Filed pursuant to Rule 424(b)(3)
Registration Nos. 333-26887 and 333-52353
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT DATED MAY 11, 1998
PROSPECTUS SUPPLEMENT
(To Prospectus dated May 30, 1997)
25,000,000 Shares
Health and Retirement Properties Trust
Common Shares of Beneficial Interest
----------------
Health and Retirement Properties Trust (the "Company" or "HRP") is a real
estate investment trust (a "REIT") which invests in healthcare related real
estate and office buildings. All of the common shares of beneficial interest
(the "Shares") offered hereby are being offered by the Company, and the
proceeds will be used to repay indebtedness and for new investments. The Shares
are listed on the New York Stock Exchange (the "NYSE") under the symbol "HRP."
On May 8, 1998 the last reported sale price for the Shares on the NYSE was
$203/16 per Share.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Price Underwriting Proceeds to
to Public Discount (1) Company (2)
----------- -------------- -------------
<S> <C> <C> <C>
Per Share ......... $ $ $
- -------------------- ----------- -------------- -------------
Total (3) ......... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the several Underwriters a 30-day option to
purchase up to 3,750,000 additional Shares on the same terms and
conditions as set forth above solely to cover over-allotments, if any. If
such option is exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
----------------
The Shares offered hereby are offered by the several Underwriters, subject to
prior sale, when, as and if issued to and accepted by them, subject to approval
of certain legal matters by counsel for the Underwriters and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the Shares will be made against payment therefor in New York, New
York on or about , 1998.
----------------
Merrill Lynch & Co.
Donaldson, Lufkin & Jenrette
Securities Corporation
A.G. Edwards & Sons, Inc.
Legg Mason Wood Walker
Incorporated
Morgan Stanley Dean Witter
PaineWebber Incorporated
Prudential Securities Incorporated
Salomon Smith Barney
----------------
The date of this Prospectus Supplement is May , 1998.
<PAGE>
HEALTH AND RETIREMENT PROPERTIES TRUST
[PICTURE]
Bridgepoint Square (5 Buildings)
Austin, TX
452,294 Square Feet, Built 1995-97
Major Tenants:
Motorola, Inc.
IBM Corporation
Southwestern Bell
[PICTURE]
BlueCross BlueShield Building
Eagan, MN
144,654 Square Feet, Built 1986
Major Tenants:
BlueCross BlueShield of Minnesota
[PICTURE]
One Franklin Plaza
Philadelphia, PA
608,161 Square Feet, Built 1980
Major Tenants:
SmithKline Beecham (U.S. Headquarters)
[PICTURE]
Putnam Place (2 Buildings)
Quincy/Braintree, MA
222,726 Square Feet, Built 1986-88
Major Tenants:
Putnam Investments, Inc.
GMAC
[PICTURE]
National Institute of Standards and Technology
Gaithersburg, MD
137,087 Square Feet, Built 1995
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SHARES. SUCH
TRANSACTIONS INCLUDE STABILIZING, THE PURCHASE OF SHARES TO COVER SYNDICATE
SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
S-2
<PAGE>
SUMMARY
The following summary should be read together with the detailed
information and financial statements appearing elsewhere or incorporated by
reference in this Prospectus Supplement and the attached Prospectus dated May
30, 1997 (the "Prospectus"). All references to "HRP" or the "Company" include
consolidated subsidiaries. Unless otherwise noted, the information presented
throughout this Prospectus Supplement assumes that the transactions described
in "Recent Developments--Investments," including the Company's acquisition of
ownership of the property subject to the mortgage described under "--1998
Commitments to Date," have been completed; but this offering (the "Offering")
is not contingent upon completion of those transactions and their completion is
not assured. Unless otherwise stated, the information presented also assumes
that the Underwriters' over-allotment option is not exercised.
THE COMPANY
HRP has an equity market capitalization of over $2 billion and is one of
the largest publicly traded REITs. HRP was organized in 1986 to invest
principally in nursing homes and rehabilitation health facilities. In the early
1990s HRP focused new investments in retirement housing and assisted living
facilities. By the mid-1990s the Company began to invest in office buildings:
first HRP purchased multi-tenanted medical office buildings; then HRP purchased
29 office buildings leased to agencies of the U.S. Government; and recently
most of HRP's new investments have been in commercial office buildings, some of
which are leased to medical related users (e.g., major drug companies and
health insurers) and some of which are leased to non-medical tenants. Also, in
1995, HRP invested $100 million of equity to help create another publicly
traded REIT, Hospitality Properties Trust ("HPT"). HRP's investments, at cost,
now total $2.9 billion and are divided as follows:
HRP Portfolio by Type of Property
(dollars in millions)
[tabular representation of pie chart]
Commercial Offices $994 36%
U.S. Government Leased Offices $461 16%
Medical Offices/Clinics/Bio-Tech $404 14%
Equity Investment in HPT $100 3%
Retirement/Assisted Living $442 15%
Specialty Healthcare $175 6%
Long Term Care $293 10%
HRP's ability to pay and increase its dividends depends upon its receipt
of rents from tenants. HRP believes its lease maturity schedule and tenant
credit quality enhance the security of its dividend. Over 71% of HRP's gross
revenues are derived from leases that expire in 2003 or thereafter. Over 77% of
HRP's rents are from tenants that are themselves investment grade rated or are
publicly owned.
<TABLE>
<CAPTION>
HRP Lease Maturities HRP Tenant Credit Quality
Percentage of Percentage of
Year Annual Revenues Tenant Annual Revenues
- ---------------------------- ----------------- ----------------------------------------- ----------------
<S> <C> <C> <C>
1998 .................. 3.9% U.S. Government ......................... 20.1%
1999 .................. 3.9 Marriott International .................. 8.4
2000 .................. 4.8 Other Investment Grade Tenants .......... 20.0
2001 .................. 10.1 Other Publicly Owned Tenants ............ 29.1
----
2002 .................. 5.8 Total Investment Grade and Public 77.6
2003 or after ......... 71.5 Other Tenants ........................... 22.4
----
</TABLE>
S-3
<PAGE>
Growth Strategy
HRP believes that three business trends are now occurring that will create
numerous high quality real estate investment opportunities, especially in
commercial office properties. First, a number of insurance companies and
pension plans that have historically owned large portfolios of direct real
estate investments are now selling their properties and investing in more
liquid real estate securities. Second, investment partnerships created to
purchase distressed real estate in the early 1990s are now divesting their
improved assets. Third, many companies that own the properties in which they
conduct business are selling their real estate to invest proceeds in their core
business activities. HRP continues regularly to evaluate investment
opportunities in healthcare related real estate; however, HRP has determined to
continue growing by broadening its investment horizons to include commercial
office properties, especially those leased to high credit quality tenants on a
long-term basis.
Historical Performance
During the 11 years since HRP's initial public offering, HRP has paid 45
consecutive quarterly dividends and raised its dividend rate 13 times. HRP's
current quarterly dividend rate is $.38/share ($1.52/share per year).
HRP Dividend Growth
[tabular representation of bar graph]
1987 $1.06
1988 $1.12
1989 $1.14
1990 $1.17
1991 $1.23
1992 $1.26
1993 $1.30
1994 $1.33
1995 $1.38
1996 $1.42
1997 $1.46
Quarter Ended March 31, 1998 Annualized $1.52
Since HRP's initial public offering in December 1986, an investment in the
Shares has provided shareholders an average total return, assuming reinvestment
of dividends when paid and including share price appreciation, of approximately
18% per annum. The following table shows how $100 invested in HRP's Shares at
December 31, 1986 would have grown to $665 as of May 8, 1998, as compared with
the return an investor would have realized from a $100 investment in the equity
securities represented by the Standard & Poor's 500 Index or the National
Association of Real Estate Investment Trusts ("NAREIT") Index.
<TABLE>
<CAPTION>
Value at May 8, 1998
Average Annual of a $100 Investment
Return on December 31, 1986
---------------- ---------------------
<S> <C> <C>
HRP ....................... 18.2% $665
S&P 500 Index (1) ......... 17.7% $633
NAREIT Index (1) .......... 11.6% $347
</TABLE>
- ---------
(1) Index to April 30, 1998, the most recent data available.
S-4
<PAGE>
SUMMARY HISTORICAL AND ADJUSTED PRO FORMA FINANCIAL INFORMATION
The following table is derived from the audited and unaudited financial
statements of the Company incorporated herein by reference and from the
Unaudited Adjusted Pro Forma Consolidated Financial Statements included
elsewhere in this Prospectus Supplement and should be read together with those
financial statements and the accompanying footnotes.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
1993 1994 1995 1996 1997
------------ ------------ ------------- ------------- -------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Operating Data:
Total revenues $56,485 $86,683 $113,322 $120,183 $208,863
Net income(2) 33,417 49,919 64,236 73,254 114,000
Dividends(3) 44,869 76,317 83,954 94,299 144,271
Per Common Share:
Net income(2) $.97 $.95 $1.08 $1.11 $1.24
Dividends(3) 1.30 1.33 1.38 1.42 1.46
Average Shares
outstanding 34,407 52,738 59,227 66,255 92,168
Other Data:(4)
Funds From
Operations $46,566 $71,851 $84,638 $99,106 $146,312
FFO per Share 1.35 1.36 1.43 1.50 1.59
Balance Sheet Data:
Investments, net $507,123 $766,990 $ 963,622 $1,182,085 $2,072,776
Total assets 527,662 840,206 999,677 1,229,522 2,135,963
Total borrowings 73,000 216,513 269,759 492,175 787,879
Total shareholders'
equity 441,135 602,039 685,592 708,048 1,266,260
<CAPTION>
Adjusted
Pro Forma (1)
-------------------------------
Three Months Year Ended Three Months
Ended March 31, December 31, Ended March 31,
----------------------------- -------------- ----------------
1997 1998 1997 1998
-------------- -------------- -------------- ----------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Operating Data:
Total revenues $35,884 $71,952 $362,742 $91,897
Net income(2) 19,399 31,381 171,859 42,087
Dividends(3) 35,532 40,377
Per Common Share:
Net income(2) $0.27 $0.31 $1.31 $.32
Dividends(3) 0.36 0.38
Average Shares
outstanding 71,905 101,471 130,725 130,941
Other Data:(4)
Funds From
Operations $27,030 $44,269 $233,035 $58,595
FFO per Share 0.38 0.44 1.78 0.45
Balance Sheet Data:
Investments, net $1,569,384 $2,319,691 $2,753,666
Total assets 1,679,377 2,389,251 2,813,501
Total borrowings 363,757 895,826 843,146
Total shareholders'
equity 1,240,849 1,362,270 1,839,200
</TABLE>
- ---------
(1) Adjusted pro forma data is presented at or for the year ended December 31,
1997 and at or for the three months ended March 31, 1998, giving effect to
the transactions described in "Recent Developments--Investments."
(2) Includes, as an extraordinary charge, the write-off of deferred finance
charges resulting from prepayment of debt: $4.3 million ($.13 per Share),
$2.0 million ($.04 per Share), $3.9 million ($.05 per Share) and $1.1
million ($.01 per Share) for the years 1993, 1994, 1996 and 1997,
respectively. Includes gain on sale of properties of $4.0 million ($.08
per Share), $2.5 million ($.04 per Share) and $2.9 million ($.03 per
Share) in 1994, 1995 and 1997, respectively, and a provision for loss on
sale of properties of $10.0 million ($.19 per Share) in 1994.
(3) Amounts represent dividends declared with respect to the periods shown.
(4) The Company's "Funds From Operations" ("FFO") represents net income
(computed in accordance with generally accepted accounting principles
("GAAP")), before gain or loss on sale of properties and extraordinary
items, depreciation and other non-cash items and includes HRP's pro rata
share of HPT's FFO. Management considers FFO to be a measure of the
financial performance of an equity REIT that provides a relevant basis for
comparison among REITs. FFO does not represent cash flow from operating
activities (as determined in accordance with GAAP) and should not be
considered as an alternative to net income as an indicator of the
Company's financial performance or to cash flows as a measure of
liquidity.
THE OFFERING
<TABLE>
<S> <C>
Shares being offered by the Company ................. 25,000,000
Shares to be outstanding after the Offering ......... 131,531,678
Use of proceeds ..................................... To repay debt, to make new investments and
for general business purposes.
NYSE symbol ......................................... HRP
</TABLE>
S-5
<PAGE>
RECENT DEVELOPMENTS
From January 1, 1997 through the date hereof HRP has engaged in the
following significant activities:
Investments
1997 Investments. During the year 1997 HRP purchased 70 office properties
with 6.2 million square feet for total consideration of $970 million:
1997 Acquisitions
<TABLE>
<S> <C> <C> <C>
Location Major Tenants Investment Square Feet
- ------------------------------- ---------------------------------------- ------- ------------
Investments Over $20 Million (000's)
New York, NY Health Insurance Plan of NY $110,928 420,368
Los Angeles, CA (2 buildings) Cedars-Sinai Medical Center 109,907 330,715
Philadelphia, PA SmithKline Beecham Corporation 78,967 608,161
Austin, TX (5 buildings) IBM, Motorola 78,563 452,294
Washington, DC US Army Corp of Engineers 64,756 323,270
College Park, MD US Dept of Agriculture 50,767 324,415
Massachusetts (20 buildings) Fallon Clinics 48,094 373,511
Washington, DC US Dept of VA 37,713 157,005
Oklahoma City, OK US IRS 24,762 180,781
Buffalo, NY US Dept of Justice 23,729 146,779
Gaithersburg, MD Nat. Inst. of Standards and Technology 23,603 137,087
San Diego, CA US DEA 22,998 147,955
Richland, WA (2 buildings) US Dept of Energy 21,388 137,331
Other Investments
Washington, DC Metro Area 4 buildings 66,766 522,085
Southern California 6 buildings 52,820 360,772
Philadelphia, PA Metro Area 5 buildings 29,832 306,487
Boston, MA Metro Area 1 building 5,497 75,440
Other locations 16 buildings 118,495 1,239,883
</TABLE>
In addition, during 1997, the Company purchased five nursing homes in Colorado
and one retirement housing property in Washington state for total consideration
of $30.1 million. Also, during 1997, the Company sold 14 nursing homes and
received mortgage principal payments and prepayments totalling $83.0 million.
1998 Investments. Since the beginning of 1998 HRP has purchased 21 office
properties with 2.4 million square feet for total consideration of $302
million:
1998 Year to Date Acquisitions
<TABLE>
<S> <C> <C> <C>
Location Major Tenants Investment Square Feet
- ------------------------------ ---------------------------- ------- ------------
Investments Over $20 Million (000's)
Philadelphia, PA PNC Bank $115,408 825,374
Rockville, MD US FDA 32,657 187,701
Quincy, MA (2 buildings) Putnam Investments 31,650 222,726
Other Investments
Minneapolis, MN Metro Area 3 buildings 38,580 511,994
Philadelphia, PA Metro Area 4 buildings 24,906 197,519
Austin, TX Metro Area 2 buildings 12,378 155,897
Boston, MA Metro Area 1 building 10,616 54,111
Other locations 7 buildings 35,963 289,654
</TABLE>
From January 1 through May 8, 1998 the Company has also received mortgage
payments and prepayments totalling $19.8 million on certain nursing home and
assisted living facility loans.
S-6
<PAGE>
1998 Commitments to Date. HRP has either issued letters of intent that
have been accepted or executed purchase agreements with respect to 15
commercial office properties containing 2.7 million square feet. The total
consideration payable for these properties is $405.1 million. Over half of this
sum is allocable to the acquisition of a mortgage note at a discount to face
value. This mortgage note is secured by a Class A office tower located in a
central business district of a major metropolitan area; at maturity,
realization on collateral for this secured note may involve foreclosure or
other judicial proceedings. All of HRP's pending acquisitions are subject to
various contingencies typical of major real estate transactions. HRP believes
that most, if not all, of these committed acquisitions will result in closed
transactions. However, no assurance of this fact can be provided at this time.
Financing
Common Stock. During February and March 1998 HRP issued 6,977,575 shares
to four unit investment trusts sponsored by various investment banks including
some of the Underwriters. The net proceeds of these offerings of $133.1 million
were used to repay outstanding amounts under HRP's revolving bank credit
facility (the "Bank Credit Facility") and for new investments.
Unsecured Term Debt. During February 1998 HRP issued $100 million of
unsecured 6.70% Notes due 2005 and $50 million of unsecured Remarketed Reset
Notes due 2007. The Remarketed Reset Notes currently require interest at 6.1%
per annum, but this interest rate and other terms are subject to change in July
1998. The $148.9 million net proceeds of these offerings were used to repay
outstanding amounts under the Bank Credit Facility and for new investments.
Bank Credit Facility. The Bank Credit Facility is used for interim
acquisition funding and for working capital until equity or long term debt is
raised. At January 1, 1998 the Bank Credit Facility permitted borrowings up to
$450 million and was scheduled to mature in 2001. In April 1998 the Bank Credit
Facility was amended to permit borrowings up to $500 million and to extend the
maturity to 2002.
Other Matters
Change of Name. The Company's Board of Trustees has recommended that the
Company's name be changed to "HRPT Properties Trust." This name change is
intended to call attention to the fact that the Company invests in commercial
office properties as well as healthcare related real estate. The new name was
selected to represent the Company's heritage and to be similar to the Company's
existing NYSE trading symbol. This change of name is subject to shareholder
approval at the annual meeting of shareholders scheduled for May 12, 1998.
New Trustee. In April 1998 Ralph J. Watts, a Trustee of the Company since
1995, died. At the May 12 shareholders' meeting the Board of Trustees intends
to nominate Mr. Patrick F. Donelan as a new Trustee to replace Mr. Watts. Mr.
Donelan is currently Executive Vice President of Dresdner Kleinwort Benson
North America LLC of New York, a subsidiary of Dresdner Bank AG of Germany.
S-7
<PAGE>
DISTRIBUTIONS
The Company has paid 45 consecutive quarterly dividends since its initial
public offering in December 1986. The Company's current dividend rate is
$.38/Share per quarter, or $1.52/Share per year. The next quarterly dividend
for the period ending June 30, 1998 is expected to be declared in early July
1998, and it will be paid to shareholders of record at that time. Purchasers of
Shares in the Offering who hold their Shares through the record date for the
next dividend will receive a full $.38 per Share dividend for the quarter
ending June 30, 1998.
The Company intends to continue to declare and pay future dividends in
cash on a quarterly basis, but may from time to time declare and pay special
dividends. Payment of dividends by the Company is subject to continued
compliance with certain restrictions contained in the Company's loan
agreements. The Company's dividends are based upon Funds From Operations, which
have in the past exceeded earnings. Cash available for distribution may not
necessarily equal Funds From Operations as the cash flow of the Company is
affected by certain factors not included in the Funds From Operations
calculation. Management expects that the Company will continue to pay dividends
based upon Funds From Operations and that such dividends may exceed earnings.
Accordingly, the Company expects a portion of its dividends to be considered a
return of capital, which may not be subject to income tax until Shares are
sold. There can be no assurance that the Company will be able to increase its
quarterly dividend or maintain it at the current level. Information about
dividends on a quarterly basis is summarized in the following table:
HRP Declared Dividends Per Share(1)
<TABLE>
<CAPTION>
Quarter 1987 1988 1989 1990 1991
- --------- --------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
First ... $.275(2) $.28 $.28 $.29 $.30
Second .. .26 .28 .28 .29 .31
Third ... .27 .28 .29 .29 .31
Fourth .. .28 .28 .29 .30 .31
----------- ------- ------- ------- -------
Total $1.085 $1.12 $1.14 $1.17 $1.23
<CAPTION>
Quarter 1992 1993 1994 1995 1996 1997 1998
- --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
First ... $.31 $.32 $.33 $.34 $.35 $.36 $.38
Second .. .31 .32 .33 .34 .35 .36
Third ... .32 .33 .33 .35 .36 .37
Fourth .. .32 .33 .34 .35 .36 .37
------- ------- ------- ------- ------- -------
Total $1.26 $1.30 $1.33 $1.38 $1.42 $1.46
</TABLE>
- ----------
(1) Dividends are generally paid in the quarter following the quarter to which
they relate. With respect to dividends paid in 1987 through 1997, $.289,
$.065, $.332, $.267, $.104, $.218, $.335, $.081, $.161, $.350 and $.252,
respectively, represented return of capital.
(2) Includes $.025 for the period from December 23, 1986 (commencement of the
Company's operations) through December 31, 1986.
PRICE RANGE OF SHARES
The Shares are listed on the NYSE under the symbol "HRP." The following
table sets forth the range of high and low sale prices on the NYSE from the
first quarter of 1996 through May 8, 1998:
<TABLE>
<CAPTION>
High Low
---------- --------
<S> <C> <C>
1996
First Quarter ................................ $17-3/8 $16
Second Quarter ............................... 17-7/8 16-3/8
Third Quarter ................................ 18-1/8 16-3/8
Fourth Quarter ............................... 19-1/4 17-3/4
1997
First Quarter ................................ 20-5/8 18
Second Quarter ............................... 19 17-3/4
Third Quarter ................................ 19-1/8 17-5/8
Fourth Quarter ............................... 20-5/16 18-9/16
1998
First Quarter ................................ 20-15/16 19-5/8
Second Quarter (through May 8, 1998) ......... 20-3/16 19-1/4
</TABLE>
S-8
<PAGE>
CAPITALIZATION
The following table shows the capitalization of the Company as of March
31, 1998 and on an adjusted pro forma basis to give effect to the completion of
the Offering and the application of the proceeds thereof and the completion of
all acquisitions listed in "Recent Developments--Investments." See "Unaudited
Adjusted Pro Forma Consolidated Financial Statements."
<TABLE>
<CAPTION>
March 31, 1998
-----------------------------
(dollars in thousands)
Adjusted
Actual Pro Forma(1)
------------- -------------
<S> <C> <C>
Bank Credit Facility .............................................. $ 160,000 $ 107,320
Mortgage debt payable ............................................. 26,157 26,157
Senior notes payable, net ......................................... 499,851 499,851
7.25% Convertible Subordinated Debentures due 2001 ................ 40,000 40,000
7.5% Convertible Subordinated Debentures due 2003 ................. 169,818 169,818
---------- ----------
Total indebtedness .............................................. 895,826 843,146
Shareholders' equity:
Preferred Shares of Beneficial Interest, par value $.01 per share;
50,000,000 authorized, none issued .............................. -- --
Common Shares of Beneficial Interest, par value $.01 per share;
125,000,000 and 150,000,000 shares authorized and adjusted pro
forma; 106,256,403 and 131,256,403 shares issued and outstanding
and adjusted pro forma ......................................... 1,063 1,313
Additional paid in capital ....................................... 1,512,767 1,989,447
Cumulative net income ............................................ 451,679 451,679
Dividends ........................................................ (603,239) (603,239)
---------- ----------
Total shareholders' equity ...................................... 1,362,270 1,839,200
---------- ----------
Total capitalization .............................................. $2,258,096 $2,682,346
========== ==========
</TABLE>
- ----------
(1) Borrowings under the Bank Credit Facility are expected to total
approximately $475 million at the date of closing of the Offering.
Adjusted pro forma borrowings under the Bank Credit Facility assume all of
the acquisitions listed in "Recent Developments--Investments" are
completed. If some or all of these acquisitions are not completed,
borrowings under the Bank Credit Facility may be reduced. The adjusted pro
forma calculation assumes the price to the public of the Shares offered
hereby will be $203/16.
USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to be
approximately $ million. A portion of the net proceeds from the Offering will
be used to repay amounts outstanding under the Company's Bank Credit Facility.
The remaining net proceeds plus new borrowings under the Bank Credit Facility
will be used to fund the acquisitions listed in "Recent
Developments--Investments." In the event such acquisitions are not consummated,
net proceeds of the Offering remaining after repayment of the Bank Credit
Facility will be used for general business purposes including new acquisitions.
Outstanding amounts under the Company's Bank Credit Facility bear interest, at
the Company's option, at LIBOR plus 75 basis points or prime, and the Bank
Credit Facility expires in 2002. At May 8, 1998 the interest rate applicable to
the Bank Credit Facility was 6.4% per annum.
S-9
<PAGE>
THE COMPANY
The Company has investments in 247 properties located in 35 states and the
District of Columbia.
Location of HRP Properties
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
Total Total
Number of Investment Number of Investment
State Properties (in thousands) State Properties (in thousands)
- ------------------------------ ------------ ---------------- ---------------------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Alaska ....................... 1 $ 1,000 Nebraska ................... 10 $ 10,733
Arizona ...................... 9 65,269 New Hampshire .............. 1 3,754
California ................... 32 325,145 New Jersey ................. 4 28,707
Colorado ..................... 11 55,068 New Mexico ................. 2 11,011
Connecticut .................. 10 106,549 New York ................... 6 185,042
Delaware ..................... 1 45,000 North Carolina ............. 2 3,015
District of Columbia ......... 4 147,170 Ohio ....................... 4 27,244
Florida ...................... 10 148,672 Oklahoma ................... 1 24,762
Georgia ...................... 5 15,233 Pennsylvania ............... 16 511,723
Illinois ..................... 3 101,454 Rhode Island ............... 1 8,100
Iowa ......................... 7 8,204 South Dakota ............... 3 7,589
Kansas ....................... 4 7,745 Texas ...................... 19 189,253
Louisiana .................... 1 19,139 Vermont .................... 8 29,768
Maryland ..................... 7 182,210 Virginia ................... 5 82,056
Massachusetts ................ 34 251,238 Washington ................. 4 40,931
Michigan ..................... 2 9,247 West Virginia .............. 1 4,879
Minnesota .................... 3 38,580 Wisconsin .................. 9 44,016
Missouri ..................... 3 11,564 Wyoming .................... 4 17,564
-- ----------
Total properties ........... 247 2,768,634
===
Hospitality Properties
Trust (147 hotels in
35 states) ................. 100,000
----------
Total investments .......... $2,868,634
==========
</TABLE>
S-10
<PAGE>
Commercial Office Properties
The Company began to invest in multi-tenant medical office buildings in
the early 1990s. After the acquisition of a portfolio of 29 properties leased
to the U.S. Government, the Company developed the infrastructure to acquire and
manage office buildings on a nationwide basis. The Company believes that
certain current business trends have created favorable investment opportunities
for commercial office properties: institutional investors have begun disposing
of their direct ownership of properties and to invest in more liquid real
estate securities; purchasers of distressed properties in the early 1990s are
now divesting their improved assets; and many businesses are selling their
owned real estate to invest proceeds in core activities. Although there are
other REITs and companies that specialize in acquiring and owning commercial
office properties, the Company believes that these trends will afford it
numerous investment opportunities at attractive prices for several years.
Moreover, unlike most REITs that focus exclusively upon commercial office
properties, the Company's focus to date has been upon stabilized office
properties, with long term leases to strong credit tenants rather than
properties that afford immediate turn around potential because of vacancies or
short term leases.
Government Office Properties
Most U.S. Government office space requirements are managed by the General
Services Administration ("GSA"). Most large GSA leases are written for initial
terms of 10 to 20 years plus tenant renewal options totaling an additional 5 to
20 years. Many GSA leases, including leases for some of the Company's
properties, permit the Government to terminate the lease by notice given any
time after a so-called "firm term." The weighted average remaining firm term
for the Government office properties owned by the Company is approximately
seven years. From 1980 to September 1996 the amount of space leased by the GSA
increased from 139 million square feet to 146 million square feet. This
increase in U.S. Government leased space occurred despite a declining civilian
government work force, as federal civilian employment decreased approximately
9% from 2.2 million employees in 1980 to 2.0 million employees in 1995. The
Company believes that the GSA's long term demand for leased space will continue
to be strong as a result of federal budget pressure to limit capital
expenditures and the need to use funds available for capital expenditures to
modernize the GSA inventory of owned buildings, over half of which exceed 50
years of age. Based upon the Government's investments in tenant improvements to
the Company's properties, the high cost of relocation and the stability of the
missions and space requirements of the Government agencies that occupy these
properties, the Company believes that there is a high probability of GSA lease
renewals for its properties through their renewal options, and in many cases
beyond those periods. Moreover, because of the locations of many of these
properties and the high standards to which they have been developed, the
Company believes it may be able to lease or sell most of these properties to
commercial users in the event the Government terminates or fails to renew a
lease.
Healthcare Properties
The population of the United States is aging. According to information
from the U.S. Census Bureau, the segment of the U.S. population age 65 and over
is increasing and is expected to increase sharply through the year 2020. The
Company believes that the demand for services provided at retirement
communities, assisted living centers and nursing homes should increase as the
population ages. Certain recent federal and state legislation seeks to limit
the amount of growth in government expenditures for Medicare and Medicaid.
These limitations may adversely affect the profitability of healthcare
operating companies and might, in certain circumstances, affect their ability
to pay rent or service debt. These government funding limitations will likely
also make it less profitable to construct new healthcare facilities and this
may increase the value of existing facilities. The Company believes that the
net effect of these demographic and legislative changes will be to make it less
profitable to provide services and facilities for government funded patients
and more profitable to provide services and facilities for non-government
funded patients. The Company intends to respond to these changes in three ways:
(i) by focusing new investments in healthcare properties that are not directly
dependent upon a high percentage of Medicaid or Medicare revenues, including
retirement housing, assisted living facilities, medical office buildings and
nursing homes with a high percentage of private pay revenues; (ii) by
encouraging and making funding available to the operators of the Company's
properties to improve these properties in order to attract a greater amount of
non-government revenues and (iii) whenever possible, by making new investments
in properties leased to well capitalized operators.
S-11
<PAGE>
Equity Investment in HPT
The Company has invested $100 million and owns 4,000,000 common shares of
beneficial interest of HPT, which constitute 9.3% of the total HPT shares
outstanding. HPT is a REIT in the business of owning hotels and leasing them to
independent hotel operating companies. HPT was organized by the Company in
February 1995 as an outgrowth of the Company's relationship with Host Marriott
Corporation and Marriott International, Inc. ("Marriott"), which arose from the
Company's previous investment in retirement communities leased to Marriott. In
August 1995, HPT completed an initial public offering of shares and currently
has a total equity market capitalization of $1.4 billion. HPT currently owns or
has commitments to purchase 150 hotels, which are located in 35 states and
contain 21,255 rooms. The Company receives dividends on its HPT shares at the
current annual rate of $2.56 per share. The Company's financial reports include
its share of HPT's operating results under the equity method of accounting. HPT
shares are listed on the NYSE, and on May 8, 1998 the last reported sale price
for HPT shares was $327/8 per share.
INVESTMENT POLICY
In order to benefit from potential property appreciation, the Company
prefers to own and lease properties rather than make mortgage investments.
Approximately 97.1% of the Company's investments are in owned properties.
HRP Type of Investment
(dollars in millions)
[tabular representation of pie chart]
Owned* $2,785 97%
Mortgages $84 3%
- ----------
*Owned properties include the Company's equity investment in HPT. HPT owns all
of its hotels.
FINANCING POLICY
The Company considers equity offerings when, in the Company's judgment,
doing so will improve the Company's capital structure, while not materially
adversely affecting the market value of its Shares or impeding the Company's
ability to increase regularly its per share dividend rate. In addition to the
use of equity, the Company utilizes short term and long term borrowings to
finance investments and to pay operating expenses. The Company's unsecured
senior indebtedness has been rated investment grade by Standard & Poor's
Ratings Services, Moody's Investors Service, Inc. and Fitch IBCA, Inc. When
variable rate debt is used, the Company often purchases interest rate futures
contracts to hedge against changes in interest rates. The Company's borrowing
guidelines established in the Bank Credit Facility and by its Board of Trustees
prohibit the Company from maintaining a debt to book capitalization ratio of
greater than .50 to 1, except in certain limited circumstances. On May 8, 1998,
the Company's debt to book capitalization ratio was .41 to 1. After completion
of the Offering and the application of the proceeds thereof, the Company's as
adjusted debt to book capitalization ratio will be approximately .31 to 1. As
of May 8, 1998 approximately $204.9 million of the Company's total debt
outstanding was represented by subordinated convertible debentures, convertible
into Shares at $18.00 per Share. Upon conversion of these debentures and
completion of the Offering, the Company's as adjusted debt to book
capitalization ratio would be approximately .24 to 1. The Company may in the
future choose to modify its debt to book capitalization guidelines. There can
be no assurance that any debentures will be converted or that equity or debt
capital will be available in the future on reasonable terms to fund the
Company's operations or growth.
S-12
<PAGE>
LEASE EXPIRATIONS
The following table sets forth the percentage of the Company's annual
revenues from investments represented by leases and mortgages that expire or
mature in the years 1998 through 2007 and thereafter.
<TABLE>
<CAPTION>
Adjusted Pro Forma Percentage of
Year Annual Revenues(1) Annual Revenues
- --------------------------------- ----------------------- ----------------
(dollars in thousands)
<S> <C> <C>
1998 ............................ $ 14,321 3.9%
1999 ............................ 14,072 3.9
2000 ............................ 17,563 4.8
2001 ............................ 37,058 10.1
2002 ............................ 21,093 5.8
2003 ............................ 31,062 8.5
2004 ............................ 17,942 4.9
2005 ............................ 27,568 7.5
2006 ............................ 35,304 9.7
2007 and thereafter (2) ......... 150,026 40.9
-------- -----
Totals: ......................... $366,009 100.0%
======== =====
</TABLE>
- ----------
(1) Adjusted pro forma annual revenues are for the period ended March 31, 1998
and assume all acquisitions described in "Recent
Developments--Investments" occurred on January 1, 1997. Most of the
Company's commercial office properties and properties leased to the U.S.
Government are leased on a gross or modified gross lease basis. Most of
the Company's healthcare properties are leased on a net lease basis.
Accordingly, the revenues received by the Company from the commercial
office and government office properties are not necessarily indicative of
the net operating income from those properties, and the revenues and
percentage of total revenues are not necessarily indicative of the net
operating income or FFO likely to be realized by the Company.
(2) Includes the Company's pro rata share of revenues of HPT. All of HPT's
leases expire after 2007. The Company reports income and FFO derived from
its investment in HPT using the equity method of accounting. The Company
believes its pro rata share of HPT's revenues included above is an
appropriate means to reflect the lease expirations in the Company's
current investment portfolio.
THE LESSEES
The Company's financial condition depends, in large part, upon the
financial condition of its lessees. The Company's two largest tenants are the
U.S. Government and Marriott. Approximately 48.5% of the Company's annual
revenues are derived from tenants whose unsecured obligations are rated
investment grade. Another 29.1% of the Company's annual revenues come from
other public companies that are not investment grade rated but for whom credit
evaluation information is readily available.
<TABLE>
<CAPTION>
Adjusted Pro Forma Percentage of
Tenant Annual Revenues(1) Annual Revenues
- ------------------------------------------------------------ ----------------------- ----------------
(dollars in thousands)
<S> <C> <C>
U.S. Government ............................................ $ 73,498 20.1%
Marriott ................................................... 30,644 8.4
Other Investment Grade Tenants ............................. 73,447 20.0
Other Publicly Owned Tenants (2) ........................... 106,502 29.1
-------- -----
Subtotal Investment Grade and Other Public Tenants ......... 284,091 77.6
Other Tenants .............................................. 81,918 22.4
-------- -----
Totals: .................................................... $366,009 100.0%
======== =====
</TABLE>
- ----------
(1) Adjusted pro forma annual revenues are for the period ended March 31, 1998
and assume all acquisitions described in "Recent
Developments--Investments" occurred on January 1, 1997. Most of the
Company's commercial office properties and properties leased to the U.S.
Government are leased on a gross or modified gross lease basis. Most of
the Company's healthcare properties are leased on a net lease basis.
Accordingly, the revenues received by the Company from the commercial
office and government office properties are not necessarily indicative of
the net operating income from those properties, and the revenues and
percentage of total revenues are not necessarily indicative of the net
operating income or FFO likely to be realized by the Company.
(2) Includes the Company's $100 million investment in HPT and the Company's pro
rata share of HPT's FFO. HPT is itself investment grade rated by Standard
& Poor's Ratings Services (BBB-) and by Moody's Investors Service, Inc.
(Baa3). However, the Company's investment in HPT is an equity investment
and not a debt obligation of HPT. The Company reports income and FFO
derived from its investment in HPT using the equity method of accounting.
The Company believes its pro rata share of HPT's FFO should be included in
its percentage of revenues derived from publicly owned companies as
approximately 90% of HPT's hotels are currently operated by affiliates of
publicly owned companies.
S-13
<PAGE>
U.S. Government. Most of the Company's U.S. Government leases were
undertaken by the GSA and assigned to other Government agencies including the
U.S. Department of Veterans Affairs, the Internal Revenue Service, the U.S.
Department of Agriculture, the National Institute of Standards and Technology,
U.S. Defense Information Systems, and the U.S. Department of Energy. All of
these leases are general obligations of the U.S. Government.
Marriott International. Marriott is a NYSE-listed company with an equity
market capitalization on May 8, 1998 of $8.3 billion. In addition to its
retirement housing and assisted living properties, some of which are leased
from the Company, Marriott owns and operates hotels and other businesses on a
worldwide basis and has announced annual revenues of approximately $9.0
billion. Marriott has unconditionally guaranteed its lease obligations to the
Company. Marriott's senior credit obligations are rated investment grade by
Standard & Poor's (BBB) and Moody's Investors Service, Inc. (Baa2).
Investment Grade Tenants. The Company leases office space to the following
investment grade companies or their subsidiaries: Goldman Sachs & Co., New York
Life Insurance Company, Ford Motor Credit Corp., Northern Telecom Ltd.,
SmithKline Beecham Corporation, Merck & Co., Inc., Aetna Inc., PNC Bank Corp.,
FMC Corporation, Druck Corporation, AT&T Corp., IBM Corp., Motorola, Inc.,
FedEx Incorporated, Legg Mason Wood Walker Incorporated, Merrill Lynch & Co.,
USF&G Corporation, SBC Communications, Inc., Hoechst AG, Schering-Plough
Corporation, Marsh McLennan, Inc., Bell Atlantic Corporation and HEALTHSOUTH
Corporation. Certain of the Company's properties are leased to not-for-profit
entities that are investment grade rated: two medical clinic buildings and a
headquarters office building in Mid-Town Manhattan are leased to Health
Insurance Plan of Greater New York, a not-for-profit health maintenance
organization; medical office buildings in Boston, Massachusetts and Aurora,
Colorado are principally leased to affiliates of Boston's Beth Israel Hospital,
Boston's Children's Medical Center, Harvard Pilgrim Healthcare (a Boston area
not-for-profit health maintenance organization), and Columbia HealthOne LLC (a
joint venture between Columbia/HCA Healthcare Corporation and HealthOne, Inc.,
a not-for-profit healthcare system); and Cedars Sinai Medical Center, a
not-for-profit hospital based in Los Angeles, is the largest tenant in two
medical office buildings and garages attached to that hospital that are owned
by the Company.
Other Public Company Tenants. The Company also leases to the following
publicly owned tenants or their subsidiaries: Paragon Health Network, Inc.,
Brookdale Living Communities, Inc., Sun Healthcare Group, Inc., Genesis Health
Ventures, Inc., ARV Assisted Living Inc., Integrated Health Services, Inc.,
Alliance Pharmaceutical Corp., Corvas International, Inc., Neurocrine
Biosciences, Inc., Laboratory Corp. of America Holdings, IBAH Inc.,
CytoTherapeutics, Inc., Apollo Group, Concentra Managed Care, Inc., Danka
Business Systems plc, Focal, Inc., MedPartners, Inc., National Instrument
Corporation, NCQ Corp., Inc., Ohio Casualty Corporation, Paychex, Inc., PSW
Technologies, Inc., Quest Diagnostics Incorporated, Silicon Graphics, Inc., Sun
Microsystems, Inc., United Healthcare Corporation, Westinghouse Electric
Corporation and Unilab Corp.
Other Tenant Operators. The Company's other tenants include 30 privately
held nursing home and assisted living companies and over 400 private company
tenants in multi-tenant office buildings.
S-14
<PAGE>
MANAGEMENT
The Trustees and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ------------------------------ ----- -------------------------------------------------
<S> <C> <C>
Barry M. Portnoy 52 Managing Trustee
Gerard M. Martin 63 Managing Trustee
Bruce M. Gans, M.D. 51 Trustee
Rev. Justinian Manning, C.P. 71 Trustee
Patrick F. Donelan 57 Trustee Nominee
David J. Hegarty 41 President, Chief Operating Officer and Secretary
Ajay Saini 38 Treasurer and Chief Financial Officer
John A. Mannix 42 Executive Vice President
David M. Lepore 37 Senior Vice President
</TABLE>
Barry M. Portnoy was a founder and has been a Trustee of the Company since
its organization in 1986. Mr. Portnoy also serves as a Managing Trustee of HPT.
Mr. Portnoy was a partner in the law firm of Sullivan & Worcester LLP from 1978
through March 1997.
Gerard M. Martin was a founder and has been a Trustee of the Company since
its organization in 1986. Mr. Martin also serves as a Managing Trustee of HPT.
Bruce M. Gans, M.D. has been a Professor and Chairman of the Department of
Physical Medicine and Rehabilitation at Wayne State University and a Senior
Vice President of the Detroit Medical Center since 1989.
The Reverend Justinian Manning, C.P. has been, since September 1990, the
pastor of St. Gabriel's parish in Brighton, Massachusetts. He is also on the
Board of Directors of Charlesview, a low and moderate income housing program.
He is past Treasurer and a former Director of St. Paul's Benevolent,
Educational and Missionary Institute, a New Jersey corporation, which oversees
foundations in Massachusetts, Connecticut, New York, Pennsylvania, Maryland and
Florida and the Institute's Overseas Missions. He was formerly on the Board of
Directors of St. Paul's Monastery Manor, in Pittsburgh, Pennsylvania, a
congregate housing facility. He belonged to the Provincial Council of the
Passionist Provincialate and is the former Director of Consolidation for the
Community.
Patrick F. Donelan has been since 1996 Executive Vice President of
Dresdner Kleinwort Benson North America LLC, a New York based banking
institution, which is a subsidiary of Dresdner Bank AG of Germany. Prior to
1996 Mr. Donelan was Chairman of Kleinwort Benson North America, Inc., a
subsidiary of Kleinwort Benson Ltd. of England, which was acquired by Dresdner
Bank AG in 1997. The Board of Trustees intends to nominate Mr. Donelan to fill
a current vacancy that was caused by the recent death of its former Trustee
Ralph J. Watts.
David J. Hegarty is the President, Chief Operating Officer and Secretary
of the Company. He has served the Company in various capacities since 1987,
prior to which he was an audit manager with Ernst & Young LLP. Mr. Hegarty is a
certified public accountant.
Ajay Saini is the Treasurer and Chief Financial Officer of the Company.
Mr. Saini has served the Company in various capacities since June 1990, prior
to which he was employed by Ernst & Young LLP. Mr. Saini is a certified public
accountant.
John A. Mannix is the Executive Vice President of the Company. Mr. Mannix
served as Vice President with the Company's investment advisor from 1989 to
1998. Mr. Mannix is responsible for acquisitions of medical office,
biotechnology and commercial office properties and is active in leasing of the
portfolio. Mr. Mannix is a member of the Urban Land Institute, Building Owners
and Managers Association and the Greater Boston Real Estate Board's Real Estate
Finance Association.
David M. Lepore is the Senior Vice President of the Company responsible
for building operations, leasing and acquisition diligence. Mr. Lepore has been
employed in various capacities by the Company's investment advisor since 1992.
Prior to 1992 he was employed by The Beacon Companies. Mr. Lepore is a member
of the Building Owners and Managers Association (BOMA) and is a certified Real
Property Administrator.
S-15
<PAGE>
Dr. Gans, Mr. Donelan and Rev. Manning are and will be the Company's
Independent Trustees, that is, Trustees who are not affiliated with any of the
Company's lessees or mortgagors or with REIT Management & Research, Inc. ("the
Advisor"). Under the Company's Declaration of Trust, a majority of the
Company's Trustees will at all times consist of Independent Trustees. All major
investment and policy decisions affecting the Company are made by the Board of
Trustees.
All day to day operations of the Company are conducted by the Advisor
pursuant to an investment advisory contract. The Advisor is owned by Messrs.
Portnoy and Martin. Messrs. Portnoy, Martin, Hegarty, Saini, Mannix and Lepore,
as well as all other personnel involved in the Company's operations, are
employees of the Advisor. The Advisor is paid an annual advisory fee calculated
on the basis of total assets under management (.7% of the first $250 million,
plus .5% of additional assets), and an annual incentive fee equal for each year
to 15% of the annual increase in the Company's funds from operations (as
defined in the investment advisory contract) per share (but in no event more
than $.01 per share), times the weighted average number of shares outstanding
on a fully diluted basis in such year. With respect to properties which are
gross leased and/or occupied by multiple tenants, certain property management
services, which are beyond the scope of the investment advisory contract, are
provided under property management contracts by the Advisor. The Company
believes that the fees paid for property management services (approximately 3%
of gross revenues from the affected properties) are at or below the levels the
Company would pay on an arms' length basis for similar services in the market
generally. Prior to the Company's decision to invest in commercial office
properties affiliates of the Advisor had invested in commercial real estate for
their own account. Now that the Company is investing in these types of
properties the Advisor and the Company have agreed that the Advisor will not
purchase or sell any commercial office real estate without first offering it to
the Company. The investment advisory contract and the various property
management contracts have all been approved on behalf of the Company by the
Independent Trustees. All incentive fees earned by the Advisor are paid in
Shares. The Company believes that its total administrative costs are at or
below industry averages.
FEDERAL INCOME TAX AND ERISA CONSIDERATIONS
The following description of certain federal income tax matters and
Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
considerations relating to the Company is qualified in its entirety by
reference to the more detailed description thereof contained in the Company's
1997 Annual Report on Form 10-K (the "Form 10-K"), which is incorporated herein
by reference. Sullivan & Worcester LLP, Boston, MA, has rendered its opinion
that the discussion in this section and in the Form 10-K in the sections
captioned "Federal Income Tax Considerations" and "ERISA Plans, Keogh Plans and
Individual Retirement Accounts" in all material respects is accurate and fairly
summarizes the federal income tax and ERISA issues addressed therein and the
opinions of counsel referred to in those sections represent Sullivan &
Worcester LLP's opinions on those subjects.
The Company believes that it has qualified, and it intends to remain
qualified, as a real estate investment trust (a "REIT") under the Internal
Revenue Code of 1986, as amended (the "Code"). As a REIT, the Company's net
income distributed as dividends to shareholders will generally be exempt from
federal income taxation. Distributions to the Company's shareholders generally
will be includable in their income; however, dividends distributed that are in
excess of current or accumulated earnings will be treated for tax purposes as a
return of capital to the extent of a shareholder's basis in its Shares, and
will reduce such basis.
Treasury Regulations issued on October 6, 1997 (the "New Regulations")
alter the withholding rules on dividends paid to certain foreign holders of
Shares. Initially to have been effective for payments made after December 31,
1998, the New Regulations are now slated to be effective for payments made
after December 31, 1999. Under the New Regulations, to obtain a reduced rate of
withholding under an income tax treaty, a foreign holder of Shares generally
will be required to provide an Internal Revenue Service Form W-8 certifying its
entitlement to benefits under the treaty. The New Regulations also provide
special rules to determine whether, for purposes of determining the
applicability of a tax treaty, dividends paid to a foreign holder that is an
entity should be treated as paid to the entity or to those holding an interest
in that entity, and whether such entity or such holders in the entity are
entitled to benefits under the tax treaty. The New Regulations also alter the
information reporting and backup withholding rules applicable to foreign
holders of Shares and, among other things, provide certain presumptions under
which a foreign holder is subject to information reporting and backup
withholding until the Company receives certification from such holder of its
foreign status.
President Clinton has proposed four legislative changes (the "Clinton
Proposals") that would affect the taxation and operation of REITs generally,
but are not expected to alter significantly the Company's operations or to
affect
S-16
<PAGE>
its continued qualification as a REIT. First, the Clinton Proposals would limit
the grandfathered status of so-called "paired share REITs" by, in effect,
preventing them from acquiring or operating new properties under the paired
share structure. Second, the Clinton Proposals would prevent a REIT from
acquiring more than 10% of the value of all classes of stock of a corporation
(other than another REIT), with certain grandfathering for existing ownership
interests. Third, with respect to companies electing REIT status for the first
time, the Clinton Proposals would impose a new "closely held" prohibition on
the ownership of a REIT so that no one person (i.e., a corporation,
partnership, trust, or individual) could own more than 50% of the vote or value
of the REIT. With respect to these first three Clinton Proposals, the Company
is not engaged in the types of activities that are the subject of the proposed
changes, nor are there any plans for the Company to become so engaged. Thus,
even if ultimately enacted, these three Clinton Proposals would not alter the
Company's operations or affect its continued qualification as a REIT. The
fourth Clinton Proposal would impose both corporate-level and shareholder-level
taxes on a corporation worth more than $5 million (other than an S corporation
or another REIT) that merges into or combines with a REIT after December 31,
1998 in an otherwise tax-free merger or reorganization. While the Company has
no current plans to merge with or combine with any such corporation, the
Company in the past has been a party to such tax-free mergers and
reorganizations as part of its acquisition and growth strategy. Accordingly, it
is possible that this fourth Clinton Proposal may preclude or affect the
attractiveness of potential future mergers or acquisitions with real estate
companies.
The Company intends to conduct its affairs so that the assets of the
Company will not be deemed to be "plan assets" of any individual retirement
account, employee benefit plan subject to Title 1 of ERISA, or other qualified
retirement plan subject to Section 4975 of the Code which acquires its Shares.
EACH PROSPECTIVE PURCHASER OF THE SHARES OFFERED HEREBY IS ADVISED TO
CONSULT HIS OR HER OWN PROFESSIONAL ADVISOR REGARDING THE SPECIFIC FEDERAL,
STATE, LOCAL, FOREIGN AND OTHER TAX AND ERISA CONSEQUENCES TO HIM OR HER OF THE
PURCHASE, OWNERSHIP AND SALE OF THE SHARES OFFERED HEREBY.
S-17
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the purchase agreement
(the "Purchase Agreement"), the Company has agreed to sell to each of the
Underwriters named below (each, an "Underwriter" and, collectively, the
"Underwriters"), for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"), Donaldson, Lufkin & Jenrette Securities Corporation, A.G.
Edwards & Sons, Inc., Legg Mason Wood Walker Incorporated, Morgan Stanley & Co.
Incorporated, PaineWebber Incorporated, Prudential Securities Incorporated and
Smith Barney Inc. are acting as representatives (the "Representatives"), and
each of the Underwriters has agreed severally to purchase from the Company, the
number of Shares set forth opposite its respective name below.
<TABLE>
<CAPTION>
Number of
Underwriter Shares
- ------------------------------------------------------------------ -----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated ............................................
Donaldson, Lufkin & Jenrette Securities Corporation .........
A.G. Edwards & Sons, Inc. ...................................
Legg Mason Wood Walker Incorporated .........................
Morgan Stanley & Co. Incorporated ...........................
PaineWebber Incorporated ....................................
Prudential Securities Incorporated ..........................
Smith Barney Inc. ...........................................
----------
Total ..................................................... 25,000,000
==========
</TABLE>
The Purchase Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters are
committed to purchase all of such Shares if any are purchased.
The Representatives have advised the Company that the Underwriters propose
initially to offer such Shares to the public at the public offering price set
forth on the cover page of this Prospectus Supplement and to certain dealers at
such price less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may reallow, a discount not in excess
of $ per share on sales to certain other dealers. After the initial
offering to the public, the public offering price, concession and discount may
be changed.
The Company has granted to the Underwriters an option, exercisable for 30
days after the date of this Prospectus Supplement, to purchase up to 3,750,000
additional Shares (the "Option Shares") to cover over-allotments, if any, at a
price per share equal to the public offering price per share set forth on the
cover page of this Prospectus Supplement, less the underwriting discount. If
this option is exercised, each Underwriter will, subject to certain conditions,
have a firm commitment to purchase approximately the same percentage of such
Option Shares that the number of Shares initially purchased by it bears to
25,000,000 Shares.
In the Purchase Agreement, the Company has agreed to indemnify the
Underwriters against certain civil liabilities, including liabilities under the
Securities Act of 1933, as amended.
The Company has agreed that it will not, without the prior written consent
of Merrill Lynch, register, offer, sell, contract to sell, grant any option to
purchase or otherwise dispose of any Shares or any securities convertible into
or exercisable or exchangeable for Shares, or warrants to purchase Shares, for
a period of 90 days after the date of the Purchase Agreement, other than (i)
the Shares offered hereby, (ii) Shares purchased pursuant to dividend
reinvestment and stock purchase plans, (iii) Shares to be issued pursuant to
the Company's Incentive Share Award
S-18
<PAGE>
Plan, (iv) provided that recipients of such Shares are subject to the above
restriction, Shares to be issued in connection with acquisitions or in a unit
investment trust transaction and (v) Shares to be issued upon conversion of the
Company's outstanding convertible debentures.
Until the distribution of the Shares is completed, rules of the Securities
and Exchange Commission (the "Commission") may limit the ability of the
Underwriters and certain selling group members to bid for and purchase the
Shares. As an exception to these rules, the Underwriters are permitted to
engage in certain transactions that stabilize the price of the Shares. Such
transactions consist of bids or purchases for the purposes of pegging, fixing
or maintaining the price of the Shares.
If the Underwriters create a short position in the Shares in connection
with the Offering, i.e., if they sell more Shares than are set forth on the
cover page of this Prospectus Supplement, the Underwriters may reduce that
short position by purchasing Shares in the open market. The Underwriters may
also elect to reduce any short position by exercising all or part of the
over-allotment option described above.
The Underwriters may also impose a penalty bid on certain selling group
members. This means that if the Underwriters purchase Shares in the open market
to reduce the Underwriters' short position or to stabilize the price of the
Shares, they may reclaim the amount of the selling concession from the selling
group members who sold those Shares as part of the Offering.
In general, purchases of a security for the purposes of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Shares. In addition,
neither the Company nor any of the Underwriters makes any representation that
the Underwriters will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
LEGAL MATTERS
Certain legal matters with respect to the Shares offered by the Company
have been passed upon for the Company by Sullivan & Worcester LLP, Boston, MA
and will be passed upon for the Underwriters by Brown & Wood LLP, New York, NY.
Sullivan & Worcester LLP has relied and Brown & Wood LLP will rely, as to all
matters of Maryland law, upon the opinion of Piper & Marbury L.L.P., Baltimore,
MD. Sullivan & Worcester LLP has also given its opinion as to certain federal
income tax matters and certain ERISA considerations relating to the Company.
See "Federal Income Tax and ERISA Considerations." Barry M. Portnoy was a
partner in the firm of Sullivan & Worcester LLP until March 31, 1997 and is a
Managing Trustee of the Company and of HPT, a director and 50% shareholder of
the Advisor and a director and/or significant shareholder of certain lessees of
the Company. Sullivan & Worcester LLP represents the Advisor, such lessees and
certain of their affiliates on various matters.
EXPERTS
The consolidated financial statements and financial statement schedules of
the Company included or incorporated by reference in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, have been audited by
Ernst & Young LLP, independent auditors, as set forth in their reports thereon
included or incorporated by reference therein and incorporated herein by
reference which, as to the years 1997 and 1996, are based in part on the report
of Arthur Andersen LLP, independent public accountants. Such consolidated
financial statements and financial statement schedules are incorporated herein
by reference in reliance upon such reports given upon the authority of such
firms as experts in accounting and auditing.
Combined financial statements of Marriott International, Inc. (f/k/a New
Marriott MI, Inc.), as contained in its Annual Report on Form 10-K for the year
ended January 2, 1998, have been audited by Arthur Andersen LLP, independent
public accountants, as set forth in their report thereon included therein and
incorporated herein by reference. Such financial statements are incorporated
herein by reference in reliance upon such report given upon the authority of
said firm as experts in accounting and auditing.
The statement of revenue and certain expenses for 1600 Market Street for
the year ended December 31, 1997 included in the Company's Current Report on
Form 8-K dated March 30, 1998 has been audited by Ernst & Young
S-19
<PAGE>
LLP, independent auditors, as set forth in their report included therein and
incorporated herein by reference. Such financial statements are incorporated
herein by reference in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
In addition to the documents incorporated by reference or deemed
incorporated by reference into the accompanying Prospectus, which Prospectus is
supplemented by this Prospectus Supplement, the following documents, which have
been filed with the Commission pursuant to the Securities and Exchange Act of
1934, as amended (the "Exchange Act"), are hereby incorporated in this
Prospectus Supplement and specifically made a part hereof by reference: (i) the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997, as amended (the "Annual Report"); (ii) the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 31, 1998; (iii) the Company's
Current Reports on Form 8-K dated February 11, 1998, February 12, 1998,
February 17, 1998, February 18, 1998, February 19, 1998, February 27, 1998,
March 19, 1998, March 24, 1998, March 30, 1998, April 10, 1998, April 14, 1998
and May 11, 1998; and (iii) the combined financial statements of Marriott,
Commission No. 1-13881, at and for the fiscal year ended January 2, 1998, as
contained in Marriott's Annual Report on Form 10-K for the year ended January
2, 1998. All documents filed by the Company pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act (i) subsequent to the date of this Prospectus
Supplement and prior to the termination of the Offering shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing of such documents.
Any statement contained herein or in a document incorporated or deemed to
be incorporated herein by reference shall be deemed to be modified or
superseded for purposes of this Prospectus Supplement to the extent that a
statement contained herein, or in any other subsequently filed document that
also is or is deemed to be incorporated herein by reference, modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this Prospectus Supplement or the accompanying Prospectus.
The Company will provide without charge to each person to whom this
Prospectus Supplement is delivered, upon the written or oral request of such
person, a copy of any and all of the information that has been incorporated by
reference in this Prospectus Supplement (excluding exhibits unless such
exhibits are specifically requested or such exhibits are specifically
incorporated by reference into the information that this Prospectus Supplement
incorporates). Requests for such copies should be made to the Company at its
principal executive offices, 400 Centre Street, Newton, MA 02158, Attention:
Investor Relations, telephone (617) 332-3990.
FORWARD LOOKING STATEMENTS
THIS PROSPECTUS SUPPLEMENT CONTAINS FORWARD LOOKING STATEMENTS. SUCH
STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES WHICH COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED OR PROJECTED.
PROSPECTIVE PURCHASERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE
FORWARD LOOKING STATEMENTS WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY
UNDERTAKES NO OBLIGATION TO PUBLISH REVISED FORWARD LOOKING STATEMENTS TO
REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE
OCCURRENCE OF PRESENTLY UNANTICIPATED EVENTS.
------------
THE AMENDED AND RESTATED DECLARATION OF TRUST ESTABLISHING THE COMPANY, DATED
JULY 1, 1994, A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS THERETO (THE
"DECLARATION"), IS DULY FILED IN THE OFFICE OF THE DEPARTMENT OF ASSESSMENTS
AND TAXATION OF THE STATE OF MARYLAND, PROVIDES THAT THE NAME "HEALTH AND
RETIREMENT PROPERTIES TRUST" REFERS TO THE TRUSTEES UNDER THE DECLARATION
COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO
TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF THE COMPANY SHALL BE HELD
TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR
CLAIM AGAINST, THE COMPANY. ALL PERSONS DEALING WITH THE COMPANY, IN ANY WAY,
SHALL LOOK ONLY TO THE ASSETS OF THE COMPANY FOR THE PAYMENT OF ANY SUM OR THE
PERFORMANCE OF ANY OBLIGATION.
S-20
<PAGE>
HEALTH AND RETIREMENT PROPERTIES TRUST
Unaudited Adjusted Pro Forma Consolidated Financial Statements
The following unaudited adjusted pro forma consolidated balance sheet at
March 31, 1998 is intended to present the consolidated financial position of
the Company as if the transactions described in the notes hereto had been
consummated at March 31, 1998. The following unaudited adjusted pro forma
consolidated statements of income are intended to present the consolidated
results of operations of the Company as if the transactions described in the
notes had been consummated as of the beginning of the periods presented. These
unaudited adjusted pro forma consolidated financial statements should be read
in conjunction with, and are qualified in their entirety by reference to, the
separate consolidated financial statements of the Company for the year ended
December 31, 1997, incorporated herein by reference to the Company's Current
Report on Form 8-K dated February 27, 1998, and the Company's unaudited
consolidated financial statements for the quarter ended March 31, 1998,
incorporated herein by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998, and the Company's unaudited pro forma
consolidated financial statements incorporated herein by reference to the
Company's Current Report on Form 8-K, dated May 11, 1998. These unaudited
adjusted pro forma consolidated financial statements are not necessarily
indicative of the expected financial position or results of operations of the
Company for any future period. Differences would result from, among other
considerations, future changes in the Company's portfolio of investments,
changes in interest rates, changes in the capital structure of the Company,
delays in the acquisition of certain properties and changes in property level
operating expenses.
F-1
<PAGE>
HEALTH AND RETIREMENT PROPERTIES TRUST
Unaudited Adjusted Pro Forma Consolidated Balance Sheet
March 31, 1998
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Adjusted
Historical (A) Adjustments Pro Forma
---------------- ------------------ --------------
<S> <C> <C> <C>
ASSETS
Real estate properties, at cost:
Land .................................................................... $ 288,933 $ 43,398 $ 332,331
Buildings and improvements .............................................. 1,958,782 390,577 2,349,359
---------- ---------- ----------
2,247,715 433,975 (B) 2,681,690
Less accumulated depreciation ........................................... (123,652) -- (123,652)
---------- ---------- ----------
2,124,063 433,975 2,558,038
Real estate mortgages and notes, net ..................................... 84,195 -- 84,195
Investment in HPT ........................................................ 111,433 -- 111,433
Cash and cash equivalents ................................................ 21,678 (9,725)(C) 11,953
Interest and rents receivable ............................................ 20,419 -- 20,419
Deferred interest and finance costs, net, and other assets ............... 27,463 -- 27,463
---------- ---------- ----------
$2,389,251 $ 424,250 $2,813,501
========== ========== ==========
LIABILITIESAND SHAREHOLDERS' EQUITY
Bank notes payable ....................................................... $ 160,000 $ (52,680)(D) $ 107,320
Senior notes payable, net ................................................ 499,851 -- 499,851
Mortgage notes payable ................................................... 26,157 -- 26,157
Convertible subordinated debentures ...................................... 209,818 -- 209,818
Accounts payable and accrued expenses .................................... 32,371 -- 32,371
Deferred rents ........................................................... 33,448 -- 33,448
Security deposits ........................................................ 17,818 -- 17,818
Due to affiliates ........................................................ 7,141 -- 7,141
Dividend payable ......................................................... 40,377 -- 40,377
Shareholders' equity:
Preferred shares of beneficial interest, $.01 par value;
50,000,000 authorized; none issued ..................................... -- -- --
Common shares of beneficial interest, $.01 par value;
125,000,000 and 150,000,000 shares authorized and
adjusted pro forma, 106,256,403 and 131,256,403
shares issued and outstanding and adjusted pro forma ................... 1,063 250(E) 1,313
Additional paid in capital .............................................. 1,512,767 476,680(E) 1,989,447
Cumulative net income ................................................... 451,679 -- 451,679
Dividends ............................................................... (603,239) -- (603,239)
---------- ---------- ----------
Total shareholders' equity ............................................. 1,362,270 476,930 1,839,200
---------- ---------- ----------
$2,389,251 $ 424,250 $2,813,501
========== ========== ==========
</TABLE>
See accompanying notes
F-2
<PAGE>
HEALTH AND RETIREMENT PROPERTIES TRUST
Unaudited Adjusted Pro Forma Consolidated Statement of Income
For the Three Months Ended March 31, 1998
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Adjusted
Historical (A) Adjustments Pro Forma
---------------- ------------------ ------------
<S> <C> <C> <C>
Revenues:
Rental income ................................. $ 66,894 $ 19,945(F) $ 86,839
Interest and other income ..................... 5,058 -- 5,058
--------- -------- ---------
Total revenues .............................. 71,952 19,945 91,897
--------- -------- ---------
Expenses:
Operating expenses ............................ 13,502 4,019(F) 17,521
Interest ...................................... 13,651 796(F,G) 14,447
Depreciation and amortization ................. 12,658 3,620(F) 16,278
General and administrative .................... 3,619 804(F) 4,423
--------- -------- ---------
Total expenses .............................. 43,430 9,239 52,669
--------- -------- ---------
Income before equity in earnings of HPT ......... 28,522 10,706 39,228
Equity in earnings of HPT ....................... 1,327 -- 1,327
Gain on equity transaction of HPT ............... 1,532 -- 1,532
--------- -------- ---------
Net income ...................................... $ 31,381 $ 10,706 $ 42,087
========= ======== =========
Basic FFO ....................................... $ 44,269 $ 14,326 $ 58,595
========= ======== =========
Diluted FFO ..................................... $ 48,364 $ 14,326 $ 62,690
========= ======== =========
Weighted average shares outstanding ............. 101,471 29,470(H) 130,941
========= ======== =========
Diluted average shares outstanding .............. 113,175 29,470(H) 142,645
========= ======== =========
Basic and diluted earnings per common share:
Net income ...................................... $ 0.31 $ 0.32
========= =========
Basic FFO ....................................... $ 0.44 $ 0.45
========= =========
Diluted FFO ..................................... $ 0.43 $ 0.44
========= =========
</TABLE>
See accompanying notes
F-3
<PAGE>
HEALTH AND RETIREMENT PROPERTIES TRUST
Unaudited Adjusted Pro Forma Consolidated Statement of Income
For the Year Ended December 31, 1997
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Adjusted
Historical (A) Adjustments Pro Forma
---------------- ------------------- ------------
<S> <C> <C> <C>
Revenues:
Rental income .......................................... $188,000 $ 154,245(I) $342,245
Interest and other income .............................. 20,863 (366) 20,497
-------- ---------- --------
Total revenues ....................................... 208,863 153,879 362,742
-------- ---------- --------
Expenses:
Operating expenses ..................................... 26,765 37,735(I) 64,500
Interest ............................................... 36,766 21,817(I,J) 58,583
Depreciation and amortization .......................... 39,330 28,864(I) 68,194
General and administrative ............................. 11,670 7,604(I) 19,274
-------- ---------- --------
Total expenses ....................................... 114,531 96,020 210,551
-------- ---------- --------
Income before equity in earnings of HPT, gain on sale of
properties and extraordinary item ....................... 94,332 57,859 152,191
Equity in earnings of HPT ................................ 8,590 -- 8,590
Gain on equity transaction of HPT ........................ 9,282 -- 9,282
-------- ---------- --------
Income before gain on sale of properties and
extraordinary item ...................................... 112,204 57,859 170,063
Gain on sale of properties, net .......................... 2,898 -- 2,898
-------- ---------- --------
Income before extraordinary item ......................... 115,102 57,859 172,961
Extraordinary item--early extinguishment of debt ......... (1,102) -- (1,102)
-------- ---------- --------
Net income ............................................... $114,000 $ 57,859 $171,859
======== ========== ========
Basic FFO ................................................ $146,312 $ 86,723 $233,035
======== ========== ========
Diluted FFO .............................................. $162,738 $ 86,723 $249,461
======== ========== ========
Weighted average shares outstanding ...................... 92,168 38,557(K) 130,725
======== ========== ========
Diluted weighted average shares outstanding .............. 103,952 38,557(K) 142,509
======== ========== ========
Per Common Share Amounts:
Net income ............................................... $ 1.24 $ 1.31
======== ========
Basic FFO ................................................ $ 1.59 $ 1.78
======== ========
Diluted FFO .............................................. $ 1.57 $ 1.75
======== ========
</TABLE>
See accompanying notes
F-4
<PAGE>
HEALTH AND RETIREMENT PROPERTIES TRUST
Notes to Unaudited Adjusted Pro Forma Consolidated Financial Statements
(dollars in thousands, except per share data)
Consolidated Balance Sheet Adjustments
A. Represents the historical balance sheet and income statement of the Company
as of and for the periods ending December 31, 1997 and March 31, 1998,
respectively.
B. Represents the Company's acquisition in April 1998 of a commercial office
property located in Massachusetts (the "Recent Acquisition") and the
proposed acquisitions of a medical office property located in California, a
medical office property and a commercial office property located in Texas,
three commercial office properties located in Ohio, three commercial office
properties located in New Jersey, two commercial office properties located
in Pennsylvania, a commercial office property located in Connecticut, a
commercial office property located in Delaware, a commercial office property
located in Massachusetts and a commercial office property located in New
York (the "Proposed Acquisitions"), which include the Company's proposed
acquisition of ownership of the property subject to the mortgage described
under "Recent Developments--Investments--1998 Commitments to Date." The
Proposed Acquisitions are subject to various closing conditions customary in
real estate transactions, including, but not limited to, due diligence,
Board of Trustees approval and final documentation; in the case of the
mortgage, realization on collateral may involve foreclosure or other
judicial proceedings. No assurances can be given as to when or if these
Proposed Acquisitions will be consummated. The effect of the Proposed
Acquisitions is as follows:
<TABLE>
<S> <C>
Real estate, at cost ......... $ 402,325
Cash ......................... (295,005)
----------
Bank notes payable ........... $ 107,320
==========
</TABLE>
C. Represents net cash on hand used for the Recent Acquisition and the expected
cash to be used in connection with the Proposed Acquisitions.
D. Represents proposed net borrowings under the Company's revolving line of
credit as follows:
<TABLE>
<S> <C>
Repayment with proceeds from the Offering ............... $ (476,930)
Drawings to partially fund the Recent Acquisition and the
Proposed Acquisitions .................................. 424,250
----------
$ (52,680)
==========
</TABLE>
E. Represents the following:
<TABLE>
<S> <C>
Gross proceeds from the Offering (25,000,000 Shares at $203/16/Share) $ 504,688
Estimated expenses of the Offering .................................. (27,758)
---------
$ 476,930
=========
Par value of the Shares ............................................. $ 250
Additional paid-in capital .......................................... 476,680
---------
$ 476,930
=========
</TABLE>
Consolidated Statement of Income Adjustments for the Quarter Ended
March 31, 1998
F. Represents the increases in rental income, interest expense, operating
expenses, depreciation and amortization and general and administrative
expenses arising from the Proposed Acquisitions, the Recent Acquisition and
the Company's acquisitions during January, February and March 1998 of two
medical office properties and four commercial office properties located in
Pennsylvania, four commercial office properties located in Texas, a medical
office property located in Massachusetts, a commercial office property
located in Maryland, one medical office property and two commercial office
properties located in Minnesota and three medical office properties and a
commercial office property located in Florida (collectively, "1998
Acquisitions"). These
F-5
<PAGE>
HEALTH AND RETIREMENT PROPERTIES TRUST
Notes to Unaudited Adjusted Pro Forma Consolidated Financial Statements
(dollars in thousands, except per share data)
acquisitions were funded with available cash and by drawings under the
Company's revolving bank credit facility. The effect of the Proposed
Acquisitions is as follows:
<TABLE>
<S> <C>
Total revenue .......... $11,639
Total expenses ......... 6,045
-------
Net income ............. $ 5,594
=======
</TABLE>
G. Represents the net increase in interest expense relating to the issuance of
additional Remarketed Reset Notes, the issuance of 6.7% Senior Notes in
February 1998 due in 2005 (the "6.7% Notes") and the net decrease in
interest expense arising from the Company's sale of Shares in February and
March 1998, and the use of proceeds from the Offering, the proceeds of which
were and will be, in part, used to repay amounts then outstanding on the
Company's revolving bank credit facility.
H. Reflects the impact of the Offering and the sale of Shares by the Company
during February and March 1998.
Consolidated Statement of Income Adjustments for the Year Ended December 31,
1997
I. Represents the increases in rental income, interest expense, operating
expenses, depreciation and amortization and general and administrative
expenses arising from the 1998 Acquisitions, and the acquisitions during
1997 of the government office properties from Government Property Investors,
Inc. ("GPI"), two medical office properties and two parking structures
located in Los Angeles, California, a 200 unit retirement housing property
located in Spokane, Washington, 20 medical office clinics and ancillary
structures located in Massachusetts, three medical and two commercial office
buildings located in Pennsylvania, a medical office property located in
Colorado, a medical office property located in Maryland, a medical
laboratory property located in Rhode Island, three medical office properties
located in California and a medical office property located in Washington
D.C. These acquisitions were funded with available cash and by drawings
under the Company's revolving bank credit facility. The effect of the
Proposed Acquisitions is as follows:
<TABLE>
<S> <C>
Total revenue .......... $52,855
Total expenses ......... 26,568
-------
Net income ............. $26,287
=======
</TABLE>
J. Represents the net increase in interest expense relating to the issuance of
Remarketed Reset Notes in July 1997, the issuance of 6.75% Senior Notes in
December 1997, the 6.7% Notes and the assumption of indebtedness pursuant to
the acquisition of GPI, the net decrease in interest expense arising from
the prepayment of certain floating rate senior notes in July 1997, the
issuance of Shares pursuant to the GPI acquisition, the sale of Shares in
February and March 1998, and the use of proceeds from the Offering, proceeds
of which were and will be, in part, used to repay amounts then outstanding
on the Company's revolving bank credit facility.
K. Reflects the impact of the Offering and the issuance of Shares by the
Company in March 1997, February and March 1998.
F-6
<PAGE>
HEALTH AND RETIREMENT PROPERTIES TRUST
[PICTURE]
Marriott International, Inc.
Stratford Court of Boca Raton
Boca Raton, FL
349 Senior Living Units, Built 1994
[PICTURE]
1600 Market Street
Philadelphia, PA
825,374 Square Feet, Built 1983
Major Tenants:
PNC Bank
Schnader, Harrison, Segal & Lewis
[PICTURE]
Torrey Pines Science Center (3 buidings)
San Diego, CA
163,057 Square Feet, Built 1985/86
Major Tenants:
Alliance Pharmaceutical Corporation
Neurocrine Biosciences Incorporated
Corvas International Incorporated
Canji, Inc.
[PICTURE]
Brookdale Living Communities, Inc.
The Hallmark
Chicago, IL
341 Senior Living Units, Built 1990
[PICTURE]
Cedars-Sinai Medical Office
Towers and Garages (4 Buildings)
Los Angeles, CA
330,715 Square Feet, Built 1978-79
Major Tenants:
Cedars-Sinai Medical Center
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus Supplement or the Prospectus and, if given or made, such information
or representations must not be relied upon as having been authorized by the
Company or any of the Underwriters. This Prospectus Supplement and the
Prospectus do not constitute an offer to sell or the solicitation of an offer
to buy the Shares by anyone in any jurisdiction in which such offer or
solicitation is not authorized, or in which the person making such offer or
solicitation is not qualified to do so, or to any person to whom it is unlawful
to make such offer or solicitation. Neither the delivery of this Prospectus
Supplement or the Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof.
---------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
Prospectus Supplement
Summary ................................................ S-3
Recent Developments .................................... S-6
Distributions .......................................... S-8
Price Range of Shares .................................. S-8
Capitalization ......................................... S-9
Use of Proceeds ........................................ S-9
The Company ............................................ S-10
Investment Policy ...................................... S-12
Financing Policy ....................................... S-12
Lease Expirations ...................................... S-13
The Lessees ............................................ S-13
Management ............................................. S-15
Federal Income Tax and ERISA Considerations ............ S-16
Underwriting ........................................... S-18
Legal Matters .......................................... S-19
Experts ................................................ S-19
Incorporation of Certain Information by
Reference ........................................... S-20
Forward Looking Statements ............................. S-20
Unaudited Adjusted Pro Forma Consolidated
Financial Statements ................................ F-1
Prospectus
Available Information .................................. (ii)
Incorporation of Certain Documents by
Reference ........................................... (ii)
The Company ............................................ 1
Use of Proceeds ........................................ 1
Ratio of Earnings to Fixed Changes ..................... 1
Description of Debt Securities ......................... 1
Description of Shares .................................. 10
Description of Preferred Shares ........................ 11
Description of Depository Shares ....................... 17
Description of Warrants ................................ 19
Description of Convertible Subordinated
Debentures .......................................... 20
Limitation of Liability; Shareholder Liability ......... 20
Redemption; Business Combinations and Control
Share Acquisitions .................................. 21
Plan of Distribution ................................... 24
Legal Matters .......................................... 25
Experts ................................................ 25
</TABLE>
25,000,000 Shares
Health and Retirement
Properties Trust
Common Shares
of Beneficial Interest
---------------------------------------
P R O S P E C T U S S U P P L E M E N T
---------------------------------------
Merrill Lynch & Co.
Donaldson, Lufkin & Jenrette
Securities Corporation
A.G. Edwards & Sons, Inc.
Legg Mason Wood Walker
Incorporated
Morgan Stanley Dean Witter
PaineWebber Incorporated
Prudential Securities Incorporated
Salomon Smith Barney
May , 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------