997, and 1995 was $1.25 and $1.11, respectively, based on the assumption
that the issuance of shares in the Company's public offerings during 1997 and
1995, and the related repayment of outstanding bank borrowings, took place at
the beginning of each year.
Reclassifications. Certain reclassifications have been made to the prior
years' financial statements to conform with the current year's presentation.
Federal Income Taxes. The Company is a real estate investment trust under
the Internal Revenue Code of 1986, as amended. Accordingly, the Company expects
not to be subject to federal income taxes provided it distributes its taxable
income and meets certain other requirements for qualifying as a real estate
investment trust.
Use of Estimates. Preparation of these financial statements in conformity
with generally accepted accounting principles requires management to make
certain estimates and assumptions that may affect the amounts reported in these
financial statements and related notes. The actual results could differ from
these estimates.
F-8
<PAGE>
HEALTH AND RETIREMENT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
New Accounting Pronouncements. The Financial Accounting Standards Board has
issued Financial Accounting Standards Board Statement No. 128, "Earnings Per
Share" ("FAS 128"), Statement No. 129 "Disclosure of Information about Capital
Structure" ("FAS 129"), Statement No. 130, "Reporting Comprehensive Income"
("FAS 130") and Statement No. 131 "Disclosures About Segments of an Enterprise
and Related Information" ("FAS 131"). FAS 128 and FAS 129 were adopted for the
Company's 1997 financial statements. The adoption of each of these statements
had no impact on the Company's financial statements. FAS 130 and FAS 131 must be
adopted for the Company's 1998 financial statements. The Company anticipates
that FAS 130 and FAS 131 will have no impact on the Company's financial
condition or results of operations.
Note 3. Real Estate Properties
In February 1997, the Company agreed to acquire 30 office buildings (the
"Government Properties") leased to various agencies of the United States
Government through the acquisition of Government Properties Investors, Inc.
("GPI"). The acquisition was accounted for as a purchase and the net assets and
results of operations have been included in the consolidated financial
statements since the date of acquisition. As of December 31, 1997, the Company
completed the purchase of 29 of the Government Properties for approximately
$439.5 million and elected not to acquire one of the Government Properties. The
acquisition of the Government Properties was funded, in part, with the proceeds
from the issuance of the Company's common shares pursuant to a public offering,
the issuance of 4,019,429 common shares of the Company in a private placement
and the assumption of $27.6 million of debt.
In September 1997, the Company sold 14 nursing properties for $33.5 million
and purchased three nursing properties which were mortgage financed by the
Company for $15.7 million. In connection with the sale of the nursing
properties, the company recognized a gain of $2.9 million.
Also during the year ended December 31, 1997, the Company acquired one
retirement community, 22 medical and other office buildings and 20 medical
clinics for an aggregate amount of approximately $539.1 million in 13 separate
transactions. In addition, the Company funded improvements to its existing
properties of approximately $4.3 million.
In January and February 1998, the Company acquired seven medical and other
office buildings for $71.6 million. In addition, the Company sold one of the
Government Properties for $5.7 million. No gain or loss was recognized on the
sale of this property.
The Company's real estate properties are leased on a gross lease, modified
gross lease or triple net lease basis, pursuant to noncancellable, fixed term
operating leases expiring from 1998 to 2022. Generally, the Company's triple net
leases to a single tenant are cross-collateralized, cross-defaulted and
cross-guaranteed and generally provide for renewal terms at existing rates
followed by several market rate renewal terms. The triple net leases generally
require the lessee to provide all property management services. The Company's
gross leases and modified gross leases require the Company to provide certain
property management services. The Government Properties and certain medical and
other office properties owned by the Company are managed by M&P Partners Limited
Partnership ("M&P"), an affiliate of the Company.
The future minimum lease payments to be received by the Company during the
current terms of the leases as of December 31, 1997, are approximately $223.6
million in 1998, $216.5 million in 1999, $208.8 million in 2000, $199.1 million
in 2001, $185.4 million in 2002 and $1.4 billion thereafter.
Note 4. Investment in Hospitality Properties Trust
At December 31, 1997, the Company owned 4,000,000 common shares of
beneficial interest of HPT with a carrying value of $111.1 million and a market
value, based on quoted market prices, of $131.5 million. HPT is a real estate
investment trust which invests principally in income producing hotel real
estate. The Company's percentage of ownership of HPT as of December 31, 1997 was
10.3%. During December 1997, HPT completed a public stock offering of common
F-9
<PAGE>
HEALTH AND RETIREMENT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
shares. As a result of this transaction, the Company's ownership percentage in
HPT was reduced from 14.9% to 10.3% in 1997 and the Company realized a gain of
$9.3 million. Although the Company did not sell any shares, pursuant to the
Company's accounting policy, gains and losses on the issuance of common shares
of beneficial interest by HPT are recognized in the Company's income statement.
Summarized financial data of HPT is as follow (dollars in thousands, except per
share amounts):
<TABLE>
<CAPTION>
February 7, 1995
(inception) to
December 31, Year Ended December 31, December 31,
----------------------------- --------------------------
1997 1996 1997 1996 1995
----------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real estate
properties, net $1,207,868 $816,469 Revenues $114,132 $ 82,629 $ 23,642
Other assets, net 105,388 55,134 Expenses 54,979 30,965 12,293
-------------------------- ----------------------------------------
$1,313,256 $871,603 Net income $ 59,153 $ 51,664 $ 11,349
========================== ========================================
Security deposits $ 146,662 $ 81,360 Average shares 27,530 23,170 4,515
========================================
Other liabilities 158,701 145,035 Net income per share $2.15 $2.23 $2.51
========================================
Shareholders'
equity 1,007,893 645,208
--------------------------
$1,313,256 $871,603
==========================
</TABLE>
Note 5. Real Estate Mortgages and Notes Receivable, Net
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
(dollars in thousands)
----------------------------
<S> <C> <C>
Mortgage notes receivable, net of discounts of $209 and
$1,574, respectively, and net of reserves of $927 and
$1,743, respectively, due February 1998 through
December 2016 $ 40,301 $ 58,750
Mortgage notes receivable due December 2010 19,185 19,358
Mortgage notes receivable, repaid in 1997 -- 15,444
Mortgage notes receivable due December 2002 12,240 12,309
Mortgage notes receivable due January 2013 11,466 11,500
Mortgage notes receivable, repaid in January 1998 11,472 11,500
Mortgage note receivable, repaid in 1997 -- 10,000
Mortgage notes receivable due December 2016 7,063 8,634
Other collateralized notes receivable due January 1999 196 345
Loan to an affiliate due June 1998 2,365 2,365
-------- --------
$104,288 $150,205
======== ========
</TABLE>
During 1997, the Company received regularly scheduled principal payments of
$1.2 million and prepayments of mortgages secured by 19 nursing facilities of
$48.3 million. The Company also provided improvement financing for existing
mortgaged properties of $0.5 million.
At December 31, 1997, the interest rates on the mortgages and notes
receivable ranged from 8.02% to 13.75% per annum.
In January and February 1998, the Company received $20.1 million from the
repayment of mortgage loans secured by three retirement facilities and two
nursing facilities.
F-10
<PAGE>
HEALTH AND RETIREMENT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Shareholders' Equity
During 1997, the Company issued 27,025,000 common shares in a public
offering, raising net proceeds of approximately $483.2 million, issued 3,985,028
common shares in a private placement for the purchase of real estate, issued
910,379 common shares in exchange for the conversion of $16.1 million of its
convertible subordinated debentures due 2003 and issued 32,846 common shares to
HRPT Advisors, Inc., (the "Advisor") an affiliate, as the incentive fee earned
for the year ended December 31, 1996. In January 1998, the Company issued 34,401
common shares in connection with the purchase of real estate.
In January 1998, the Company declared a dividend of $.37 to be distributed
on February 20, 1998. Dividends per share paid by the Company for 1997, 1996 and
1995 were $1.45, $1.41 and $1.37, respectively.
The Company adopted a Shareholders Rights Plan ("Rights"). Each Right
entitles the holder to purchase or to receive securities or other assets of the
Company, upon the occurrence of certain events. The Rights expire on October 17,
2004 and are redeemable at the Company's option at any time.
The Company has reserved 1,000,000 shares of the Company's common shares
under the terms of the 1992 Incentive Share Award Plan (the "Award Plan").
During 1997, 1996 and 1995, 9,500, 7,250 and 8,500 shares, respectively, were
granted to officers of the Company and certain employees of the Advisor. In
addition, the three independent Trustees, as part of their annual fee, are each
granted 500 common shares annually. The shares granted to the Trustees vest
immediately. The shares granted to the officers and certain employees of the
Advisor vest over a three year period. At December 31, 1997, 856,944 shares of
the Company's common shares remain reserved for issuance under the Award Plan.
Note 7. Commitments and Contingencies
At December 31, 1997, the Company had total commitments aggregating $92.1
million to fund or finance improvements to certain properties leased or
mortgaged by the Company and to purchase ten medical and other office buildings.
The medical and other office buildings were purchased for $71.6 million in
January and February 1998.
The Company is involved in litigation with a former tenant. The amounts
claimed against the Company are material. The Company intends to defend itself
and to pursue its claims and rights against the former tenant. The outcome of
this pending litigation cannot be predicted.
Lessee's and mortgagors' of the Company's long-term care facilities and
nursing facilities are dependent upon compliance with regulations within the
health care industry. Future changes to these regulations may affect the health
care industry, the Company's lessees and mortgagors and, as a result, the
Company.
Note 8. Transactions with Affiliates
As of January 1, 1998, the Company entered into an agreement with REIT
Management and Research, Inc. ("RMR"), an affiliate of the Company, and the
Advisor. RMR provides investment, management, property management services for
some of the recently acquired Government Properties and medical and other office
buildings and administrative services to the Company. During the three years
ended December 31, 1997, such services were provided by the Advisor and M&P on
similar terms. RMR is owned by Gerard M. Martin and Barry M. Portnoy, who also
serve as Managing Trustees of the Company. RMR is compensated at an annual rate
equal to .7% of the Company's real estate investments up to $250.0 million and
.5% of such investments thereafter plus property management fees equal to three
percent of gross rents from the managed properties. RMR is also entitled to an
incentive fee comprised of restricted shares of the Company's common stock based
on a formula. Incentive fees paid to the Advisor for the years ended December
31, 1997, 1996 and 1995 were $1.0 million, $0.6 million and $0.6 million, which
represent approximately 52,316, 32,846 and 35,560 common shares, respectively.
At December 31, 1997, the Advisor owned 1,082,056 common shares.
F-11
<PAGE>
HEALTH AND RETIREMENT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Messrs. Martin and Portnoy are principal shareholders of Connecticut
Subacute Corporation ("CSC"), Connecticut Subacute Corporation II, New Hampshire
Subacute Corporation and Vermont Subacute Corporation (collectively the
"Subacute Entities"). The Subacute Entities are lessees of the Company. The
Company has extended a $4.0 million line of credit to CSC. At December 31, 1997
and 1996, there was $2.4 million outstanding under this agreement. The lease and
mortgage transactions with the Subacute Entities are based on market terms and
are generally similar to the Company's lease and mortgage agreements with
unaffiliated companies. The former president of the Company is the president of
the Subacute Entities.
Amounts resulting from transactions with affiliates included in the
accompanying statements of income, shareholders' equity and cash flows are as
follows:
Years Ended December 31,
-------------------------------
1997 1996 1995
(dollars in thousands)
-------------------------------
Investment advisory fees earned by the Advisor $ 8,620 $ 5,349 $ 5,763
Dividends paid to the Advisor 1,557 1,467 1,383
Rent and interest income from Subacute Entities 13,616 12,981 12,015
Management fees earned by M&P 2,382 371 56
Note 9. Indebtedness
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
(dollars in thousands)
---------------------------
<S> <C> <C>
$450,000 unsecured revolving bank credit facility, due March 2001, at
LIBOR plus a premium $200,000 $140,000
Senior Notes, Series B, repaid in 1997 -- 125,000
Senior Notes, due 2002 at 6.75% 150,000 --
Remarketed Reset Notes, due 2007 at LIBOR plus 0.45% 200,000 --
Mortgage Notes Payable, due 2008 at 8.00% 13,958 --
Mortgage Notes Payable, due 2009 at 7.66% 12,371 --
Convertible Subordinated Debentures, due 2003 at 7.50% 171,650 187,790
Convertible Subordinated Debentures, due 2001 at 7.25% 40,000 40,000
---------------------------
787,979 492,790
Less unamortized discounts (100) (615)
---------------------------
$787,879 $492,175
===========================
</TABLE>
In March 1997, the Company extended and modified its $250.0 million
unsecured revolving bank credit facility. Subsequently, in July 1997, the
Company expanded the credit facility to $450.0 million. The credit facility
matures in 2001 and bears interest at LIBOR plus a premium. The rate was 6.8% at
December 31, 1997.
During July 1997, the Company issued senior unsecured Remarketed Reset Notes
totaling $200.0 million. The notes are due in 2007 and the initial interest rate
is LIBOR plus a premium. The rate was 6.2% at December 31, 1997. Proceeds from
F-12
<PAGE>
HEALTH AND RETIREMENT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the issuance of the notes were used to prepay $125.0 million of the Company's
Floating Rate Senior Notes, Series B, due 1999 and approximately $75.0 million
outstanding under the Company's bank credit facility. In connection with this
refinancing, the Company recognized an extraordinary loss of $1.1 million from
the early extinguishment of debt as a result of the write-off of unamortized
issuance costs associated with the prepaid debt.
In December 1997, the Company issued unsecured Senior Notes totaling $150.0
million, at a discount (.067%). The notes bear interest at 6.75% and mature in
2002. Net proceeds from the notes were used to repay $140.0 million then
outstanding under the Company's bank credit facility and for general business
purposes.
During 1997, approximately $16.1 million of the Convertible Subordinated
Debentures (the "Debentures") due 2003 had been converted into 910,379 common
shares of the Company. The Debentures are callable in October 1999 and are
convertible at any time into common shares of the Company at $18 per share.
During January 1998, approximately $.8 million of the Debentures due 2003 were
converted into 31,387 common shares of the Company.
At December 31, 1997, three properties with an aggregate net book value of
$41.5 million were secured by mortgages due in 2008 and 2009.
The required principal payments due during the next five years are $1.5
million in 1998, $1.7 million in 1999, $1.8 million in 2000, $241.9 million in
2001, $152.1 million in 2002 and $389.0 million thereafter.
Note 10. Fair Value of Financial Instruments
The Company's financial instruments include cash and cash equivalents,
mortgage notes receivable, rents receivable, an equity investment, senior notes,
mortgage notes payable, convertible debentures, accounts payable and other
accrued expenses, letter of credit and security deposits. Except as follows, the
fair values of the financial instruments were not materially different from
their carrying values at December 31, 1997:
Carrying Amount Fair Value
(dollars in thousands)
--------------------------------
Real estate mortgages and notes $104,288 $110,140
Investment in HPT 111,134 131,500
Senior notes, mortgage notes payable
and convertible debentures 587,879 591,190
Commitments -- 92,096
Letter of credit -- 1,653
The fair values of the real estate mortgages, senior notes, mortgage notes
payable and convertible debentures are based on estimates using discounted cash
flow analysis and currently prevailing rates. The fair value of the investment
in HPT is based on the quoted per share price of $32.875 at December 31, 1997.
The fair value of the commitments and letter of credit represents the actual
amounts committed.
F-13
<PAGE>
HEALTH AND RETIREMENT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Concentration of Credit Risk
The Company's assets are primarily invested in income producing real estate
located throughout the United States. The Company's significant lessees,
mortgagees and equity investment are as follows:
<TABLE>
<CAPTION>
Equity Investment, Notes,
Mortgages and Real Estate Equity Earnings, Rent and
Properties, Net Mortgage Interest Revenue
----------------------------- -----------------------------
December 31, 1997 Year Ended December 31, 1997
(dollars in thousands) (dollars in thousands)
----------------------------- -----------------------------
Amount % of Total Amount % of Total
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
United States Government $ 433,223 21% $ 43,388 20%
Marriott International, Inc. 299,893 15 30,365 14
Integrated Health Services, Inc. 172,834 8 27,041 13
Other 1,166,826 56 112,281 53
----------------------------- -----------------------------
$2,072,776 100% $213,075 100%
============================= =============================
<CAPTION>
Equity Investment, Notes,
Mortgages and Real Estate Equity Earnings, Rent and
Properties, Net Mortgage Interest Revenue
----------------------------- -----------------------------
December 31, 1997 Year Ended December 31, 1997
(dollars in thousands) (dollars in thousands)
----------------------------- -----------------------------
Amount % of Total Amount % of Total
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Marriott International, Inc. $ 307,219 26% $ 30,524 24%
Horizon/CMS Healthcare Corporation 114,008 10 16,180 13
GranCare, Inc. 87,184 7 15,491 13
Other 673,674 57 63,047 50
----------------------------- -----------------------------
$1,182,085 100% $125,242 100%
============================= =============================
</TABLE>
F-14
<PAGE>
HEALTH AND RETIREMENT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Selected Quarterly Financial Data (Unaudited)
The following is a summary of the unaudited quarterly results of operations of
the Company for 1997 and 1996. The amounts are in thousands except for per share
amounts.
<TABLE>
<CAPTION>
1997
-----------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 35,884 $ 52,507 $ 57,304 $ 63,168
Income before equity in earnings of HPT, gain on equity
transaction of HPT, gain on sale of properties and
extraordinary items 17,143 25,669 26,186 25,334
Equity in earnings and gain on equity transaction of HPT 2,256 2,189 2,238 11,189
Income before gain on sale of properties and
extraordinary items 19,399 27,858 28,424 36,523
Gain on sale of properties -- -- 2,898 --
Income before extraordinary items 19,399 27,858 31,322 36,523
Extraordinary items - early extinguishment of debt -- -- (1,102) --
Net income 19,399 27,858 30,220 36,523
Per share data:
Income before equity in earnings of HPT, gain on equity
transaction of HPT, gain on sale of properties and
extraordinary items .24 .26 .26 .26
Income before gain on sale of properties and
extraordinary items .27 .28 .29 .37
Income before extraordinary items .27 .28 .32 .37
Net income .27 .28 .31 .37
<CAPTION>
1996
-----------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 28,480 $ 29,624 $ 29,917 $ 32,162
Income before equity in earnings of HPT and gain on
equity transaction of HPT 16,120 16,623 16,157 15,801
Equity in earnings and gain on equity transaction of HPT 2,092 5,839 2,301 2,231
Income before extraordinary items 18,212 22,462 18,458 18,032
Extraordinary items - early extinguishment of debt (2,443) -- -- (1,467)
Net income 15,769 22,462 18,458 16,565
Per share data:
Income before equity in earnings of HPT and gain on
equity transaction of HPT .24 .25 .24 .24
Income before extraordinary items .28 .34 .28 .27
Net income .24 .34 .28 .25
</TABLE>
F-15
<PAGE>
HEALTH AND RETIREMENT PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Pro Forma Information (Unaudited)
The following unaudited condensed Pro Forma Statements of Income assumes
the acquisition of GPI described in Note 3 had occurred on January 1, 1996.
These pro forma statements are not necessarily indicative of the expected
results of operations for any future period. Differences could result from, but
are not limited to, additional property investments, changes in interest rates
and changes in the debt and/or equity structure of the Company.
Condensed Pro Forma Statements of Income (unaudited)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1997 1996
---- ----
(dollars in thousands, except per share amounts)
------------------------------------------------
<S> <C> <C>
Total revenues $221,051 $176,125
Income before extraordinary items $119,988 $102,711
Net income $118,886 $ 98,801
Income before extraordinary items per basic share $1.29 $1.46
Net income per basic share $1.28 $1.41
</TABLE>
F-16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEALTH AND RETIREMENT PROPERTIES TRUST
By: /s/ Ajay Saini
Ajay Saini, Treasurer and Chief Financial Officer
Date: February 27, 1998
EXHIBIT 10.1
MASTER MANAGEMENT AGREEMENT
THIS MASTER MANAGEMENT AGREEMENT (this "Agreement") is made and entered
into as of the 1st day of January, 1998 and effective as of the Effective Date
(as defined below), by and among REIT Management and Research, Inc., a Delaware
corporation ("Managing Agent"), and the parties identified on the signature page
of this Agreement as Owners (each, an "Owner" and, "collectively, "Owners").
W I T N E S S E T H :
WHEREAS, Owners are the owners of those premises described on Exhibit
A, attached hereto and made a part hereof (collectively, the "Managed
Premises"); and
WHEREAS, Owners desire to retain Managing Agent, and Managing Agent is
willing to serve, as managing agent with respect to the Managed Premises, all
upon the terms and subject to the conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the agreements
herein contained, Owners and Managing Agent hereby agree as follows:
1. Engagement. Subject to the terms and conditions hereinafter set
forth, Owners hereby employ Managing Agent with respect to the Managed Premises.
Managing Agent hereby accepts such employment as managing agent and agrees to
devote such time, attention and effort as may be appropriate to operate and
manage the Managed Premises in a diligent, orderly and efficient manner.
Managing Agent may, with Owners' consent, subcontract out some or all of its
obligations hereunder to third party managers; provided, however, that, in any
such event, Managing Agent shall be and remain primarily liable to Owners for
performance hereunder.
Notwithstanding anything to the contrary set forth in this Agreement,
the services to be provided by Manager hereunder shall exclude all services
(including, without limitation, any garage management or cafeteria management
services) whose performance by an advisor to any Owner could give rise to an
Owner's receipt of "impermissible tenant service income" as defined in
ss.856(d)(7) of the Internal Revenue Code (as amended or superseded hereafter)
or could in any other way jeopardize an Owner's federal or state tax
classification as a real estate investment trust. Manager shall not perform any
such service and if, in any event, Manager shall inadvertently perform any such
service, no compensation therefor shall be paid or payable hereunder.
2. General Parameters. Any or all services may be performed or goods
purchased by Managing Agent under arrangements jointly with or for other
properties owned or managed by Managing Agent and the costs shall be reasonably
apportioned. Managing
<PAGE>
-2-
Agent may employ personnel who are assigned to work exclusively at the Managed
Premises or partly at the Managed Premises and other buildings owned and/or
managed by Managing Agent. Wages, benefits and other related costs of
centralized accounting personnel and employees employed by Managing Agent and
assigned to work exclusively or partly at the Managed Premises shall be fairly
apportioned and reimbursed, pro rata, by Owners in addition to the Fee and
Construction Supervision Fee (as defined in Section 5).
3. Duties. Without limitation, Managing Agent agrees to perform the
following specific duties:
(a) To seek tenants for the Managed Premises in accordance
with the rental schedule established by the applicable Owner and to
negotiate leases including renewals thereof and to lease in the
applicable Owner's name space on a lease form approved by such Owner,
only to tenants, at rentals, and for periods of occupancy all as are
approved in each case by the applicable Owner. To employ appropriate
means in order that the availability of rental space is made known to
potential tenants; provided, however, that such means shall not include
the employment of brokers unless otherwise agreed by the applicable
Owner. The legal expenses of negotiating such leases and leasing such
space shall be approved and paid by the applicable Owner.
(b) To collect all rents and other income from the Managed
Premises and to give receipts therefor, both on behalf of Owners, and
deposit such funds in such banks and such accounts as are named, from
time to time, by Owners, in agency accounts for and under the name of
Owners. Managing Agent shall be empowered to sign disbursement checks
on these accounts.
(c) To make contracts for and to supervise any repairs and/or
alterations to the Managed Premises, including tenant improvements and
decoration of rental space, as may be approved by the applicable Owner.
(d) For Owners' account and at its expense, to hire, supervise
and discharge employees as required for the efficient operation and
maintenance of the Managed Premises.
(e) To obtain, at Owners' expense, appropriate insurance for
the Managed Premises protecting Owners and Managing Agent while acting
on behalf of Owners against all normally insurable risks relating to
the Managed Premises and complying with the requirements of Owners'
mortgagee, if any, and, upon approval thereof, to cause the same to be
provided and maintained by all tenants with respect to the Managed
Premises to the extent required by the terms of such tenants' leases.
(f) To promptly notify the applicable Owner and its insurance
carriers, as required by the applicable policies, of any casualty or
injury to person or property at the
<PAGE>
-3-
Managed Premises, and complete customary reports in connection
therewith.
(g) To procure seasonably all supplies and other materials
necessary for the proper operation of the Managed Premises, at Owners'
expense.
(h) To pay promptly from rental receipts, other income derived
from the Managed Premises, or other monies made available by Owners for
such purpose, all costs incurred in the operation of the Managed
Premises which are expenses of Owners hereunder, including wages or
other payments for services rendered, invoices for supplies or other
items furnished in relation to the Managed Premises, and pay over
forthwith the balance of such rental receipts, income and monies to
Owners or as Owners shall from time to time direct. (In the event that
the sum of the expenses to operate and the compensation due the
Managing Agent exceed gross receipts in any month and no excess funds
from prior months are available for payment of such excess, Owners
shall pay promptly the amount of the deficiency thereof to Managing
Agent upon receipt of statements therefor.)
(i) To advise Owners promptly of any material developments in
the operation of the Managed Premises that might affect the profitable
operation of the Managed Premises.
(j) To establish, in Owners' name and with Owners' approval,
reasonable rules and regulations for tenants of the Managed Premises.
(k) At the direction of the applicable Owner and with counsel
selected by such Owner, to institute or defend, as the case may be, any
and all legal actions or proceedings (in the name of such Owner if
necessary) relating to operation of the Managed Premises.
(l) To maintain the books and records of Owners reflecting the
management and operation of the Managed Premises, making available for
reasonable inspection and examination by Owners or its representatives,
all books, records and other financial data relating to the Managed
Premises.
(m) To prepare and deliver seasonably to tenants of the
Managed Premises such statements of expenses or other information as
shall be required on the landlord's part to be delivered to such
tenants for computation of rent, additional rent, or any other reason.
(n) To aid, assist and cooperate with Owners in matters
relating to taxes and assessments and insurance loss adjustments,
notify the Owners of any tax increase or special assessments relating
to the Managed Premises and, with Owners' approval, to enter into
contracts for tax abatements services.
<PAGE>
-4-
(o) To provide such emergency services as may be required for
the efficient management and operation of the Managed Premises on a
24-hour basis.
(p) To enter into contracts for utilities (including, without
limitation, water, fuel, electricity and telephone) and for building
services (including, without limitation, cleaning of windows, common
areas and tenant space, ash, rubbish and garbage hauling, snow plowing,
landscaping, carpet cleaning and vermin extermination), and for other
services as are appropriate to first class office space.
(q) To seek the lowest competitive price commensurate with
desired quality for all items purchased or services contracted by it
under this Agreement.
(r) To take such action generally consistent with the
provisions of this Agreement, as Owners might with respect to the
Managed Premises if personally present.
4. Authority. Owners give to Managing Agent the authority and powers to
perform the foregoing duties on behalf of Owners subject, however, to Owners'
approval as specified. Owners further authorize Managing Agent to incur such
reasonable expenses, specifically contemplated in Section 2, on behalf of Owners
as are necessary in the performance of those duties.
5. Special Authority of Agent. In addition to, and not in limitation
of, the duties and authority of Managing Agent contained herein, Managing Agent
shall perform the following duties, but only with Owners' prior approval in each
case:
(a) Terminate tenancies and sign and serve in the name of
Owners such notices therefor as may be required for the proper
management of the Managed Premises.
(b) With counsel selected by Owners, and at Owners' expense,
institute and prosecute actions to evict tenants and recover possession
of rental space, and recover rents and other sums due; and when
expedient, settle, compromise and release such actions or suits or
reinstate such tenancies.
6. Compensation.
(a) In consideration of the services to be rendered by the
Managing Agent hereunder, Owners agree to pay and the Managing Agent
agrees to accept as its sole compensation (i) a management fee (the
"Fee") equal to three percent (3%) of the gross collected rents
actually received by Owners from the Managed Premises, such gross rents
to include all fixed rents, percentage rents, additional rents,
operating expense and tax escalations, and any other charges paid to
Owners in connection with occupancy of the Managed Premises, but
excluding any amounts collected from tenants to reimburse Owners for
the cost of capital improvements or for expenses incurred in curing any
tenant default or in enforcing any
<PAGE>
-5-
remedy against any tenant; and (ii) a construction supervision fee (the
"Construction Fee") in connection with all interior and exterior
construction renovation or repair activities at the Managed Premises,
including, without limitation, all tenant and capital improvements in,
on or about the Managed Premises, undertaken during the term of this
Agreement, other than ordinary maintenance and repair, equal to five
percent (5%) of the cost of such construction which shall include the
costs of all related professional services and the cost of general
conditions.
(b) The Fee shall be due and payable monthly, in arrears based
on a reasonable annual estimate or budget with an annual reconciliation
within thirty (30) days after the end of each calendar year. The
Construction Fee shall be due and payable periodically, as agreed by
Managing Agent and Owners, based on actual costs incurred to date.
(c) Notwithstanding anything herein to the contrary, Owners
shall reimburse Managing Agent for reasonable travel expenses incurred
when traveling to and from the Managed Premises while performing its
duties in accordance with this Agreement; provided, however, that,
reasonable travel expenses shall not include expenses incurred for
travel to and from the Managed Premises by personnel assigned to work
exclusively at the Premises.
(d) Managing Agent shall also receive the amount of any lump
sum reimbursables paid by tenants of the Managed Premises to the extent
amounts paid exceed costs incurred by Owners for work performed with
respect thereto.
(e) Managing Agent shall be entitled to no other additional
compensation, whether in the form of commission, bonus or the like for
its services under this Agreement. Except as otherwise specifically
provided herein with respect to payment by Owners of legal fees,
accounting fees, salaries, wages, fees and charges of parties hired by
the Managing Agent on behalf of Owners to perform operating and
maintenance functions in the Managed Premises, and the like, if
Managing Agent hires third parties to perform services required to be
performed hereunder by Managing Agent without additional charge to
Owners, Managing Agent shall (except to the extent the same are
reasonably attributable to an emergency at the Managed Premises) be
responsible for the charges of such third parties. Managing Agent shall
not, however, hire any third party without Owners' prior written
consent, which consent shall not be unreasonably withheld. In addition,
Managing Agent shall, at its expense, assume Owners' obligations under
the contracts and agreements listed as Exhibit B, attached hereto and
made a part hereof.
7. Contracts. Managing Agent shall not, without the prior consent of
Owners, enter into any contracts on behalf of Owners which extend beyond the
then current term of this Agreement.
<PAGE>
-6-
8. Term of Agreement. The term of this Agreement shall begin on the
date hereof and, unless sooner terminated as herein provided, shall end on that
date which is thirty (30) days following written notice of termination given by
either Owners or Managing Agent to the other. This Agreement may be terminated
with respect to less than all of the properties comprising the Managed Premises.
9. Termination or Expiration. Upon termination or expiration of this
Agreement with respect to any of the Managed Premises for any reason whatsoever,
Managing Agent shall promptly turn over to Owners all books, papers, funds,
records, keys and other items relating to the management and operation of such
Managed Premises, including, without limitation, all leases in the possession of
the Managing Agent and shall render to Owners a final accounting with respect
thereto through the date of termination.
10. Assignment of Rights and Obligations.
(a) Without Owners' prior written consent, Managing Agent
shall not sell, transfer, assign or otherwise dispose of or mortgage,
hypothecate or otherwise encumber or permit or suffer any encumbrance
of all or any part of its rights and obligations hereunder, and any
transfer, encumbrance or other disposition of an interest herein made
or attempted in violation of this paragraph shall be void and
ineffective, and shall not be binding upon Owners.
(b) Owners, without Managing Agent's consent, may assign its
rights and obligations hereunder to any mortgagee with respect to, or
successor Owners of, the Managed Premises, but not otherwise.
(c) Consistent with the foregoing paragraphs (a) and (b), the
terms "Owners" and "Managing Agent" as used in this Agreement shall
mean the original parties hereto and their respective mortgagees,
successors, assigns, heirs and legal representatives.
11. Fidelity Bond. Owners, at Owners' expense, may require that
employees of Managing Agent who handle or are responsible for Owners' money to
be bonded by a fidelity bond in an amount sufficient in Owners' determination to
cover any loss which may occur in the management and operation of the Managed
Premises or that Managing Agent obtain a fiduciary policy of insurance.
12. Indemnification and Insurance.
(a) Owners agree to defend, indemnify and hold harmless
Managing Agent from and against all costs, claims, expenses and
liabilities (including reasonable attorneys' fees) arising out of
Managing Agent's performance of its duties in accordance with this
Agreement including, without limitation, injury or damage to persons or
property occurring in, on or about the Managed Premises and violations
or alleged violations of any law, ordinance,
<PAGE>
-7-
regulation or order of any governmental authority regarding the Managed
Premises except any injury, damage or violation resulting from Managing
Agent's default hereunder, or from Managing Agent's fraud, gross
negligence or willful misconduct in the performance of its duties
hereunder.
(b) Owners agrees that required insurance shall include, at
Owners' expense, public liability and workmen's compensation insurance
upon the following terms and conditions:
(i) policies shall be so written as to protect the
Managing Agent in the manner and to the same extent as Owners.
(ii) Workmen's compensation policies shall be written
to comply with applicable legal requirements.
(iii) The public liability insurance shall be written
in limits of not less than One Million Dollars ($1,000,000)
per occurrence for bodily injury and Five Hundred Thousand
Dollars ($500,000) per occurrence for
property damage.
(iv) Such public liability insurance shall include
the standard extensions of liability coverage as may be
mutually agreed upon from time to time, and shall name both
parties and their respective employees as additional insureds.
13. Notices. Whenever notice is to be sent pursuant to this Agreement
to either party to this Agreement, it is expressly understood that same shall be
sent postage prepaid, certified mail, return receipt requested to either party
at 400 Centre Street, Newton, Massachusetts 02158, or to any such address that
either party may hereinafter designate.
14. Limitation of Liability.
(a) No partner of Owners or Managing Agent shall be personally
liable hereunder, all such liability being limited in the case of
Owners to the interest of Owners in the Managed Premises and in the
case of Managing Agent, to its interest hereunder.
(b) The Declarations of Trust establishing some Owners, a copy
of which, together with all amendments thereto (the "Declarations"), is
duly filed with the Department of Assessments and Taxation of the State
of Maryland, provides that the names of such Owners refers to the
trustees under such Declarations collectively as trustees, but not
individually or personally, and that no trustee, officer, shareholder,
employee or agent of such Owners shall be held to any personal
liability, jointly or severally, for any obligation of, or claim
against, such Owners. All persons dealing with such Owners, in any way,
shall look only to the respective assets of such Owners for
<PAGE>
-8-
the payment of any sum or the performance of any obligation of such
Owners. In any event, all liability of such Owners hereunder is limited
to the interest of such Owners in the Managed Premises and, in the case
of Managing Agent, to its interest hereunder.
(c) It is the intention of the parties hereto that each Owner
be liable hereunder only with respect to the Managed Premises owned by
such Owner and that each Owner be solely responsible for liabilities
incurred with respect only to its properties and receive all income
therefrom.
15. Modification of Agreement. This Agreement may not be modified,
altered or amended in manner except by an amendment in writing, duly executed by
the parties hereto. Additional properties may be added to the scope of this
Agreement by substituting for Exhibit A to this Agreement a revised Exhibit A
including such property or properties, provided that such replacement Exhibit A
shall be initialed by Owners and Managing Agent.
16. Independent Contractor. This Agreement is not one of general agency
by Managing Agent for Owners, but one with Managing Agent engaged as an
independent contractor. Nothing in this Agreement is intended to create a joint
venture, partnership, tenancy-in-common or other similar relationship between
Owners and Managing Agent for any purposes whatsoever.
17. Law Governing. This Agreement shall be governed by and in
accordance with the laws of The Commonwealth of Massachusetts.
18. Effective Date. The "Effective Date" of this Agreement shall be,
with respect to any property listed on Exhibit A, the later to occur of January
1, 1998 and the date on which such property shall be added to Exhibit A.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
a sealed instrument as of the date above first written.
MANAGING AGENT:
REIT MANAGEMENT AND RESEARCH, INC.
By: /s/ David M. Lepore
Its (Vice) President
OWNERS:
TRUSTEES OF HARVARD STREET REALTY TRUST
By: /s/ David J. Hegarty
As Trustee and not individually
<PAGE>
-9-
HUB PROPERTIES TRUST
By: /s/ David J. Hegarty
Its President
HRPT MEDICAL BUILDING REALTY TRUST
By: /s/ David J. Hegarty
As Trustee and not individually
CAUSEWAY HOLDINGS, INC.
By: /s/ David J. Hegarty
Its President
HUB LA LIMITED PARTNERSHIP
By: HUB LA Properties Trust, its
general partner
By: /s/ David J. Hegarty
Its President
HUB REALTY FUNDING, INC.
By: /s/ David J. Hegarty
Its President
HUB REALTY RICHLAND, INC.
By: /s/ David J. Hegarty
Its President
HUB REALTY IV, INC.
By: /s/ David J. Hegarty
Its President
<PAGE>
-10-
HUB REALTY III, INC.
By: /s/ David J. Hegarty
Its President
HUB REALTY COLLEGE PARK, I, LLC
By: HUB Management, Inc.
By: /s/ David J. Hegarty
Its President
HUB REALTY KANSAS CITY, INC.
By: /s/ David J. Hegarty
Its President
HUB REALTY BUFFALO, INC.
By: /s/ David J. Hegarty
Its President
HUB REALTY SAN DIEGO I, INC.
By: /s/ David J. Hegarty
EPA GOLDEN, L.P.
By: Hub Realty Golden, Inc., general
partner
By: /s/ David J. Hegarty
Its President
HUB ACQUISITION TRUST
By: /s/ David J. Hegarty
Its President
<PAGE>
-11-
HUB RI PROPERTIES TRUST
By: /s/ David J. Hegarty
Its President
HUB WOODMONT LIMITED LIABILITY COMPANY
By: HUB Woodmont Properties Trust,
managing member
By: /s/ David J. Hegarty
Its President
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT A
Managed Premises
Owner (abbreviated)
<S> <C> <C>
Hub Prop. Trust Sorrento Valley, 5555, San Diego, CA
5601, 5626
Hub Prop. Trust Torrey Pines, 3030-50 San Diego, CA
Science Park
Hub Prop. Trust Fair Oaks Fairfax, VA
Hub Prop. Trust 145 University Avenue Westwood, MA
Hub Prop. Trust 1145 19th Street Washington, DC
Hub Prop. Trust 443 Gulph Road King of Prussia, PA
Hub Prop. Trust 515 Penn Avenue Ft. Washington, PA
Hub Prop. Trust 525 Virginia Avenue Ft. Washington, PA
Hub Prop. Trust 1035 Virginia Avenue Ft. Washington, PA
Hub Prop. Trust 723 Drescher Road Horsham, PA
Hub Prop. Trust 7 W. 34th Street New York, NY
Hub Prop. Trust One Franklin Plaza Philadelphia, PA
Hub Prop. Trust 100 South Charles St., Baltimore, MD
Tower II
Hub Prop. Trust 710N/230S. Euclid & Anaheim, CA
1085 N. Harbor
Hub Prop. Trust 6300 Bridgepoint Pkwy Austin, TX
Hub Prop. Trust 2141 K Street, N.W. Washington, DC
Hub Prop. Trust 3043 Walton Road Plym. Meeting, PA
Hub Prop. Trust 475 Virginia Drive Ft. Washington, PA
Hub Prop. Trust 6937 N. IH Austin, TX
Hub Prop. Trust 4 Maguire Road Lexington, MA
Hub Prop. Trust 210 Mall Blvd. King of Prussia, PA
Hub Prop. Trust 216 Mall Blvd. King of Prussia, PA
Hub Woodmont 1401 Rockville Pike Rockville, MD
HR Fndg Inc. 15 Twelfth Street Petersburg, AK
HR Fndg Inc. 8900 Lakes at 610 Houston, TX
Business Park
HR Fndg Inc. 711 14th Avenue Safford, AZ
HR Fndg Inc. 220 E. Bryan Street Savannah, GA
HR Fndg Inc. 435 Montano Boulevard Albuquerque, NM
HR Fndg Inc. 9797 Aero Drive San Diego, CA
HR Fndg Inc. 5353 North Yellowstone Cheyenne, WY
Drive
HR Fndg Inc. 1474 Rodeo Road Santa Fe, NM
HR Fndg Inc. 820 West Diamond Ave. Gaithersburg, MD
HR Fndg Inc. 20400 Century Blvd. Germantown, MD
HR Fndg Inc. 6710 Oxon Hill Drive Oxon Hill, MD
HR Buffalo Inc. 138 Delaware Avenue Buffalo, NY
H.Grpp LLC 4181 Ruffin Road San Diego, CA
Hub LA LP Cedar Sinai I Los Angeles, CA
Hub LA LP Cedar Sinai II Los Angeles, CA
HR Richland Inc. 2420 & 2430 Stevens Richland, WA
Center Place
HRPT Med. Bldg. RT 1295 Boylston Street Boston, MA
HRPT Med. Bldg RT 109 Brookline Avenue Boston, MA
Causeway Hldgs Inc. 251 Causeway Street Boston, MA
<PAGE>
-2-
Owner (abbreviated)
47 Hvd. St. Rlty Tr. 47 Harvard Street Westwood, MA
HR IV, Inc. 2029 Stonewall Jackson Falling Waters, WV
Road
HR III, Inc. 55 North Robinson Oklahoma City, OK
HR Collg Pk I LLC 4700 River Road Riverdale, MD
Hub Realty KC, Inc. 4241 N.E. 34th Street Kansas City, MO
HR S. Diego I Inc. 4560 Viewridge Drive San Diego, CA
HR Fndg. Inc. 5600 Columbia Pike Falls Church, VA
HR Fndg. Inc. 20 Massachusetts Ave. Washington, DC
HR Fndg. Inc. 625 Indiana Avenue Washington, DC
HR Fndg. Inc. 400 State Avenue Kansas City, KS
HR Fndg. Inc. 201 Indianola Avenue Phoenix, AZ
HR Fndg. Inc. 3285 E. Hemisphere Loop Tucson, AZ
HR Fndg. Inc. 5051 Rodeo Road Los Angeles, CA
HR Fndg. Inc. 701 Clay Avenue Waco, TX
HR Fndg. Inc. 16194 West 45th Street Golden, CO
Hub Prop. Trust 830 E. Potomac Circle Aurora, CO
Hub RI Prop. Trust 701 George Washington
Highway Lincoln, RI
</TABLE>
Initials:
Owners: /s/ DJH
Managing Agent: /s/ DML
<PAGE>
EXHIBIT B
Assumed Contracts
Property Management Agreement, dated as of June 16, 1994, between GovProp
Funding, L.P. and Rosecliff Realty Inc., as amended.
Property Management Agreement, dated as of February 7, 1995, between Rosecliff
Realty Richland Inc. and Rosecliff Realty Inc. (Richland, WA).
Property Management Agreement, dated as of July 27, 1995, between Rosecliff
Realty College Park I, LLC and Rosecliff Realty Inc. (College Park, MD).
Property Management Agreement, dated as of October 13, 1995, between Rosecliff
Realty Kansas City, Inc., and Rosecliff Realty Inc. (Kansas City, MO).
Property Management Agreement, dated as of September 7, 1995, between Rosecliff
Realty III, Inc. and Rosecliff Realty Inc. (Oklahoma City, OK).
Property Management Agreement, dated as of September 7, 1995, between Rosecliff
Realty IV, Inc. and Rosecliff Realty Inc. (Falling Waters, WV).
Property Management Agreement, dated as of March 13, 1996, between Rosecliff
Realty Buffalo, Inc. and Rosecliff Realty Inc. (Buffalo, NY).
Property Management Agreement, dated as of December 23, 1995, between Roseview
San Diego Limited Partnership and Rosecliff Realty Inc. (San Diego, CA (DEA)),
as amended.
Property Management Agreement, dated as of July 19, 1996 between Rose Group LLC
and Rosecliff Realty Inc. (San Diego, CA (DFAS)).
Development & Management Agreement, dated as of August 22, 1996, between
Imperial Industrial Group and Rose Group LLC (San Diego, CA (DFAS)).
EXHIBIT 10.2
PARKING OPERATION MANAGEMENT AGREEMENT
THIS PARKING OPERATION MANAGEMENT AGREEMENT (this "Agreement") is
entered into as of the 1st day of January 1998, by and between the persons
identified as "Owner" on the signature page to this Agreement ("Owner"), and
GARAGE MANAGEMENT, INC., a Delaware corporation ("Contractor").
In consideration of the covenants herein contained, Owner and
Contractor hereby agree as follows:
1. Scope of Engagement. Owner hereby engages Contractor to provide
professional parking management of the parking garages and/or areas at the
premises described on Exhibit A to this Agreement (the "Managed Premises").
2. Term. The term of this Agreement shall begin on the date hereof and,
unless sooner terminated as herein provided, shall end on that date which is
thirty (30) days following written notice of termination given by either Owner
or Contractor to the other. This Agreement may be terminated with respect to
less than all of the properties comprising the Managed Premises.
3. Independent Contractor. Contractor shall perform all of the services
as an independent contractor and not as an agent of Owner. Owner shall reserve
the right to instruct Contractor in writing through Contractor's agent or
supervisor regarding the extent of the services and the results to be
accomplished thereby; provided, however, Contractor shall have sole control,
supervision, direction, and responsibility over its employees and the manner of
providing the services. Except as set forth in this Agreement, Contractor shall
have no authority to take any action on behalf of Owner without the express
written consent of Owner.
4. Operation of the Managed Premises. For its operation of the Managed
Premises, Contractor agrees to the following:
(a) The Managed Premises are primarily for the convenient use and
benefit of tenants and guests of the adjacent building(s) and
will at all times be available to building tenants and guests
(during the hours of operation) subject to Owner's right to
designate special usage from time to time.
(b) The Managed Premises will be operated in a manner consistent
with that of first-class garages and/or areas in the area in
which the Managed Premises are located. Accordingly,
Contractor will staff the operation with good, experienced,
professional
<PAGE>
-2-
management. Contractor will operate the Managed Premises
efficiently and properly through proper utilization of space,
manpower and direction.
(c) The Managed Premises will be open for parking as directed by
Owner.
(d) The Managed Premises will be maintained in a neat and clean
condition, and will comply with all city, state and federal
laws, rules or regulations, including, without limitation, any
regulations or guidelines adopted for operation of the Managed
Premises by Owner.
(e) Contractor will issue permits to only those tenants designated
by Owner and collect parking fees from those tenants in a
manner directed by and acceptable to Owner.
(f) Contractor will make recommendations, subject to Owner's
approval, for operation of the Managed Premises including a
system of tags, tickets or other methods best designed to
indicate the number of vehicles using the Managed Premises and
recommend parking rates for the Managed Premises.
(g) All rates will be subject to the prior approval of Owner.
(h) No signs will be erected in or about the Managed Premises
without prior approval of Owner.
(i) Contractor shall purchase on behalf of Owner all federal,
state, and local licenses required by law to be obtained for
the operation of the Managed Premises.
(j) Contractor shall supervise the proper and efficient parking in
the Managed Premises of the cars of members of the general
public; collect parking fees from such transient parkers in
accordance with rates and policies as established by Owner;
issue, collect and keep safe all parking tickets received from
such transient parkers; and prepare and maintain accurate
reports and records on a daily basis of all such transient
parking operations. In this connection, Contractor
acknowledges that the primary intent for use of the Managed
Premises is to serve employees, patrons, and visitors of the
buildings.
(k) Contractor shall supervise and control continuous daily
policing of the Managed Premises and equipment; establish
controls to prevent vandalism, theft, arson, damage to parked
cars, and to the Managed Premises and equipment; maintain the
Managed Premises as required to prevent unreasonable
accumulation of debris, dust, oil, dirt, slicks, and loss of
security.
<PAGE>
-3-
(l) Prior to September 1st of each year, Contractor will provide
Owner a budget for the ensuing year in a form reasonably
satisfactory to Owner.
(m) Contractor shall comply with all applicable city, county,
state, and federal laws and regulations and obtain all
necessary licenses, bonds and permits applicable for the
Managed Premises.
5. Costs Reimbursement.
(a) Owner shall pay Contractor an amount equal to the actual costs
reasonably incurred and actually paid by Contractor in
furnishing services under this Agreement. Costs incurred in
furnishing services may include the following:
(i) On-The-Job Payroll Costs. All wages and salaries for
on-site personnel employed by Contractor to fulfill
its obligations under this Agreement.
(ii) Payroll Taxes and Other Direct Costs. All payroll
taxes, whether federal, state, or local.
(iii) Cost of Materials, Supplies and Equipment. The actual
cost of materials, supplies, and equipment used by
Contractor in the performance of duties hereunder;
provided, however, that, any materials and supplies
or equipment so purchased shall be mutually agreed
upon by Owner and Contractor prior to such purchase.
(iv) Other Items. Contractor shall contract for and
purchase on authorization of Owner and at Owner's
expense any other services and commodities necessary
in the operation and maintenance of the Managed
Premises, as well as for the making of all repairs,
alterations, and decorations with respect thereto,
including, without limitation, sweeping of the
Managed Premises and gutters of the adjacent streets
weekly; provided, however, that Contractor shall not
contract for any repair or alteration, without the
prior approval of Owner.
(b) Payments to Contractor. As full and complete payment for
services provided by Contractor under this Agreement, Owner
will pay Contractor a monthly management fee of three percent
(3%) of gross parking receipts for such month.
(c) Payments. Payments of the charges of all items listed in this
Section 5, and all disbursements which are
<PAGE>
-4-
required under this Agreement, including the compensation of
Contractor herein set forth, shall be made by Owner to
Contractor within fifteen (15) days after the end of the month
or upon receipt or the bill of expense as submitted by
Contractor, whichever is later.
6. Parking Revenues.
(a) All parking revenues shall belong to Owner subject to
the following:
(i) Contractor will keep books of accounts and records in
accordance with generally accepted accounting
principles to properly reflect all parking revenues
with disbursements received and made in connection
with the operation of the Managed Premises. Such
books of accounts and records shall, at all times,
during regular business hours, be open to the
inspection of Owner or any of its duly appointed
agents at such place as Contractor customarily
maintains the same.
(ii) On or before the 10th day of each month, Contractor
will submit to Owner a monthly operating statement
for the previous month. All operating statements will
be certified as true and correct by an officer of
Contractor. Such statements shall show the status of
collections and expenditures and shall be supported
by vouchers, canceled parking tickets, validation
book slips, checks, duplicate invoices, and similar
documentation shall be kept at the Managed Premises
or at Contractor's principal place of business, and
shall at all times during the regular business hours
be open to Owner for inspection or any of its duly
appointed agents. Canceled parking tickets shall be
retained by Contractor for a period of thirty (30)
days following the end of the month in which they are
used. Contractor shall be permitted to destroy the
tickets at that time, unless Owner shall have made
written request for the retention of specific tickets
prior to the expiration of said thirty (30) days.
(b) Contractor will, at the direction of Owner:
(i) give Owner a check daily in the amount of the
receipts collected the previous day; or
(ii) deposit daily all revenues from the Managed Premises
to an account in the name of Owner at a bank
designated by Owner, which revenues will be
<PAGE>
-5-
the property of and for the exclusive use of Owner.
Contractor will make all necessary disbursements
required for the operation of the Managed Premises
including, but not limited to, wages, payroll taxes
and benefits, supplies, uniforms, operating repairs,
cleaning, telephone, bookkeeping and accounting,
accidents and other claims and expenses and other
normal and usual operating costs. At the end of each
month, Contractor will be paid within fifteen (15)
days of receipt of the bill.
(c) Contractor will reimburse Owner for Contractor theft,
embezzlement or other loss of gross parking receipts by
Contractor's employees or agents.
(d) In order to control insurance costs, damage to parked vehicles
not parked by Contractor employees, when such damage is under,
Three Hundred Fifty Dollars ($350), may be paid from parking
revenues. Contractor will coordinate claims relating to loss
or damage to vehicles. Damage caused to cars by Contractor's
employees will be the sole responsibility of Contractor.
7. Insurance. At all times during the term of this Agreement,
Contractor shall carry insurance coverage naming Owner as an additional insured
for the term of this Agreement and shall provide proof of such coverage upon the
execution of this Agreement and at such times as Owner shall request. This
insurance shall be maintained with an insurance company or companies
satisfactory to Owner and qualified to do business in the jurisdiction in which
the Managed Premises are located. Such insurance coverage shall include the
following:
(a) Worker's Compensation Insurance covering all employees subject
to statutory benefits and including employer's liability
coverage with a limit of at least $100,000.
(b) Comprehensive general liability insurance with limits of not
less than $1,000,000 covering the Managed Premises and
operations, blanket contractual, garage liability and personal
injury.
(c) Garagekeeper's legal liability insurance covering exposure
from fire and explosion, theft of an entire car, riot and
civil commotion, malicious mischief and vandalism.
(d) Fidelity bond of $25,000 for Contractor's employees to cover
reimbursement to Owner for Contractor's employee theft,
embezzlement or other loss of gross parking receipts by
Contractor's employees.
<PAGE>
-6-
All such insurance will be for the protection of Owner, and Owner will be named
as an additional insured. Policies or certificates evidencing all insurance
shall be furnished to Owner and the certificates or policies shall contain an
endorsement requiring the insurance carrier to provide not less than thirty (30)
days' written notice to the additional insured in the event of cancellation or
material change. All of the foregoing insurance policies shall be considered as
primary and any policies held or obtained by Owner shall be considered as excess
and noncontributory. It is understood and agreed that Owner is responsible for
providing and maintaining appropriate insurance coverage on the Managed Premises
structures.
8. Indemnification. Contractor shall defend, indemnify and hold
harmless Owner and its contractors, licensees, agents, servants, employees,
guests, invitees, or visitors, from any and all actions, costs, claims, demands,
losses and expenses, damages and liabilities of every kind and nature whatsoever
whether direct, indirect or consequential (including, but not limited, to
attorney's and consultant's fees and other expenses of litigation or
arbitration) arising from or by reason of third party claims based, in whole or
part, on any breach or alleged breach of any Contractor's obligations, a
negligent act or omission or alleged negligent act or omission of Contractor
arising under this Agreement, including, but not limited to, property damage,
personal injury, death or contractual liabilities; provided, however, that the
foregoing provision shall not be construed to make Contractor liable for any
actions, costs, claims, demands, losses, expenses, damages or liabilities
resulting from injuries to third parties caused by the negligence of Owner, or
any of its officers, licensees, agents, servants, employees or visitors.
9. Waiver of Subrogation. Each of the parties releases the other and
waives any claim for recovery for loss or damage to persons or to the property
on or about the Managed Premises, arising out of or incident to fire, lightning
or other perils included in the standard fire insurance extended endorsement
coverage. Each party hereby agrees to obtain the appropriate consent of their
respective insurers, if necessary, with respect to this waiver of subrogation;
provided, however, that this paragraph shall not be construed as to in any way
affect the rights of either party to recover under insurance policies insuring
any matters covered by this waiver.
10. Fidelity Bond. Owner, at Owner's expense, may require that
employees of Managing Agent who handle or are responsible for Owner's money to
be bonded by a fidelity bond in an amount sufficient in Owner's determination to
cover any loss which may occur in the management and operation of the Managed
Premises or that Contractor obtain a fiduciary policy of insurance.
11. Employees.
(a) Contractor will employ, discharge and supervise all persons
necessary for operation of the Managed Premises
<PAGE>
-7-
including, without limitation, managers, attendants, cashiers
or other personnel necessary for the efficient operation of
the Managed Premises.
(b) All personnel will be employees of Contractor and not Owner.
(c) Contractor shall give notice to Owner prior to any changes in
personnel or duty assignment except when such changes are made
in response to an emergency situation in which case Contractor
shall give notice of such changes immediately thereafter.
(d) All personnel will comply with Owner's dress and appearance
code which Owner will establish and may at Owner's discretion
change with ninety (90) days' notice.
(e) Owner shall at all times have the right to accept or reject
individual Contractor personnel. Contractor will not remove
personnel acceptable to Owner without Owner's express
approval. Such approval will not unreasonably be withheld.
12. Uniforms and Badges. Contractor shall outfit all employees with
uniforms satisfactory to Owner. The cost of such uniforms and cleaning thereof
shall be at Owner's expense.
13. Right to Audit Books and Records. Upon Owner's request, either
Owner's accountants or an independent accounting firm shall have the right to
audit and inspect those portions of Contractor's books and records that pertain
to the costs incurred in furnishing services under this Agreement.
14. Notices. Whenever notice is to be sent pursuant to this Agreement
to either party to this Agreement, it is expressly understood that same shall be
sent postage prepaid, certified mail, return receipt requested to either party
at 400 Centre Street, Newton, Massachusetts 02158, or to any such address that
either party may hereinafter designate.
15. Termination or Expiration. Upon termination or expiration of this
Agreement with respect to any of the Managed Premises for any reason whatsoever,
Contractor shall promptly turn over to Owner all books, papers, funds, records,
keys and other items relating to the management and operation of such Managed
Premises and shall render to Owner a final accounting with respect thereto
through the date of termination.
16. Limitation of Liability.
(a) No officer, director, trustee or partner of Owner shall be
personally liable hereunder, all such liability being limited
in the case of Owner to the interest of
<PAGE>
-8-
Owner in the Managed Premises and in the case of Contractor,
to its interest hereunder.
(b) The Declarations of Trust establishing some of Owner, a copy
of which, together with all amendments thereto (the
"Declarations"), is duly filed with the Department of
Assessments and Taxation of the State of Maryland, provides
that the names of such Owner refers to the trustees under such
Declarations collectively as trustees, but not individually or
personally, and that no trustee, officer, shareholder,
employee or agent of such Owner shall be held to any personal
liability, jointly or severally, for any obligation of, or
claim against, such Owner. All persons dealing with such
Owner, in any way, shall look only to the respective assets of
such Owner for the payment of any sum or the performance of
any obligation of such Owner. In any event, all liability of
such Owner hereunder is limited to the interest of such Owner
in the Managed Premises.
(c) It is the intention of the parties hereto that each Owner be
liable hereunder only with respect to the Managed Premises
owned by such Owner and that each Owner be solely responsible
for liabilities incurred with respect only to its properties
and receive all income therefrom.
17. Modification of Agreement. This Agreement may not be modified,
altered or amended in manner except by an amendment in writing, duly executed by
the parties hereto. Additional properties may be added to the scope of this
Agreement by substituting for Exhibit A to this Agreement a revised Exhibit A
including such property or properties, provided that such replacement Exhibit A
shall be initialed by Owner and Contractor.
18. Law Governing. This Agreement shall be governed by and in
accordance with the laws of The Commonwealth of Massachusetts.
19. Effective Date. The "Effective Date" of this Agreement shall be,
with respect to any property listed on Exhibit A, the later to occur of January
1, 1998 and the date on which such property shall be added to Exhibit A.
<PAGE>
-9-
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
under seal as of the date above first written.
OWNERS:
HUB PROPERTIES TRUST:
By: /s/ David J. Hegarty
David J. Hegarty, its President
MANAGER:
GARAGE MANAGEMENT, INC.
By: /s/ David Lepore
David Lepore, its President
<PAGE>
Exhibit A
Managed Premises
Owner Property Address
----- ----------------
Hub Properties Trust 1145 19th Street
Washington, DC
EXHIBIT 23
Consent Of Independent Auditors
We consent to the incorporation by reference in Post-Effective Amendment No. 1
to the Registration Statement (Form S-3 No. 33-62135) of Health and Retirement
Properties Trust and in the related Prospectus; in the Registration Statement
(Form S-3 No. 333- 26887) of Health and Retirement Properties Trust and in the
related Prospectus; and in the Registration Statement (Form S-3 No. 333-34823)
of Health and Retirement Properties Trust and in the related Prospectus of our
report dated February 9, 1998, with respect to the consolidated financial
statements of Health and Retirement Properties Trust dated February 27, 1998,
filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Boston, Massachusetts
February 26, 1998
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<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 22,355
<SECURITIES> 0
<RECEIVABLES> 104,288
<ALLOWANCES> 0
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<CURRENT-ASSETS> 0
<PP&E> 1,969,023
<DEPRECIATION> 111,669
<TOTAL-ASSETS> 2,135,963
<CURRENT-LIABILITIES> 0
<BONDS> 787,879
0
0
<COMMON> 988
<OTHER-SE> 1,265,272
<TOTAL-LIABILITY-AND-EQUITY> 2,135,963
<SALES> 0
<TOTAL-REVENUES> 208,863
<CGS> 0
<TOTAL-COSTS> 114,531
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<INTEREST-EXPENSE> 36,766
<INCOME-PRETAX> 114,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 114,000
<DISCONTINUED> 0
<EXTRAORDINARY> (1,102)
<CHANGES> 0
<NET-INCOME> 114,000
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