-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IZ4TgxXyfNOb0f3EiUH9/CVVWaF5VFM3UpaBGUO+O6fNZOr+CZlMlo/EVwSk4fCT AvcePELsQaZA3vs2UG6I3w== 0000908737-00-000102.txt : 20000510 0000908737-00-000102.hdr.sgml : 20000510 ACCESSION NUMBER: 0000908737-00-000102 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 DATE AS OF CHANGE: 20000509 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SENIOR HOUSING PROPERTIES TRUST CENTRAL INDEX KEY: 0001075415 STANDARD INDUSTRIAL CLASSIFICATION: 6798 IRS NUMBER: 043445278 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-15319 FILM NUMBER: 589387 BUSINESS ADDRESS: STREET 1: 400 CENTRE STREET CITY: NEWTON STATE: MA ZIP: 02458 BUSINESS PHONE: 6173323990 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark one) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________ Commission File Number 001-15319 SENIOR HOUSING PROPERTIES TRUST (Exact name of registrant as specified in its charter) Maryland 04-3445278 (State or other jurisdiction of incorporation) (IRS Employer Identification No.) 400 Centre Street, Newton, Massachusetts 02458 (Address of principal executive offices) (Zip Code) 617-796-8350 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Shares of Beneficial Interest New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock of the registrant held by non-affiliates was $129.0 million based on the $9 7/8 closing price per share for such stock on the New York Stock Exchange on March 27, 2000. For purposes of this calculation, 12,809,237 held by HRPT Properties Trust and an aggregate of 128,458 held by the trustees and executive officers of the registrant have been included in the number of shares held by affiliates. Number of the registrant's Common Shares of Beneficial Interest, $.01 par value ("Shares"), outstanding as of March 27, 2000: 26,001,500. DOCUMENTS INCORPORATED BY REFERENCE Part III of this Annual Report on Form 10-K is incorporated by reference from our definitive Proxy Statement for the annual meeting of shareholders currently scheduled to be held on May 11, 2000. IMPORTANT FACTORS This Annual Report on Form 10-K contains statements which constitute forward looking statements within the meaning of the Securities Litigation Reform Act of 1995. These statements appear in a number of places in this Form 10-K regarding our intent, belief or expectations with respect to the outcome of current agreements and negotiations with certain of our tenants which are in bankruptcy proceedings, our ability to obtain requisite approvals for any agreements reached, our ability to successfully operate properties which we take back from financially troubled tenants, possible expansion of our portfolio, performance of our assets, our ability to make distributions, policies and plans regarding investments, financings and other matters, the effect of the year 2000 issue, our ability to successfully negotiate with some of our tenants in bankruptcy, our tax status as a real estate investment trust, our ability to appropriately balance the use of debt and equity and to access capital markets or other sources of funds and statements of assumptions underlying such statements as to intent, belief or expectations. Readers are cautioned that any such forward looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially from those contained in the forward looking statements as a result of various factors. Such factors include without limitation the status of the economy and the capital markets (including prevailing interest rates), compliance with and changes to regulations and payment and reimbursement policies within the health care industry, changes in financing terms, competition within the health care industry, and changes in federal, state and local legislation. The accompanying information contained in this Annual Report on Form 10-K, including under the headings "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," identifies other important factors that could cause such differences. THE AMENDED AND RESTATED DECLARATION OF TRUST ESTABLISHING SENIOR HOUSING PROPERTIES TRUST, DATED SEPTEMBER 20, 1999, A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS THERETO, IS DULY FILED IN THE OFFICE OF THE STATE DEPARTMENT OF ASSESSMENTS AND TAXATION OF MARYLAND, PROVIDES THAT THE NAME "SENIOR HOUSING PROPERTIES TRUST" REFERS TO THE TRUSTEES UNDER THE DECLARATION OF TRUST AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF SENIOR HOUSING PROPERTIES TRUST SHALL BE HELD TO ANY PERSONAL LIABILITY FOR ANY OBLIGATION OF, OR CLAIM AGAINST, SENIOR HOUSING PROPERTIES TRUST. ALL PERSONS DEALING WITH SENIOR HOUSING PROPERTIES TRUST SHALL LOOK ONLY TO THE ASSETS OF SENIOR HOUSING PROPERTIES TRUST FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.
SENIOR HOUSING PROPERTIES TRUST 1999 FORM 10-K ANNUAL REPORT Table of Contents Part I Page Item 1. Business................................................................................ 1 Item 2. Properties.............................................................................. 30 Item 3. Legal Proceedings....................................................................... 33 Item 4. Submission of Matters to a Vote of Security Holders..................................... 33 Part II Item 5. Market for Registrant's Common Stock and Related Shareholder Matters.................... 34 Item 6. Selected Financial Data................................................................. 34 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................... 36 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............................. 40 Item 8. Financial Statements and Supplementary Data............................................. 41 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................................. 41 Part III Item 10. Directors and Executive Officers of the Registrant...................................... * Item 11. Executive Compensation.................................................................. * Item 12. Security Ownership of Certain Beneficial Owners and Management.......................... * Item 13. Certain Relationships and Related Transactions.......................................... * * Incorporated by reference from our Proxy Statement for the Annual Meeting of Shareholders currently scheduled to be held on May 11, 2000, to be filed pursuant to Regulation 14A. Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................... 42
References in this Annual Report on Form 10-K to the "Company" or "Senior Housing" include consolidated subsidiaries, unless the context indicates otherwise. PART I Item 1. Business The Company. Senior Housing Properties Trust ("Senior Housing") is a Maryland real estate investment trust ("REIT") that invests in senior housing income producing real estate, including senior apartments and assisted living, congregate care and nursing home properties. Senior Housing was organized on December 16, 1998 as a 100% owned subsidiary of HRPT Properties Trust ("HRPT"), a REIT which invests principally in office buildings. On October 12, 1999, HRPT distributed 13.2 million common shares of Senior Housing to HRPT shareholders to create Senior Housing as a separate public REIT. Senior Housing's principal executive offices are located at 400 Centre Street, Newton, Massachusetts 02458, and its telephone number is (617) 796-8350. As of December 31, 1999, we owned 81 properties for a total investment of $708.8 million and had mortgage investments in 12 properties aggregating $22.9 million, net of loan loss reserve, for total real estate investments of $731.7 million in 26 states. The properties are described in greater detail in "Item 2. Properties." Number of Total Investments State Properties at December 31, 1999 - - ----- ---------- -------------------- (in thousands) Arizona 6 $42,861 California 8 53,879 Colorado 8 34,348 Connecticut (1) 6 35,914 Florida 5 131,990 Georgia 4 12,308 Illinois 2 98,742 Iowa 6 8,207 Kansas 1 1,320 Louisiana 1 4,277 Maryland 1 33,080 Massachusetts 4 69,562 Michigan 2 9,086 Missouri 2 3,788 Nebraska 10 10,627 New Jersey 1 13,007 New York 1 10,700 North Carolina 3 6,389 Ohio 1 3,445 Pennsylvania 1 15,598 South Dakota 3 7,589 Texas 1 12,410 Virginia 3 57,666 Washington 2 19,542 Wisconsin 8 28,098 Wyoming 3 7,245 ---- -------- Total Investments 93 $731,678 ==== ======== (1) Three of these properties were sold after December 31, 1999. 1 We believe that the aging of the United States population will increase the demand for existing senior apartments, congregate communities, assisting living properties and nursing homes and encourage development of new properties. Our basic business plan is to profit from this increasing demand in two ways. First, we intend to purchase additional properties and lease them at initial rents that are greater than our costs of acquisition capital. Second, we intend to structure leases that provide for periodic rental increases based in part on gross operating revenue increases at our properties. Our current operating environment, though, is challenging. The long term care industry has been financially devastated by Medicare payment reductions, increased governmental regulation, rapid growth of the competing assisting living industry and tight capital markets. The current difficulties being faced by the healthcare industry have severely affected some of our tenants. Our business plan contemplates investment in properties which offer four types of senior housing accommodations, including some properties that combine more than one type in a single building or campus. Senior Apartments. Senior apartments are marketed to residents who are generally capable of caring for themselves. Residence is generally restricted on the basis of age. Purpose built properties may have special function rooms, concierge services, high levels of security and centralized call buttons for emergency use. Tenants at these properties who need healthcare or assistance with the activities of daily living are expected to contract independently for those services with homemakers or home healthcare companies. Congregate Communities. Congregate communities also provide a high level of privacy to residents and require residents to be capable of relatively high degrees of independence. Unlike a senior apartment property, a congregate community usually bundles several services as part of a regular monthly charge--for example, one or two meals per day in a central dining room, weekly maid service or a social director. Additional services are generally available from staff employees on a fee-for-service charge basis. In some congregate communities, separate parts of the property are dedicated to assisted living or nursing services. Assisted Living Properties. Assisted living properties are typically comprised of one bedroom suites which include private bathrooms and efficiency kitchens. Services provided usually include three meals per day in a central dining room, daily housekeeping, laundry, medical reminders and 24 hour availability of assistance with the activities of daily living such as dressing and bathing. Professional nursing and healthcare services are usually available at the facility on call or at regularly scheduled times. Since the early 1990s there has been explosive growth in the number of small public companies developing purpose built assisted living properties. Many of those properties have recently been completed and are now fully occupied and appropriate investments for us. Nursing Homes. Nursing homes generally provide extensive nursing and healthcare services similar to those available in hospitals, without the high costs associated with operating theaters, emergency rooms or intensive care units. A typical purpose built nursing home includes mostly two-bed rooms with a separate toilet in each room and shared dining and bathing facilities. Some private rooms are often available for those residents who can afford to pay higher rates or for patients whose medical conditions require segregation. Nursing homes are generally staffed by licensed nursing professionals 24 hours per day. During the past few years nursing home owners and operators have faced two significant business challenges. First, the rapid expansion of the assisted living industry which started in the early 1990s has attracted a number of residents away from nursing homes. This was especially significant because the residents who elected assisted living facilities had often previously been the most profitable residents in the nursing homes--residents who required a lesser amount of care and who were able to pay higher private rates rather than government rates. The second major challenge arose as a result of Medicare and Medicaid cost containment laws beginning in 1994, particularly 1997 federal legislation that required the Medicare program to implement a prospective payment program for various subacute services provided in skilled nursing homes. Implementation 2 of this Medicare prospective payment program began on July 1, 1998. Prior to the prospective payment program Medicare paid nursing home operators based upon audited costs for services provided. The prospective payment system sets Medicare rates based upon government estimated costs of treating specified medical conditions. Although it is possible that a nursing home may increase its profit if it is able to provide quality services at below average costs, we believe that the effect of the new Medicare rate setting methodology will be to reduce the profitability of Medicare services in nursing homes. This belief is based on similar Medicare changes that were implemented for hospitals during the 1980s. Tenants and Leases. Our financial condition depends, in part, on the financial condition of our tenants. About 46% of our historical rents are received from Marriott International, Inc. and some of its subsidiaries ("Marriott") and Brookdale Living Communities, Inc. and some of its subsidiaries ("Brookdale"). Our properties leased to these operators predominantly offer independent and assisted living services; and almost all of the revenues of these properties are paid by residents from private resources. As previously announced, our other large tenants, Integrated Health Services, Inc. ("IHS") and Mariner Post-Acute Network, Inc. ("Mariner"), which on a combined basis represent about 48% of our historical rents, filed for bankruptcy in early 2000. More information concerning those tenants is set forth below under "Business Developments--Tenant Financial Condition." Properties leased to IHS and Mariner are predominantly nursing homes. Our leases are so called "triple net" leases which require the tenants to maintain our properties during the lease terms and to indemnify us for liability which may arise by reason of our ownership of the properties. We own 14 congregate care communities and assisted living properties located in seven states with 3,950 units that are leased to subsidiaries of Marriott. Marriott is a NYSE listed company whose major businesses are developing, operating and managing hotels, senior housing properties and time share resorts. The annual rent under this lease is $30.9 million, which is 34% of our historical total annual rent, and the lease provides for rent increases equal to 4.5% of increases in gross revenues of the properties. Marriott has guaranteed all of these lease obligations. Our historic investment in these properties is $325.5 million. The current lease expiration is 2013, and Marriott has four all-or-none renewal options for five years each. The following table presents summary financial information of Marriott from its Annual Report on 10-K for the year ended December 31, 1999. Summary Financial Information of Marriott International, Inc. (in millions) As of or for the year ended ---------------------------------------------- January 2, January 1, December 31, 1998 1999 1999 ----------- ---------- ------------ Sales.......................... $7,236 $7,968 $8,739 Net income..................... 324 390 400 Total assets................... 5,161 6,233 7,324 Debt........................... 422 1,267 1,676 We own four congregate care communities located in four states with 829 units that are leased to a subsidiary of Brookdale. Brookdale is a Nasdaq listed company whose principal business is operating senior housing and congregate care communities. The annual rent under this lease is $11.2 million, which is 12% of our historical total annual rent, and the lease provides for rent increases equal to 10% of increases in gross revenues of the properties starting in 1999. Brookdale has guaranteed all of these lease obligations. Our historic investment in these properties is $101.9 million. The current lease expiration is 2019, and Brookdale has two all-or-none renewal options for twenty-five years each. We own one nursing home with 150 units that is leased to a subsidiary of Genesis Health Ventures, Inc. ("Genesis"). Genesis is a NYSE listed company whose major businesses are operating nursing homes, 3 congregate care communities and assisting living properties. The annual rent under this lease is $1.4 million, which is two percent of our historical total annual rent, and the lease provides for annual rent increases of $13,000. Our historic investment in this property is $13.0 million. The current lease expiration is 2005, and Genesis has two all-or-none renewal options for ten years each and one for five years. In addition to the tenants described above, we currently lease three nursing homes located in three states with 423 units to three separate private companies. These leases require total annual rent of $1.3 million. We currently own 27 nursing homes and three senior apartments with 3,205 units located in nine states that are leased to subsidiaries of IHS. In addition, we have mortgage investments secured by 12 nursing homes with 1,070 units located in three states that are operated by IHS. IHS's major businesses are operating nursing homes and providing home healthcare services. These 42 properties are divided into two pools, and the obligations under leases and mortgages within each pool are subject to cross default and collateralization covenants with all other properties in the same pool. The annual rent under these leases of $22.8 million and the interest of $4.1 totaled 30% of our historical total annual rent. IHS has guaranteed all of these leases and mortgage obligations. IHS and its subsidiaries which are our tenants or mortgagors are subject to bankruptcy proceedings. See "Business Developments--Tenant Financial Condition." The current lease expirations are 2006 in the case of one pool and 2010 in the case of the other (in each case with renewal options), subject to the effect of the bankruptcy proceedings. Our investment in these properties, after an impairment loss write-down and loan loss reserve, is $185.2 million. The following table present summary financial information of IHS for the latest period available from its Annual Report on Form 10-K for the year ended December 31, 1998, and Quarterly Report on Form 10-Q for the period ended September 30, 1999.
Summary Financial Information of Integrated Health Services, Inc. (in millions) As of or for the nine As of or for the year ended months ended December 31, September 30, ----------------------------- --------------------- 1996 1997 1998 1998 1999 ------- -------- -------- -------- -------- Total revenue ............................ $ 1,204 $ 1,403 $ 2,972 $ 2,253 $ 1,904 Earnings (loss) from continuing operations 48 3 137 126 (1,831) Net earnings (loss) ...................... 46 (34) (68) (79) (1,831) Total assets ............................. 5,002 5,393 3,596 Debt ..................................... 3,219 3,383 3,536
We currently own 24 nursing homes and two congregate care communities with 3,482 units located in six states leased to subsidiaries of Mariner. Mariner's principal business is operating nursing homes. The $16.7 million annual rent under this lease represents about 18% of our historical total annual rent. Mariner has guaranteed all of the lease obligations. Our investment in these properties after an impairment loss write-down is $80.7 million. Mariner and its subsidiaries which are our tenants are subject to bankruptcy proceedings. See "Business Developments--Tenant Financial Condition." The current lease term with Mariner expires in 2013 (with renewal options), subject to the effect of the bankruptcy proceedings. We have reached an agreement in principle with Mariner involving, among other things, the termination of the lease of the properties, our assumption of operating responsibilities for 17 of the properties and our conveyance of title to the remaining five properties to Mariner. The remaining four nursing homes are now subleased to two private companies and we expect to negotiate with these two subtenants for their continued operations of those properties. Our agreement is contingent upon approval of Mariner's creditors committee and the bankruptcy court and required regulatory approvals. 4 Other terms of our leases have included and may in the future generally include the following: Cross Default. When we lease more than one property to a single tenant or a group of affiliated tenants all those leases are cross defaulted. All or None Renewal Options. When we lease more than one property to a single tenant or a group of affiliated tenants, lease renewal options may only be exercised on an all or none basis. Maintenance and Alterations. Our tenants are required to maintain, at their expense, the leased properties in good order and repair, including structural and nonstructural maintenance. Except in the case of properties leased to Marriott, capital alterations and additions to any leased property which exceed a threshold amount of aggregate cost may only be made with our prior consent. Any alterations or improvements made to any leased property during the terms of the leases become our property, subject to our obligation to pay to the tenants unamortized costs at lease termination. At the end of the leases, our tenants are required to surrender their leased properties in substantially the same condition as existed on the commencement dates of the leases, subject to any permitted alterations and subject to ordinary wear and tear. Assignment. Our consent is generally required for any assignment or sublease of our properties. In the event of a subletting, the initial tenant remains liable under the lease and all guarantees and other security remain in place. Environmental Matters. Our tenants are required, at their expense, to remove and dispose of any hazardous substance at the leased properties in compliance with all applicable environmental laws and regulations and to pay any costs we incur in connection with removal and disposal. Each tenant has indemnified us for any claims asserted as a result of the presence of hazardous substances at any property and from a violation or alleged violation of any applicable environmental law or regulation. Indemnification and Insurance. Each tenant has agreed to indemnify us from all claims arising from our ownership or their use of our properties. Each tenant is required to maintain insurance on our properties covering: o comprehensive general liability for damage to property or bodily injury arising out of the ownership, use, occupancy or maintenance of the properties; o commercial property "all risk" liability for damage to improvements, merchandise, trade fixtures, furnishings, equipment and personal property; o workers' compensation liability; o business interruption loss; o in some cases, medical malpractice; and o other losses customarily insured by businesses similar to the business conducted at our properties. The leases require that we be named as an additional insured under these policies. Damage, Destruction or Condemnation. In the event any of our properties is damaged by fire, or other casualty or is taken for a public use, we receive all insurance or taking proceeds and our tenants are required to pay any difference between the amount of proceeds and the historical investment by us or HRPT in the affected property. In the event of material destruction or condemnation, some tenants have a right to purchase the affected property for amounts at least equal to our or HRPT's historical investment in the property. 5 Events of Default Events of default include: o the failure of the tenant to pay rent when due; o the failure of the tenant to perform key terms, covenants or conditions of its lease and the continuance thereof for a specified period after written notice; o the occurrence of events of insolvency with respect to the tenant; o the failure of the tenant to maintain required insurance coverages; or o the revocation of any material license necessary for the tenant's operation of our property. Remedies. Upon the occurrence of any event of default, we may (subject to applicable law): o terminate the affected lease and accelerate the rent; o terminate the tenant's rights to the affected property, relet the property and recover from the tenant the difference between the amount of rent which would have been due under the applicable lease and the rent received under the reletting; and o make any payment or perform any act required to be performed by the tenant under its lease. The defaulting tenant is obligated to reimburse us for all payments made and all costs and expenses incurred in connection with any exercise of the foregoing remedies. Ground Lease Terms. The land underlying two of our properties is leased. Our leases require our tenants to pay and perform all obligations arising under these ground leases. These ground leases terminate on 2086 and 2079. The annual rents payable under the ground leases in 1999 totaled $138,100. If our tenants fail to pay the applicable ground rent, we may have to do so in order to protect our investment in these properties. The following discussion sets forth our policies regarding investments, dispositions, financings and other activities. The board of trustees has set these policies and although there is no current intention to do so, the board of trustees may amend or revise these policies at any time without a vote of shareholders. Investment Policies Acquisitions. Our investment goals are to acquire additional senior apartments, congregate communities, assisted living properties and nursing homes, primarily for income and secondarily for their appreciation potential. In making future acquisitions, we will consider a range of factors including: o the acquisition price of the proposed property; o the estimated replacement cost of the proposed property; o proposed lease terms; o the financial strength and operating reputation of the proposed tenant; o historical and projected cash flows of the property to be acquired; o the location and competitive market environment of the proposed property; 6 o the physical condition of the proposed property and its potential for redevelopment or expansion; and o the price segment and payment sources in which the proposed property is operated. We intend to acquire properties which will enhance the diversity of our portfolio in respect to tenants, types of services provided and locations. We have no policies which specifically limit the percentage of our assets which may be invested in any individual property, in any one type of property, in properties leased to any one tenant or in properties leased to an affiliated group of tenants. Other Investment in Real Estate. We emphasize direct wholly owned investments in fee interests. However, circumstances may arise in which we may invest in leaseholds, joint ventures, mortgages and other real estate interests. We may invest in real estate joint ventures if we conclude that by doing so we may benefit from the participation of co-venturers or that our opportunity to participate in the investment is contingent on the use of a joint venture structure. We may invest in participating, convertible or other types of mortgages if we conclude that by doing so we may benefit from the cash flow or appreciation in the value of a property which is not available for purchase. Disposition Policies From time to time we may consider the sale of one or more properties. Future disposition decisions, if any, will be made based on a number of factors including the following: o the proposed sale price; o the strategic fit of the property with the rest of our portfolio; o potential opportunities to increase revenues by reinvesting sale proceeds; o the potential for, or the existence of, any environmental or regulatory problems affecting a particular property; o our alternative capital needs; and o the maintenance of our qualification as a REIT under the Internal Revenue Code. We contemplate certain dispositions in connection with our negotiations with two tenants which are in bankruptcy proceedings. See "Business Developments--Tenant Financial Condition." Financing Policies We have a $350 million bank credit facility. The facility requires payment of interest only at LIBOR plus a premium prior to maturity on September 15, 2002. Outstanding borrowings under the facility were $200 million at December 31, 1999. This bank credit facility is secured by first mortgages upon, and a collateral assignment of leases from, 18 properties. This bank credit facility has several covenants typically found in revolving loan facilities including covenants to maintain a minimum net worth and minimum collateral value and which prohibit us from incurring debt in excess of 60% of its total capital. We use this bank credit facility to fund acquisitions and for working capital. Periodically, we expect to repay amounts drawn under the bank credit facility with proceeds of equity and long term debt offerings. Our organizational documents do not limit the amount of indebtedness we may incur. At present we expect to maintain a capital structure in which our debt will not exceed 60% of our total capital. We will consider future equity offerings when, in our judgment, doing so will improve our capital structure without materially adversely 7 affecting the market value of its shares. Unless we achieve an investment grade rating at some future date, we expect that the least costly debt capital available to us will be secured debt and that most of our debt will be secured. In the future, we may modify our current financing policies in light of then current economic conditions, relative costs of debt and equity capital, acquisition opportunities and other factors; and our intended ratio of debt to total capital may change. Policies with Respect to Other Activities We operate in a manner that will not subject us to regulation under the Investment Company Act of 1940. Except for the possible acquisition of other REITs which are engaged in similar businesses, we do not currently intend to invest in the securities of other companies for the purpose of exercising control, to underwrite securities of other companies or to trade actively in loans or other investments. We may make investments other than as previously described, although we do not currently intend to do so. We have authority to repurchase or otherwise reacquire our shares or other securities we issue and may do so in the future. In the future, we may issue shares or other securities in exchange for property. Also, although we have no current intention to do so, we may make loans to third parties, including to our trustees and officers and to joint ventures in which we participate. Business Developments Spin-Off In September 1999, our registration statement on Form S-11 was declared effective by the Securities and Exchange Commission. As a result, on October 12, 1999, a majority ownership of our shares were distributed to HRPT shareholders through a special distribution (the "Spin-Off"). Subsequently, both companies trade separately on the New York Stock Exchange. Tenant Financial Condition Three of our tenants, The Frontier Group, Inc. ("Frontier"), Mariner and IHS, have filed for protection under bankruptcy laws. Frontier filed in July 1999, Mariner filed in January 2000 and IHS filed in February 2000. Bankruptcy laws may allow our tenants relief or discharge them from their financial obligations to us. For 1999, rental income and mortgage interest related to Frontier, Mariner and IHS was $2.2 million, $15.4 million and $26.6 million, respectively. At December 31, 1999, our historical investments, before impairment loss recognition and net of accumulated depreciation in properties operated by these three tenants, were $10.0 million, $68.3 million and $136.9 million, respectively. We also had mortgage investments, before loss reserves, related to properties operated by IHS of $36.6 million at December 31, 1999. We have concluded that impairment indicators are present with respect to properties operated by these tenants and have prepared undiscounted cash flow projections for each of the properties. For purposes of these projections, we have assumed that rents on some properties may be modified and that some of the leases may be terminated after which we will operate the properties for a period of time and, ultimately, sell them. In addition, a third party not in bankruptcy is responsible for the lease obligations of some of the properties operated by IHS. We have assumed that the guarantor will honor these lease obligations. The undiscounted cash flow projections reflect the expected rents to be earned over the lease term and the expected cash flows earned from operating the properties for a period of time plus the proceeds from assumed future sales of the properties. Cash flows during the period in which we may operate the properties are estimated based on the historical performance of each property, excluding rent paid to us. Projected sale prices are based on an estimated per bed value consistent with industry practice and reflect prices that we have observed in recent transactions. Based on these undiscounted cash flow projections, we have concluded that some of our real estate and mortgage investments were impaired as of December 31, 1999. Based on our estimated fair values net of selling costs, we have written down the carrying value of these real estate investments, including investments leased to an affiliate, 8 Advisors Healthcare Group, Inc., and operated by IHS, as of December 31, 1999, by recording an impairment loss write-down in the accompanying consolidated statement of income of $15.5 million. In addition, we have recorded a loan loss reserve of $14.5 million related to the mortgage investment we considered impaired. At December 31, 1999 after impairment losses, loan loss reserves and net of accumulated depreciation, the net book value of the properties operated by Frontier, IHS and Mariner were $10.0 million, $147.5 million and $65.2 million, respectively. It is reasonably possible that estimates of future cash flows could be reduced significantly depending on the outcome of the bankruptcy proceedings or if the non-bankrupt third party should fail to honor its obligations. As a result, additional losses could be recognized in future periods and these amounts could be material. In February 2000, we sold all of the properties that were leased to Frontier for $13.0 million. We are continuing pursuing claims against Frontier and other parties for breach of its leases and for rental arrearages. The amount of net gain, if any, which may be realized from the sale of the Frontier properties will depend upon the outcome of these claims. The amount of gain or loss to be realized as a result of this transaction is not expected to be material. Because these properties have been sold, we will no longer receive rental income from these properties. In March 2000, we reached an agreement in principle with Mariner as follows: o Mariner's lease obligations for all 26 properties which we own and lease to Mariner will be terminated. o Approximately $24.0 million of cash and securities which we hold to secure Mariner's obligations will be retained by us. o We will assume operating responsibilities for 17 of these 26 properties. Title to five of these properties will be transferred to Mariner which will continue the operations. The remaining four nursing homes are now subleased to two private companies and we expect to negotiate with these two subtenants for their continued operations of those properties. Our agreement with Mariner is contingent upon approval by Mariner's creditors committee and the Delaware Bankruptcy Court before which Mariner's bankruptcy is pending and required regulatory approvals from various states where affected nursing homes are located. If this agreement is approved we expect that we may realize gains and that our future earnings and cash flows may be less than the rent previously earned from the Mariner leases, at least on a short term basis. This agreement is contingent upon third party approvals beyond our control. If and when this agreement is implemented it may result in additional material gains or losses. We are currently in negotiations with IHS. The current negotiations include, but are not limited to, the possibilities that we will sell some of the properties, that lease or mortgage terms may be changed, that new tenants may begin operations of properties, that properties may be operated by us for our own account or that mortgage obligations due to us may be released for other compensation. We may recognize additional gains or losses when these negotiations are completed and the additional gains or losses may be material. Investments There were no new investments made during 1999. The Investment Manager REIT Management & Research, Inc. ("REIT Management") is a Delaware corporation owned by Gerard M. Martin and Barry M. Portnoy. REIT Management's principal executive offices are located at 400 Centre Street, Newton, Massachusetts 02458, and its telephone number is (617) 332-3990. Simultaneous with 9 the Spin-Off, we entered into a new investment advisory agreement with REIT Management, pursuant to which REIT Management provides investment, management and administrative services to us. The agreement has been renewed through December 31, 2000. REIT Management also acts as the investment manager to HRPT and has other business interests. The Directors of REIT Management are Gerard M. Martin, Barry M. Portnoy and David J. Hegarty. The officers of REIT Management are David J. Hegarty, President and Secretary, John G. Murray, Executive Vice President, John Popeo, Treasurer, and Ajay Saini, John A. Mannix, David M. Lepore, Thomas M. O'Brien and Jennifer B. Clark, Vice Presidents. Gerard M. Martin and Barry M. Portnoy are our managing trustees, and David J. Hegarty and Ajay Saini are our officers. Employees As of March 27, 2000, we had no employees. REIT Management, which administers our day-to-day operations, had about 200 full-time employees. Regulation and Reimbursement The tenants and borrowers who operate our properties, including long-term care facilities, congregate communities, assisted living centers and senior apartments, must comply with federal, state and local statutes and regulations in order to operate the properties. The health care industry depends significantly upon federal and federal/state programs for revenues and, as a result, is vulnerable to the budgetary policies of both the federal and state governments. Government Regulations and Rate Setting Senior Apartments. Generally, government programs do not pay for housing in senior apartments. Rents are paid from the residents' private resources. Accordingly, the government regulations that apply to these types of properties are generally limited to zoning, building and fire codes, Americans with Disabilities Act requirements and other life safety type regulations applicable to residential real estate. Government rent subsidies and government assisted development financing for low income senior housing are exceptions to these general statements. The development and operation of subsidized senior housing properties are subject to numerous governmental regulations. While it is possible that we may purchase and lease some subsidized senior apartment properties, we do not expect these investments to be a major part of our future business, and today we own no properties where rent subsidies are applicable. Congregate Communities. We understand that generally government benefits are not available to congregate communities and the resident charges in these properties are paid from private resources. However, a number of Federal Supplemental Security Income program benefits pay housing costs for elderly or disabled residents to live in these types of residential facilities. The Social Security Act requires states to certify that they will establish and enforce standards for any category of group living arrangement in which a significant number of supplemental security income residents reside or are likely to reside. Categories of living arrangements which may be subject to these state standards include congregate facilities and assisted living properties. Because congregate communities usually offer common dining facilities, in many locations they are required to obtain licenses applicable to food service establishments in addition to complying with land use and life safety requirements. In many states, congregate communities are licensed by state health departments, social service agencies, or offices on aging with jurisdiction over group residential facilities for seniors. To the extent that congregate communities maintain units in which assisted living or nursing services are provided, these units are subject to applicable state regulations. In some states, insurance or consumer protection agencies regulate congregate communities in which residents pay entrance fees or prepay other costs. Assisted Living. According to the National Academy for State Health Policy, 39 states provide Medicaid payments for residents in some assisted living properties under waivers granted by the Health Care Finance Administration of the U.S. Department of Health and Human Services or under Medicaid state plans and three other states are planning to do so. Because rates paid to assisted living property operators are lower 10 than rates paid to nursing home operators some states use this waiver program as a means of lowering the cost of services for residents who may not need the higher intensity of medical care provided in nursing homes. States that administer Medicaid programs for assisted living facilities are responsible for monitoring the services at and physical conditions of the participating properties. Different states apply different standards in these matters, but generally we believe these monitoring processes are similar to the concerned states' inspection processes for nursing homes. Because of the large number of states using Medicaid to purchase services at assisted living properties, it is not surprising that a majority of states have adopted licensing standards applicable to assisted living facilities. The National Academy for State Health Policy reported in November of 1999 that 29 states had implemented licensing standards specifically for assisted living, rules were being drafted in another three states and another 11 states were currently studying the regulation of assisted living facilities. State regulatory models vary; there is no national consensus on a definition of assisted living, and no uniform approach by the states to regulating assisted living facilities. Some state licensing standards apply to assisted living facilities whether or not they accept Medicaid funding. Moreover, a 1998 study by the National Academy for State Health Policy found that several states require certificates of need from state health planning authorities before new assisted living properties may be developed, and three states have adopted moratoria on the development of new assisted living facilities. Based on our analysis of current economic and regulatory trends, we believe that assisted living properties that become dependent upon Medicaid payments for a majority of their revenues will decline in value because Medicaid rates will fail to keep up with increasing costs. For the same reason, we also believe that assisted living properties located in states that adopt certificate of need requirements or otherwise restrict the development of new assisted living properties will increase in value because these limitations upon development will help ensure higher occupancy and higher non-governmental rates. Accordingly, we intend to focus new investments in assisted living properties that are not overly dependent upon governmental revenues and that are in areas where there are barriers to competition created by certificate of need laws or otherwise. Two federal government studies were recently completed to provide background information and make recommendations regarding the regulation of, and the possibility of increased governmental funding for, the assisted living industry. In April 1999, the General Accounting Office issued a report to the Senate Special Committee on Aging and the Committee held hearings on consumer protection and quality of care issues in assisted living facilities. The GAO studied assisted living facilities in four states and found a variety of residential settings serving a wide range of resident health and care needs. The GAO found that providers often give consumers insufficient information to determine whether a particular facility can meet their needs and that state licensing and oversight approaches vary widely. The GAO anticipates that as the states increase the use of Medicaid to pay for assisted living, federal financing will likewise grow, and these trends will focus more public attention on the place of assisted living in the continuum of long-term care and upon state standards and compliance approaches. The second study, a national survey of assisted living facilities, was funded by the Department of Health and Human Services' Assistant Secretary for Planning and Evaluation and is expected to result in additional reports which will touch upon all aspects of the assisted living industry including quality of care and financing. The 1998 National Academy for State Health Policy study referenced above and an April 1999 report on the national survey of assisted living facilities are part of this second study. We cannot predict whether these studies will result in governmental policy changes or new legislation, or what impact any changes may have. Based upon our analysis of current economic and regulatory trends, we do not believe that the federal government is likely to have a material impact upon the current regulatory environment in which the assisted living industry operates unless it also undertakes expanded funding obligations; and we do not believe a materially increased financial commitment from the federal government is presently likely. However, we do anticipate that assisted living facilities will increasingly be licensed and regulated by the various states, and that with the absence of federal standards, the states' policies will continue to vary widely. Nursing Homes. About 67% of all nursing home revenues in 1997 came from government Medicare and Medicaid programs. Nursing homes are also among the most highly regulated businesses in the country. The federal and state governments regularly monitor the quality of care provided at nursing homes and regularly inspect the physical condition of nursing home properties. These periodic inspections and occasional changes in 11 life safety and physical plant requirements sometimes require nursing home owners to spend money for capital improvements. These mandated capital improvements have in the past usually resulted in Medicare and Medicaid rate adjustments, albeit on the basis of amortization of expenditures over extended useful lives of the improvements. However, under the new Medicare prospective payment system, which began being phased in over three years starting in 1998, capital costs are part of the prospective rate and will not be facility specific. Other recent legislative and regulatory actions with respect to state Medicaid rates and the Medicare prospective payment system are limiting the reimbursement levels for some nursing home and other eldercare services. At the same time federal enforcement and oversight of nursing homes is increasing, thereby making licensing and certification of these facilities more rigorous. These actions have adversely affected the revenues and increased the expenses of many nursing home operators, including several of our tenants. The federal Health Care Financing Administration, HCFA, has begun to implement an initiative to increase the effectiveness of Medicare/Medicaid nursing facility survey and enforcement activities. HCFA's initiative follows its July 1998 report to Congress on the effectiveness of the survey and enforcement system, several March 1999 reports by HCFA's Office of Inspector General concerning quality of care in nursing homes, a July 1998 General Accounting Office investigation which found inadequate care in a significant proportion of California nursing homes, and a March 1999 GAO report which recommended that HCFA and the states strengthen their compliance and enforcement practices to better ensure that nursing homes provide adequate care. In 1998 and 1999, the Senate Special Committee on Aging held hearings on these issues. HCFA is taking steps to focus survey and enforcement efforts at nursing homes with repeat violations of Medicare/Medicaid standards, including chain-operated facilities with patterns of noncompliance. HCFA also is requiring state agencies to use enforcement sanctions and remedies more promptly and effectively when substandard care is identified. HCFA is increasing its oversight of state survey agencies. In addition HCFA has adopted new regulations expanding federal and state authority to impose civil money penalties in instances of noncompliance. Medicare/Medicaid survey results for each nursing home are being posted on the internet. Federal efforts to target fraud and abuse by Medicare and Medicaid providers have also increased. An adverse determination concerning any tenant's license or eligibility for Medicare or Medicaid reimbursement or its compliance with applicable federal or state regulation may adversely affect such operator and its affiliates and may restrict its ability to pay rent and mortgage interest. Most states also limit the number of nursing homes by requiring developers to obtain certificates of need before new facilities may be built. Even in those states such as California and Texas that have eliminated certificate of need laws, the state health authorities usually have retained other means of limiting new nursing home development. Examples of these other means are the use of moratoria, licensing laws or limitations upon participation in the state Medicaid program. We believe that these governmental limitations generally make nursing home properties more valuable by extending their useful lives and limiting competition. A number of legislative proposals that would affect major reforms of the health care system have been introduced in Congress, such as additional Medicare and Medicaid reforms and cost containment measures. We cannot predict whether any of these legislative proposals will be adopted or, if adopted, what effect, if any, these proposals would have on our business, lessees or mortgagors. Competition. We compete with other real estate investment trusts which regularly seek attractive investment opportunities in senior housing facilities. We also compete with banks, non-bank finance companies, leasing companies and insurance companies which invest in this type of real estate. Some of these competitors have resources that are greater than ours and have lower costs of capital. 12 FEDERAL INCOME TAX CONSIDERATIONS The following summary of federal income tax and ERISA consequences is based on existing law, and is limited to investors who own our shares as investment assets rather than as inventory or as property used in a trade or business. The summary does not discuss the particular tax consequences that might be relevant to you if you are subject to special rules under the federal income tax law, for example if you are: o a bank, life insurance company, regulated investment company, or other financial institution, o a broker or dealer in securities or foreign currency, o a person who has a functional currency other than the U.S. dollar, o a person who acquires our shares in connection with employment or other performance of services, o a person subject to alternative minimum tax, o a person who owns our shares as part of a straddle, hedging transaction, constructive sale transaction, or conversion transaction, or o except as specifically described in the following summary, a tax-exempt entity or a foreign person. The sections of the Internal Revenue Code that govern the federal income tax qualification and treatment of a REIT and its shareholders are complex. This presentation is a summary of applicable Internal Revenue Code provisions, related rules and regulations and administrative and judicial interpretations, all of which are subject to change, possibly with retroactive effect. Future legislative, judicial, or administrative actions or decisions could affect the accuracy of statements made in this summary. We have not sought a ruling from the IRS with respect to any matter described in this summary, and we cannot assure you that the IRS or a court will agree with the statements made in this summary. In addition, the following summary is not exhaustive of all possible tax consequences, and does not discuss any estate, gift, state, local, or foreign tax consequences. For all these reasons, we urge you and any prospective acquiror of our shares to consult with a tax advisor about the federal income tax and other tax consequences of the acquisition, ownership and disposition of our shares. Federal income tax consequences may differ depending on whether or not you are a "U.S. shareholder." For purposes of this summary, a U.S. shareholder for federal income tax purposes is: o a citizen or resident of the United States, including an alien individual who is a lawful permanent resident of the United States or meets the substantial presence residency test under the federal income tax laws, o a corporation, partnership or other entity treated as a corporation or partnership for federal income tax purposes, that is created or organized in or under the laws of the United States, any state thereof or the District of Columbia, unless otherwise provided by Treasury regulations, o an estate the income of which is subject to federal income taxation regardless of its source, or o a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust, or electing trusts in existence on August 20, 1996 to the extent provided in Treasury regulations, whose status as a U.S. shareholder is not overridden by an applicable tax treaty. Conversely, a "non-U.S. shareholder" is a beneficial owner of our shares who is not a U.S. shareholder. 13 Taxation as a REIT We will elect to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code commencing with our 1999 taxable year. Our 1999 taxable year began when we ceased to be wholly-owned by HRPT in October 1999 and ended on December 31, 1999. Our REIT election, assuming continuing compliance with the federal income tax qualification tests summarized below, continues in effect for subsequent taxable years. Although no assurance can be given, we believe that we are organized, have operated, and will continue to operate in a manner that qualifies us to be taxed under the Internal Revenue Code as a REIT. As a REIT, we generally will not be subject to federal income tax on our net income distributed as dividends to our shareholders. Distributions to our shareholders generally will be includable in their income as dividends to the extent of our current or accumulated earnings and profits. A portion of these dividends may be treated as capital gain dividends, as explained below. No portion of any dividends will be eligible for the dividends received deduction for corporate shareholders. Distributions in excess of current or accumulated earnings and profits generally will be treated for federal income tax purposes as a return of capital to the extent of a recipient shareholder's basis in our shares, and will reduce this basis. Our current or accumulated earnings and profits will generally be allocated first to distributions on our outstanding preferred shares, if any, and thereafter to distributions on our common shares. Our counsel, Sullivan & Worcester LLP, has opined that we have been organized and have qualified as a REIT under the Internal Revenue Code for our 1999 taxable year, and that our current investments and plan of operation will enable us to meet the requirements for qualification and taxation as a REIT under the Internal Revenue Code. Our actual qualification and taxation as a REIT will depend upon our ability to meet the various REIT qualification tests imposed under the Internal Revenue Code and summarized below. While we believe that we will operate in a manner to satisfy the various REIT qualification tests, our counsel has not reviewed and will not review compliance with these tests on a continuing basis. If we fail to qualify as a REIT in any year, we will be subject to federal income taxation as if we were a domestic corporation, and our shareholders will be taxed like shareholders of ordinary corporations. In this event, we could be subject to significant tax liabilities, and the amount of cash available for distribution to our shareholders may be reduced or eliminated. If we qualify for taxation as a REIT and meet the annual distribution tests described below, we generally will not be subject to federal corporate income taxes on the amount distributed. However, even if we qualify for federal income taxation as a REIT, we may be subject to federal tax in the following circumstances: o We will be taxed at regular corporate rates on any undistributed "real estate investment trust taxable income," including our undistributed net capital gains. o If our alternative minimum taxable income exceeds our taxable income, we may be subject to the corporate alternative minimum tax on our items of tax preference. o If we have net income from the sale or other disposition of "foreclosure property" that is held primarily for sale to customers in the ordinary course of business or other nonqualifying income from foreclosure property, we will be subject to tax on this net income from foreclosure property at the highest regular corporate rate, which is currently 35%. REITs may elect to operate foreclosure property which is, in general, property acquired or reduced to possession after a default or imminent default on a loan secured by the property or on a lease of the property. We anticipate operating several facilities as foreclosure property in the manner prescribed by applicable Internal Revenue Code provisions. o If we have net income from prohibited transactions, including sales or other dispositions of inventory or property held primarily for sale to customers in the ordinary course of business other than foreclosure property, we will be subject to tax on this income at a 100% rate. 14 o If we fail to satisfy the 75% gross income test or the 95% gross income test discussed below, but nonetheless maintain our qualification as a REIT, we will be subject to tax at a 100% rate on the greater of the amount by which we fail the 75% or the 95% test, multiplied by a fraction intended to reflect our profitability. o If we fail to distribute for any calendar year at least the sum of 85% of our REIT ordinary income for that year, 95% of our REIT capital gain net income for that year, and any undistributed taxable income from prior periods, we will be subject to a 4% excise tax on the excess of the required distribution over the amounts actually distributed. o If we acquire an asset from a corporation in a transaction in which our basis in the asset is determined by reference to the basis of the asset in the hands of a present or former C corporation, and if we subsequently recognize gain on the disposition of this asset during the ten-year period beginning on the date on which the asset ceased to be owned by the C corporation, then we will pay tax at the highest regular corporate tax rate, which is currently 35%, on the lesser of the excess of the fair market value of the asset over the C corporation's basis in the asset on the date the asset ceased to be owned by the C corporation, or the gain recognized in the disposition. If we invest in properties in foreign countries, our profits from those investments will generally be subject to tax in the countries where those properties are located. The nature and amount of this taxation will depend on the laws of the countries where the properties are located. If we operate as we currently intend, then we will distribute our taxable income to our shareholders and we will not pay federal income tax, and thus we generally cannot recover the cost of foreign taxes imposed on our foreign investments by claiming foreign tax credits against our federal income tax liability. Also, we cannot pass through to our shareholders any foreign tax credits. If we fail to qualify for federal income taxation as a REIT in any taxable year, then we will be subject to federal tax in the same manner as an ordinary corporation. Distributions to our shareholders in any year in which we fail to qualify as a REIT will not be deductible, nor will these distributions be required to be made. In that event, to the extent of our current and accumulated earnings and profits, all distributions to our shareholders will be taxable as ordinary dividend income and, subject to limitations in the Internal Revenue Code, will be eligible for the dividends received deduction for corporate recipients. Also in that event, we will generally be disqualified from federal income taxation as a REIT for the four taxable years following disqualification. Failure to qualify for federal income taxation as a REIT for even one year could result in our incurring substantial indebtedness or liquidating substantial investments in order to pay the resulting corporate-level taxes. REIT Qualification Requirements General Requirements. Section 856(a) of the Internal Revenue Code defines a REIT as a corporation, trust or association: (1) that is managed by one or more trustees or directors; (2) the beneficial ownership of which is evidenced by transferable shares or by transferable certificates of beneficial interest; (3) that would be taxable, but for Sections 856 through 859 of the Internal Revenue Code, as an ordinary domestic corporation; (4) that is not a financial institution or an insurance company subject to special provisions of the Internal Revenue Code; (5) the beneficial ownership of which is held by 100 or more persons; 15 (6) that is not "closely held" as defined under the personal holding company stock ownership test, as described below; and (7) that meets other tests regarding income, assets and distributions, all as described below. Section 856(b) of the Internal Revenue Code provides that conditions (1) to (4), inclusive, must be met during the entire taxable year and that condition (5) must be met during at least 335 days of a taxable year of 12 months, or during a pro rata part of a taxable year of less than 12 months. Section 856(h)(2) of the Internal Revenue Code provides that conditions (5) and (6) need not be met for our first taxable year as a REIT. We believe that we have satisfied conditions (1) to (6), inclusive, during each of the requisite periods ending on or before December 31, 1999, and that we will continue to satisfy those conditions in future taxable years. There can, however, be no assurance in this regard. By reason of condition (6) above, we will fail to qualify as a REIT for a taxable year if at any time during the last half of the year more than 50% in value of our outstanding shares is owned directly or indirectly by five or fewer individuals. To help comply with condition (6), our declaration of trust contains provisions restricting transfers of our shares. In addition, if we comply with applicable Treasury regulations for ascertaining the ownership of our outstanding shares and do not know, or by exercising reasonable diligence would not have known, that we failed condition (6), then we will be treated as satisfying condition (6). Also, our failure to comply with these applicable Treasury regulations for ascertaining ownership of our outstanding shares may result in a penalty of $25,000, or $50,000 for intentional violations. Accordingly, we intend to comply with these Treasury regulations, and to request annually from record holders of significant percentages of our shares information regarding the ownership of our shares. Under our declaration of trust, our shareholders are required to respond to these requests for information. For purposes of condition (6) above, shares in a REIT held by a pension trust are treated as held directly by the pension trust's beneficiaries in proportion to their actuarial interests in the pension trust. Consequently, five or fewer pension trusts could own more than 50% of the interests in an entity without jeopardizing that entity's federal income tax qualification as a REIT. However, as discussed below, if a REIT is a "pension-held REIT," each pension trust owning more than 10% of the REIT's shares by value generally will be taxed on a portion of the dividends received from the REIT, based on the ratio of: (1) the REIT's gross income for the year that would be unrelated trade or business income if the REIT were a qualified pension trust, to (2) the REIT's total gross income for the year. Our Wholly-Owned Subsidiaries and Our Investments through Partnerships. Section 856(i) of the Internal Revenue Code provides that any corporation 100% of whose stock is held by a REIT is a qualified REIT subsidiary and shall not be treated as a separate corporation. The assets, liabilities and items of income, deduction and credit of a qualified REIT subsidiary are treated as the REIT's. We believe that each of our direct and indirect wholly-owned subsidiaries will either be a qualified REIT subsidiary within the meaning of Section 856(i) of the Internal Revenue Code, or a noncorporate entity that for federal income tax purposes is not treated as separate from its owner under regulations issued under Section 7701 of the Internal Revenue Code. Thus, in applying all the federal income tax REIT qualification requirements described in this summary, all assets, liabilities and items of income, deduction and credit of our direct and indirect wholly-owned subsidiaries are treated as ours. We may invest in real estate through one or more limited or general partnerships or limited liability companies that are treated as partnerships for federal income tax purposes. In the case of a REIT that is a partner in a partnership, regulations under the Internal Revenue Code provide that, for purposes of the REIT qualification requirements regarding income and assets discussed below, the REIT is deemed to own its proportionate share of the assets of the partnership corresponding to the REIT's proportionate capital interest in 16 the partnership and is deemed to be entitled to the income of the partnership attributable to this proportionate share. In addition, for these purposes, the character of the assets and gross income of the partnership generally retain the same character in the hands of the REIT. Accordingly, our proportionate share of the assets, liabilities, and items of income of each partnership in which we are a partner is treated as ours for purposes of the income tests and asset tests discussed below. In contrast, for purposes of the distribution requirement discussed below, we must take into account as a partner our distributive share of the partnership's income as determined under the general federal income tax rules governing partners and partnerships under Sections 701 through 777 of the Internal Revenue Code. Income Tests. There are two gross income requirements for qualification as a REIT under the Internal Revenue Code: o At least 75% of our gross income, excluding gross income from sales or other dispositions of property held primarily for sale, must be derived from investments relating to real property, including "rents from real property" as defined under Section 856 of the Internal Revenue Code, mortgages on real property, or shares in other REITs. When we receive new capital in exchange for our shares or in a public offering of five-year or longer debt instruments, income attributable to the temporary investment of this new capital in stock or a debt instrument, if received or accrued within one year of our receipt of the new capital, is generally also qualifying income under the 75% test. o At least 95% of our gross income, excluding gross income from sales or other dispositions of property held primarily for sale, must be derived from a combination of items of real property income that satisfy the 75% test described above, dividends, interest, payments under interest rate swap or cap agreements, options, futures contracts, forward rate agreements, or similar financial instruments, and gains from the sale or disposition of stock, securities, or real property. For purposes of these two requirements, income derived from a "shared appreciation provision" in a mortgage loan is generally treated as gain recognized on the sale of the property to which it relates. Although we will use our best efforts to ensure that the income generated by our investments will be of a type which satisfies both the 75% and 95% gross income tests, there can be no assurance in this regard. In order to qualify as "rents from real property" under Section 856 of the Internal Revenue Code, several requirements must be met: o The amount of rent received generally must not be based on the income or profits of any person, but may be based on receipts or sales. o Rents do not qualify if the REIT owns 10% or more by vote or value of the tenant, whether directly or after application of attribution rules. While we intend not to lease property to any party if rents from that property would not qualify as rents from real property, application of the 10% ownership rule is dependent upon complex attribution rules and circumstances that may be beyond our control. For example, an unaffiliated third party's ownership directly or by attribution of 10% or more by value of our shares, or 10% or more by value of HRPT Properties Trust's shares for so long as HRPT Properties Trust owns 10% or more by value of us, as well as 10% or more by vote or value of the stock of one of our lessees, would result in that lessee's rents not qualifying as rents from real property. Our declaration of trust disallows transfers or purported acquisitions, directly or by attribution, of our shares that could result in disqualification as a REIT under the Internal Revenue Code and permits our trustees to repurchase the shares to the extent necessary to maintain our status as a REIT under the Internal Revenue Code. Nevertheless, there can be no assurance that these provisions in our declaration of trust will be effective to prevent REIT status under the Internal Revenue Code from being jeopardized under the 10% lessee affiliate rule. Furthermore, there can be no assurance that we will be able to monitor and enforce these restrictions, nor will our 17 shareholders necessarily be aware of ownership of shares attributed to them under the Internal Revenue Code's attribution rules. o In order for rents to qualify, we generally must not manage the property or furnish or render services to the tenants of the property, except through an independent contractor from whom we derive no income. There is an exception to this rule permitting a REIT to perform customary tenant services of the sort which a tax-exempt organization could perform without being considered in receipt of "unrelated business taxable income" as defined in Section 512(b)(3) of the Internal Revenue Code. In addition, a de minimis amount of noncustomary services will not disqualify income as "rents from real property" so long as the value of the impermissible services does not exceed 1% of the gross income from the property. o If rent attributable to personal property leased in connection with a lease of real property is 15% or less of the total rent received under the lease, then the rent attributable to personal property will qualify as rents from real property; if this 15% threshold is exceeded, the rent attributable to personal property will not so qualify. The portion of rental income treated as attributable to personal property is determined according to the ratio of the tax basis of the personal property to the total tax basis of the real and personal property which is rented. For taxable years after 2000, the ratio will be determined by reference to fair market values rather than tax bases. We believe that all or substantially all our rents have qualified and will qualify as rents from real property for purposes of Section 856 of the Internal Revenue Code. In order to qualify as mortgage interest on real property for purposes of the 75% test, interest must derive from a mortgage loan secured by real property with a fair market value, at the time the loan is made, at least equal to the amount of the loan. If the amount of the loan exceeds the fair market value of the real property, the interest will be treated as interest on a mortgage loan in a ratio equal to the ratio of the fair market value of the real property to the total amount of the mortgage loan. Other than sales of foreclosure property, any gain we realize on the sale of property held as inventory or other property held primarily for sale to customers in the ordinary course of business will be treated as income from a prohibited transaction that is subject to a penalty tax at a 100% rate. This prohibited transaction income also may have an adverse effect upon our ability to satisfy the 75% and 95% gross income tests for federal income tax qualification as a REIT. We cannot provide assurances as to whether or not the IRS might successfully assert that one or more of our dispositions is subject to the 100% penalty tax. However, we believe that dispositions of assets that we might make will not be subject to the 100% penalty tax, because we intend to: o own our assets for investment with a view to long-term income production and capital appreciation; o engage in the business of developing, owning and operating our existing properties and acquiring, developing, owning and operating new properties; and o make occasional dispositions of our assets consistent with our long-term investment objectives. If we fail to satisfy one or both of the 75% or 95% gross income tests for any taxable year, we may nevertheless qualify as a REIT for that year if: o our failure to meet the test was due to reasonable cause and not due to willful neglect; o we report the nature and amount of each item of our income included in the 75% or 95% gross income tests for that taxable year on a schedule attached to our tax return; and o any incorrect information on the schedule was not due to fraud with intent to evade tax. 18 It is impossible to state whether in all circumstances we would be entitled to the benefit of this relief provision for the 75% and 95% gross income tests. Even if this relief provision did apply, a special tax equal to 100% is imposed upon the greater of the amount by which we failed the 75% test or the 95% test, multiplied by a fraction intended to reflect our profitability. Asset Tests. At the close of each quarter of each taxable year, we must also satisfy three percentage tests relating to the nature of our assets: o At least 75% of our total assets must consist of real estate assets, cash and cash items, shares in other REITs, government securities, and stock or debt instruments purchased with proceeds of a stock offering or an offering of our debt with a term of at least five years, but only for the one-year period commencing with our receipt of the offering proceeds. o Not more than 25% of our total assets may be represented by securities other than those securities that count favorably toward the preceding 75% asset test. o Of the investments included in the preceding 25% asset class, the value of any one issuer's securities that we own may not exceed 5% of the value of our total assets, and we may not own more than 10% of any one non-REIT issuer's outstanding voting securities. For taxable years after 2000, we may not own more than 10% of the vote or value of any one non-REIT issuer's outstanding securities, unless that issuer is our taxable REIT subsidiary or the securities are straight debt securities. When a failure to satisfy the above asset tests results from an acquisition of securities or other property during a quarter, the failure can be cured by disposition of sufficient nonqualifying assets within 30 days after the close of that quarter. We intend to maintain records of the value of our assets to document our compliance with the above three asset tests, and to take actions as may be required to cure any failure to satisfy the tests within 30 days after the close of any quarter. Annual Distribution Requirements. In order to qualify for taxation as a REIT under the Internal Revenue Code, we are required to make annual distributions other than capital gain dividends to our shareholders in an amount at least equal to the excess of: (A) the sum of 95% of our "real estate investment trust taxable income," as defined in Section 857 of the Internal Revenue Code, computed by excluding any net capital gain and before taking into account any dividends paid deduction for which we are eligible, and 95% of our net income after tax, if any, from property received in foreclosure, over (B) the sum of our qualifying noncash income, e.g., imputed rental income or income from transactions inadvertently failing to qualify as like-kind exchanges. For our taxable years after 2000, the preceding 95% percentages are reduced to 90%. The distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before we timely file our tax return for the earlier taxable year and if paid on or before the first regular distribution payment after that declaration. Dividends declared in October, November, or December and paid during the following January will be treated as having been both paid and received on December 31 of the prior taxable year. A distribution which is not pro rata within a class of our beneficial interests entitled to a distribution, or which is not consistent with the rights to distributions among our classes of beneficial interests, is a preferential distribution that is not taken into consideration for purposes of the distribution requirements, and accordingly the payment of a preferential distribution could affect our ability to meet the distribution requirements. Taking into account our distribution policies, including the dividend reinvestment plan we have adopted, we expect that we will not make any preferential distributions. The distribution requirements may be waived by the IRS if a REIT establishes that it failed to meet them by reason of distributions previously made to meet the requirements of the 19 4% excise tax discussed below. To the extent that we do not distribute all of our net capital gain and all of our real estate investment trust taxable income, as adjusted, we will be subject to tax on undistributed amounts. In addition, we will be subject to a 4% excise tax to the extent we fail within a calendar year to make required distributions to our shareholders of 85% of our ordinary income and 95% of our capital gain net income plus the excess, if any, of the "grossed up required distribution" for the preceding calendar year over the amount treated as distributed for that preceding calendar year. For this purpose, the term "grossed up required distribution" for any calendar year is the sum of our taxable income for the calendar year without regard to the deduction for dividends paid and all amounts from earlier years that are not treated as having been distributed under the provision. If we do not have enough cash or other liquid assets to meet the 95% distribution requirements, we may find it necessary to arrange for new debt or equity financing to provide funds for required distributions, or else our REIT status for federal income tax purposes could be jeopardized. We can provide no assurance that financing would be available for these purposes on favorable terms. If we fail to distribute sufficient dividends for any year, we may be able to rectify this failure by paying "deficiency dividends" to shareholders in a later year. These deficiency dividends may be included in our deduction for dividends paid for the earlier year, but an interest charge would be imposed upon us for the delay in distribution. Although we may be able to avoid being taxed on amounts distributed as deficiency dividends, we will remain liable for the 4% excise tax discussed above. Recent Federal Taxation Changes. The Tax Relief Extension Act of 1999 was enacted late in 1999 and is effective for taxable years after 2000. This legislation contained several tax provisions regarding REITs, including a reduction of the annual distribution requirement for real estate investment trust taxable income from 95% to 90%, as mentioned above. The Act also changed the 10% voting securities test under current law to a 10% vote or value test. Thus, subject to exceptions, a REIT will no longer be allowed to own more that 10% by vote or value of the outstanding securities of any issuer, other than a qualified REIT subsidiary or another REIT. Another exception to this new test, which is also an exception to the 5% asset test under current law, allows a REIT to own any or all of the securities of an electing "taxable REIT subsidiary," provided that no more than 20% of the REIT's assets is represented by the stock or securities of taxable REIT subsidiaries. A taxable REIT subsidiary can perform noncustomary services for tenants of a REIT without disqualifying rents received from the tenants for purposes of the REIT's gross income tests and can also undertake third-party management and development activities and activities that are not related to real estate. A taxable REIT subsidiary cannot directly or indirectly operate or manage a health care facility. A taxable REIT subsidiary will be taxed as a subchapter C corporation but will be subject to earnings stripping limitations on the deductibility of interest paid to the REIT. In addition, a REIT will be subject to a 100% excise tax on certain excess amounts to ensure that: o tenants who pay a taxable REIT subsidiary for services are charged an arm's length amount by the taxable REIT subsidiary for these services; o shared expenses of a REIT and its taxable REIT subsidiary are allocated fairly between the two; and o interest paid by a taxable REIT subsidiary to the REIT that owns it is commercially reasonable. In connection with foreclosure actions, we anticipate operating health care properties through taxable subsidiaries in which we own less than 10% of the vote but most of the value, all in accordance with current laws. For taxable years after 2000, we will restructure our affairs as appropriate to comply with the requirements of applicable law. 20 Depreciation and Federal Income Tax Treatment of Leases Our initial tax bases in our assets will generally be our acquisition cost. We will generally depreciate our real property on a straight-line basis over 40 years and our personal property over 12 years. These depreciation schedules may vary for properties that we acquire through tax-free or carryover basis acquisitions. The initial tax bases and depreciation schedules for our assets we held immediately after we ceased to be wholly-owned by HRPT Properties Trust depends upon whether the deemed exchange that resulted from the spin-off was an exchange under Section 351(a) of the Internal Revenue Code. We believe that Section 351(a) treatment was appropriate, and we carried over HRPT Properties Trust's tax basis and depreciation schedule in each of the assets, and to the extent that HRPT Properties Trust recognized gain on an asset in the deemed exchange, we have additional tax basis in that asset which we depreciate in the same manner as we depreciate newly purchased assets. In contrast, if Section 351(a) treatment was not appropriate for the deemed exchange, then we will be treated as though we acquired all our assets at the time of the spin-off in a fully taxable acquisition, thereby acquiring aggregate tax bases in these assets equal to the aggregate amount realized by HRPT Properties Trust in the deemed exchange, and we will depreciate these tax bases in the same manner as we depreciate newly purchased assets. We believe, and Sullivan & Worcester LLP has opined, that it is likely that the deemed exchange was an exchange under Section 351(a), and we will perform all our tax reporting accordingly. We may be required to amend these tax reports, including those sent to our shareholders, if the IRS successfully challenges our position that the deemed exchange is an exchange under Section 351(a). We intend to comply with the annual REIT distribution requirements regardless of whether the deemed exchange was an exchange under Section 351(a). We will be entitled to depreciation deductions from our facilities only if we are treated for federal income tax purposes as the owner of the facilities. This means that the leases of the facilities must be classified for federal income tax purposes as true leases, rather than as sales or financing arrangements, and we believe this to be the case. In the case of sale-leaseback arrangements, the IRS could assert that we realized prepaid rental income in the year of purchase to the extent that the value of a leased property, at the time of purchase, exceeded the purchase price for that property. While we believe that the value of leased property at the time of purchase did not exceed purchase prices, because of the lack of clear precedent we cannot provide assurances as to whether the IRS might successfully assert the existence of prepaid rental income in any of our sale-leaseback transactions. Additionally, Section 467 of the Internal Revenue Code, which concerns leases with increasing rents, may apply to those of our leases which provide for rents that increase from one period to the next. Section 467 of the Internal Revenue Code provides that in the case of a so-called "disqualified leaseback agreement" rental income must be accrued at a constant rate. Where constant rent accrual is required, we could recognize rental income from a lease in excess of cash rents and, as a result, encounter difficulty in meeting the annual distribution requirement. Disqualified leaseback agreements include leaseback transactions where a principal purpose for providing increasing rent under the agreement is the avoidance of federal income tax. Recently issued Treasury regulations provide that rents will not be treated as increasing for tax avoidance purposes where the increases are based upon a fixed percentage of lessee receipts. Therefore, the additional rent provisions in our leases that are based on a fixed percentage of lessee receipts generally should not cause the leases to be disqualified leaseback agreements under Section 467. Taxation of U.S. Shareholders As long as we qualify as a REIT for federal income tax purposes, a distribution to our U.S. shareholders that we do not designate as a capital gain dividend will be treated as an ordinary income dividend to the extent that it is made out of current or accumulated earnings and profits. Distributions made out of our current or accumulated earnings and profits that we properly designate as capital gain dividends will be taxed as long-term capital gains, as discussed below, to the extent they do not exceed our actual net capital gain for the taxable 21 year. However, corporate shareholders may be required to treat up to 20% of any capital gain dividend as ordinary income under Section 291 of the Internal Revenue Code. In addition, we may elect to retain net capital gain income and treat it as constructively distributed. In that case: (1) we will be taxed at regular corporate capital gains tax rates on retained amounts, (2) each U.S. shareholder will be taxed on its designated proportionate share of our retained net capital gains as though that amount were distributed and designated a capital gain dividend, (3) each U.S. shareholder will receive a credit for its designated proportionate share of the tax that we pay, (4) each U.S. shareholder will increase its adjusted basis in our shares by the excess of the amount of its proportionate share of these retained net capital gains over its proportionate share of this tax that we pay, and (5) both we and our corporate shareholders will make commensurate adjustments in our respective earnings and profits for federal income tax purposes. If we elect to retain our net capital gains in this fashion, we will notify our U.S. shareholders of the relevant tax information within 60 days after the close of the affected taxable year. For noncorporate U.S. shareholders, long-term capital gains are generally taxed at maximum rates of 20% or 25%, depending upon the type of property disposed of and the previously claimed depreciation with respect to this property. If for any taxable year we designate as capital gain dividends any portion of the dividends paid or made available for the year to our U.S. shareholders, including our retained capital gains treated as capital gain dividends, then the portion of the capital gain dividends so designated that will be allocated to the holders of a particular class of shares will on a percentage basis equal the ratio of the amount of the total dividends paid or made available for the year to the holders of that class of shares to the total dividends paid or made available for the year to holders of all classes of our shares. We will similarly designate the portion of any capital gain dividend that is to be taxed to noncorporate U.S. shareholders at the maximum rates of 20% or 25% so that the designations will be proportional among all classes of our shares. Distributions in excess of current or accumulated earnings and profits will not be taxable to a U.S. shareholder to the extent that they do not exceed the shareholder's adjusted basis in the shareholder's shares, but will reduce the shareholder's basis in those shares. To the extent that these excess distributions exceed the adjusted basis of a U.S. shareholder's shares, they will be included in income as capital gain, with long-term gain generally taxed to noncorporate U.S. shareholders at a maximum rate of 20%. No U.S. shareholder may include on his federal income tax return any of our net operating losses or any of our capital losses. Dividends that we declare in October, November or December of a taxable year to U.S. shareholders of record on a date in those months will be deemed to have been received by shareholders on December 31 of that taxable year, provided we actually pay these dividends during the following January. Also, items that are treated differently for regular and alternative minimum tax purposes are to be allocated between a REIT and its shareholders under Treasury regulations which are to be prescribed. It is possible that these Treasury regulations will require tax preference items to be allocated to our shareholders with respect to any accelerated depreciation or other tax preference items that we claim. A U.S. shareholder's sale or exchange of our shares will result in recognition of gain or loss in an amount equal to the difference between the amount realized and the shareholder's adjusted basis in the shares sold or exchanged. This gain or loss will be capital gain or loss, and will be long-term capital gain or loss if the 22 shareholder's holding period in the shares exceeds one year. In addition, any loss upon a sale or exchange of our shares held for six months or less will generally be treated as a long-term capital loss to the extent of our long-term capital gain dividends during the holding period. Noncorporate U.S. shareholders who borrow funds to finance their acquisition of our shares could be limited in the amount of deductions allowed for the interest paid on the indebtedness incurred. Under Section 163(d) of the Internal Revenue Code, interest paid or accrued on indebtedness incurred or continued to purchase or carry property held for investment is generally deductible only to the extent of the investor's net investment income. A U.S. shareholder's net investment income will include ordinary income dividend distributions received from us and, if an appropriate election is made by the shareholder, capital gain dividend distributions received from us; however, distributions treated as a nontaxable return of the shareholder's basis will not enter into the computation of net investment income. Taxation of Tax-Exempt Shareholders In Revenue Ruling 66-106, the IRS ruled that amounts distributed by a REIT to a tax-exempt employees' pension trust did not constitute "unrelated business taxable income," even though the REIT may have financed some its activities with acquisition indebtedness. Although revenue rulings are interpretive in nature and subject to revocation or modification by the IRS, based upon the analysis and conclusion of Revenue Ruling 66-106, our distributions made to shareholders that are tax-exempt pension plans, individual retirement accounts, or other qualifying tax-exempt entities should not constitute unrelated business taxable income, unless the shareholder has financed its acquisition of our shares with "acquisition indebtedness" within the meaning of the Internal Revenue Code. Special rules apply to tax-exempt pension trusts, including so-called 401(k) plans but excluding individual retirement accounts or government pension plans, that own more than 10% by value of a "pension-held REIT" at any time during a taxable year. The pension trust may be required to treat a percentage of all dividends received from the pension-held REIT during the year as unrelated business taxable income. This percentage is equal to the ratio of: (1) the pension-held REIT's gross income derived from the conduct of unrelated trades or businesses, determined as if the pension-held REIT were a tax-exempt pension fund, less direct expenses related to that income, to (2) the pension-held REIT's gross income from all sources, less direct expenses related to that income, except that this percentage shall be deemed to be zero unless it would otherwise equal or exceed 5%. A REIT is a pension-held REIT if: o the REIT is "predominantly held" by tax-exempt pension trusts, and o the REIT would otherwise fail to satisfy the "closely held" ownership requirement discussed above if the stock or beneficial interests in the REIT held by tax-exempt pension trusts were viewed as held by tax-exempt pension trusts rather than by their respective beneficiaries. A REIT is predominantly held by tax-exempt pension trusts if at least one tax-exempt pension trust owns more than 25% by value of the REIT's stock or beneficial interests, or if one or more tax-exempt pension trusts, each owning more than 10% by value of the REIT's stock or beneficial interests, own in the aggregate more than 50% by value of the REIT's stock or beneficial interests. Because of the restrictions in our declaration of trust regarding the ownership concentration of our shares, we believe that we are not and will not be a pension-held REIT. However, because our shares are publicly traded, we cannot completely control whether or not we are or will become a pension-held REIT. 23 Taxation of Non-U.S. Shareholders The rules governing the United States federal income taxation of non-U.S. shareholders are complex, and the following discussion is intended only as a summary of these rules. If you are a non-U.S. shareholder, we urge you to consult with your own tax advisor to determine the impact of United States federal, state, local, and foreign tax laws, including any tax return filing and other reporting requirements, with respect to your investment in our shares. In general, a non-U.S. shareholder will be subject to regular United States federal income tax in the same manner as a U.S. shareholder with respect to its investment in our shares if that investment is effectively connected with the non-U.S. shareholder's conduct of a trade or business in the United States. In addition, a corporate non-U.S. shareholder that receives income that is or is deemed effectively connected with a trade or business in the United States may also be subject to the 30% branch profits tax under Section 884 of the Internal Revenue Code, which is payable in addition to regular United States federal corporate income tax. The balance of this discussion on the United States federal income taxation of non-U.S. shareholders addresses only those non-U.S. shareholders whose investment in our shares is not effectively connected with the conduct of a trade or business in the United States. A distribution by us to a non-U.S. shareholder that is not attributable to gain from the sale or exchange of a United States real property interest and that is not designated as a capital gain dividend will be treated as an ordinary income dividend to the extent that it is made out of current or accumulated earnings and profits. A distribution of this type will generally be subject to United States federal income tax and withholding at the rate of 30%, or the lower rate that may be specified by a tax treaty if the non-U.S. shareholder has in the manner prescribed by the IRS demonstrated its entitlement to benefits under a tax treaty. Because we cannot determine our current and accumulated earnings and profits until the end of the taxable year, withholding at the rate of 30% or applicable lower treaty rate will be imposed on the gross amount of any distribution to a non-U.S. shareholder that we make and do not designate a capital gain dividend. Notwithstanding this withholding on distributions in excess of our current and accumulated earnings and profits, these distributions are a nontaxable return of capital to the extent that they do not exceed the non-U.S. shareholder's adjusted basis in our shares, and the nontaxable return of capital will reduce the adjusted basis in these shares. To the extent that distributions in excess of current and accumulated earnings and profits exceed the non-U.S. shareholder's adjusted basis in our shares, the distributions will give rise to tax liability if the non-U.S. shareholder would otherwise be subject to tax on any gain from the sale or exchange of these shares, as discussed below. A non-U.S. shareholder may seek a refund from the IRS of amounts withheld on distributions to him in excess of our current and accumulated earnings and profits. For any year in which we qualify as a REIT, distributions that are attributable to gain from the sale or exchange of a United States real property interest are taxed to a non-U.S. shareholder as if these distributions were gains effectively connected with a trade or business in the United States conducted by the non-U.S. shareholder. Accordingly, a non-U.S. shareholder will be taxed on these amounts at the normal capital gain rates applicable to a U.S. shareholder, subject to any applicable alternative minimum tax and to a special alternative minimum tax in the case of nonresident alien individuals; the non-U.S. shareholder will be required to file a United States federal income tax return reporting these amounts, even if applicable withholding is imposed as described below; and corporate non-U.S. shareholders may owe the 30% branch profits tax under Section 884 of the Internal Revenue Code in respect of these amounts. We will be required to withhold from distributions to non-U.S. shareholders, and remit to the IRS, 35% of the maximum amount of any distribution that could be designated as a capital gain dividend. In addition, for purposes of this withholding rule, if we designate prior distributions as capital gain dividends, then subsequent distributions up to the amount of the designated prior distributions will be treated as capital gain dividends. The amount of any tax withheld is creditable against the non-U.S. shareholder's United States federal income tax liability, and any amount of tax withheld in excess of that tax liability may be refunded provided that an appropriate claim for refund is filed with the IRS. If for any taxable year we designate as capital gain dividends any portion of the dividends paid or made available for the year to our shareholders, including our retained capital gains treated as capital gain 24 dividends, then the portion of the capital gain dividends so designated that will be allocated to the holders of a particular class of shares will on a percentage basis equal the ratio of the amount of the total dividends paid or made available for the year to the holders of that class of shares to the total dividends paid or made available for the year to holders of all classes of our shares. Tax treaties may reduce the withholding obligations on our distributions. Under some treaties, however, rates below 30% generally applicable to ordinary income dividends from United States corporations may not apply to ordinary income dividends from a REIT. If the amount of tax withheld by us with respect to a distribution to a non-U.S. shareholder exceeds the shareholder's United States federal income tax liability with respect to the distribution, the non-U.S. shareholder may file for a refund of the excess from the IRS. In this regard, note that the 35% withholding tax rate on capital gain dividends corresponds to the maximum income tax rate applicable to corporate non-U.S. shareholders but is higher than the 20% and 25% maximum rates on capital gains generally applicable to noncorporate non-U.S. shareholders. Generally effective with respect to distributions paid after December 31, 2000, new Treasury regulations alter the information reporting and backup withholding rules applicable to non-U.S. shareholders and provide presumptions under which a non-U.S. shareholder is subject to backup withholding and information reporting until we or the applicable withholding agent receives certification from the shareholder of its non-U.S. shareholder status. In some instances, these certification requirements are more burdensome than those applicable under current Treasury regulations. These new Treasury regulations also provide special rules to determine whether, for purposes of determining the applicability of a tax treaty, our distributions to a non-U.S. shareholder that is an entity should be treated as paid to the entity or to those owning an interest in that entity, and whether the entity or its owners are entitled to benefits under the tax treaty. These new Treasury regulations encourage non-U.S. shareholders and withholding agents to use the new IRS Forms W-8 series, rather than the predecessor IRS Forms W-8, 1001, and 4224, and require use of the IRS Forms W-8 series for payments made after December 31, 2000. If our shares are not "United States real property interests" within the meaning of Section 897 of the Internal Revenue Code, a non-U.S. shareholder's gain on sale of these shares generally will not be subject to United States federal income taxation, except that a nonresident alien individual who was present in the United States for 183 days or more during the taxable year will be subject to a 30% tax on this gain. Our shares will not constitute a United States real property interest if we are a "domestically controlled REIT." A domestically controlled REIT is a REIT in which at all times during the preceding five-year period less than 50% in value of its shares is held directly or indirectly by foreign persons. We believe that we are and will be a domestically controlled REIT and thus a non-U.S. shareholder's gain on sale of our shares will not be subject to United States federal income taxation. However, because our shares are publicly traded, we can provide no assurance that we will be a domestically controlled REIT. If we are not a domestically controlled REIT, a non-U.S. shareholder's gain on sale of our shares will not be subject to United States federal income taxation as a sale of a United States real property interest, if that class of shares is "regularly traded," as defined by applicable Treasury regulations, on an established securities market like the New York Stock Exchange, and the non-U.S. shareholder has at all times during the preceding five years owned 5% or less by value of that class of shares. If the gain on the sale of our shares were subject to United States federal income taxation, the non-U.S. shareholder will generally be subject to the same treatment as a U.S. shareholder with respect to its gain, will be required to file a United States federal income tax return reporting that gain, and in the case of corporate non-U.S. shareholders might owe branch profits tax under Section 884 of the Internal Revenue Code. A purchaser of our shares from a non-U.S. shareholder will not be required to withhold on the purchase price if the purchased shares are regularly traded on an established securities market or if we are a domestically controlled REIT. Otherwise, a purchaser of our shares from a non-U.S. shareholder may be required to withhold 10% of the purchase price paid to the non-U.S. shareholder and to remit the withheld amount to the IRS. Backup Withholding and Information Reporting Information reporting and backup withholding may apply to distributions or proceeds paid to our shareholders under the circumstances discussed below. Amounts withheld under backup withholding are 25 generally not an additional tax and may be refunded or credited against the REIT shareholder's federal income tax liability. A U.S. shareholder will be subject to backup withholding at a 31% rate when it receives distributions on our shares or proceeds upon the sale, exchange, redemption, retirement or other disposition of our shares, unless the U.S. shareholder properly executes under penalties of perjury an IRS Form W-9 or substantially similar form that: o provides the U.S. shareholder's correct taxpayer identification number; and o certifies that the U.S. shareholder is exempt from backup withholding because it is a corporation or comes within another exempt category, it has not been notified by the IRS that it is subject to backup withholding, or it has been notified by the IRS that it is no longer subject to backup withholding. If the U.S. shareholder does not provide its correct taxpayer identification number on the IRS Form W-9 or substantially similar form, it may be subject to penalties imposed by the IRS and the REIT or other applicable withholding agent may also have to withhold a portion of any capital gain distributions paid to it. Unless the U.S. shareholder has established on a properly executed IRS Form W-9 or substantially similar form that it is a corporation or comes within another exempt category, distributions on our shares paid to it during the calendar year, and the amount of tax withheld if any, will be reported to it and to the IRS. Distributions on our shares to a non-U.S. shareholder during each calendar year and the amount of tax withheld, if any, will generally be reported to the non-U.S. shareholder and to the IRS. This information reporting requirement applies regardless of whether the non-U.S. shareholder is subject to withholding on distributions on our shares or whether the withholding was reduced or eliminated by an applicable tax treaty. Also, distributions paid to a non-U.S. shareholder on our shares may be subject to backup withholding at a 31% rate, unless the non-U.S. shareholder properly certifies its non-U.S. shareholder status on an IRS Form W-8 or substantially similar form in the manner described above. Similarly, information reporting and 31% backup withholding will not apply to proceeds a non-U.S. shareholder receives upon the sale, exchange, redemption, retirement or other disposition of our shares, if the non-U.S. shareholder properly certifies its non-U.S. shareholder status on an IRS Form W-8 or substantially similar form. Even without having executed an IRS Form W-8 or substantially similar form, however, in some cases information reporting and 31% backup withholding will not apply to proceeds that a non-U.S. shareholder receives upon the sale, exchange, redemption, retirement or other disposition of our shares if the non-U.S. shareholder receives those proceeds through a broker's foreign office. As described above, new Treasury regulations alter the information reporting and backup withholding rules applicable to non-U.S. shareholders for payments made after December 31, 2000, and in general these new Treasury Regulations replace IRS Forms W-8, 1001, and 4224 with the new IRS Forms W-8 series. For a non-U.S. shareholder whose income and gain on our shares is effectively connected to the conduct of a United States trade or business, a slightly different rule may apply to proceeds received upon the sale, exchange, redemption, retirement or other disposition of our shares. Until the non-U.S. shareholder complies with the new Treasury regulations, information reporting and 31% backup withholding may apply in the same manner as to a U.S. shareholder, and thus the non-U.S. shareholder may have to execute an IRS Form W-9 or substantially similar form to prevent the backup withholding. Other Tax Consequences You should recognize that our and our shareholders' federal income tax treatment may be modified by legislative, judicial, or administrative actions at any time, which actions may be retroactive in effect. The rules dealing with federal income taxation are constantly under review by the Congress, the IRS and the Treasury Department, and statutory changes as well as promulgation of new regulations, revisions to existing regulations, and revised interpretations of established concepts occur frequently. No prediction can be made as to the likelihood of passage of new tax legislation or other provisions either directly or indirectly affecting us and our 26 shareholders. Revisions in federal income tax laws and interpretations of these laws could adversely affect the tax consequences of an investment in our shares. We and our shareholders may also be subject to state or local taxation in various state or local jurisdictions, including those in which we or our shareholders transact business or reside. State and local tax consequences may not be comparable to the federal income tax consequences discussed above. 27 ERISA PLANS, KEOGH PLANS AND INDIVIDUAL RETIREMENT ACCOUNTS General Fiduciary Obligations Fiduciaries of a pension, profit-sharing or other employee benefit plan subject to Title I of the Employee Retirement Income Security Act of 1974, ERISA, must consider whether: o their investment in our shares satisfies the diversification requirements of ERISA; o the investment is prudent in light of possible limitations on the marketability of our shares; o they have authority to acquire our shares under the applicable governing instrument and Title I of ERISA; and o the investment is otherwise consistent with their fiduciary responsibilities. Trustees and other fiduciaries of an ERISA plan may incur personal liability for any loss suffered by the plan on account of a violation of their fiduciary responsibilities. In addition, these fiduciaries may be subject to a civil penalty of up to 20% of any amount recovered by the plan on account of a violation. Fiduciaries of any IRA, Roth IRA, Keogh Plan or other qualified retirement plan not subject to Title I of ERISA, referred to as "non-ERISA plans," should consider that a plan may only make investments that are authorized by the appropriate governing instrument. Fiduciary shareholders should consult their own legal advisors if they have any concern as to whether the investment is consistent with the foregoing criteria. Prohibited Transactions Fiduciaries of ERISA plans and persons making the investment decision for an IRA or other non-ERISA plan should consider the application of the prohibited transaction provisions of ERISA and the Internal Revenue Code in making their investment decision. Sales and other transactions between an ERISA plan or a non-ERISA plan, and persons related to it are prohibited transactions. The particular facts concerning the sponsorship, operations and other investments of an ERISA plan or non-ERISA plan may cause a wide range of other persons to be treated as disqualified persons or parties in interest with respect to it. A prohibited transaction, in addition to imposing potential personal liability upon fiduciaries of ERISA plans, may also result in the imposition of an excise tax under the Internal Revenue Code or a penalty under ERISA upon the disqualified person or party in interest with respect to the plan. If the disqualified person who engages in the transaction is the individual on behalf of whom an IRA or Roth IRA is maintained or his beneficiary, the IRA or Roth IRA may lose its tax-exempt status and its assets may be deemed to have been distributed to the individual in a taxable distribution on account of the prohibited transaction, but no excise tax will be imposed. Fiduciary shareholders should consult their own legal advisors as to whether the ownership of our shares involves a prohibited transaction. Special Fiduciary and Prohibited Transactions Consequences The Department of Labor, which has administrative responsibility over ERISA plans as well as non-ERISA plans, has issued a regulation defining "plan assets." The regulation generally provides that when an ERISA or non-ERISA plan acquires a security that is an equity interest in an entity and that security is neither a "publicly offered security" nor a security issued by an investment company registered under the Investment Company Act of 1940, the ERISA plan's or non-ERISA plan's assets include both the equity interest and an undivided interest in each of the underlying assets of the entity, unless it is established either that the entity is an operating company or that equity participation in the entity by benefit plan investors is not significant. Each class of our shares that is, our common shares and any class of preferred shares that we may issue must be analyzed separately to ascertain whether it is a publicly offered security. The regulation defines a 28 publicly offered security as a security that is "widely held," "freely transferable" and either part of a class of securities registered under the Securities Exchange Act of 1934, or sold under an effective registration statement under the Securities Act of 1933, provided the securities are registered under the Securities Exchange Act of 1934 within 120 days after the end of the fiscal year of the issuer during which the offering occurred. All our outstanding shares have been registered under the Securities Exchange Act of 1934. The regulation provides that a security is "widely held" only if it is part of a class of securities that is owned by 100 or more investors independent of the issuer and of one another. However, a security will not fail to be "widely held" because the number of independent investors falls below 100 subsequent to the initial public offering as a result of events beyond the issuer's control. Our common shares have been widely held and we expect our common shares to continue to be widely held. We expect the same to be true of any class of preferred stock that we may issue, but we can give no assurance in that regard. The regulation provides that whether a security is "freely transferable" is a factual question to be determined on the basis of all relevant facts and circumstances. The regulation further provides that, where a security is part of an offering in which the minimum investment is $10,000 or less, some restrictions on transfer ordinarily will not, alone or in combination, affect a finding that these securities are freely transferable. The restrictions on transfer enumerated in the regulation as not affecting that finding include: o any restriction on or prohibition against any transfer or assignment which would result in a termination or reclassification for federal or state tax purposes, or would otherwise violate any state or federal law or court order; o any requirement that advance notice of a transfer or assignment be given to the issuer and any requirement that either the transferor or transferee, or both, execute documentation setting forth representations as to compliance with any restrictions on transfer which are among those enumerated in the regulation as not affecting free transferability, including those described in the preceding clause of this sentence; o any administrative procedure which establishes an effective date, or an event prior to which a transfer or assignment will not be effective; and o any limitation or restriction on transfer or assignment which is not imposed by the issuer or a person acting on behalf of the issuer. We believe that the restrictions imposed under our declaration of trust on the transfer of shares do not result in the failure of our shares to be "freely transferable." Furthermore, we believe that at present there exist no other facts or circumstances limiting the transferability of our shares which are not included among those enumerated as not affecting their free transferability under the regulation, and we do not expect or intend to impose in the future, or to permit any person to impose on our behalf, any limitations or restrictions on transfer which would not be among the enumerated permissible limitations or restrictions. Assuming that each class of our shares will be "widely held" and that no other facts and circumstances exist which restrict transferability of these shares, we have received an opinion of our counsel Sullivan & Worcester LLP that our shares will not fail to be "freely transferable" for purposes of the regulation due to the restrictions on transfer of the shares under our declaration of trust and that under the regulation the shares are publicly offered securities and our assets will not be deemed to be "plan assets" of any ERISA plan or non-ERISA plan that invests in our shares. 29 Item 2. Properties At December 31, 1999, we had real estate investments totaling $731.7 million, at cost, after an impairment loss write-down and loan loss reserve, in 93 properties that were leased to or operated by nine tenants or mortgagors. We believe that the physical plant of the facilities in which we have invested is suitable and adequate for our present and any proposed uses. At December 31, 1999, 18 properties with an aggregate cost of $427.4 million were mortgaged to secure our bank credit facility. The following table summarizes some information about our properties as of December 31, 1999. All dollar figures are in thousands. Certain tenants' obligations to pay the rents or interest stated below may be affected by bankruptcy proceedings affecting those tenants. See "Item 1. Business--Business Developments--Tenant Financial Condition."
Built/ Location Property Type Renovated(1) Units/Beds(2) Investment (3) - - --------------------------------------- ---------------------- ---------------- ---------------- -------------- (000s) Marriott International, Inc. Scottsdale, AZ Assisted Living 1990 148 $9,926 Sun City, AZ Assisted Living 1990 148 11,916 Laguna Hills, CA Congregate Care 1991 402 31,791 Boca Raton, FL Congregate Care 1999 347 44,836 Deerfield Beach, FL Congregate Care 1986 288 16,935 Fort Myers, FL Congregate Care 1987 463 23,905 Palm Harbor, FL Congregate Care 1992 319 33,863 Port St. Lucie, FL Assisted Living 1993 128 12,451 Arlington Heights, IL Congregate Care 1986 363 36,742 Silver Spring, MD Congregate Care 1992 351 33,080 Bellaire, TX Assisted Living 1991 145 12,410 Arlington, VA Congregate Care 1992 419 18,889 Charlottesville, VA Congregate Care 1991 315 29,829 Virginia Beach, VA Assisted Living 1990 114 8,948 ---------------- -------------- 3,950 325,521 Brookdale Living Communities, Inc. Mesa, AZ Congregate Care 1985 185 14,800 Chicago, IL Congregate Care 1990 341 62,000 Brighton, NY Congregate Care 1988 103 10,700 Spokane, WA Congregate Care 1993 200 14,350 ---------------- -------------- 829 101,850 Mariner Post-Acute Network, Inc. (4) Phoenix, AZ Nursing Home 1984 127 3,185 Yuma, AZ Nursing Home 1984 128 2,326 Yuma, AZ Congregate Care 1984 65 708 Fresno, CA Nursing Home 1985 180 3,503 Lancaster, CA Nursing Home 1994 99 3,488 Newport Beach, CA Nursing Home 1994 167 4,128 Stockton, CA Nursing Home 1991 122 3,136 Tarzana, CA Nursing Home 1969 192 3,060 Thousand Oaks, CA Nursing Home 1970 124 3,454 Van Nuys, CA Nursing Home 1984 58 1,319 Lakewood, CO Nursing Home 1985 175 4,721 Littleton, CO Nursing Home 1965 230 5,576 30 Built/ Location Property Type Renovated(1) Units/Beds(2) Investment (3) - - --------------------------------------- ---------------------- ---------------- ---------------- -------------- (000s) Concord, NC Nursing Home 1990 110 $2,216 Wilson, NC Nursing Home 1990 119 2,402 Winston-Salem, NC Nursing Home 1990 80 1,771 Huron, SD Nursing Home 1977 163 3,256 Huron, SD Congregate Care 1968 59 1,014 Sioux Falls, SD Nursing Home 1979 139 3,319 Brookfield, WI Nursing Home 1995 226 6,891 Clintonville, WI Nursing Home 1965 78 1,761 Clintonville, WI Nursing Home 1969 109 1,747 Madison, WI Nursing Home 1987 73 1,887 Milwaukee, WI Nursing Home 1983 215 5,043 Milwaukee, WI Nursing Home 1997 102 1,601 Pewaukee, WI Nursing Home 1969 237 3,416 Waukesha, WI Nursing Home 1995 105 5,752 ---------------- -------------- 3,482 80,680 Integrated Health Services, Inc. (Lease No. 1) (4) Canon City, CO (5) Nursing Home/ Senior Apartments 1984 157 6,520 Colorado Springs, CO Nursing Home 1996 132 5,481 Delta, CO Nursing Home 1978 100 3,737 Grand Junction, CO Nursing Home 1986 120 4,408 Grand Junction, CO Nursing Home 1995 82 3,905 College Park, GA Nursing Home 1985 100 3,025 Dublin, GA Nursing Home 1968 130 4,504 Glenwood, GA Nursing Home 1972 62 1,742 Marietta, GA Nursing Home 1973 109 3,037 Clarinda, IA Nursing Home 1968 117 1,823 Council Bluffs, IA Nursing Home 1963 62 1,217 Mediapolis, IA Nursing Home 1973 62 2,121 Pacific Junction, IA Nursing Home 1978 12 343 Winterset, IA (5) Nursing Home/ Senior Apartments 1995 118 2,703 Ellinwood, KS Nursing Home 1972 59 1,320 Tarkio, MO Nursing Home 1996 95 2,455 Ainsworth, NE (6) Nursing Home 1995 50 445 Ashland, NE (6) Nursing Home 1996 101 1,851 Blue Hill, NE (6) Nursing Home 1996 81 1,119 Edgar, NE (6) Nursing Home 1995 54 139 Grand Island, NE Nursing Home 1996 80 1,934 Gretna, NE (6) Nursing Home 1995 62 940 Lyons, NE (6) Nursing Home 1974 84 810 Milford, NE (6) Nursing Home 1970 66 904 Sutherland, NE (6) Nursing Home 1995 62 1,270 Waverly, NE (6) Nursing Home 1995 50 1,215 Laramie, WY Nursing Home 1986 144 4,022 Worland, WY (5) Nursing Home/ Senior Apartments 1996 99 3,223 ---------------- -------------- 2,450 66,213 31 Built/ Location Property Type Renovated(1) Units/Beds(2) Investment(3) - - --------------------------------------- ---------------------- ---------------- ---------------- -------------- (000s) Integrated Health Services, Inc. (Lease No. 2) (4) Cheshire, CT (7) Nursing Home 1971 210 $9,459 Waterbury, CT (7) Nursing Home 1974 180 5,247 New Haven, CT (7) Nursing Home 1971 195 5,716 Slidell, LA (6) Nursing Home 1989 118 4,277 Middleboro, MA Nursing Home 1987 124 17,523 Worcester, MA Nursing Home 1990 173 18,769 Boston, MA Nursing Home 1985 201 24,978 Hyannis, MA Nursing Home 1982 142 8,292 Howell, MI (6) Nursing Home 1985 189 4,930 Farmington, MI (6) Nursing Home 1991 153 4,156 Canonsburg, PA Nursing Home 1990 140 15,598 ---------------- -------------- Burlington, NJ Nursing Home 1994 150 13,007 ---------------- -------------- 150 13,007 Private Company Tenants St. Joseph, MO Nursing Home 1976 120 1,333 Seattle, WA Nursing Home 1964 103 5,192 Waterford, CT (8) Nursing Home 1989 148 5,253 Killingly, CT (8) Nursing Home 1989 190 6,060 Willimantic, CT (8) Nursing Home 1989 124 4,179 Grove City, OH Nursing Home 1965 200 3,445 ---------------- -------------- 885 25,462 ---------------- -------------- Total Portfolio 13,571 $731,678 ================ ============== (1) The dates presented are the later of the date of original construction or the date of substantial renovation as evidenced by capital expenditures in excess of 20% of HRPT's historical investment. (2) Units/beds are a customary measure of property values used in the senior housing industry. (3) Represents HRPT's carryforward historical costs before depreciation and, in some cases is net of impairment loss write-down and loan loss reserve. (4) Tenant or mortgagors subject to bankruptcy proceedings. (5) Two properties are located at each of these locations. (6) These properties are mortgage investments. (7) These three properties are managed by IHS. Under this management agreement, IHS has guaranteed the rent for these properties. (8) These properties were sold in February 2000.
32 Item 3. Legal Proceedings Although in the ordinary course of business we are or may become involved in legal proceedings, we have a limited operating history and are not aware of any material pending legal proceedings affecting any of our properties for which we might become liable. However, as discussed above in "Item 1. Business--Business Developments--Tenant Financial Condition," several of our tenants have filed for bankruptcy, and we are pursuing claims and negotiations in those bankruptcy proceedings. The amounts at stake in these tenant bankruptcy proceedings are material. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of shareholders during the fourth quarter of the year covered by this Annual Report on Form 10-K. 33 PART II Item 5. Market for Registrant's Common Stock and Related Shareholder Matters Our Shares began trading on the New York Stock Exchange (symbol: SNH) on October 12, 1999. The following table sets forth for the period indicated the high and low closing sale prices for the Shares as reported in the New York Stock Exchange Composite Transactions reports. High Low ---- --- Fourth Quarter 1999 (since October 12, 1999) $16 5/16 $11 1/16 The closing price of the Shares on the New York Stock Exchange on March 27, 2000 was $9 7/8. As of March 27, 2000, there were approximately 5,229 holders of record of the Shares, and we estimate that as of such date there were in excess of 100,000 beneficial owners of the Shares. The following table sets forth the amount of distributions paid in 1999 and the respective annualized rates. Distribution Annualized Per Share Distribution Rate --------- ----------------- November 22, 1999 $0.60 $2.40 All distributions have been paid and 100% of the 1999 distribution was classified as ordinary income and there was no return of capital. As previously discussed, two of our largest tenants, IHS and Mariner have experienced significant operating losses in 1999. Earlier this year they both filed for bankruptcy. These two tenants are responsible for approximately 48% of our revenues. We have reached a tentative agreement with Mariner, which is contingent upon third party approvals and we continue to negotiate with IHS regarding our future business relationships. A smaller tenant, Frontier Group, Inc., which represents 2% of our revenues filed for bankruptcy during 1999 and, in February 2000 we sold these three properties for $13.0 million. See "Item 1. Business--Business Developments--Tenant Financial Condition." The level of distributions to be made by us will depend, in part, on the final outcome of the negotiations with these tenants. In order to qualify for the beneficial tax treatment accorded to REITs by Sections 856 through 860 of the Internal Revenue Code, we are required to make distributions to shareholders which annually will be at least 95% of our taxable income. All distributions will be made by us at the discretion of the Trustees and will depend on our earnings, our cash flow available for distribution, our financial condition and other factors that the Trustees deem relevant. We have in the past distributed, and intend to continue to distribute, substantially all of our real estate investment trust taxable income to our shareholders. In October 1999, pursuant to our Incentive Share Award Plan, our two independent trustees at the time of our Spin-Off from HRPT each received a grant of 500 Shares valued at $16.50 per Share, the average price of the Shares on the NYSE on October 12, 1999 and our third independent trustee, who was subsequently elected to the fill the vacancy on our Board of Trustees, received a grant of 500 Shares valued at $12.75 per Share, the closing price of the Shares on the NYSE on October 21, 1999. The grants were made pursuant to the exemption from registration contained in Section 4(2) of the Securities Act of 1933, as amended. 34 Item 6. Selected Financial Data Prior to October 12, 1999, we and our properties were owned by HRPT. The following data is presented as if we were a separate entity from HRPT. Set forth below is selected financial data for the periods and dates indicated. This financial data has been derived from HRPT's historical financial statements for periods prior to October 12, 1999. Per share data has been presented as if the shares were outstanding for all periods prior to October 12, 1999. The following table includes pro rata allocations of interest expense and general and administrative expenses for periods prior to October 12, 1999. In the opinion of our management, the methods used for allocating interest and general and administrative expenses are reasonable. However, it is impossible to estimate all operating costs that we would have incurred as a separate public company from HRPT. Accordingly, the net income and funds from operations shown are not necessarily indicative of results that we may realize as a separate company. Additionally, year to year comparisions are impacted by property acquisitions during historical periods. This data should be read in conjunction with, and is qualified in its entirety by reference to, the consolidated financial statements and accompanying notes included herein in Item 14 of this Annual Report on Form 10-K. Amounts are in thousands, except per share information.
Income Statement Data: Year Ended December 31, ------------------------------------------------------ 1999 1998 1997 1996 1995 ------------------------------------------------------ Total revenues $ 90,790 $ 88,306 $ 84,171 $ 70,442 $ 66,604 Net income(1) 14,834 46,236 44,723 36,441 31,062 Funds from operations (2) 67,091 64,533 62,549 51,824 45,810 Distributions 15,601 -- -- -- -- Weighted average shares outstanding 26,000 26,000 26,000 26,000 26,000 Per share: Net income(1) $ 0.57 $ 1.78 $ 1.72 $ 1.40 $ 1.19 Funds from operations (2) 2.58 2.48 2.41 1.99 1.76 Distributions 0.60 -- -- -- -- Balance Sheet Data: At December 31, ------------------------------------------------------ 1999 1998 1997 1996 1995 ------------------------------------------------------ Real estate properties, at cost $708,739 $732,393 $720,987 $692,034 $586,940 Real estate mortgages, net 22,939 37,826 38,134 38,270 37,798 Total assets 654,000 686,296 692,586 679,201 587,701 Total indebtedness 200,000 -- -- -- -- Total shareholders' equity 409,406 642,069 646,938 664,492 573,793 (1) Includes an impairment loss write-down and loan loss reserve totaling $30.0 million ($1.15 per share) for 1999. (2) Funds from operations or "FFO," as defined in the white paper on funds from operations which was approved by the Board of Governors of NAREIT in March 1995, is net income computed in accordance with GAAP, before gains or losses from sales of properties and extraordinary items, plus depreciation and amortization and after adjustment for unconsolidated partnerships and joint ventures. Senior Housing considers FFO to be an appropriate measure of performance for an equity REIT, along with cash flow from operating activities, financing activities and investing activities, because it provides investors with an indication of an equity REIT's ability to incur and service debt, make capital expenditures, pay distributions and fund other cash needs. Senior Housing computes FFO in accordance with the standards established by NAREIT which may not be comparable to FFO reported by other REITs that do not define the term in 35 accordance with the current NAREIT definition or that interpret the current NAREIT definition differently. FFO does not represent cash generated by operating activities in accordance with GAAP and should not be considered as an alternative to net income, determined in accordance with GAAP, as an indication of financial performance or the cash flow from operating activities, determined in accordance with GAAP, as a measure of liquidity.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following information is provided in connection with, and should be read in conjunction with, the Consolidated Financial Statements included herein as Item 14 of this Annual Report on Form 10-K. RESULTS OF OPERATIONS Year Ended December 31, 1999, Compared to 1998 For the year ended December 31, 1999, compared to the year ended December 31, 1998, total revenues increased by $2.5 million, total expenses increased by $33.9 million and net income decreased by $31.4 million. Total revenues increased due to the full year impact of the rent generated from five properties acquired during 1998. Total expenses increased primarily due to a $30.0 million charge to income consisting of a write-down for the impairment of assets and a loan loss reserve. In addition, depreciation expense increased by $4.0 million, due to a change in the estimated useful lives of some real estate properties and the full year impact of five properties acquired during 1998. Net income was $14.8 million, or $0.57 per share, for the period ending December 31, 1999. During the period ending December 31, 1998, net income was $46.2 million, and on a pro forma 26.0 million average shares outstanding net income was $1.78 per share. As previously announced, three of our tenants, Frontier, Mariner and IHS have filed for protection under the bankruptcy laws. Frontier filed in July 1999, Mariner filed in January 2000 and IHS filed in February 2000. Bankruptcy laws may allow our tenants relief or discharge them from their financial obligations to us. For 1999, rental and mortgage interest income related to Frontier, Mariner and IHS was $2.2 million, $15.4 million and $26.6 million, respectively. At December 31, 1999 real estate investments, before impairment loss recognition and net of accumulated depreciation, for these three tenants were $10.0 million, $68.3 million and $136.9 million, respectively. We also had mortgage investments, before loss reserves, related to IHS of $36.6 million at December 31, 1999. Based on estimates of future cash flows from properties leased to Mariner and IHS, we recognized an impairment in the carrying value of properties totaling $30.0 million. In February 2000, all of the properties that were leased to Frontier were sold for $13.0 million. In March 2000, we repaid $12.0 million on our bank credit facility. In March 2000, we reached a conditional agreement with Mariner as follows: o Mariner's lease obligations for all 26 properties which we own and lease to Mariner will be terminated. o Approximately $24.0 million of cash and securities which we hold to secure Mariner's obligations will be retained by us. o We will assume operating responsibilities for 17 of these 26 properties. Title to five of these properties will be transferred to Mariner which will continue the operations. The remaining four nursing homes are now subleased to two private companies and we expect to negotiate with these two subtenants for their continued operations of those properties. 36 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued Our agreement with Mariner is contingent upon approval by Mariner's creditors committee and the Delaware Bankruptcy Court before which Mariner's bankruptcy is pending and required regulatory approvals from various states where affected nursing homes are located. The three Frontier properties which have been sold and the five Mariner properties which may be transferred for retention of the security deposits which we hold have been owned by us and our predecessor, HRPT since 1987 and 1990, respectively. Because of previously recorded depreciation and other accounting requirements we expect to realize accounting and tax gains as a result of these transactions during the first half of 2000. At the same time, future interest savings from the repayment of our bank credit facility with the proceeds from the sale of the Frontier properties and operating earnings from the former Mariner properties is expected to be less than the rent which we previously received from Mariner and Frontier, at least until the operations of the Mariner properties which are assumed by us are stabilized and those properties are sold or re-leased. Because we are still pursuing claims for breach of lease and rental arrearages for the former Frontier properties and because the Mariner agreement is contingent and subject to possible changes, the amount of gains or reduced cash flow which we will realize cannot be accurately estimated at this time. We are currently in negotiations with IHS. The current negotiations include, but are not limited to, the possibilities that we will sell the properties now leased to IHS, that lease terms may be changed, that new tenants may begin operations of these properties, that properties may be operated by us for our own account or mortgage obligations due to us may be released for other compensation. No assurances can be made as to if, when and how these negotiations will be concluded. We may recognize additional gains or losses when these negotiations are completed. Funds from operations for the year ended December 31, 1999, were $67.1 million, or $2.58 per share, compared to $64.5 million, or $2.48 per share, in 1998. The increase is due to the full year impact of income from five properties acquired during 1998. Non-recurring and non-cash losses excluded from the 1999 calculation of funds from operations aggregated $30.0 million. Distributions for the year ended December 31, 1999, were $15.6 million or $0.60 per share. Cash flow provided by operating activities and cash available for distribution may not necessarily equal funds from operations as cash flow is affected by other factors not included in the funds from operations calculation, such as changes in assets and liabilities. Year Ended December 31, 1998, Compared to 1997 For the year ended December 31, 1998, compared to the year ended December 31, 1997, total revenues increased by $4.1 million, total expenses increased by $2.6 million and net income increased by $1.5 million. Total revenues increased due to rent generated from the acquisition of five properties during 1998 and the full year impact of the rent generated from five properties acquired during 1997. Total expenses increased primarily because of higher allocated interest expense of $2.3 million, which resulted from increased borrowings. Net income was $46.2 million and $44.7 million for the year ended December 31, 1998 and 1997, respectively. There were no shares outstanding during these periods. On a pro forma 26.0 million average shares outstanding, net income per share would have been $1.78 and $1.72 for the year ended December 31, 1998 and 1997, respectively. Funds from operations increased by $2.0 million for the year ended December 31, 1998, compared to the prior period due to income from five properties acquired during 1998 and the full year impact of income from five properties acquired during 1997. 37 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued LIQUIDITY AND CAPITAL RESOURCES In September 1999, our registration statement on Form S-11, relating to the distribution of 13.2 million of our common shares to HRPT's shareholders (the "Spin-Off") was declared effective by the Securities and Exchange Commission. Prior to the Spin-Off, we had 26.0 million common shares outstanding, all of which were owned by HRPT. On October 12, 1999, HRPT distributed 13.2 million of our common shares to HRPT's shareholders of record on October 8, 1999. At December 31, 1999, we had cash and cash equivalents of $17.1 million. For the years ended December 31, 1999 and 1998, cash flows from operating activities were $64.1 million and $60.2 million, respectively, cash flows from investing activities were $387,000 and $306,000, respectively, and cash used for financing activities was $47.5 million and $60.4 million, respectively. We expect that our current cash, cash equivalents, future cash flows from operating and financing activities will be sufficient to meet our short-term and long-term working capital requirements. Total assets decreased by $32.3 million from $686.3 million as of December 31, 1998, to $654.0 million as of December 31, 1999. The decrease was primarily due to the write-down resulting from impairment of assets, a loan loss reserve provision and depreciation. On September 1, 1999, we agreed to pay HRPT $200 million (the "Formation Debt") in connection with the transfer to us of HRPT's 100% ownership in one of the subsidiaries that own some of our properties. The Formation Debt bore interest at HRPT's weighted average cost of debt, (7.1%), and was paid to HRPT on October 13, 1999. In September 1999, we entered into an agreement for a $350 million, three-year, interest only bank credit facility secured by first mortgages on 18 properties. The interest rate is LIBOR plus 2.0% per annum and will increase by 0.25% if our debt to total capital, as defined, exceeds 50%. The bank credit facility is available for acquisitions, working capital and for general business purposes. We have the ability to repay and redraw amounts under this bank credit facility until its maturity in 2002. Our bank credit facility documentation has customary representations, warranties, covenants and event of default provisions. The material restrictive financial covenants require us to: o limit debt to no more than 60% of total capital, as defined; o maintain a ratio of net income plus interest expense and depreciation to interest expense of at least 1.5; and o maintain a tangible net worth, as defined, of $450 million, subject to increases based on equity issuances. After the Spin-Off, we borrowed $200 million under this bank credit facility which we used to pay the Formation Debt to HRPT. At December 31, 1999, we had $150 million available under the bank credit facility. In March 2000, we used $12 million of proceeds from the sale of the three former Frontier properties to reduce amounts outstanding under the bank credit facility to $188 million, leaving $162 million available to be borrowed. In the short-term, we expect to use the bank credit facility to fund our working capital needs for operations of the Mariner properties which we will assume if the Mariner agreement described above is approved. 38 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued In both the short-term and the long-term, we intend to acquire additional senior housing properties. These purchases will be initially funded with excess working capital, if any, and proceeds of borrowings under the bank credit facility. We expect to repay bank credit facility borrowings periodically with long-term debt or equity capital. We believe that we will have sufficient access to capital markets to meet our working capital needs, our growth objectives and refinance our debt as needed. However, access to capital will depend upon numerous factors, including some beyond our control. We can provide no assurance that we will be able to raise additional capital in sufficient amounts, or at appropriate costs, to meet our working capital needs, to fund growth or to repay debt in both the short-term and the long-term. Impact of Inflation Inflation might have both positive and negative impact upon our business. Inflation might cause the value of our real estate investments to increase. Similarly, in an inflationary environment, the percentage rents which we receive based upon CPI increases or as a percentage of our tenants' revenues should increase. Also, rent yields we could charge for new investments would likely increase. Offsetting these benefits, inflation might cause the costs of equity and debt capital to increase. To mitigate the adverse impact of increased costs of debt capital in the event of material inflation we may purchase interest rate cap agreements. The decision to enter into these agreements will be based on the amount of floating rate debt outstanding and our belief that material interest rate increases are likely to occur. We do not believe inflation in the U.S. economy during the next few years will have any material effect on our business. Year 2000 We experienced no disruptions in our information and non-information technology systems and incurred no costs with respect to year 2000 issues. We are not aware of any material problems resulting from year 2000 issues by our systems or the systems of our tenants or their material vendors and our material vendors, but will continue to monitor these systems throughout the year to ensure that any late year 2000 issues that may arise are addressed promptly. Certain Considerations The discussion and analysis of our financial condition and results of operations requires us to make estimates and assumptions and contains statements of our beliefs, intent or expectation concerning projections, plans, future events and performance. The estimates, assumptions and statements, such as those relating to the approval of the Mariner agreement, our ability to operate and stabilize operations at the Mariner properties, our ability to successfully negotiate with Mariner's subtenants, our ability to successfully negotiate with IHS, our ability to expand our portfolio, performance of our assets, the ability to make distributions, our tax status as a "real estate investment trust," the ability to appropriately balance the use of debt and equity and to access capital markets, depend upon various factors over which we and/or our lessees have or may have limited or no control. Those factors include, without limitation, the status of the economy, status of the capital markets (including prevailing interest rates), compliance with the changes to regulations within the healthcare industry, competition, changes to federal, state, and local legislation and other factors. We cannot predict the impact of these factors, if any. However, these factors could cause our actual results for subsequent periods to be different from those stated, estimated or assumed in this discussion and analysis of our financial condition and results of operations. We believe that our estimates and assumptions are reasonable and prudent at this time. 39 Item 7A. Quantitative and Qualitative Disclosures About Market Risk We are exposed to market changes in interest rates. Because interest on all our outstanding debt is at a floating rate, changes in interest rates will not affect the value of our outstanding debt instruments. However, changes in interest rates will affect our operating results. For example, the interest rate payable on our outstanding indebtedness of $200 million at December 31, 1999, is 8.17% per annum. An immediate 10% change in that interest rate or 81.7 basis points, would increase or decrease our costs by $1.6 million, or $0.06 per share per year: Impact of Changes in Interest Rates (dollars in thousands) Total Interest Interest Rate Outstanding Expense Per Year Debt Per Year -------------- ----------- ----------- At December 31, 1999 8.17% $200,000 $ 16,340 10% reduction 7.35% 200,000 14,700 10% increase 8.99% 200,000 17,980 The foregoing table presents a so-called "shock" analysis, which assumes that the interest rate change by 10%, or 81.7 basis points, is in effect for a whole year. If interest rates were to change gradually over one year, the impact would be less. We borrow in U.S. dollars and all of our current borrowings are subject to interest at LIBOR plus a premium. Accordingly, we are vulnerable to changes in U.S. dollar based short-term rates, specifically LIBOR. During the past few months, short-term U.S. dollar based interest rates have tended to rise. We are unable to predict the direction or amount of interest rate changes during the next year. We purchased an interest rate cap agreement on our current debt to protect against rate increases above 8%. However, we may incur additional debt at floating or fixed rates in the future, which would increase our exposure to market changes in interest rates. We currently own real estate mortgages receivable inclusive of a loan loss reserve with a carrying value of $22.9 million. When comparable term market interest rates decline, the value of these receivables increases; when comparable term market interest rates rise, the value of these receivables declines. Using discounted cash flow analyses at a weighted average estimated per year market rate for December 31, 1999 of 10.75%, the estimated fair value of our mortgages receivable was $23.7 million. An immediate 10% change in the market rate of interest, or 108 basis points, applicable to our real estate mortgages receivable at December 31,1999, would affect the fair value of those receivables as follows: Carrying Value of Real Estate Interest Rate Mortgages Estimated Fair Per Year Receivable Value ------------- ----------------- -------------- (dollars in thousands) Estimated market 10.75% $22,939 $23,722 10% reduction 9.67% 22,939 25,256 10% increase 11.83% 22,939 22,328 40 Item 7A. Quantitative and Qualitative Disclosures About Market Risk - continued If the market rate changes occurred gradually over time, the effect of these changes would be realized gradually. Because our real estate mortgages receivable are fixed rate instruments, changes in market interest rates will have no effect on our operating results unless these receivables are sold. At this time, we expect to hold our existing mortgages to their maturity and not to realize any profit or loss from trading these mortgages. Also, we do not presently expect to expand our mortgage investments. The interest rate changes that affect the valuations of our mortgages are U.S. dollar long-term rates for corporate obligations of companies with ratings similar to our mortgagors. Item 8. Financial Statements and Supplementary Data The information required by this item is included herein in Item 14 of this Annual Report on Form 10-K. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable PART III The information in Part III (Items 10 11, 12 and 13) is incorporated by reference to our definitive Proxy Statement, which will be filed not later than 120 days after the end of our fiscal year. 41 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Index to Financial Statements and Financial Statement Schedules
SENIOR HOUSING PROPERTIES TRUST Page The following consolidated financial statements and financial statement schedules of Senior Housing Properties Trust are included herein on the pages indicated: Report of Ernst and Young LLP, Independent Public Accountants F-1 Consolidated Balance Sheets as of December 31, 1999 and 1998 F-2 Consolidated Statements of Income for each of the three years in the periods ended December 31, 1999 F-3 Consolidated Statements of Shareholders' Equity for each of the three years in the periods ended December 31, 1999 F-4 Consolidated Statements of Cash Flows for each of the three years in the periods ended December 31, 1999 F-5 Notes to Consolidated Financial Statements F-6 Schedule III - Real Estate and Accumulated Depreciation S-1 Schedule IV - Mortgage Loans on Real Estate S-5
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, or are inapplicable, and therefore have been omitted. (b) Reports on Form 8-K During the fourth quarter of 1999, we filed the following Current Reports on Form 8-K: (i) Current Report on Form 8-K dated October 21, 1999, relating to the election of a new trustee (Item 5). (c) Exhibits 2.1 Transaction Agreement, dated September 21, 1999, between HRPT Properties Trust and the Company. (Incorporated by reference to the Current Report on Form 8-K filed on October 26, 1999 by HRPT Properties Trust.) 3.1 Amended and Restated Declaration of Trust. (Filed herewith.) 3.2 Amended and Restated Bylaws, as amended to date. (Filed herewith.) 4.1 Form of temporary common share certificate. (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 8.1 Opinion of Sullivan & Worcester LLP as to certain tax matters. (Filed herewith.) 10.1 Advisory Agreement, dated as of October 12, 1999, between the Company and REIT Management & Research, Inc. (+) (Filed herewith.) 42 10.2 1999 Incentive Share Award Plan. (+) (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 10.3 Promissory Note, dated September 1, 1999, from the Company and SPTMRT Properties Trust, as makers, to HRPT Properties Trust, as holder. (Incorporated by reference to the Current Report on Form 8-K filed on October 26, 1999 by HRPT Properties Trust.) 10.4 Revolving Loan Agreement, dated as of September 15, 1999, among the Company, Dresdner Bank AG, the Other Lenders Party Thereto, SPTMRT Properties Trust and SPTBrook Properties Trust, together with Exhibits and Form of Mortgage, Form of Deed of Trust and Form of Pledge Agreement. (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 10.5 Master Lease Agreement, dated as of December 27, 1996, between Health and Retirement Properties Trust and BLC Property, Inc. (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 10.6 Guaranty Agreement, dated as of December 27, 1996, by Brookdale Living Communities, Inc., Brookdale Living Communities of Illinois, Inc., Brookdale Living Communities of New York, Inc., and Brookdale Living Communities of Arizona, Inc. in favor of Health and Retirement Properties Trust. (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 10.7 First Amendment to Master Lease Agreement and Incidental Documents, dated as of May 7, 1997, by and among Health and Retirement Properties Trust, BLC Property, Inc., Brookdale Living Communities of Washington, Inc., Brookdale Living Communities of Arizona, Inc., Brookdale Living Communities of Illinois, Inc., Brookdale Living Communities of New York, Inc., Brookdale Living Communities, Inc, The Prime Group, Inc., Prime International, Inc., PGLP, Inc., Prime Group Limited Partnership, and Prime Group II, L.P. (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 10.8 Representative Lease for properties leased to subsidiaries of Marriott International, Inc. (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 10.9 Representative Guaranty of Tenant Obligations, dated as of October 8, 1993, by Marriott International, Inc. in favor of HMC Retirement Properties, Inc. (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 10.10 Representative First Amendment to Lease for properties leased to subsidiaries of Marriott International, Inc. (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 10.11 Representative Assignment and Assumption of Leases, Guarantees and Permits for properties leased to subsidiaries of Marriott International, Inc. (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 10.12 Representative Second Amendment of Lease for properties leased to subsidiaries of Marriott International, Inc. (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 43 10.13 Representative First Amendment of Guaranty by Marriott International, Inc., dated as of May 16, 1994, in favor of HMC Retirement Properties, Inc. (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 10.14 Assignment of Lease, dated as of June 16, 1994, by HMC Retirement Properties, Inc. in favor of Health and Rehabilitation Properties Trust. (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 10.15 Third Amendment to Facilities Lease, dated as of June 30, 1994, between HMC Retirement Properties, Inc. and Marriott Senior Living Services, Inc. (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 10.16 Third Amendment to Facilities Lease, dated as of June 30, 1994, between HMC Retirement Properties, Inc. and Marriott Senior Living Services, Inc. (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 10.17 Consent and Modification Agreement, dated as of October 10, 1997, between Marriott International, Inc., Marriott Senior Living Services, Inc., New Marriott MI, Inc., Health and Retirement Properties Trust, and Church Creek Corporation. (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 10.18 Master Lease Document, General Terms and Conditions dated as of December 28, 1990, between Health and Rehabilitation Properties Trust and AMS Properties, Inc. (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 10.19 Representative Lease for properties leased to Mariner Post-Acute Network, Inc. (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 10.20 Lease dated as of March 27, 1992, between Health and Rehabilitation Properties Trust and AMS Properties, Inc. (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 10.21 Amendment to Master Lease Document dated as of December 29, 1993 between Health and Rehabilitation Properties Trust and AMS Properties, Inc. (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 10.22 Amendment to AMS Properties, Inc. Facility Leases dated as of October 1, 1994 between Health and Retirement Properties Trust and AMS Properties, Inc. (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 10.23 Amendment to AMS Properties, Inc. Facility Leases dated October 31, 1997 between Health and Retirement Properties Trust and AMS Properties, Inc. (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 10.24 Representative Lease for properties leased to Mariner Post-Acute Network, Inc. (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 10.25 Master Lease Agreement dated as of June 30, 1992 by and between Health and Rehabilitation Properties Trust and GCI Health Care Centers, Inc. (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 44 10.26 Amended and Restated HRP Shares Pledge Agreement, dated as of June 30, 1992, between Health and Retirement Properties Trust and AMS Properties, Inc. (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 10.27 Amended and Restated Voting Trust Agreement, dated as of June 30, 1992 from AMS Properties, Inc. to HRPT Advisors, Inc., as voting trustee. (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 10.28 Representative Lease for properties leased to Mariner Post-Acute Network, Inc. (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 10.29 Representative Lease for properties leased to Mariner Post-Acute Network, Inc. (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 10.30 Amendment to Master Lease Document dated as of December 29, 1993 between Health and Rehabilitation Properties Trust and GCI Health Care Centers, Inc. (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 10.31 Amendment to GCI Health Care Centers, Inc., Master Lease Document and Facility Leases dated as of October 1, 1994 between Health and Retirement Properties Trust and GCI Health Care Centers, Inc. (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 10.32 Amendment to GCI Health Care Centers, Inc. Facility Leases dated October 31, 1997 between Health and Retirement Properties Trust and GCI Health Care Centers, Inc. (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 10.33 Guaranty, Cross Default and Cross Collateralization Agreement, dated as of June 30, 1992, by and among AMS Properties, Inc., CGI Health Care Centers, Inc. and Health and Rehabilitation Properties Trust. (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 10.34 Guaranty, dated as of October 31, 1997, by Grancare Inc. in favor of Health and Retirement Properties Trust. (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 10.35 Guaranty, dated as of October 31, 1997, by Paragon Health Network, Inc. in favor of Health and Retirement Properties Trust. (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 10.36 Amended, Restated and Consolidated Master Lease Document, dated as of September 24, 1997, between Health and Retirement Properties Trust and ECA Holdings, Inc., Marietta/SCC, Inc., Glenwood/SCC, Inc., Dublin/SCC, Inc., and College Park/SCC, Inc. (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 10.37 Guaranty By Integrated Health Services, Inc., dated as of September 24, 1997, by Integrated Health Services, Inc., in favor of Health and Retirement Properties Trust (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 10.38 Representative Lease Agreement for properties leased to Integrated Health Services, Inc. (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 45 10.39 Representative Lease Agreement for properties leased to Integrated Health Services, Inc. (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 10.40 Guaranty, dated as of February 11 1994, by Horizon Healthcare Corporation in favor of Health and Rehabilitation Properties Trust. (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 10.41 Consent, Assumption and Guaranty Agreement, dated as of December 31, 1997, by and among Integrated Health Services, Inc., IHS Acquisition No. 108, Inc., IHS Acquisition No. 112, Inc., IHS Acquisition No. 113, Inc., IHS Acquisition No. 135, Inc., IHS Acquisition No. 148, Inc., IHS Acquisition No. 152, Inc., IHS Acquisition No. 153, Inc., IHS Acquisition No. 154, Inc., IHS Acquisition No. 155, Inc., IHS Acquisition No. 175, Inc., Healthsouth Corporation, Horizon Healthcare Corporation, Health and Retirement Properties Trust, and Indemnity Collection Corporation. (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 12.1 Statement regarding computation of ratio of earnings to fixed charges. (Filed herewith.) 21.1 List of Subsidiaries. (Filed herewith.) 23.1 Consent of Sullivan & Worcester LLP. (Contained In Exhibit 8.1.) 27.1 Financial Data Schedule. (Filed herewith.) ---------------------- (+) Management contract or compensatory plan or arrangement. 46 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Trustees and Shareholders of Senior Housing Properties Trust We have audited the accompanying consolidated balance sheets of Senior Housing Properties Trust as of December 31, 1999 and 1998, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. Our audits also included the financial statements and schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Senior Housing Properties Trust and subsidiaries as of December 31, 1999 and 1998 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Boston, Massachusetts March 17, 2000 F-1
SENIOR HOUSING PROPERTIES TRUST CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) December 31, --------------------------------------- 1999 1998 ----------------- ---------------- ASSETS Real estate properties, at cost, (including properties leased to affiliates with a cost of $20,422 in 1999 and $38,270 in 1998): Land $69,673 $69,673 Buildings and improvements 639,066 662,720 ----------------- ---------------- 708,739 732,393 Accumulated depreciation (108,709) (94,616) ----------------- ---------------- 600,030 637,777 Real estate mortgages receivable, net of loan loss reserve of $14,500 in 1999 22,939 37,826 Cash and cash equivalents 17,091 139 Other assets 13,940 10,554 ----------------- ---------------- $654,000 $686,296 ================= ================ LIABILITIES AND SHAREHOLDERS' EQUITY Bank notes payable $200,000 $-- Deferred rents and other deferred revenues 26,715 28,266 Security deposits 15,235 15,235 Other liabilities 2,317 726 Due to affiliate 327 -- Commitments and contingencies -- -- Shareholders' equity: Common shares of beneficial interest, $0.01 par value: 50,000,000 shares authorized, 26,001,500 shares and 26,374,760 shares issued and outstanding, respectively 260 264 Additional paid-in capital 444,511 -- Cumulative net loss (19,764) -- Distributions (15,601) -- Ownership interest of HRPT Properties Trust -- 641,805 ----------------- ---------------- Total shareholders' equity 409,406 642,069 ----------------- ---------------- $654,000 $686,296 ================= ================
See accompanying notes F-2
SENIOR HOUSING PROPERTIES TRUST CONSOLIDATED STATEMENTS OF INCOME (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Year Ended December 31, ----------------------------------------------------------- 1999 1998 1997 ----------------- ----------------- ----------------- Revenues: Rental income $84,881 $82,542 $78,463 Interest and other income 5,909 5,764 5,708 ----------------- ----------------- ----------------- Total revenues 90,790 88,306 84,171 ----------------- ----------------- ----------------- Expenses: Interest 18,768 19,293 16,958 Depreciation 22,247 18,297 17,826 General and administrative 4,941 4,480 4,664 Loan loss reserve 14,500 -- -- Impairment of assets 15,500 -- -- ----------------- ----------------- ----------------- Total expenses 75,956 42,070 39,448 ----------------- ----------------- ----------------- Net income $14,834 $46,236 $44,723 ================= ================= ================= Weighted average shares outstanding (note 2) 26,000 26,000 26,000 ================= ================= ================= Basic and diluted earnings per share data: Net income $0.57 $1.78 $1.72 ================= ================= =================
See accompanying notes F-3
SENIOR HOUSING PROPERTIES TRUST CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS) Ownership Interest of Additional HRPT Number of Common Paid-in Cumulative Properties Shares Shares Capital Net Loss Distributions Trust Total ------------ ----------- ------------ ------------- --------------- ------------- ------------ Balance at December 31, 1996 -- $-- $-- $-- $-- $664,492 $664,492 Net income -- -- -- -- -- 44,723 44,723 Owner distribution, net -- -- -- -- -- (62,277) (62,277) ------------ ----------- ------------ ------------- --------------- ------------- ------------ Balance at December 31, 1997 -- -- -- -- -- 646,938 646,938 Net income -- -- -- -- -- 46,236 46,236 Owner distribution, net -- -- -- -- -- (51,369) (51,369) Issuance of shares 26,374,760 264 -- -- -- -- 264 ------------ ----------- ------------ ------------- --------------- ------------- ------------ Balance at December 31, 1998 26,374,760 264 -- -- -- 641,805 642,069 Net income (January 1 to October 11) -- -- -- -- -- 34,598 34,598 Owner distribution, net -- -- -- -- -- (31,919) (31,919) Cancellation of shares (374,760) (4) -- -- -- 4 -- Distribution of shares to HRPT shareholders -- -- 444,488 -- -- (644,488) (200,000) Net loss (October 12 to December 31) -- -- -- (19,764) -- -- (19,764) Distributions -- -- -- -- (15,601) -- (15,601) Issuance of shares 1,500 -- 23 -- -- -- 23 ------------ ----------- ------------ ------------- --------------- ------------- ------------ Balance at December 31, 1999 26,001,500 $260 $444,511 $(19,764) $(15,601) $-- $409,406 ============ =========== ============ ============= =============== ============= ============
See accompanying notes F-4
SENIOR HOUSING PROPERTIES TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) Year Ended December 31, ----------------------------------------------------- 1999 1998 1997 ---------------- -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $14,834 $46,236 $44,723 Adjustments to reconcile net income to cash provided by operating activities: Depreciation 22,247 18,297 17,826 Impairment of assets and loan loss reserve 30,000 -- -- Changes in assets and liabilities: Other assets (3,363) (2,876) (2,394) Deferred rents and other deferred revenues (1,551) (1,455) 22,087 Security deposits -- -- 8,815 Other liabilities 1,591 34 37 Due to affiliate 327 -- -- ---------------- -------------- -------------- Cash provided by operating activities 64,085 60,236 91,094 ---------------- -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Real estate acquisitions and improvements -- (2) (19,799) Investments in mortgage loans -- -- (124) Repayments of mortgage loans 387 308 260 ---------------- -------------- -------------- Cash provided by (used for) investing activities 387 306 (19,663) ---------------- -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Owner's net distribution (31,919) (60,403) (71,431) Distributions (15,601) -- -- Proceeds from borrowing 200,000 -- -- Repayment of Formation Debt due to HRPT Properties Trust (200,000) -- -- ---------------- -------------- -------------- Cash used for financing activities (47,520) (60,403) (71,431) ---------------- -------------- -------------- Increase in cash and cash equivalents 16,952 139 -- Cash and cash equivalents at beginning of period 139 -- -- ---------------- -------------- -------------- Cash and cash equivalents at end of period $17,091 $139 $-- ================ ============== ============== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $2,446 $-- $-- NON-CASH INVESTING ACTIVITIES: Real estate acquisitions -- (9,298) (9,154) NON-CASH FINANCING ACTIVITIES: Formation Debt due to HRPT Properties Trust 200,000 -- -- Owner's contribution -- 9,298 9,154 Issuance of common shares 23 -- --
See accompanying notes F-5 SENIOR HOUSING PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Organization The consolidated financial statements of Senior Housing Properties Trust include the accounts of 81 properties and 12 mortgages receivable (the "Properties") and of Senior Housing Properties Trust ("Senior Housing Trust"). The Properties and Senior Housing Trust are collectively referred to as "Senior Housing". These consolidated financial statements are presented as if Senior Housing was a legal entity separate from HRPT Properties Trust ("HRPT"); although no such entity existed until October 12, 1999. Senior Housing operates in a single segment. HRPT organized Senior Housing Trust, a 100% owned subsidiary through October 11, 1999, as a Maryland real estate investment trust on December 16, 1998. At the time of its organization, Senior Housing Trust issued 26.4 million shares to HRPT for consideration of $263,748. Subsequently, 0.4 million shares were cancelled and 26.0 million shares are currently issued and outstanding. For a substantial part of the periods presented, the Properties were owned by HRPT. On or about June 30, 1999, the Properties were transferred by HRPT to several of its 100% owned subsidiaries. Effective as of September 1, 1999, HRPT transferred 100% ownership of the several subsidiaries, which own the Properties, to Senior Housing Trust. On October 12, 1999, HRPT distributed 13.2 million shares of its 26.0 million Senior Housing Trust shares to HRPT shareholders (the "Spin-Off"). Note 2. Summary of Significant Accounting Policies BASIS OF PRESENTATION. Prior to the Spin-Off, all of Senior Housing was owned by HRPT, and transactions have been presented at HRPT's historical basis. Prior to the Spin-Off substantially all the rental income and mortgage interest income received by HRPT from the tenants and mortgagors of Senior Housing was deposited in and commingled with HRPT's general funds. Funds for capital investments and other cash required by Senior Housing was provided by HRPT. Prior to September 1, 1999, interest expense was allocated based on HRPT's historical interest expense as a percentage of HRPT's average historical costs of real estate investments. General and administrative costs of HRPT for the periods prior to the Spin-Off were allocated to Senior Housing based on HRPT's investment advisory agreement formula and other costs were allocated based on historical costs as a percentage of HRPT's average historical costs of real estate investments. In the opinion of management, the methods for allocating interest and general and administrative expenses were reasonable. It was not practicable to estimate additional costs that would have been incurred by Senior Housing as a separate entity. REAL ESTATE PROPERTIES AND MORTGAGE INVESTMENTS. Depreciation on real estate properties is expensed on a straight-line basis over estimated useful lives of up to 40 years for buildings and improvements and up to 12 years for personal property. During 1999, the estimated useful lives of certain real estate properties were changed. The effect reduced net income and earnings per share, for the period ending December 31, 1999, $3.8 million and $0.15 per share, respectively. Impairment losses on properties are recognized when indicators of impairment are present and the estimated, undiscounted cash flows to be generated by the properties are less than the carrying amount of concerned properties. CASH AND CASH EQUIVALENTS. Cash and cash equivalents consisting of overnight repurchase agreements and short-term investments with original maturities of three months or less at the date of purchase are carried at cost plus accrued interest which approximates market. INTEREST RATE CAP AGREEMENTS. Senior Housing has entered into an interest rate cap agreement to limit exposure to the risk of rising interest rates. This arrangement, which expires in December 2001, has a notional amount of $200 million. Senior Housing will be entitled to receive payments by a counterparty should LIBOR increase above a threshold amount. F-6 SENIOR HOUSING PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS REVENUE RECOGNITION. Rental income from operating leases is recognized on a straight-line basis over the life of the lease agreements. Interest income is recognized as earned over the terms of the real estate mortgages. Percentage rent and supplemental mortgage interest income are recognized as earned. For interim periods, percentage rent and supplemental mortgage interest income are accrued prior to achievement of specified targets when the achievement of the targets is probable. For the years ended December 31, 1999, 1998 and 1997, percentage rent and supplemental mortgage interest income aggregated $4.0 million, $2.9 million and $2.9 million, respectively. EARNINGS PER COMMON SHARE. Because Senior Housing's operations were included in the consolidated financial statements of HRPT prior to the Spin-Off, there are no shareholder equity accounts for Senior Housing prior to 1999. Common shares outstanding of 26.0 million at October 12, 1999 have been included in the earnings per share calculation as if the shares were outstanding for all periods prior to October 12, 1999. Earnings per common share are computed using the weighted average number of shares outstanding during the period. Senior Housing has no common share equivalents, instruments convertible into common shares or other dilutive instruments. USE OF ESTIMATES. Preparation of these financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that may affect the amounts reported in these financial statements and related notes. The actual results could differ from these estimates. INCOME TAXES. Prior to the Spin-Off, Senior Housing's operations were included in HRPT's income tax returns. Senior Housing and HRPT qualify as real estate investment trusts under the Internal Revenue Code of 1986, as amended. Accordingly, they are not expected to be subject to federal income taxes provided they distribute their taxable income and continue to meet the other requirements for qualifying as a real estate investment trust. However, they are subject to state and local taxes on their income and property. NEW ACCOUNTING PRONOUNCEMENTS. The Financial Accounting Standards Board issued Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133") in 1998, which was further amended by Statement No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of Effective Date of FASB Statement No. 133" in 1999. FAS 133 must be adopted for the 2001 financial statements. Senior Housing believes adoption of FAS 133 is not expected to have a significant impact on its reported financial condition or results of operations. Note 3. Report of Tenants' Financial Condition Three of Senior Housing's tenants, The Frontier Group, Inc. ("Frontier"), Mariner Post-Acute Network, Inc. ("Mariner") and Integrated Health Services, Inc. ("IHS") have filed for protection under bankruptcy laws. Frontier filed in July 1999, Mariner filed in January 2000 and IHS filed in February 2000. For 1999, rental income and mortgage interest related to Frontier, Mariner and IHS was $2.2 million, $15.4 million and $26.6 million, respectively. At December 31, 1999 real estate investments, before impairment loss recognition and net of accumulated depreciation, for these three tenants were $10.0 million, $68.3 million and $136.9 million, respectively. Senior Housing also had mortgage investments, before loss reserves, related to IHS of $36.6 million at December 31, 1999. Senior Housing has concluded that impairment indicators are present with respect to properties operated by these tenants and has prepared undiscounted cash flow projections for each of the properties. For purposes of these projections, Senior Housing has assumed that rents on some properties may be modified and that some of the leases may be terminated after which Senior Housing will operate the properties for a period of time and, ultimately, sell them. In addition, a third party not in bankruptcy has guaranteed the lease obligations of some of the properties operated by one of the tenants. Senior Housing has assumed that the guarantor will honor the lease obligations. The undiscounted cash flow projections reflect the expected rents to be earned over the lease term and the expected cash flows earned from operating the properties for a period of time plus the proceeds F-7 SENIOR HOUSING PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS from assumed future sales of the properties. Cash flows during the period in which Senior Housing may operate the properties are estimated based on the historical performance of each property, excluding rent paid to Senior Housing. Projected sale prices are based on an estimated per bed value consistent with industry practice and reflect prices that Senior Housing has observed in recent transactions. Based on these undiscounted cash flow projections, Senior Housing has concluded that certain of its real estate and mortgage investments are impaired as of December 31, 1999. Based on its estimates of fair values net of selling costs, Senior Housing has written down the carrying value of these real estate investments, including investments leased to an affiliate, Advisors Healthcare Group, Inc. ("Advisors Health"), as of December 31, 1999 by recording an impairment loss write-down in the accompanying consolidated statement of income of $15.5 million. In addition, Senior Housing has recorded a loan loss reserve of $14.5 million related to the mortgage investment it considered impaired. It is reasonably possible that estimates of future cash flows could be reduced significantly depending on the outcome of the bankruptcy proceedings or if the third party should fail to honor its guarantee. As a result, additional losses could be recognized in future periods and the amounts could be material. In February 2000, Senior Housing sold all of the properties that were leased to Frontier for $13.0 million. Senior Housing is continuing to pursue claims against Frontier and other parties for breach of its leases and for rental arrearages. The amount of net gain, if any, which may be realized from the sale of the Frontier properties will depend upon the outcome of these claims. The amount of gain or loss to be realized as a result of this transaction is not expected to be material. Because these properties have been sold, Senior Housing will no longer receive rental income from these properties. In March 2000, Senior Housing reached an agreement in principle with Mariner whereby Mariner may be released from its lease obligations, certain security deposits held by Senior Housing may be retained by Senior Housing, certain properties now operated by Mariner will in the future be operated by Senior Housing, and other properties now owned by Senior Housing will be conveyed to Mariner. If this agreement is approved Senior Housing expects that it may realize gains and that its future earnings and cash flows may be less than the rent previously earned from the Mariner leases, at least on a short term basis. This agreement is contingent upon third party approvals beyond Senior Housing's control. If and when this agreement is implemented it may result in additional material gains or losses. Senior Housing is currently in negotiations with IHS. The current negotiations include, but are not limited to, the possibilities that Senior Housing will sell some of the properties, that lease or mortgage terms may be changed, that new tenants may begin operations of properties, that properties may be operated by Senior Housing for its own account or that mortgage obligations due to Senior Housing may be released for other compensation. Senior Housing may recognize additional gains or losses when these negotiations are completed and the additional gains or losses may be material. Note 4. Real Estate Properties The owned Properties are generally leased on a triple net basis, pursuant to noncancellable, fixed term operating leases expiring between 2001 to 2019. Generally, the leases to a single tenant or group of affiliated tenants are cross-defaulted and cross-guaranteed, and provide for all or none tenant renewal options at existing rates followed by several market rate renewal terms. These triple net leases generally require the lessee to pay all property operating costs. The future minimum lease payments to be received during the current terms of the leases, as of December 31, 1999, were approximately $78.3 million in 2000, $78.0 million in 2001, $79.4 million in 2002, $79.6 million in 2003, $79.4 million in 2004 and $602.7 million thereafter. These future payments include minimum lease payments from IHS and Mariner of $36.3 million in 2000, $36.5 million in 2001, $36.6 million in 2002, $36.8 million in 2003, $36.9 million in 2004, and $179.9 million thereafter. F-8 SENIOR HOUSING PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 5. Real Estate Mortgages Receivable December 31, ------------------------------------ 1999 1998 ----------------- --------------- (dollars in thousands) Mortgage notes receivable due December 2016 $8,693 $8,769 Mortgage note receivable due January 2013 883 883 Mortgage note receivable due December 2010 18,777 18,992 Mortgage note receivable due January 2006 9,086 9,182 ----------------- --------------- 37,439 37,826 Loan loss reserve (14,500) -- ----------------- --------------- $22,939 $37,826 ================= =============== At December 31, 1999, the interest rates on these notes receivable ranged from 10.3% to 13.75% per annum. In 1999 Senior Housing established an allowance of $14.5 million for the impairment of a real estate mortgage loan with a face value of $18.8 million. Note 6. Shareholders' Equity Senior Housing has reserved 1,300,000 shares of Senior Housing's common shares under the terms of the 1999 Incentive Share Award Plan (the "Award Plan"). During 1999, the three Independent Trustees, as part of their annual fee, were each granted 500 common shares from this plan. The shares granted to the Trustees vest immediately. At December 31, 1999, 1,298,500 of Senior Housing's common shares remain reserved for issuance under the Award Plan. In January 2000, Senior Housing declared a distribution of $0.60 per share which was distributed on February 24, 2000. Distributions per share paid by Senior Housing for 1999 were $0.60 per share, or approximately $15.6 million. Note 7. Commitments and Contingencies At December 31, 1999 and 1998, Senior Housing had total commitments aggregating $3.7 million to fund or finance improvements to the Properties. Note 8. Transactions with Affiliates Senior Housing has entered into an agreement with REIT Management & Research, Inc. ("REIT Management") to provide investment, management and administrative services. Gerard M. Martin and Barry M. Portnoy, who serve as managing trustees of Senior Housing and HRPT, own REIT Management. REIT Management is paid by Senior Housing based on a formula amount of gross invested assets in the properties. Investment advisory fees for 1999, 1998 and 1997 with respect to Senior Housing's invested assets were $3.9 million, $3.8 million and $3.7 million, respectively. Beginning with the year ending December 31, 2000, REIT Management will also be entitled to an incentive fee, paid in restricted shares, based on a formula. Messrs. Martin and Portnoy are principal shareholders of Advisors Health (formerly known as Connecticut Subacute Corporation II), which is a lessee of Senior Housing. The lease with Advisors Health is based on market terms and is generally similar to Senior Housing's leases with unaffiliated companies. These properties are managed by IHS. Senior Housing recorded rental income of $4.5 million as a result of this lease during each of the years ending December 31, 1999, 1998 and 1997. F-9 SENIOR HOUSING PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 9. Indebtedness In September 1999, Senior Housing entered into an agreement for a $350 million, three-year, interest only, bank credit facility. The bank credit facility is secured by 18 properties, with a net book value of $380.2 million at December 31, 1999, and matures in 2002. The interest rate is LIBOR plus a premium (8.17% at December 31, 1999) and will increase if Senior Housing's debt to total capital, as defined, meets or exceeds 50%. The bank credit facility is available for acquisitions, working capital and for general business purposes. On October 13, 1999, $200 million, used to pay the formation debt due to HRPT, was outstanding under the bank credit facility. Note 10. Fair Value of Financial Instruments and Commitments The financial statements presented include mortgage investments, rents receivable, other liabilities and security deposits. Except as follows, the fair values of the financial instruments and commitments to fund improvements were not materially different from their carrying values at December 31, 1999 and 1998:
1999 1998 -------------------------------- ------------------------------- Carrying Carrying Amount Fair Value Amount Fair Value --------------- ------------- -------------- ------------- (dollars in thousands) (dollars in thousands) Real estate mortgages receivable, net $22,939 $23,722 $37,826 $40,525 Commitments to fund improvements -- 3,707 -- 3,707 Interest rate cap agreement -- 341 -- --
The fair values of the real estate mortgages and interest rate cap agreement are based on estimates using discounted cash flow analyses and currently prevailing market rates. The fair value of the commitments represent the actual amounts committed. F-10 SENIOR HOUSING PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 11. Concentration of Credit Risk The assets included in these financial statements are primarily income producing senior housing real estate located throughout the United States. The following is a summary of the significant lessees and mortgagors as of and for the years ended December 31, 1999 and 1998:
Year Ending December 31, 1999 December 31, 1999 ------------------------------- ----------------------------- % of % of Investment Total Revenue Total --------------- ------------ ------------- ------------ (dollars in thousands) (dollars in thousands) Marriott International, Inc. $325,521 45% $30,893 35% Integrated Health Services, Inc. 185,158 25 26,615 30 Brookdale Living Communities, Inc. 101,850 14 11,174 13 Mariner Post-Acute Network, Inc. 80,680 11 15,449 17 Frontier Group, Inc. 15,492 2 2,160 2 All others 22,977 3 2,786 3 --------------- ------------ ------------- ------------ $731,678 100% $89,077 100% =============== ============ ============= ============ Year Ending December 31, 1998 December 31, 1998 --------------- -- ------------ ------------- -- ------------ % of % of Investment Total Revenue Total --------------- ------------ ------------- ------------ (dollars in thousands) (dollars in thousands) Marriott International, Inc. $325,521 42% $30,270 35% Integrated Health Services, Inc. 217,893 29 26,841 31 Brookdale Living Communities, Inc. 101,850 13 11,074 13 Mariner Post-Acute Network, Inc. 86,486 11 13,620 16 Frontier Group, Inc. 15,492 2 2,160 2 All others 22,977 3 2,792 3 --------------- ------------ ------------- ------------ $770,219 100% $86,757 100% =============== ============ ============= ============
F-11 SENIOR HOUSING PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 12. Selected Quarterly Financial Data (unaudited) The following is a summary of the quarterly results of operations of Senior Housing for 1999 and 1998. The dollars are in thousands except per share amounts. 1999 ------------------------------------------------------ First Second Third Fourth Quarter Quarter Quarter Quarter ------------ ------------ --------------- ------------ Revenues $22,668 $22,622 $22,621 $22,879 Net income (loss) (1) 10,971 10,861 11,176 (18,174) Per share data: Net income (loss) 0.42 0.42 0.43 (0.70) 1998 ------------------------------------------------------ First Second Third Fourth Quarter Quarter Quarter Quarter ------------ ------------ --------------- ------------ Revenues $21,496 $21,714 $21,711 $23,385 Net income 11,134 11,537 11,012 12,553 Per share data: Net income 0.43 0.44 0.42 0.48 (1) Reflects an impairment loss, as described in note 3, during the Fourth Quarter F-12
SENIOR HOUSING PROPERTIES TRUST SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1999 (Dollars in thousands) Initial Cost Gross Amount Carried at Close to Company of Period 12/31/99 ---------------- --------------------------- Buildings Costs Capitalized Buildings Original and Subsequent to and Accumulated Date Construction Location State Land Equipment Acquisition Impairment Land Equipment Total(1) Depreciation(2) Aquired Date - - ------------------------------------------------------------------------------------------------------------------------------------ Yuma AZ $103 $604 $1 $-- $103 $605 $708 $129 06/30/92 1984 Phoenix AZ 655 2,525 5 -- 655 2,530 3,185 544 06/30/92 1963 Yuma AZ 223 2,100 3 -- 223 2,103 2,326 445 06/30/92 1984 Scottsdale AZ 979 8,807 140 -- 990 8,936 9,926 1,256 05/16/94 1990 Sun City AZ 1,174 10,569 173 -- 1,189 10,727 11,916 1,486 06/17/94 1990 Mesa AZ 1,480 13,320 - -- 1,480 13,320 14,800 1,013 12/27/96 1985 Newport Beach CA 1,176 1,729 1,223 -- 1,176 2,952 4,128 676 12/28/90 1962 Fresno CA 738 2,577 188 -- 738 2,765 3,503 727 12/28/90 1963 Van Nuys CA 716 378 225 -- 718 601 1,319 175 12/28/90 1969 Thousand Oaks CA 622 2,522 310 -- 622 2,832 3,454 721 12/28/90 1965 Tarzana CA 1,277 977 806 -- 1,278 1,782 3,060 456 12/28/90 1969 Lancaster CA 601 1,859 1,028 -- 601 2,887 3,488 695 12/28/90 1969 Stockton CA 382 2,750 4 -- 382 2,754 3,136 585 06/30/92 1968 Laguna Hills CA 3,132 28,184 475 -- 3,172 28,619 31,791 3,788 09/09/94 1975 Littleton CO 185 5,043 348 -- 185 5,391 5,576 1,378 12/28/90 1965 Lakewood CO 232 3,766 723 -- 232 4,489 4,721 1,094 12/28/90 1972 Grand Junction CO 204 3,875 329 -- 204 4,204 4,408 781 12/30/93 1968 Grand Junction CO 6 2,583 1,316 -- 136 3,769 3,905 624 12/30/93 1978 Colorado Springs CO 245 5,236 - -- 245 5,236 5,481 300 09/26/97 1972 Delta CO 167 3,570 - -- 167 3,570 3,737 204 09/26/97 1963 Canon City CO 292 6,228 - -- 292 6,228 6,520 357 09/26/97 1970 Killingly CT 240 5,360 460 -- 240 5,820 6,060 2,123 05/15/87 1972 Willimantic CT 134 3,566 479 -- 166 4,013 4,179 1,411 05/15/87 1965 Waterford CT 86 4,714 453 -- 86 5,167 5,253 1,952 05/15/87 1965 Cheshire CT 520 7,380 1,559 -- 520 8,939 9,459 3,204 11/01/87 1963 Waterbury CT 1,003 9,023 915 (5,694) 1,003 4,244 5,247 445 05/11/92 1974 New Haven CT 1,681 14,953 1,236 (12,154) 1,681 4,035 5,716 667 05/11/92 1971 Deerfield Beach FL 1,664 14,972 299 -- 1,690 15,245 16,935 2,143 05/16/94 1986 Palm Harbor FL 3,327 29,945 591 -- 3,379 30,484 33,863 4,285 05/16/94 1992 Boca Raton FL 4,404 39,633 799 -- 4,474 40,362 44,836 5,673 05/20/94 1994 Port St. Lucie FL 1,223 11,009 219 -- 1,242 11,209 12,451 1,575 05/20/94 1993 Fort Myers FL 2,349 21,137 419 -- 2,385 21,520 23,905 2,892 08/16/94 1984 S-1 SENIOR HOUSING PROPERTIES TRUST SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1999 (Dollars in thousands) Initial Cost Gross Amount Carried at Close to Company of Period 12/31/99 ---------------- --------------------------- Buildings Costs Capitalized Buildings Original and Subsequent to and Accumulated Date Construction Location State Land Equipment Acquisition Impairment Land Equipment Total(1) Depreciation(2) Aquired Date - - ------------------------------------------------------------------------------------------------------------------------------------ Marietta GA 300 2,702 35 -- 300 2,737 3,037 292 05/15/96 1967 Dublin GA 442 3,982 80 -- 442 4,062 4,504 432 05/15/96 1968 Glenwood GA 174 1,564 4 -- 174 1,568 1,742 160 05/15/96 1972 College Park GA 300 2,702 23 -- 300 2,725 3,025 304 05/15/96 1985 Mediapolis IA 94 1,776 251 -- 94 2,027 2,121 366 12/30/93 1973 Winterset IA 111 2,099 493 -- 111 2,592 2,703 454 12/30/93 1973 Clarinda IA 77 1,453 293 -- 77 1,746 1,823 308 12/30/93 1968 Pacific Junction IA 32 306 5 -- 32 311 343 40 04/01/95 1978 Council Bluffs IA 225 893 99 -- 225 992 1,217 189 04/01/95 1963 Arlington Heights IL 3,621 32,587 534 -- 3,665 33,077 36,742 4,377 09/09/94 1986 Chicago IL 6,200 55,800 - -- 6,200 55,800 62,000 4,243 12/27/96 1990 Ellinwood KS 130 1,137 53 -- 130 1,190 1,320 155 04/01/95 1972 Middleboro MA 1,771 15,752 - -- 1,771 15,752 17,523 4,676 05/01/88 1970 Worcester MA 1,829 15,071 1,869 -- 1,829 16,940 18,769 6,608 05/01/88 1970 Boston MA 2,164 20,836 1,978 -- 2,164 22,814 24,978 8,345 05/01/89 1968 Hyannis MA 829 7,463 - -- 829 7,463 8,292 2,240 05/11/92 1972 Silver Spring MD 3,229 29,065 786 -- 3,301 29,779 33,080 4,063 07/25/94 1992 St. Joseph MO 111 1,027 195 -- 111 1,222 1,333 185 06/04/93 1976 Tarkio MO 102 1,938 415 -- 102 2,353 2,455 408 12/30/93 1970 Concord NC 90 2,126 - -- 90 2,126 2,216 544 09/10/98 1990 Wilson NC 27 2,375 - -- 27 2,375 2,402 606 09/10/98 1990 Winston-Salem NC 75 1,696 - -- 75 1,696 1,771 429 09/10/98 1990 Grand Island NE 119 1,446 369 -- 119 1,815 1,934 195 04/01/95 1963 Burlington NJ 1,300 11,700 7 -- 1,300 11,707 13,007 1,245 09/29/95 1994 Brighton NY 1,070 9,630 - -- 1,070 9,630 10,700 732 12/27/96 1988 Grove City OH 332 3,081 32 -- 332 3,113 3,445 508 06/04/93 1965 Canonsburg PA 1,499 13,493 606 -- 1,518 14,080 15,598 4,675 03/01/91 1985 Huron SD 45 968 1 -- 45 969 1,014 204 06/30/92 1968 Sioux Falls SD 253 3,062 4 -- 253 3,066 3,319 647 06/30/92 1960 Huron SD 144 3,108 4 -- 144 3,112 3,256 654 06/30/92 1968 S-2 SENIOR HOUSING PROPERTIES TRUST SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1999 (Dollars in thousands) Initial Cost Gross Amount Carried at Close to Company of Period 12/31/99 ---------------- --------------------------- Buildings Costs Capitalized Buildings Original and Subsequent to and Accumulated Date Construction Location State Land Equipment Acquisition Impairment Land Equipment Total(1) Depreciation(2) Aquired Date - - ------------------------------------------------------------------------------------------------------------------------------------ Bellaire TX 1,223 11,010 177 -- 1,238 11,172 12,410 1,570 05/16/94 1991 Virginia Beach VA 881 7,926 141 -- 893 8,055 8,948 1,132 05/16/94 1990 Charlottesville VA 2,936 26,422 471 -- 2,976 26,853 29,829 3,719 06/17/94 1991 Arlington VA 1,859 16,734 296 -- 1,885 17,004 18,889 2,320 07/25/94 1992 Seattle WA 256 4,869 67 -- 256 4,936 5,192 938 11/01/93 1964 Spokane WA 1,035 13,315 - -- 1,035 13,315 14,350 938 05/07/97 1993 Brookfield WI 834 3,849 8,014 (5,806) 834 6,057 6,891 470 12/28/90 1964 Clintonville WI 49 1,625 87 -- 30 1,731 1,761 436 12/28/90 1965 Clintonville WI 14 1,695 38 -- 14 1,733 1,747 438 12/28/90 1960 Madison WI 144 1,633 110 -- 144 1,743 1,887 439 12/28/90 1920 Waukesha WI 68 3,452 2,232 -- 68 5,684 5,752 1,189 12/28/90 1958 Milwaukee WI 277 3,883 - -- 277 3,883 4,160 883 03/27/92 1969 Milwaukee WI 232 1,368 1 -- 232 1,369 1,601 319 09/10/98 1970 Pewaukee WI 984 2,432 - -- 984 2,432 3,416 589 09/10/98 1963 Worland WY 132 2,503 588 -- 132 3,091 3,223 526 12/30/93 1970 Laramie WY 191 3,632 199 -- 191 3,831 4,022 715 12/30/93 1964 -------- --------- -------- ---------- -------- --------- --------- --------- Grand Total $69,030 $628,080 $35,283 ($23,654) $69,673 $639,066 $708,739 $108,709 ======== ========= ======== ========== ======== ========= ========= ========= (1) Aggregate cost for federal income tax purposes is approximately $770,860. (2) Depreciation is provided for on buildings and improvements for periods ranging up to 40 years and on equipment up to 12 years. (3) Represents acquisition dates of HRPT Properties Trust. S-3 SENIOR HOUSING PROPERTIES TRUST SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1999 (Dollars in thousands) Initial Cost Gross Amount Carried at Close to Company of Period 12/31/99 ---------------- --------------------------- Buildings Costs Capitalized Buildings Original and Subsequent to and Accumulated Date Construction Location State Land Equipment Acquisition Impairment Land Equipment Total(1) Depreciation(2) Aquired Date - - ------------------------------------------------------------------------------------------------------------------------------------ Reconciliation of the carrying amount of real estate and equipment and accumulated depreciation at the beginning of the period: Real Estate and Accumulated Equipment Depreciation -------------------- ---------------- Balance at January 1, 1997 $692,034 $56,387 Additions 28,953 17,826 -------------------- ---------------- Balance at December 31, 1997 720,987 74,213 Additions 11,406 20,403 -------------------- ---------------- Balance at December 31, 1998 732,393 94,616 Additions - 22,247 Impairment (23,654) (8,154) -------------------- ---------------- Balance at December 31, 1999 $708,739 $108,709 ==================== ================
S-4
SENIOR HOUSING PROPERTIES TRUST SCHEDULE IV MORTGAGE LOANS ON REAL ESTATE December 31, 1999 (Dollars in thousands) Principal Amount of Loans Subject to Carrying Delinquent Final Face Value of Value of Principal Location Interest Rate Maturity Date Periodic Payment Terms Mortgage (1) Mortgage or Interest - - ------------------------------------------------------------------------------------------------------------------------------------ Farmington, MI 11.50% 1/1/06 Principal and interest, payable monthly in $4,156 $4,156 $-- arrears. $3.8 million due at maturity. Howell, MI 11.50% 1/1/06 Principal and interest, payable monthly in 4,930 4,930 -- arrears. $4.5 million due at maturity. Lyons, NE 10.30% 12/31/16 Principal and interest, payable monthly in 1,549 1,549 Milford, NE arrears. $926 due at maturity. Ainsworth, NE 10.86% 12/31/16 Principal and interest, payable monthly in 5,109 5,109 -- Ashland, NE arrears. $3.1 million due at maturity. Blue Hill, NE Gretna, NE Sutherland, NE Waverly, NE Ainsworth, NE 11.23% 12/31/16 Principal and interest, payable monthly in 2,035 2,035 -- Ashland, NE arrears. $1.3 million due at maturity. Blue Hill, NE Edgar, NE Gretna, NE Sutherland, NE Waverly, NE Lyons, NE Milford, NE Slidell, LA 11.00% 12/31/10 Principal and interest, payable monthly in 18,777 4,277 -- arrears. $13.9 million due at maturity. Milwaukee, WI 13.75% 1/31/13 Interest only, payable monthly in advance. 883 883 -- $883 due at maturity. -------------- ------------- ---------- $37,439 $22,939 $-- ============== ============= ========== (1) Also represents cost for federal income tax purposes.
S-5 SENIOR HOUSING PROPERTIES TRUST SCHEDULE IV-continued MORTGAGE LOANS ON REAL ESTATE December 31, 1999 (Dollars in thousands) Reconciliation of the carrying amount of mortgage loans at the beginning of the period: Balance at January 1, 1997 $38,270 New mortgage loans 124 Collections of principal (260) ---------------- Balance at December 31, 1997 38,134 Collections of principal (308) ---------------- Balance at December 31, 1998 37,826 Collections of principal (387) Loan loss reserve (14,500) ---------------- Balance at December 31, 1999 $22,939 ================ S-6 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SENIOR HOUSING PROPERTIES TRUST By: /s/ David J. Hegarty David J. Hegarty President and Chief Operating Officer Dated: March 30, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, or by their attorney-in-fact, in the capacities and on the dates indicated.
Signature Title Date /s/ David J. Hegarty President and Chief Operating Officer March 30, 2000 David J. Hegarty /s/ Ajay Saini Treasurer and Chief Financial Officer March 30, 2000 Ajay Saini /s/ Bruce M. Gans, M.D. Trustee March 30, 2000 Bruce M. Gans, M.D. /s/ Arthur G. Koumantzelis Trustee March 30, 2000 Arthur G. Koumantzelis /s/ John L. Harrington Trustee March 30, 2000 John L. Harrington /s/ Gerard M. Martin Trustee March 30, 2000 Gerard M. Martin /s/ Barry M. Portnoy Trustee March 30, 2000 Barry M. Portnoy
EX-3.1 2 Exhibit 3.1 SENIOR HOUSING PROPERTIES TRUST ARTICLES OF AMENDMENT AND RESTATEMENT FIRST: Senior Housing Properties Trust, a Maryland real estate investment trust (the "Trust") formed under Title 8 of the Corporations and Associations Article of the Annotated Code of Maryland (as amended and in effect from time to time, and including any successor title thereto, "Title 8"), desires to amend and restate its Declaration of Trust as currently in effect and as hereinafter amended. All references in the Declaration of Trust to specific sections of Title 8 shall include applicable successor provisions. SECOND: The following provisions are all the provisions of the Declaration of Trust currently in effect and as hereinafter amended: ARTICLE I FORMATION The Trust is a real estate investment trust within the meaning of Title 8. It is also intended that the Trust shall carry on a business as a "qualified REIT subsidiary" as described in the REIT provisions of the Code (as defined in Article VII below), for so long as it is wholly owned by HRPT Properties Trust and thereafter shall qualify and carry on business as a "real estate investment trust" as described therein. The Trust shall not be deemed to be a general partnership, limited partnership, joint venture, joint stock company or a corporation, but nothing herein shall preclude the Trust from being treated for tax purposes as an association under the Code; nor shall the Trustees or shareholders or any of them for any purpose be, nor be deemed to be, nor be treated in any way whatsoever as, liable or responsible hereunder as partners or joint venturers. ARTICLE II NAME The name of the Trust is: Senior Housing Properties Trust Under circumstances in which the Board of Trustees of the Trust (the "Board of Trustees" or "Board") determines that the use of the name of the Trust is not practicable, the Trust may use any other designation or name for the Trust. To the extent permitted by Maryland law, the Board of Trustees may amend the Declaration of Trust to change the name of the Trust without any action by the shareholders. ARTICLE III PURPOSES AND POWERS Section 3.1 Purposes. The purposes for which the Trust is formed are to invest in and to acquire, hold, manage, administer, control and dispose of property and interests in property, including, without limitation or obligation, engaging in business as a real estate investment trust under the Code. Section 3.2 Powers. The Trust shall have all of the powers granted to real estate investment trusts by Title 8 and all other powers set forth in the Declaration of Trust which are not inconsistent with law and are appropriate to promote and attain the purposes set forth in the Declaration of Trust. ARTICLE IV RESIDENT AGENT The name of the resident agent of the Trust in the State of Maryland is James J. Hanks, Jr., whose post office address is c/o Ballard Spahr Andrews & Ingersoll, LLP, 300 East Lombard Street, Baltimore, Maryland 21202. The resident agent is a citizen of and resides in the State of Maryland. The Trust may change such resident agent from time to time as the Board of Trustees shall determine. The Trust may have such offices or places of business within or outside the State of Maryland as the Board of Trustees may from time to time determine. ARTICLE V BOARD OF TRUSTEES Section 5.1 Powers. Subject to any express limitations contained in the Declaration of Trust or in the Bylaws, (a) the business and affairs of the Trust shall be managed under the direction of the Board of Trustees and (b) the Board shall have full, exclusive and absolute power, control and authority over any and all property of the Trust. The Board may take any action as in its sole judgment and discretion is necessary or appropriate to conduct the business and affairs of the Trust. The Declaration of Trust shall be construed with the presumption in favor of the grant of power and authority to the Board. Any construction of the Declaration of Trust or determination made in good faith by the Board concerning its powers and authority hereunder shall be conclusive. The enumeration and definition of particular powers of the Trustees included in the Declaration of Trust or in the Bylaws shall in no way be construed or deemed by inference or otherwise in any manner to exclude or limit the powers conferred upon the Board or the Trustees under the general laws of the State of Maryland or any other applicable laws. The Board, without any action by the shareholders of the Trust, shall have and may exercise, on behalf of the Trust, without limitation, the power to terminate the status of the Trust as a real estate investment trust under the Code; to determine that compliance with any restriction or limitations on ownership and transfers of shares of the Trust's beneficial interest set forth in Article -2- VII of the Declaration of Trust is no longer required in order for the Trust to qualify as a real estate investment trust; to adopt, amend and repeal Bylaws not inconsistent with law or this Declaration of Trust; to elect officers in the manner prescribed in the Bylaws; to solicit proxies from holders of shares of beneficial interest of the Trust; and to do any other acts and deliver any other documents necessary or appropriate to the foregoing powers. Section 5.2 Number and Classification. Section 5.2.1 The number of trustees of the Trust (hereinafter the "Trustees") initially shall be two (2). On the first date on which the Trust shall have more than one shareholder of record, the number of the Trustees shall automatically and without further action by the Board of Trustees increase to five (5), which number may thereafter be increased or decreased pursuant to the Bylaws of the Trust; provided, however, that no such increase or decrease shall result in the Trust having fewer than three (3) or more than seven (7) Trustees. Any vacancies in the Board of Trustees shall be filled by a majority of the Trustees then in office, except that a majority of the entire Board of Trustees must fill a vacancy resulting from an increase in the number of Trustees. Section 5.2.2 On the first date on which the Trust shall have more than one shareholder of record, the Board of Trustees shall be classified into three groups: Group I, Group II and Group III. The number of Trustees in each group shall be determined by the Board in accordance with the Bylaws; provided that the number of Trustees in any one group shall not exceed the number of Trustees in any other group by more than one. The Trustees in Group I shall serve for a term ending at the first annual meeting of shareholders following the end of the Trust's fiscal year ending December 31, 1999, each Trustee in Group II shall serve for a term ending at the following annual meeting of shareholders and the Trustee in Group III shall serve for a term ending at the second following annual meeting of shareholders. After the respective terms of the groups indicated, each such group of Trustees shall be elected for successive terms ending at the annual meeting of shareholders held during the third year after election. Section 5.2.3 The names and business addresses of the initial Trustees who shall serve as Trustees are as follows: Name Address - - ---- ------- Gerard M. Martin c/o Reit Management & Research, Inc. 400 Centre Street Newton, Massachusetts 02458 Barry M. Portnoy c/o Reit Management & Research, Inc. 400 Centre Street Newton, Massachusetts 02458 Section 5.2.4 The Trustees may fill any vacancy, whether resulting from an increase in the number of Trustees or otherwise, on the Board in the manner provided in the Bylaws. It shall not be necessary to list in the Declaration of Trust the names and addresses of any Trustees hereinafter elected. No reduction in the number of Trustees shall have the effect of removing any Trustee from office prior to the expiration of his or her term. Subject to the provisions of Section -3- 5.3, each Trustee shall hold office until the election and qualification of his or her successor. There shall be no cumulative voting in the election of Trustees. Section 5.3 Resignation or Removal. Any Trustee may resign by written notice to the Board, effective upon execution and delivery to the Trust of such written notice or upon any future date specified in the notice. A Trustee may be removed at any time with or without cause, at a meeting of the shareholders, by the affirmative vote of the holders of not less than two-thirds (2/3) of the Shares (as defined in Section 6.1 below) then outstanding and entitled to vote generally in the election of Trustees. A Trustee judged incompetent or for whom a guardian or conservator has been appointed shall be deemed to have resigned as of the date of such adjudication or appointment. ARTICLE VI SHARES OF BENEFICIAL INTEREST Section 6.1 Authorized Shares. The beneficial interest of the Trust shall be divided into shares of beneficial interest (the "Shares"). The Trust has authority to issue 50,000,000 Shares, all of which are initially comprised of common shares of beneficial interest, $.01 par value per share ("Common Shares"). If shares of one class are classified or reclassified into shares of another class of shares pursuant to this Article VI, the number of authorized shares of the former class shall be automatically decreased and the number of shares of the latter class shall be automatically increased, in each case by the number of shares so classified or reclassified, so that the aggregate number of shares of beneficial interest of all classes that the Trust has authority to issue shall not be more than the total number of shares of beneficial interest set forth in the second sentence of this paragraph. The Board of Trustees, without any action by the shareholders of the Trust, may amend the Declaration of Trust from time to time to increase or decrease the aggregate number of Shares or the number of Shares of any class or series, including preferred shares of beneficial interest ("Preferred Shares"), that the Trust has authority to issue. Section 6.2 Common Shares. Subject to the provisions of Article VII, each Common Share shall entitle the holder thereof to one vote on each matter upon which holders of Common Shares are entitled to vote. The Board of Trustees may reclassify any unissued Common Shares from time to time in one or more classes or series of Shares. Section 6.3 Preferred Shares. The Board of Trustees may classify any unissued Preferred Shares and reclassify any previously classified but unissued Preferred Shares of any series from time to time, in one or more series of Shares. Section 6.4 Classified or Reclassified Shares. Prior to issuance of classified or reclassified Shares of any class or series, the Board of Trustees by resolution shall (a) designate that class or series; (b) specify the number of Shares to be included in the class or series; (c) set, subject to the provisions of Article VII, the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of redemption for each class or series; and (d) cause the Trust to file articles supplementary with the State Department of Assessments and Taxation of Maryland (the "SDAT"). Any of the terms of any class or series of Shares set pursuant to clause (c) of this Section 6.4 may be made dependent upon -4- facts ascertainable outside the Declaration of Trust (including the occurrence of any event, determination or action by the Trust or any other person or body) and may vary among holders thereof, provided that the manner in which such facts or variations shall operate upon the terms of such class or series of Shares is clearly and expressly set forth in the articles supplementary filed with the SDAT. Section 6.5 Authorization by Board of Share Issuance. The Board of Trustees may authorize the issuance from time to time of Shares of any class or series, whether now or hereafter authorized, or securities or rights convertible into Shares of any class or series, whether now or hereafter authorized, for such consideration (whether in cash, property, past or future services, obligation for future payment or otherwise) as the Board of Trustees may deem advisable (or without consideration), subject to such restrictions or limitations, if any, as may be set forth in this Declaration of Trust or the Bylaws of the Trust. Section 6.6 Dividends and Distributions. The Board of Trustees may from time to time authorize and declare to shareholders such dividends or distributions, in cash or other assets of the Trust or in securities of the Trust or from any other source as the Board of Trustees in its discretion shall determine. Shareholders shall have no right to any dividend or distribution unless and until authorized and declared by the Board. The exercise of the powers and rights of the Board of Trustees pursuant to this Section 6.6 shall be subject to the provisions of any class or series of Shares at the time outstanding. Section 6.7 General Nature of Shares. All Shares shall be personal property entitling the shareholders only to those rights provided in the Declaration of Trust. The shareholders shall have no interest in the property of the Trust and shall have no right to compel any partition, division, dividend or distribution of the Trust or of the property of the Trust. The death of a shareholder shall not terminate the Trust or affect its continuity nor give his or her legal representative any rights whatsoever, whether against or in respect of other shareholders, the Trustees or the trust estate or otherwise, except the sole right to demand and, subject to the provisions of the Declaration of Trust, the Bylaws and any requirements of law, to receive a new certificate for Shares registered in the name of such legal representative, in exchange for the certificate held by such shareholder. The Trust is entitled to treat as shareholders only those persons in whose names Shares are registered as holders of Shares on the beneficial interest ledger of the Trust. Section 6.8 Fractional Shares. The Trust may, without the consent or approval of any shareholder, issue fractional Shares, eliminate a fraction of a Share by rounding up or down to a full Share, arrange for the disposition of a fraction of a Share by the person entitled to it or pay cash for the fair value of a fraction of a Share. Section 6.9 Declaration and Bylaws. All shareholders are subject to the provisions of the Declaration of Trust and the Bylaws of the Trust. Section 6.10 Divisions and Combinations of Shares. Subject to an express provision to the contrary in the terms of any class or series of beneficial interest hereafter authorized, the Board of Trustees shall have the power to divide or combine the outstanding shares of any class or series of beneficial interest, without a vote of shareholders. -5- ARTICLE VII RESTRICTION ON TRANSFER AND OWNERSHIP OF SHARES Section 7.1 Definitions. For the purpose of this Article VII, the following terms shall have the following meanings: Affiliate. The term "Affiliate" shall mean, with respect to any Person, another Person controlled by, controlling or under common control with such Person. Aggregate Share Ownership Limit. The term "Aggregate Share Ownership Limit" shall mean 9.8 percent in value or in number of the aggregate of the outstanding Equity Shares. The value of the outstanding Equity Shares shall be determined by the Board of Trustees in good faith, which determination shall be conclusive for all purposes hereof. Beneficial Ownership. The term "Beneficial Ownership" shall mean ownership of Equity Shares by a Person, whether the interest in Equity Shares is held directly or indirectly (including by a nominee), and shall include, but not be limited to, interests that would be treated as owned through the application of Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code. The terms "Beneficial Owner," "Beneficially Owns" and "Beneficially Owned" shall have the correlative meanings. Business Day. The term "Business Day" shall mean any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which banking institutions in New York City are authorized or required by law, regulation or executive order to close. Charitable Beneficiary. The term "Charitable Beneficiary" shall mean one or more beneficiaries of the Charitable Trust as determined pursuant to Section 7.3.6, provided that each such organization must be described in Section 501(c)(3) of the Code and contributions to each such organization must be eligible for deduction under each of Sections 170(b)(1)(A), 2055 and 2522 of the Code. If the Code shall cease to define a charitable organization, "Charitable Beneficiary" shall mean an entity organized to do work for charitable purposes and not for profit. Charitable Trust. The term "Charitable Trust" shall mean any trust provided for in Section 7.3.1. Code. The term "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. All references to specific sections of the Code shall include applicable successor provisions. Common Share Ownership Limit. The term "Common Share Ownership Limit" shall mean 9.8 percent (in value or in number of shares, whichever is more restrictive) of the aggregate outstanding Common Shares. The number and value of outstanding Common Shares shall be determined by the Board of Trustees in good faith, which determination shall be conclusive for all purposes. -6- Constructive Ownership. The term "Constructive Ownership" shall mean ownership of Equity Shares by a Person, whether the interest in Equity Shares is held directly or indirectly (including by a nominee), and shall include, but not be limited to, interests that would be treated as owned through the application of Section 318(a) of the Code, as modified by Section 856(d)(5) of the Code. The terms "Constructive Owner," "Constructively Owns" and "Constructively Owned" shall have the correlative meanings. Declaration of Trust. The term "Declaration of Trust" shall mean these Articles of Amendment and Restatement as accepted for record by the SDAT, and any amendments thereto. Equity Shares. The term "Equity Shares" shall mean Shares of all classes or series, including, without limitation, Common Shares and Preferred Shares. Excepted Holder. The term "Excepted Holder" shall mean a shareholder of the Trust for whom an Excepted Holder Limit is created by this Article VII or by the Board of Trustees pursuant to Section 7.2.7. Excepted Holder Limit. The term "Excepted Holder Limit" shall mean, provided that the affected Excepted Holder agrees to comply with the requirements established by the Board of Trustees pursuant to Section 7.2.7, and subject to adjustment pursuant to Section 7.2.8, the percentage limit established by the Board of Trustees pursuant to Section 7.2.7. HRPT. The term "HRPT" shall mean HRPT Properties Trust, a Maryland real estate investment trust, or any successor thereto by merger or consolidation, or any transferee of all or substantially all of its assets. Initial Date. The term "Initial Date" shall mean the date upon which these Articles of Amendment and Restatement containing this Article VII is accepted for record by the SDAT. Market Price. The term "Market Price" on any date shall mean, with respect to any class or series of outstanding Equity Shares, the Closing Price for such Equity Shares on such date. The "Closing Price" on any date shall mean the last sale price for such Equity Shares, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, for such Equity Shares, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the NYSE or, if such Equity Shares are not listed or admitted to trading on the NYSE, as reported on the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which such Equity Shares are listed or admitted to trading or, if such Equity Shares are not listed or admitted to trading on any national securities exchange, the last quoted price, or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotation System or, if such system is no longer in use, the principal other automated quotation system that may then be in use or, if such Equity Shares are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in such Equity Shares selected by the Board of Trustees or, in the event that no trading price is available for such Equity Shares, the fair market value of Equity Shares, as determined in good faith by the Board of Trustees. -7- NYSE. The term "NYSE" shall mean the New York Stock Exchange. Person. The term "Person" shall mean an individual, corporation, partnership, estate, trust (including, but not limited to, a trust qualified under Sections 401(a) or 501(c)(17) of the Code), a portion of a trust permanently set aside for or to be used exclusively for the purposes described in Section 642(c) of the Code, association, private foundation within the meaning of Section 509(a) of the Code, joint stock company or other entity and also includes a group as that term is used for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, and a group to which an Excepted Holder Limit applies. Prohibited Owner. The term "Prohibited Owner" shall mean, with respect to any purported Transfer, any Person who, but for the provisions of Section 7.2.1, would Beneficially Own or Constructively Own Equity Shares, and if appropriate in the context, shall also mean any Person who would have been the record owner of Equity Shares that the Prohibited Owner would have so owned. REIT. The term "REIT" shall mean a real estate investment trust within the meaning of Section 856 of the Code. Restriction Termination Date. The term "Restriction Termination Date" shall mean the first day after the Initial Date on which the Board of Trustees determines that it is no longer in the best interests of the Trust for the restrictions and limitations on Beneficial Ownership, Constructive Ownership and Transfers of Equity Shares set forth herein to apply. RMR. The term "RMR" shall mean REIT Management & Research, Inc., the Trust's investment advisor, or any successor investment advisor to the Trust. SDAT. The term "SDAT" shall mean the State Department of Assessments and Taxation of Maryland. Transfer. The term "Transfer" shall mean any issuance, sale, transfer, gift, assignment, devise or other disposition, as well as any other event that causes any Person to acquire Beneficial Ownership or Constructive Ownership, or any agreement to take any such actions or cause any such events, of Equity Shares or the right to vote or receive dividends on Equity Shares, including (a) the granting or exercise of any option (or any disposition of any option), (b) any disposition of any securities or rights convertible into or exchangeable for Equity Shares or any interest in Equity Shares or any exercise of any such conversion or exchange right and (c) Transfers of interests in other entities that result in changes in Beneficial or Constructive Ownership of Equity Shares; in each case, whether voluntary or involuntary, whether owned of record, Constructively Owned or Beneficially Owned and whether by operation of law or otherwise. The terms "Transferring" and "Transferred" shall have the correlative meanings. Trustee. The term "Trustee" shall mean the Person unaffiliated with the Trust and a Prohibited Owner, that is appointed by the Trust to serve as trustee of the Charitable Trust. -8- Section 7.2 Equity Shares. Section 7.2.1 Ownership Limitations. During the period commencing on the Initial Date and prior to the Restriction Termination Date: (a) Basic Restrictions. (i) (1) No Person, other than an Excepted Holder and other than HRPT, RMR and their affiliates, shall Beneficially Own or Constructively Own Equity Shares in excess of the Aggregate Share Ownership Limit, (2) no Person, other than an Excepted Holder and other than HRPT, RMR and their affiliates, shall Beneficially Own or Constructively Own Common Shares in excess of the Common Share Ownership Limit and (3) no Excepted Holder shall Beneficially Own or Constructively Own Equity Shares in excess of the Excepted Holder Limit for such Excepted Holder. (ii) No Person shall Beneficially or Constructively Own Equity Shares to the extent that such Beneficial or Constructive Ownership of Equity Shares would result in the Trust being "closely held" within the meaning of Section 856(h) of the Code (without regard to whether the ownership interest is held during the last half of a taxable year), or otherwise failing to qualify as a REIT (including, but not limited to, Beneficial or Constructive Ownership that would result in the Trust owning (actually or Constructively) an interest in a tenant that is described in Section 856(d)(2)(B) of the Code if the income derived by the Trust from such tenant would cause the Trust to fail to satisfy any of the gross income requirements of Section 856(c) of the Code). (iii) Subject to Section 7.4, notwithstanding any other provisions contained herein, any Transfer of Equity Shares (whether or not such Transfer is the result of a transaction entered into through the facilities of the NYSE or any other national securities exchange or automated inter-dealer quotation system) that, if effective, would result in Equity Shares being beneficially owned by less than 100 Persons (determined under the principles of Section 856(a)(5) of the Code) shall be void ab initio, and the intended transferee shall acquire no rights in such Equity Shares. (b) Transfer in Trust. If any Transfer of Equity Shares occurs which, if effective, would result in any Person Beneficially Owning or Constructively Owning Equity Shares in violation of Section 7.2.1(a)(i) or (ii), (i) then that number of Equity Shares the Beneficial or Constructive Ownership of which otherwise would cause such Person to violate Section 7.2.1(a)(i) or (ii) (rounded up to the nearest whole share) shall be automatically transferred to a Charitable Trust for the benefit of a Charitable Beneficiary, as described in Section 7.3, effective as of the close of business on the Business Day prior to the date of such Transfer, and such Person shall acquire no rights in such Equity Shares; or (ii) if the transfer to the Charitable Trust described in clause (i) of this sentence would not be effective for any reason to prevent the violation of Section 7.2.1(a)(i) or (ii), then the Transfer of that number of Equity Shares that otherwise would cause any Person to violate -9- Section 7.2.1(a)(i) or (ii) shall be void ab initio, and the intended transferee shall acquire no rights in such Equity Shares. Section 7.2.2 Remedies for Breach. If the Board of Trustees or any duly authorized committee thereof shall at any time determine in good faith that a Transfer or other event has taken place that results in a violation of Section 7.2.1 or that a Person intends to acquire or has attempted to acquire Beneficial or Constructive Ownership of any Equity Shares in violation of Section 7.2.1 (whether or not such violation is intended), the Board of Trustees or a committee thereof shall take such action as it deems advisable to refuse to give effect to or to prevent such Transfer or other event, including, without limitation, causing the Trust to redeem Equity Shares, refusing to give effect to such Transfer on the books of the Trust or instituting proceedings to enjoin such Transfer or other event; provided, however, that any Transfers or attempted Transfers or other events in violation of Section 7.2.1 shall automatically result in the transfer to the Charitable Trust described above, and, where applicable, such Transfer (or other event) shall be void ab initio as provided above irrespective of any action (or non-action) by the Board of Trustees or a committee thereof. Section 7.2.3 Notice of Restricted Transfer. Any Person who acquires or attempts or intends to acquire Beneficial Ownership or Constructive Ownership of Equity Shares that will or may violate Section 7.2.1(a), or any Person who would have owned Equity Shares that resulted in a transfer to the Charitable Trust pursuant to the provisions of Section 7.2.1(b), shall immediately give written notice to the Trust of such event, or in the case of such a proposed or attempted transaction, give at least 15 days prior written notice, and shall provide to the Trust such other information as the Trust may request in order to determine the effect, if any, of such Transfer. Section 7.2.4 Owners Required To Provide Information. From the Initial Date and prior to the Restriction Termination Date: (a) every owner of more than five percent (or such lower percentage as required by the Code or the Treasury Regulations promulgated thereunder) of the outstanding Equity Shares, within 30 days after the end of each taxable year, shall give written notice to the Trust stating the name and address of such owner, the number of Equity Shares and other Equity Shares Beneficially Owned and a description of the manner in which such shares are held. Each such owner shall provide to the Trust such additional information as the Trust may request in order to determine the effect, if any, of such Beneficial Ownership on the Trust's status as a REIT and to ensure compliance with the Aggregate Share Ownership Limit. (b) each Person who is a Beneficial or Constructive Owner of Equity Shares and each Person (including the shareholder of record) who is holding Equity Shares for a Beneficial or Constructive Owner shall provide to the Trust such information as the Trust may request, in good faith, in order to determine the Trust's status as a REIT and to comply with requirements of any taxing authority or governmental authority or to determine such compliance. Section 7.2.5 Remedies Not Limited. Subject to Section 5.1 of the Declaration of Trust, nothing contained in this Section 7.2 shall limit the authority of the Board of Trustees to take such other action as it deems necessary or advisable to protect the Trust and the interests of its shareholders in preserving the Trust's status as a REIT. -10- Section 7.2.6 Ambiguity. In the case of an ambiguity in the application of any of the provisions of this Section 7.2, Section 7.3 or any definition contained in Section 7.1, the Board of Trustees shall have the power to determine the application of the provisions of this Section 7.2 or Section 7.3 with respect to any situation based on the facts known to it. In the event Section 7.2 or 7.3 requires an action by the Board of Trustees and the Declaration of Trust fails to provide specific guidance with respect to such action, the Board of Trustees shall have the power to determine the action to be taken so long as such action is not contrary to the provisions of Sections 7.1, 7.2 or 7.3. Section 7.2.7 Exceptions. (a) Subject to Section 7.2.1(a)(ii), the Board of Trustees, in its sole discretion, may exempt a Person from the Aggregate Share Ownership Limit and the Common Share Ownership Limit, as the case may be, and may (but is not required to) establish or increase an Excepted Holder Limit for such Person if: (i) the Board of Trustees obtains such representations and undertakings from such Person as are reasonably necessary to ascertain that no individual's Beneficial or Constructive Ownership of such Equity Shares will violate Section 7.2.1(a)(ii); (ii) such Person does not and represents that it will not own, actually or Constructively, an interest in a tenant of the Trust (or a tenant of any entity owned or controlled by the Trust) that would cause the Trust to own, actually or Constructively, more than a 9.9% interest (as set forth in Section 856(d)(2)(B) of the Code) in such tenant and the Board of Trustees obtains such representations and undertakings from such Person as are reasonably necessary to ascertain this fact (for this purpose, a tenant from whom the Trust (or an entity owned or controlled by the Trust) derives (and is expected to continue to derive) a sufficiently small amount of revenue such that, in the opinion of the Board of Trustees, rent from such tenant would not adversely affect the Trust's ability to qualify as a REIT, shall not be treated as a tenant of the Trust); and (iii) such Person agrees that any violation or attempted violation of such representations or undertakings (or other action which is contrary to the restrictions contained in Sections 7.2.1 through 7.2.6) will result in such Equity Shares being automatically transferred to a Charitable Trust in accordance with Sections 7.2.1(b) and 7.3. (b) Prior to granting any exception pursuant to Section 7.2.7(a), the Board of Trustees may require a ruling from the Internal Revenue Service, or an opinion of counsel, in either case in form and substance satisfactory to the Board of Trustees in its sole discretion, as it may deem necessary or advisable in order to determine or ensure the Trust's status as a REIT. Notwithstanding the receipt of any ruling or opinion, the Board of Trustees may impose such conditions or restrictions as it deems appropriate in connection with granting such exception. (c) In determining whether to grant any exemption pursuant to Section 7.2.7(a), the Board of Trustees may consider, among other factors, (i) the general reputation and moral character of the person requesting an exemption, (ii) whether ownership of shares would be direct or through ownership attribution, (iii) whether the person's ownership of shares would adversely affect the Trust's ability to acquire additional properties or engage in other business and (iv) whether -11- granting an exemption for the person requesting an exemption would adversely affect any of the Trust's existing contractual arrangements. (d) Subject to Section 7.2.1(a)(ii), an underwriter which participates in a public offering or a private placement of Equity Shares (or securities convertible into or exchangeable for Equity Shares) may Beneficially Own or Constructively Own Equity Shares (or securities convertible into or exchangeable for Equity Shares) in excess of the Aggregate Share Ownership Limit, the Common Share Ownership Limit or both such limits, but only to the extent necessary to facilitate such public offering or private placement. (e) The Board of Trustees may only reduce the Excepted Holder Limit for an Excepted Holder: (1) with the written consent of such Excepted Holder at any time, or (2) pursuant to the terms and conditions of the agreements and undertakings entered into with such Excepted Holder in connection with the establishment of the Excepted Holder Limit for that Excepted Holder. No Excepted Holder Limit shall be reduced to a percentage that is less than the Common Share Ownership Limit for an Excepted Holder without the written consent of such Excepted Holder. Section 7.2.8 Increase in Aggregate Share Ownership and Common Share Ownership Limits. The Board of Trustees may from time to time increase the Common Share Ownership Limit and the Aggregate Share Ownership Limit. Section 7.2.9 Legend. Each certificate for Equity Shares shall bear substantially the following legend: The shares evidenced by this certificate are subject to restrictions on Beneficial and Constructive Ownership and Transfer for the purpose, among others, of the Trust's maintenance of its status as a Real Estate Investment Trust (a "REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). Subject to certain further restrictions and except as expressly provided in the Trust's Declaration of Trust, (i) no Person may Beneficially or Constructively Own Common Shares of the Trust in excess of 9.8 percent (in value or number of shares) of the outstanding Common Shares of the Trust unless such Person is an Excepted Holder (in which case the Excepted Holder Limit shall be applicable); (ii) no Person may Beneficially or Constructively Own Equity Shares of the Trust in excess of 9.8 percent of the value of the total outstanding Equity Shares of the Trust, unless such Person is an Excepted Holder (in which case the Excepted Holder Limit shall be applicable); (iii) no Person may Beneficially or Constructively Own Equity Shares that would result in the Trust being "closely held" under Section 856(h) of the Code or otherwise cause the Trust to fail to qualify as a REIT; and (iv) no Person may Transfer Equity Shares if such Transfer would result in Equity Shares of the Trust being owned by fewer than 100 Persons. Any Person who Beneficially or Constructively Owns or attempts to Beneficially or Constructively Own Equity Shares which cause or will cause a Person to Beneficially or Constructively Own Equity Shares in excess or in violation of the above limitations must immediately notify the Trust. If any of the restrictions on transfer or ownership are violated, the Equity -12- Shares represented hereby will be automatically transferred to a Trustee of a Charitable Trust for the benefit of one or more Charitable Beneficiaries. In addition, upon the occurrence of certain events, attempted Transfers in violation of the restrictions described above may be void ab initio. All capitalized terms in this legend have the meanings defined in the Trust's Declaration of Trust, as the same may be amended from time to time, a copy of which, including the restrictions on transfer and ownership, will be furnished to each holder of Equity Shares of the Trust on request and without charge. Instead of the foregoing legend, the certificate may state that the Trust will furnish a full statement about certain restrictions on transferability to a shareholder on request and without charge. Section 7.3 Transfer of Equity Shares in Trust. Section 7.3.1 Ownership in Trust. Upon any purported Transfer or other event described in Section 7.2.1(b) that would result in a transfer of Equity Shares to a Charitable Trust, such Equity Shares shall be deemed to have been transferred to the Trustee as trustee of a Charitable Trust for the exclusive benefit of one or more Charitable Beneficiaries. Such transfer to the Trustee shall be deemed to be effective as of the close of business on the Business Day prior to the purported Transfer or other event that results in the transfer to the Charitable Trust pursuant to Section 7.2.1(b). The Trustee shall be appointed by the Trust and shall be a Person unaffiliated with the Trust and any Prohibited Owner. Each Charitable Beneficiary shall be designated by the Trust as provided in Section 7.3.6. Section 7.3.2 Status of Shares Held by the Trustee. Equity Shares held by the Trustee shall be issued and outstanding Equity Shares of the Trust. The Prohibited Owner shall have no rights in the shares held by the Trustee. The Prohibited Owner shall not benefit economically from ownership of any shares held in trust by the Trustee, shall have no rights to dividends or other distributions and shall not possess any rights to vote or other rights attributable to the shares held in the Charitable Trust. Section 7.3.3 Dividend and Voting Rights. The Trustee shall have all voting rights and rights to dividends or other distributions with respect to Equity Shares held in the Charitable Trust, which rights shall be exercised for the exclusive benefit of the Charitable Beneficiary. Any dividend or other distribution paid prior to the discovery by the Trust that Equity Shares have been transferred to the Trustee shall be paid with respect to such Equity Shares to the Trustee upon demand and any dividend or other distribution authorized but unpaid shall be paid when due to the Trustee. Any dividends or distributions so paid over to the Trustee shall be held in trust for the Charitable Beneficiary. The Prohibited Owner shall have no voting rights with respect to shares held in the Charitable Trust and, subject to Maryland law, effective as of the date that Equity Shares have been transferred to the Trustee, the Trustee shall have the authority (at the Trustee's sole discretion) (i) to rescind as void any vote cast by a Prohibited Owner prior to the discovery by the Trust that Equity Shares have been transferred to the Trustee and (ii) to recast such vote in accordance with the desires of the Trustee acting for the benefit of the Charitable Beneficiary; provided, however, that if the Trust has already taken irreversible trust action, then the Trustee shall not have the authority -13- to rescind and recast such vote. Notwithstanding the provisions of this Article VII, until the Trust has received notification that Equity Shares have been transferred into a Charitable Trust, the Trust shall be entitled to rely on its share transfer and other shareholder records for purposes of preparing lists of shareholders entitled to vote at meetings, determining the validity and authority of proxies and otherwise conducting votes of shareholders. Section 7.3.4 Sale of Shares by Trustee. Within 20 days of receiving notice from the Trust that Equity Shares have been transferred to the Charitable Trust, the Trustee of the Charitable Trust shall sell the shares held in the Charitable Trust to a person, designated by the Trustee, whose ownership of the shares will not violate the ownership limitations set forth in Section 7.2.1(a). Upon such sale, the interest of the Charitable Beneficiary in the shares sold shall terminate and the Trustee shall distribute the net proceeds of the sale to the Prohibited Owner and to the Charitable Beneficiary as provided in this Section 7.3.4. The Prohibited Owner shall receive the lesser of (1) the price paid by the Prohibited Owner for the shares or, if the Prohibited Owner did not give value for the shares in connection with the event causing the shares to be held in the Charitable Trust (e.g., in the case of a gift, devise or other such transaction), the Market Price of the shares on the day of the event causing the shares to be held in the Charitable Trust and (2) the price per share received by the Trustee from the sale or other disposition of the shares held in the Charitable Trust. Any net sales proceeds in excess of the amount payable to the Prohibited Owner shall be immediately paid to the Charitable Beneficiary. If, prior to the discovery by the Trust that Equity Shares have been transferred to the Trustee, such shares are sold by a Prohibited Owner, then (i) such shares shall be deemed to have been sold on behalf of the Charitable Trust and (ii) to the extent that the Prohibited Owner received an amount for such shares that exceeds the amount that such Prohibited Owner was entitled to receive pursuant to this Section 7.3.4, such excess shall be paid to the Trustee upon demand. Section 7.3.5 Purchase Right in Shares Transferred to the Trustee. Equity Shares transferred to the Trustee shall be deemed to have been offered for sale to the Trust, or its designee, at a price per share equal to the lesser of (i) the price per share in the transaction that resulted in such transfer to the Charitable Trust (or, in the case of a devise or gift, the Market Price at the time of such devise or gift) and (ii) the Market Price on the date the Trust, or its designee, accepts such offer. The Trust shall have the right to accept such offer until the Trustee has sold the shares held in the Charitable Trust pursuant to Section 7.3.4. Upon such a sale to the Trust, the interest of the Charitable Beneficiary in the shares sold shall terminate and the Trustee shall distribute the net proceeds of the sale to the Prohibited Owner. Section 7.3.6 Designation of Charitable Beneficiaries. By written notice to the Trustee, the Trust shall designate one or more nonprofit organizations to be the Charitable Beneficiary of the interest in the Charitable Trust such that Equity Shares held in the Charitable Trust would not violate the restrictions set forth in Section 7.2.1(a) in the hands of such Charitable Beneficiary. Section 7.4 NYSE Transactions. Nothing in this Article VII shall preclude the settlement of any transaction entered into through the facilities of the NYSE or any other national securities exchange or automated inter-dealer quotation system. The fact that the settlement of any transaction occurs shall not negate the effect of any other provision of this Article VII and any transferee in such a transaction shall be subject to all of the provisions and limitations set forth in this Article VII. -14- Section 7.5 Enforcement. The Trust is authorized specifically to seek equitable relief, including injunctive relief, to enforce the provisions of this Article VII. Section 7.6 Non-Waiver. No delay or failure on the part of the Trust or the Board of Trustees in exercising any right hereunder shall operate as a waiver of any right of the Trust or the Board of Trustees, as the case may be, except to the extent specifically waived in writing. ARTICLE VIII SHAREHOLDERS Section 8.1 Meetings. There shall be an annual meeting of the shareholders, to be held on proper notice at such time (after the delivery of the annual report) and convenient location as shall be determined by or in the manner prescribed in the Bylaws, for the election of the Trustees, if required, and for the transaction of any other business within the powers of the Trust. Except as otherwise provided in the Declaration of Trust, special meetings of shareholders may be called in the manner provided in the Bylaws. Shareholders meetings, including the annual meeting and any special meetings, may be called only by the Board of Trustees. If there are no Trustees, the officers of the Trust shall promptly call a special meeting of the shareholders entitled to vote for the election of successor Trustees. Any meeting may be adjourned and reconvened as the Trustees determine or as provided in the Bylaws. Section 8.2 Voting Rights. Subject to the provisions of any class or series of Shares then outstanding, the shareholders shall be entitled to vote only on the following matters: (a) election of Trustees as provided in Section 5.2 and the removal of Trustees as provided in Section 5.3; (b) amendment of the Declaration of Trust as provided in Article X; (c) termination of the Trust as provided in Section 12.2; (d) merger or consolidation of the Trust to the extent required by Title 8, or the sale or disposition of substantially all of the Trust Property, as provided in Article XI; and (e) such other matters with respect to which the Board of Trustees has adopted a resolution declaring that a proposed action is advisable and directing that the matter be submitted to the shareholders for approval or ratification. Except with respect to the foregoing matters, no action taken by the shareholders at any meeting shall in any way bind the Board of Trustees. Section 8.3 Preemptive and Appraisal Rights. Except as may be provided by the Board of Trustees in setting the terms of classified or reclassified Shares pursuant to Section 6.4, or as may otherwise be provided by contract, no holder of Shares shall, as such holder, (a) have any preemptive right to purchase or subscribe for any additional Shares of the Trust or any other security of the Trust which it may issue or sell or (b) have any right to require the Trust to pay him the fair value of his Shares in an appraisal or similar proceeding. Section 8.4 Extraordinary Actions. Except as specifically provided in Section 5.3 (relating to removal of Trustees) and subject to Section 8.5, notwithstanding any provision of law permitting or requiring any action to be taken or authorized by the affirmative vote of the holders of a greater number of votes, any such action shall be effective and valid if taken or approved by (i) the affirmative vote of holders of Shares entitled to cast a majority of all the votes entitled to be cast on -15- the matter, or (ii) if Maryland law hereafter permits the effectiveness of a vote described in this clause (ii), the affirmative vote of a majority of the votes cast on the matter. Section 8.5 Board Approval. The submission of any action to the shareholders for their consideration shall first be approved or advised by the Board of Trustees, and the shareholders shall not otherwise be entitled to act thereon. Section 8.6 Action By Shareholders Without a Meeting. To the extent, if any, permitted by the Bylaws of the Trust, any action required or permitted to be taken by the shareholders may be taken without a meeting by the written consent of the shareholders entitled to cast a sufficient number of votes to approve the matter as required by statute, the Declaration of Trust or the Bylaws of the Trust, as the case may be. ARTICLE IX LIABILITY LIMITATION, INDEMNIFICATION AND TRANSACTIONS WITH THE TRUST Section 9.1 Limitation of Shareholder Liability. No shareholder shall be liable for any debt, claim, demand, judgment or obligation of any kind of, against or with respect to the Trust by reason of his being a shareholder, nor shall any shareholder be subject to any personal liability whatsoever, in tort, contract or otherwise, to any person in connection with the property or the affairs of the Trust by reason of his being a shareholder. Section 9.2 Limitation of Trustee and Officer Liability. To the maximum extent that Maryland law in effect from time to time permits limitation of the liability of trustees and officers of a real estate investment trust, no current or former Trustee or officer of the Trust shall be liable to the Trust or to any shareholder for money damages. Neither the amendment nor repeal of this Section 9.2, nor the adoption or amendment of any other provision of the Declaration of Trust inconsistent with this Section 9.2, shall apply to or affect in any respect the applicability of the preceding sentence with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption. In the absence of any Maryland statute limiting the liability of trustees and officers of a Maryland real estate investment trust for money damages in a suit by or on behalf of the Trust or by any shareholder, or arising by reason of his or her action on behalf of the Trust, no Trustee or officer of the Trust shall be liable to the Trust or to any shareholder for money damages except to the extent that (a) the Trustee or officer actually received an improper benefit or profit in money, property or services, for the amount of the benefit or profit in money, property or services actually received, or (b) a judgment or other final adjudication adverse to the Trustee or officer is entered in a proceeding based on a finding in the proceeding that the Trustee's or officer's action or failure to act was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding. Section 9.3 Express Exculpatory Clauses and Instruments. Any written instrument creating an obligation of the Trust shall, to the extent practicable, include a reference to this Declaration and provide that neither the shareholders nor the Trustees nor any officers, employees or agents (including the Trust's advisor, the "Advisor") of the Trust shall be liable thereunder and that all -16- persons shall look solely to the trust estate for the payment of any claim thereunder or for the performance thereof; however, the omission of such provision from any such instrument shall not render the shareholders, any Trustee, or any officer, employee or agent (including the Advisor) of the Trust liable, nor shall the shareholders, any Trustee or any officer, employee or agent (including the Advisor) of the Trust be liable to anyone for such omission. Section 9.4 Indemnification. The Trust shall, to the maximum extent permitted by Maryland law in effect from time to time, indemnify, and pay or reimburse reasonable expenses in advance of final disposition of a proceeding to, (a) any individual who is a present or former shareholder, Trustee or officer of the Trust or (b) any individual who, while a Trustee of the Trust and at the request of the Trust, serves or has served as a trustee, director, officer, partner, employee or agent of another real estate investment trust, corporation, partnership, joint venture, trust, employee benefit plan or any other enterprise from and against any claim or liability to which such person may become subject or which such person may incur by reason of his status as a present or former shareholder, Trustee or officer of the Trust. The Trust shall have the power, with the approval of its Board of Trustees, to provide such indemnification and advancement of expenses to a person who served a predecessor of the Trust in any of the capacities described in (a) or (b) above and to any employee or agent of the Trust or a predecessor of the Trust. Section 9.5 Transactions Between the Trust and its Trustees, Officers, Employees and Agents. (a) Subject to any express restrictions adopted by the Trustees in the Bylaws or by resolution, the Trust may enter into any contract or transaction of any kind, whether or not any of its Trustees, officers, employees or agents has a financial interest in such transaction, with any person, including any Trustee, officer, employee or agent of the Trust or any person affiliated with a Trustee, officer, employee or agent of the Trust or in which a Trustee, officer, employee or agent of the Trust has a material financial interest. (b) To the extent permitted by Maryland law, a contract or other transaction between the Trust and any Trustee or between the Trust and RMR or any other corporation, trust, firm, or other entity in which any Trustee is a director or trustee or has a material financial interest shall not be void or voidable if: (i) The fact of the common directorship, trusteeship or interest is disclosed or known to: (A) The Board of Trustees or a proper committee thereof, and the Board of Trustees or such Committee authorizes, approves or ratifies the contract or transaction by the affirmative vote of a majority of disinterested Trustees, even if the disinterested Trustees constitute less than a quorum; or (B) The shareholders entitled to vote, and the contract or transaction is authorized, approved, or ratified by a majority of the votes cast by the shareholders entitled to vote other than the votes of shares owned of record or beneficially by the interested trustee, corporation, trust, firm or other entity; or (C) The contract or transaction is fair and reasonable to the Trust. -17- (ii) Common or interested trustees or the shares owned by them or by an interested corporation, trust, firm or other entity may be counted in determining the presence of a quorum at a meeting of the Board of Trustees or a committee thereof or at a meeting of the shareholders, as the case may be, at which the contract or transaction is authorized, approved or ratified. (c) The failure of a contract or other transaction between the Trust and any Trustee or between the Trust and RMR or any other corporation, trust, firm, or other entity in which any Trustee is a director or trustee or has a material financial interest to satisfy the criteria set forth in Section 9.5(b) shall not create any presumption that such contract or other transaction is void, voidable or otherwise invalid, and any such contract or other transaction shall be valid to the fullest extent permitted by Maryland law. To the fullest extent permitted by Maryland law, (i) the fixing by the Board of Trustees of compensation for a Trustee (whether as a Trustee or in any other capacity) and (ii) Section 9.4 of this Declaration of Trust or any provision of the Bylaws or any contract or transaction requiring or permitting indemnification (including advancing of expenses) in accordance with terms and procedures not materially less favorable to the Trust than those described in Section 2-418 (or any successor section thereto) of the Maryland General Corporation Law (as in effect at the time such provision was adopted or such contract or transaction was entered into or as it may thereafter be in effect) shall be deemed to have satisfied the criteria set forth in Section 9.5(b). Section 9.6 Right of Trustees, Officers, Employees and Agents to Own Shares or Other Property and to Engage in Other Business. Subject to any restrictions which may be adopted by the Trustees in the Bylaws or otherwise: Any Trustee or officer, employee or agent of the Trust may acquire, own, hold and dispose of Shares in the Trust, for his or her individual account, and may exercise all rights of a shareholder to the same extent and in the same manner as if he or she were not a Trustee or officer, employee or agent of the Trust. Any Trustee or officer, employee or agent of the Trust may, in his or her personal capacity or in the capacity of trustee, officer, director, stockholder, partner, member, advisor or employee of any Person or otherwise, have business interests and engage in business activities similar to or in addition to those relating to the Trust, which interests and activities may be similar to and competitive with those of the Trust and may include the acquisition, syndication, holding, management, development, operation or disposition, for his own account, or for the account of such Person or others, of interests in mortgages, interests in real property, or interests in Persons engaged in the real estate business. Each Trustee, officer, employee and agent of the Trust shall be free of any obligation to present to the Trust any investment opportunity which comes to him or her in any capacity other than solely as Trustee, officer, employee or agent of the Trust even if such opportunity is of a character which, if presented to the Trust, could be taken by the Trust. Any Trustee or officer, employee or agent of the Trust may be interested as trustee, officer, director, stockholder, partner, member, advisor or employee of, or otherwise have a direct or indirect interest in, any Person who may be engaged to render advice or services to the Trust, and may receive compensation from such Person as well as compensation as Trustee, officer, employee or agent or otherwise hereunder. None of these activities shall be deemed to conflict with his or her duties and powers as Trustee or officer, employee or agent of the Trust. Section 9.7 Persons Dealing with Trustees, Officers, Employees or Agents. Any act of the Trustees or of the officers, employees or agents of the Trust purporting to be done in their capacity as such, shall, as to any Persons dealing with such Trustees, officers, employees or agents, be -18- conclusively deemed to be within the purposes of this Trust and within the powers of such Trustees or officers, employees or agents. No Person dealing with the Board or any of the Trustees or with the officers, employees or agents of the Trust shall be bound to see to the application of any funds or property passing into their hands or control. The receipt of the Board or any of the Trustees, or of authorized officers, employees or agents of the Trust, for moneys or other consideration, shall be binding upon the Trust. Section 9.8 Reliance. The Trustees and the officers, employees and agents of the Trust may consult with counsel and the advice or opinion of such counsel shall be full and complete personal protection to all the Trustees and the officers, employees and agents of the Trust in respect of any action taken or suffered by them in good faith and in reliance on or in accordance with such advice or opinion. In discharging their duties, Trustees or officers, employees or agents of the Trust, when acting in good faith, may rely upon financial statements of the Trust represented to them to fairly present the financial position or results of operations of the Trust by the chief financial officer of the Trust or the officer of the Trust having charge of its books of account, or stated in a written report by an independent certified public accountant fairly to present the financial position or results of operations of the Trust. The Trustees and the officers, employees and agents of the Trust may rely, and shall be personally protected in acting, upon any instrument or other document believed by them to be genuine. ARTICLE X AMENDMENTS Section 10.1 General. The Trust reserves the right from time to time to make any amendment to the Declaration of Trust, now or hereafter authorized by law, including any amendment altering the terms or contract rights, as expressly set forth in the Declaration of Trust, of any Shares, except that the provisions governing the personal liability of the shareholders, Trustees and of the officers, employees and agents of the Trust and the prohibition of assessments upon shareholders may not be amended in any respect that could increase the personal liability of such shareholders, Trustees or officers, employees and agents of the Trust. All rights and powers conferred by the Declaration of Trust on shareholders, Trustees and officers are granted subject to this reservation. An amendment to the Declaration of Trust (a) shall be signed and acknowledged by at least a majority of the Trustees, or an officer duly authorized by at least a majority of the Trustees, (b) shall be filed for record as provided in Section 13.5 and (c) shall become effective as of the later of the time the SDAT accepts the amendment for record or the time established in the amendment, not to exceed thirty (30) days after the amendment is accepted for record. All references to the Declaration of Trust shall include all amendments thereto. Section 10.2 By Trustees. The Trustees may amend this Declaration of Trust from time to time, in the manner provided by Title 8, without any action by the shareholders, to qualify as a real estate investment trust under the Code or under Title 8 and as otherwise provided in Section 8-501(e) of Title 8 and the Declaration of Trust. If permitted by Maryland law as in effect from time to time, the Trustees may amend this Declaration of Trust from time to time in any other respect, in accordance with such law, without any action by the shareholders. -19- Section 10.3 By Shareholders. Except as otherwise provided in Section 10.2 and subject to the following sentence, any amendment to this Declaration of Trust must first be advised by the Board of Trustees and then shall be valid only if approved by (i) the affirmative vote of a majority of all the votes entitled to be cast on the matter or (ii) if Maryland law hereafter permits the effectiveness of a vote described in this clause (ii), the affirmative vote of a majority of the votes cast on the matter. Any amendment to Section 5.2.2 or 5.3 or to this sentence of the Declaration of Trust shall be valid only if approved by the Board of Trustees and then by the affirmative vote of two- thirds (2/3) of all votes entitled to be cast on the matter. ARTICLE XI MERGER, CONSOLIDATION OR SALE OF TRUST PROPERTY Subject to the provisions of any class or series of Shares at the time outstanding, the Trust may (a) merge with or into another entity, (b) consolidate with one or more other entities into a new entity or (c) sell, lease, exchange or otherwise transfer all or substantially all of the trust property. Any such action must first be approved by the Board of Trustees and, after notice to all shareholders entitled to vote on the matter, by (i) the affirmative vote of a majority of all the votes entitled to be cast on the matter or (ii) if Maryland law hereafter permits the effectiveness of a vote described in this clause (ii), the affirmative vote of a majority of the votes cast on the matter ARTICLE XII DURATION AND TERMINATION OF TRUST Section 12.1 Duration. The Trust shall continue perpetually unless terminated pursuant to Section 12.2. Section 12.2 Termination. (a) Subject to the provisions of any class or series of Shares at the time outstanding, after approval by a majority of the entire Board of Trustees, the Trust may be terminated at any meeting of shareholders by (i) the affirmative vote of a majority of all the votes entitled to be cast on the matter or (ii) or if hereafter expressly authorized by Title 8, the affirmative vote of a majority of the votes cast on the matter. Upon the termination of the Trust: (i) The Trust shall carry on no business except for the purpose of winding up its affairs. (ii) The Trustees shall proceed to wind up the affairs of the Trust and all of the powers of the Trustees under the Declaration of Trust shall continue, including the powers to fulfill or discharge the Trust's contracts, collect its assets, sell, convey, assign, exchange, transfer or otherwise dispose of all or any part of the remaining property of the Trust to one or more persons at public or private sale for consideration which may consist in whole or in part of cash, securities -20- or other property of any kind, discharge or pay its liabilities and do all other acts appropriate to liquidate its business. (iii) After paying or adequately providing for the payment of all liabilities, and upon receipt of such releases, indemnities and agreements as they deem necessary for their protection, the Trust may distribute the remaining property of the Trust among the shareholders so that after payment in full or the setting apart for payment of such preferential amounts, if any, to which the holders of any Shares at the time outstanding shall be entitled, the remaining property of the Trust shall, subject to any participating or similar rights of Shares at the time outstanding, be distributed ratably among the holders of Common Shares at the time outstanding. (b) After termination of the Trust, the liquidation of its business and the distribution to the shareholders as herein provided, a majority of the Trustees shall execute and file with the Trust's records a document certifying that the Trust has been duly terminated and the Trustees shall be discharged from all liabilities and duties hereunder, and the rights and interests of all shareholders shall cease. ARTICLE XIII MISCELLANEOUS Section 13.1 Governing Law. The Declaration of Trust is executed and delivered with reference to the laws of the State of Maryland, and the rights of all parties and the validity, construction and effect of every provision hereof shall be subject to and construed according to the laws of the State of Maryland. Section 13.2 Reliance by Third Parties. Any certificate shall be final and conclusive as to any person dealing with the Trust if executed by the Secretary or an Assistant Secretary of the Trust or a Trustee, and if certifying to: (a) the number or identity of Trustees, officers of the Trust or shareholders; (b) the due authorization of the execution of any document; (c) the action or vote taken, and the existence of a quorum, at a meeting of the Board of Trustees or shareholders; (d) a copy of the Declaration of Trust or of the Bylaws as a true and complete copy as then in force; (e) an amendment to the Declaration of Trust; (f) the termination of the Trust; or (g) the existence of any fact relating to the affairs of the Trust. No purchaser, lender, transfer agent or other person shall be bound to make any inquiry concerning the validity of any transaction purporting to be made by the Trust on its behalf or by any officer, employee or agent of the Trust. Section 13.3 Severability. (a) The provisions of the Declaration of Trust are severable, and if the Board of Trustees shall determine, with the advice of counsel, that any one or more of such provisions (the "Conflicting Provisions") are in conflict with the Code, Title 8 or other applicable federal or state laws, the Conflicting Provisions, to the extent of the conflict, shall be deemed never to have constituted a part of the Declaration of Trust, even without any amendment of the Declaration of Trust pursuant to Article X and without affecting or impairing any of the remaining provisions of the Declaration of Trust or rendering invalid or improper any action taken or omitted (including but -21- not limited to the election of Trustees) prior to such determination. No Trustee shall be liable for making or failing to make such a determination. In the event of any such determination by the Board of Trustees, the Board shall amend the Declaration of Trust in the manner provided in Section 10.2. (b) If any provision of the Declaration of Trust shall be held invalid or unenforceable in any jurisdiction, such holding shall apply only to the extent of any such invalidity or unenforceability and shall not in any manner affect, impair or render invalid or unenforceable such provision in any other jurisdiction or any other provision of the Declaration of Trust in any jurisdiction. Section 13.4 Construction. In the Declaration of Trust, unless the context otherwise requires, words used in the singular or in the plural include both the plural and singular and words denoting any gender include all genders. The title and headings of different parts are inserted for convenience and shall not affect the meaning, construction or effect of the Declaration of Trust. In defining or interpreting the powers and duties of the Trust and its Trustees and officers, reference may be made by the Trustees or officers, to the extent appropriate and not inconsistent with the Code or Title 8, to Titles 1 through 3 of the Corporations and Associations Article of the Annotated Code of Maryland. In furtherance and not in limitation of the foregoing, in accordance with the provisions of Title 3, Subtitles 6 and 7, of the Corporations and Associations Article of the Annotated Code of Maryland, the Trust shall be included within the definition of "corporation" for purposes of such provisions. Section 13.5 Recordation. The Declaration of Trust and any amendment hereto shall be filed for record with the SDAT and may also be filed or recorded in such other places as the Trustees deem appropriate, but failure to file for record the Declaration of Trust or any amendment hereto in any office other than in the State of Maryland shall not affect or impair the validity or effectiveness of the Declaration of Trust or any amendment hereto. A restated Declaration of Trust shall, upon filing, be conclusive evidence of all amendments contained therein and may thereafter be referred to in lieu of the original Declaration of Trust and the various amendments thereto. THIRD: The amendment to and restatement of the Declaration of Trust of the Trust as hereinabove set forth have been duly advised by the Board of Trustees and approved by the shareholders of the Trust as required by law. FOURTH: The total number of shares of beneficial interest which the Trust has authority to issue has not been amended by this amendment and restatement. The undersigned President acknowledges these Articles of Amendment and Restatement to be the trust act of the Trust, and as to all matters or facts required to be verified under oath, the undersigned President acknowledges, that to the best of his knowledge, information and belief, these matters and facts are true in all material respects and that this statement is made under the penalties for perjury. -22- IN WITNESS WHEREOF, the Trust has caused these Articles of Amendment and Restatement to be signed in its name and on its behalf by its President and attested to by its Assistant Secretary on this 20th day of September, 1999. ATTEST: SENIOR HOUSING PROPERTIES TRUST /s/ Alexander A. Notopoulos, Jr. /s/ David J. Hegarty (SEAL) - - -------------------------------- ------------------------------- Alexander A. Notopoulos, Jr. David J. Hegarty Assistant Secretary President -23- EX-3.2 3 Exhibit 3.2 SENIOR HOUSING PROPERTIES TRUST AMENDED AND RESTATED BYLAWS As Amended and Restated September 20, 1999 As Further Amended on March 24, 2000
TABLE OF CONTENTS Page ARTICLE I OFFICES...................................................................................1 Section 1.1 Principal Office.............................................................1 Section 1.2 Additional Offices...........................................................1 ARTICLE II MEETINGS OF SHAREHOLDERS..................................................................1 Section 2.1 Place........................................................................1 Section 2.2 Annual Meeting...............................................................1 Section 2.3 Special Meetings.............................................................1 Section 2.4 Notice of Regular or Special Meetings........................................1 Section 2.5 Notice of Adjourned Meetings.................................................2 Section 2.6 Scope of Notice..............................................................2 Section 2.7 Organization of Shareholder Meetings.........................................2 Section 2.8 Quorum.......................................................................2 Section 2.9 Voting.......................................................................2 Section 2.10 Proxies.....................................................................3 Section 2.11 Voting Rights...............................................................3 Section 2.12 Voting of Shares by Certain Holders.........................................3 Section 2.13 Inspectors..................................................................4 Section 2.14 Reports to Shareholders.....................................................4 Section 2.15 Nominations and Proposals by Shareholders...................................4 Section 2.16 No Shareholder Actions by Written Consent...................................6 Section 2.17 Voting by Ballot............................................................6 ARTICLE III TRUSTEES..................................................................................6 Section 3.1 General Powers; Qualifications; Trustees Holding Over........................6 Section 3.2 Independent Trustees.........................................................7 Section 3.3 Managing Trustees............................................................7 Section 3.4 Number.......................................................................7 Section 3.5 Annual and Regular Meetings..................................................7 Section 3.6 Special Meetings.............................................................7 Section 3.7 Notice.......................................................................7 Section 3.8 Quorum.......................................................................7 Section 3.9 Voting.......................................................................8 Section 3.10 Telephone Meetings..........................................................8 Section 3.11 Informal Action by Trustees.................................................8 Section 3.12 Waiver of Notice............................................................8 Section 3.13 Vacancies...................................................................8 Section 3.14 Compensation; Financial Assistance..........................................9 Section 3.15 Removal of Trustees.........................................................9 Section 3.16 Loss of Deposits............................................................9 Section 3.17 Surety Bonds...............................................................10 Section 3.18 Reliance...................................................................10 Section 3.19 Interested Trustee Transactions............................................10 Section 3.20 Qualifying Shares Not Required.............................................10 Section 3.21 Certain Rights of Trustees, Officers, Employees and Agents.................10 Section 3.22 Certain Transactions.......................................................10 ARTICLE IV COMMITTEES...............................................................................10 Section 4.1 Number; Tenure and Qualifications...........................................10 Section 4.2 Powers......................................................................10 Section 4.3 Meetings....................................................................10 Section 4.4 Telephone Meetings..........................................................11 Section 4.5 Informal Action by Committees...............................................11 Section 4.6 Vacancies...................................................................11 ARTICLE V OFFICERS.................................................................................11 Section 5.1 General Provisions..........................................................11 Section 5.2 Removal and Resignation.....................................................12 Section 5.3 Vacancies...................................................................12 Section 5.4 Chief Executive Officer.....................................................12 Section 5.5 Chief Operating Officer.....................................................12 Section 5.6 Chief Financial Officer.....................................................12 Section 5.7 Chairman and Vice Chairman of the Board.....................................12 Section 5.8 President...................................................................13 Section 5.9 Vice Presidents.............................................................13 Section 5.10 Secretary..................................................................13 Section 5.11 Treasurer..................................................................13 Section 5.12 Assistant Secretaries and Assistant Treasurers.............................13 ARTICLE VI CONTRACTS, LOANS, CHECKS AND DEPOSITS....................................................14 Section 6.1 Contracts...................................................................14 Section 6.2 Checks and Drafts...........................................................14 Section 6.3 Deposits....................................................................14 ARTICLE VII SHARES...................................................................................14 Section 7.1 Certificates................................................................14 Section 7.2 Transfers...................................................................14 Section 7.3 Replacement Certificate.....................................................15 Section 7.4 Closing of Transfer Books or Fixing of Record Date..........................15 Section 7.5 Share Ledger................................................................16 Section 7.6 Fractional Shares; Issuance of Units........................................16 ARTICLE VIII FISCAL YEAR..............................................................................16 ARTICLE IX DISTRIBUTIONS............................................................................16 Section 9.1 Authorization...............................................................16 Section 9.2 Contingencies...............................................................16 -ii- ARTICLE X SEAL.....................................................................................16 Section 10.1 Seal.......................................................................16 Section 10.2 Affixing Seal..............................................................16 ARTICLE XI INDEMNIFICATION AND ADVANCE OF EXPENSES..................................................17 ARTICLE XII WAIVER OF NOTICE.........................................................................18 ARTICLE XIII THE ADVISOR..............................................................................18 Section 13.1 Employment of Advisor......................................................18 Section 13.2 Other Activities of Advisor................................................18 ARTICLE XIV AMENDMENT OF BYLAWS......................................................................19 ARTICLE XV MISCELLANEOUS............................................................................19 Section 15.1 References to Declaration of Trust.........................................19 Section 15.2 Inspection of Bylaws.......................................................19
-iii- SENIOR HOUSING PROPERTIES TRUST AMENDED AND RESTATED BYLAWS ARTICLE I OFFICES Section 1.1 Principal Office. The principal office of the Trust shall be located at such place or places as the Board of Trustees may designate. Section 1.2 Additional Offices. The Trust may have additional offices at such places as the Board of Trustees may from time to time determine or the business of the Trust may require. ARTICLE II MEETINGS OF SHAREHOLDERS Section 2.1 Place. All meetings of shareholders shall be held at the principal office of the Trust or at such other place within the United States as is designated by the Trustees or the Chairman or President, given either before or after the meeting and filed with the Secretary of the Trust. Section 2.2 Annual Meeting. An annual meeting of the shareholders for the election of Trustees and the transaction of any business within the powers of the Trust shall be held on the second Thursday in May or such other date as the Board of Trustees may set, after delivery to the shareholders of the annual report, referred to in Section 2.14, at a convenient location and on proper notice, and at the time set by the Trustees, beginning with the year 2000. Failure to hold an annual meeting does not invalidate the Trust's existence or affect any otherwise valid acts of the Trust. Section 2.3 Special Meetings. Special meetings of shareholders may be called only by a majority of the Trustees. If there shall be no Trustees, the officers of the Trust shall promptly call a special meeting of the shareholders entitled to vote for the election of successor Trustees. No business shall be transacted by the shareholders at a special meeting other than business that is either (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Trustees (or any duly authorized committee thereof) or (ii) otherwise properly brought before the shareholders by or at the direction of the Trustees. Section 2.4 Notice of Regular or Special Meetings. Written notice specifying the place, day and hour of any regular or special meeting, the purposes of the meeting, and all other matters required by law shall be given to each shareholder of record entitled to vote, either personally or by sending a copy thereof by mail, telegraph or telecopier, charges prepaid, to his address appearing on the books of the Trust or theretofore given by him to the Trust for the purpose of notice or, if no address appears or has been given, addressed to the place where the principal office of the Trust is situated. If mailed, such notice shall be deemed to be given when deposited in the U.S. mail addressed to the shareholder at his post office address as it appears on the records of the Trust, with postage thereon prepaid. It shall be the duty of the Secretary to give notice of each Annual Meeting of the Shareholders at least fifteen (15) days and not more than sixty (60) days before the date on which it is to be held. Whenever an officer has been duly requested by the Trustees to call a special meeting of shareholders, it shall be his duty to fix the date and hour thereof, which date shall be not less than twenty (20) days and not more than sixty (60) days after the receipt of such request, and to give notice of such special meeting within ten (10) days after receipt of such request. Section 2.5 Notice of Adjourned Meetings. It shall not be necessary to give notice of the time and place of any adjourned meeting or of the business to be transacted thereat other than by announcement at the meeting at which such adjournment is taken, except that when a meeting is adjourned for more than 120 days after the original record date, notice of the adjourned meeting shall be given as in the case of an original meeting. Section 2.6 Scope of Notice. No business shall be transacted at an annual or special meeting of shareholders except as specifically designated in the notice and otherwise properly brought before the shareholders by or at the direction of the Trustees. Section 2.7 Organization of Shareholder Meetings. At every meeting of the shareholders, the chairman of the board, if there be one, shall conduct the meeting or, in the case of vacancy in office or absence of the chairman of the board, one of the following officers present shall conduct the meeting in the order stated: the vice chairman of the board, if there be one, the president, the vice presidents in their order of rank and seniority, or a chairman chosen by the shareholders entitled to cast a majority of the votes which all shareholders present in person or by proxy are entitled to cast. The secretary, or, in his absence, an assistant secretary, or in the absence of both the secretary and assistant secretaries, a person appointed by the chairman shall act as secretary for all shareholder meetings. Section 2.8 Quorum. At any meeting of shareholders, the presence in person or by proxy of shareholders entitled to cast a majority of all the votes entitled to be cast at such meeting shall constitute a quorum; but this section shall not affect any requirement under any statute or the Declaration of Trust for the vote necessary for the adoption of any measure. If, however, such quorum shall not be present at any meeting of the shareholders, the shareholders entitled to vote at such meeting, present in person or by proxy, shall have the power to adjourn the meeting from time to time to a date not more than 120 days after the original record date. At such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified. Section 2.9 Voting. A majority of all the votes cast at a meeting of shareholders duly called and at which a quorum is present shall be sufficient to elect a Trustee. Each share may be voted for as many individuals as there are Trustees to be elected and for whose election the share is entitled to be voted. A majority of the votes cast at a meeting of shareholders duly called and at which a quorum is present shall be sufficient to approve any other matter which may properly come before the meeting, unless more than a majority of the votes cast is required herein or by statute or by the Declaration of Trust. -2- Section 2.10 Proxies. A shareholder may cast the votes entitled to be cast by the shares owned of record by him either in person or by proxy executed by the shareholder or by his duly authorized agent in any manner permitted by law. Such proxy shall be filed with such officer of the Trust as the Trustees shall have designated for such purpose for verification prior to such meeting. Any proxy relating to the Trust's shares of beneficial interest shall be valid until the expiration date therein or, if no expiration is so indicated, for such period as is permitted pursuant to Maryland law. At a meeting of shareholders, all questions concerning the qualification of voters, the validity of proxies, and the acceptance or rejection of votes, shall be decided by the Secretary of the meeting unless inspectors of election are appointed pursuant to Section 2.13 in which event such inspectors shall pass upon all questions and shall have all other duties specified in said section. Section 2.11 Voting Rights. The Board of Trustees shall fix the date for determination of shareholders entitled to vote at a meeting of shareholders. If no date is fixed for the determination of the shareholders entitled to vote at any meeting of shareholders, only persons in whose names shares entitled to vote stand on the share records of the Trust at the opening of business on the day of any meeting of shareholders shall be entitled to vote at such meeting. Section 2.12 Voting of Shares by Certain Holders. Shares of the Trust registered in the name of a corporation, partnership, trust or other entity, if entitled to be voted, may be voted by the president or a vice president, a general partner or trustee thereof, as the case may be, or a proxy appointed by any of the foregoing individuals, unless some other person who has been appointed to vote such shares pursuant to a bylaw or a resolution of the governing board of such corporation or other entity or agreement of the partners of the partnership presents a certified copy of such bylaw, resolution or agreement, in which case such person may vote such shares. Any trustee or other fiduciary may vote shares registered in his name as such fiduciary, either in person or by proxy. Shares of the Trust directly or indirectly owned by it shall not be voted at any meeting and shall not be counted in determining the total number of outstanding shares entitled to be voted at any given time, unless they are held by it in a fiduciary capacity, in which case they may be voted and shall be counted in determining the total number of outstanding shares at any given time. The Trustees may adopt by resolution a procedure by which a shareholder may certify in writing to the Trust that any shares registered in the name of the shareholder are held for the account of a specified person other than the shareholder. The resolution shall set forth the class of shareholders who may make the certification, the purpose for which the certification may be made, the form of certification and the information to be contained in it; if the certification is with respect to a record date or closing of the share transfer books, the time after the record date or closing of the share transfer books within which the certification must be received by the Trust; and any other provisions with respect to the procedure which the Trustees consider necessary or desirable. On receipt of such certification, the person specified in the certification shall be regarded as, for the purposes set forth in the certification, the shareholder of record of the specified shares in place of the shareholder who makes the certification. Notwithstanding any other provision contained herein or in the Declaration of Trust or these Bylaws, Title 3, Subtitle 7 of the Corporations and Associations Article of the Annotated Code of Maryland (or any successor statute) shall not apply to any acquisition by any person of shares of -3- beneficial interest of the Trust. This section may be repealed, in whole or in part, at any time, whether before or after an acquisition of control shares and, upon such repeal, may, to the extent provided by any successor bylaw, apply to any prior or subsequent control share acquisition. Section 2.13 Inspectors. At any meeting of shareholders, the chairman of the meeting may appoint one or more persons as inspectors for such meeting. Such inspectors shall ascertain and report the number of shares represented at the meeting based upon their determination of the validity and effect of proxies, count all votes, report the results and perform such other acts as are proper to conduct the election and voting at the meeting. Each report of an inspector shall be in writing and signed by him or by a majority of them if there is more than one inspector acting at such meeting. If there is more than one inspector, the report of a majority shall be the report of the inspectors. The report of the inspector or inspectors on the number of shares represented at the meeting and the results of the voting shall be prima facie evidence thereof. Section 2.14 Reports to Shareholders. The Trustees shall submit to the shareholders at or before the annual meeting of shareholders a report of the business and operations of the Trust during such fiscal year containing financial statements of the Trust, accompanied by the report of an independent certified public accountant, and such further information as the Trustees may determine is required pursuant to any law or regulation to which the Trust is subject. Within the earlier of twenty (20) days after the annual meeting of shareholders or 120 days after the end of the fiscal year of the Trust, the Trustees shall place the annual report on file at the principal office of the Trust and with any governmental agencies as may be required by law and as the Trustees may deem appropriate. Section 2.15 Nominations and Proposals by Shareholders. Section 2.15.1 Annual Meetings of Shareholders. (a) Nominations of persons for election to the Board of Trustees and the proposal of business to be considered by the shareholders may be made at an annual meeting of shareholders (i) pursuant to the Trust's notice of meeting, (ii) by or at the direction of the Trustees or (iii) by any shareholder of the Trust who was a shareholder of record both at the time of giving of notice provided for in this Section 2.15.1 and at the time of the annual meeting, who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section 2.15.1. (b) For nominations or other business to be properly brought before an annual meeting by a shareholder pursuant to Section 2.15.1(a)(iii), the shareholder must have given timely notice thereof in writing to the secretary of the Trust at the principal executive offices of the Trust and such other business must otherwise be a proper matter for action by shareholders as determined by the Board of Trustees. To be timely, a shareholder's notice shall be delivered to the secretary at the principal executive offices of the Trust not later than the close of business on the 90th day nor earlier than the close of business on the 120th day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than thirty (30) days or delayed by more than sixty (60) days from such anniversary date or if the Trust has not previously held an annual meeting, notice by the shareholder -4- to be timely must be so delivered not earlier than the close of business on the 120th day prior to such annual meeting and not later than the close of business on the later of: (i) the 90th day prior to such annual meeting, or (ii) the 10th day following the day on which public announcement of the date of such meeting is first made by the Trust. In no event shall the public announcement of a postponement or adjournment of an annual meeting to a later date or time commence a new time period for the giving of a shareholder's notice as described above. A shareholder's notice shall set forth (i) as to each person whom the shareholder proposes to nominate for election or reelection as a Trustee, all information relating to such person that is required to be disclosed in solicitations of proxies for election of Trustees in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including such person's written consent to being named in the proxy statement as a nominee and to serving as a Trustee if elected; (ii) as to any other business that the shareholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such shareholder and of the beneficial owner, if any, on whose behalf the proposal is made; and (iii) as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made, (x) the name and address of such shareholder, as they appear on the Trust's books, and of such beneficial owner and (y) the number of each class of shares of the Trust which are owned beneficially and of record by such shareholder and such beneficial owner. (c) Notwithstanding anything in the second sentence of Section 2.15.1(b) to the contrary, in the event that the number of Trustees to be elected to the Board of Trustees is increased and there is no public announcement by the Trust naming all of the nominees for Trustee or specifying the size of the increased Board of Trustees at least one hundred (100) days prior to the first anniversary of the preceding year's annual meeting, a shareholder's notice required by this Section 2.15.1 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the secretary at the principal executive offices of the Trust not later than the close of business on the 10th day following the day on which such public announcement is first made by the Trust. Section 2.15.2 Special Meetings of Shareholders. Only such business shall be conducted at a special meeting of shareholders as shall have been brought before the meeting pursuant to the Trust's notice of meeting. Nominations of persons for election to the Board of Trustees may be made at a special meeting of shareholders at which Trustees are to be elected (i) pursuant to the Trust's notice of meeting, (ii) by or at the direction of the Board of Trustees or (iii), provided that the Board of Trustees has determined that Trustees shall be elected at such special meeting, by any shareholder of the Trust who was a shareholder of record both at the time of giving of notice provided for in this Section 2.15.2 and at the time of the special meeting, who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section 2.15.2. In the event the Trust calls a special meeting of shareholders for the purpose of electing one or more Trustees to the Board of Trustees, any such shareholder may nominate a person or persons (as the case may be) for election to such position as specified in the Trust's notice of meeting, if the shareholder's notice containing the information required by Section 2.15.1(b) shall be delivered to the secretary at the principal executive offices of the Trust not earlier than the close of business on the 120th day prior to such special meeting and not later than the close of business on the later of: (i) the 90th day prior to such special meeting, or (ii) the 10th day following the day on which public -5- announcement is first made of the date of the special meeting and of the nominees proposed by the Trustees to be elected at such meeting. In no event shall the public announcement of a postponement or adjournment of a special meeting to a later date or time commence a new time period for the giving of a shareholder's notice as described above. Section 2.15.3 General. (1) Only such persons who are nominated in accordance with the procedures set forth in this Section 2.15 shall be eligible to serve as Trustees and only such business shall be conducted at a meeting of shareholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 2.15. The chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section 2.15 and, if any proposed nomination or business is not in compliance with this Section 2.15, to declare that such nomination or proposal shall be disregarded. (2) For purposes of this Section 2.15, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable news service or in a document publicly filed by the Trust with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this Section 2.15, a shareholder shall also comply with all applicable requirements of state law and of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 2.15. Nothing in this Section 2.15 shall be deemed to affect any right of a shareholder to request inclusion of a proposal in, nor the right of the Trust to omit a proposal from, the Trust's proxy statement pursuant to Rule 14a-8 under the Exchange Act. Section 2.16 No Shareholder Actions by Written Consent. Shareholders shall not be authorized or permitted to take any action required or permitted to be taken at a meeting of shareholders by written consent, and may take such action only at an annual or special meeting as provided by Maryland law and the Declaration of Trust and hereby. Section 2.17 Voting by Ballot. Voting on any question or in any election may be viva voce unless the chairman of the meeting officer shall order or any shareholder shall demand that voting be by ballot. ARTICLE III TRUSTEES Section 3.1 General Powers; Qualifications; Trustees Holding Over. The business and affairs of the Trust shall be managed under the direction of its Board of Trustees. A Trustee shall be an individual at least twenty-one (21) years of age who is not under legal disability. In case of failure to elect Trustees at an annual meeting of the shareholders, the Trustees holding over shall continue to direct the management of the business and affairs of the Trust until their successors are elected and qualify. -6- Section 3.2 Independent Trustees. A majority of the Trustees holding office shall at all times be Independent Trustees (as defined below); provided, however, that upon a failure to comply with this requirement as a result of the creation of a temporary vacancy which must be filled by an Independent Trustee, whether as a result of enlargement of the Board of Trustees or the resignation, removal or death of a Trustee who is an Independent Trustee, such requirement shall not be applicable. An Independent Trustee is one who is not an employee of the Trust's investment advisor (as defined in Article XIII), and who is not involved in the Trust's day-to-day activities. Section 3.3 Managing Trustees. Any Trustee who is not an Independent Trustee may be designated a Managing Trustee by the Board of Trustees. Section 3.4 Number. At any regular meeting or at any special meeting called for that purpose, a majority of the entire Board of Trustees may establish, increase or decrease the number of Trustees. Section 3.5 Annual and Regular Meetings. An annual meeting of the Trustees shall be held immediately after and at the same place as the annual meeting of shareholders, no notice other than this Bylaw being necessary. The time and place of the annual meeting of the Trustees may be changed by the Board of Trustees. The Trustees may provide, by resolution, the time and place, either within or without the State of Maryland, for the holding of regular meetings of the Trustees without other notice than such resolution. Section 3.6 Special Meetings. Special meetings of the Trustees may be called at any time by the chairman of the board, any Managing Trustee or the president and shall be called by request of any two (2) Trustees then in office. The person or persons authorized to call special meetings of the Trustees may fix any place, either within or without the State of Maryland, as the place for holding any special meeting of the Trustees called by them. Section 3.7 Notice. Notice of any special meeting shall be given by written notice delivered personally, telegraphed, facsimile-transmitted or mailed to each Trustee at his business or residence address. Personally delivered or telegraphed notices shall be given at least twenty-four (24) hours prior to the meeting. Notice by mail shall be deposited in the U.S. mail in the place in which the principal office of the Trust is located at least seventy-two (72) hours prior to the meeting. Telephone or facsimile-transmission notice shall be given at least forty-eight (48) hours prior to the meeting. If mailed, such notice shall be deemed to be given when deposited in the U.S. mail properly addressed, with postage thereon prepaid. If given by telegram, such notice shall be deemed to be given when the telegram is delivered to the telegraph company. Telephone notice shall be deemed given when the Trustee is personally given such notice in a telephone call to which he is a party. Facsimile-transmission notice shall be deemed given upon completion of the transmission of the message to the number given to the Trust by the Trustee and receipt of a completed answer- back indicating receipt. Neither the business to be transacted at, nor the purpose of, any annual, regular or special meeting of the Trustees need be stated in the notice, unless specifically required by statute or these Bylaws. Section 3.8 Quorum. A majority of the Trustees shall constitute a quorum for transaction of business at any meeting of the Trustees, provided that, if less than a majority of such Trustees are -7- present at a meeting, a majority of the Trustees present may adjourn the meeting from time to time without further notice, and provided further that if, pursuant to the Declaration of Trust or these Bylaws, the vote of a majority of a particular group of Trustees is required for action, a quorum must also include a majority of such group. The Trustees present at a meeting which has been duly called and convened may continue to transact business until adjournment, notwithstanding the withdrawal of enough Trustees to leave less than a quorum. Section 3.9 Voting. The action of the majority of the Trustees present at a meeting at which a quorum is present shall be the action of the Trustees, unless the concurrence of a greater proportion is required for such action by specific provision of an applicable statute, the Declaration of Trust or these Bylaws. Section 3.10 Telephone Meetings. Trustees may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting. Such meeting shall be deemed to have been held at a place designated by the Trustees at the meeting. Section 3.11 Informal Action by Trustees. Unless specifically otherwise provided in the Declaration of Trust, any action required or permitted to be taken at any meeting of the Trustees may be taken without a meeting, if a majority of the Trustees shall individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the records of the Trust and shall have the same force and effect as the affirmative vote of such Trustees at a duly held meeting of the Trustees at which a quorum was present. Section 3.12 Waiver of Notice. The actions taken at any meeting of the Trustees, however called and noticed or wherever held, shall be as valid as though taken at a meeting duly held after regular call and notice if a quorum is present and if, either before or after the meeting, each of the Trustees not present signs a written waiver of notice, a consent to the holding of such meeting or an approval of the minutes thereof. All such waivers, consents or approvals shall be lodged with the Trust records or made a part of the minutes of the meeting. Section 3.13 Vacancies; Groups. If for any reason any or all the Trustees cease to be Trustees, such event shall not terminate the Trust or affect these Bylaws or the powers of the remaining Trustees hereunder (even if fewer than three (3) Trustees remain). Any vacancy shall be filled, at any regular meeting or at any special meeting called for that purpose, by a majority of the remaining Trustees, except that a vacancy resulting from an increase in the number of Trustees shall be filled by a majority of the entire Board of Trustees. Any individual so elected as Trustee shall hold office for the unexpired term of the Trustee he is replacing. On the first date on which the Trust shall have more than one shareholder of record (the "Distribution Date"), the number of Trustees in Group I shall be one (1), the number of Trustees in Group II shall be two (2), and the number of Trustees in Group III shall be two (2) (each of Group I, Group II and Group III being referred to herein as a "Group"). On or prior to the Distribution -8- Date, a majority of the entire Board of Trustees shall designate the Group of which each Trustee in office on the Distribution Date shall initially be a member, subject to the limitations contained in Section 5.2.2 of the Declaration of Trust. The term of a Trustee elected to fill any vacancy on the Board of Trustees on the Distribution Date or at any time thereafter shall be set by a majority of the Board of Trustees when the position is created or, in the case of vacancies existing on the Distribution Date, when such position is filled, by designating the new position as Group I, Group II or Group III, subject to the limitations contained in Section 5.2.2 of the Declaration of Trust. In the event a vacancy on the Board of Trustees is filled by vote of shareholders pursuant to Article II and the Declaration of Trust rather than by the Board of Trustees pursuant to this Section 3.13, the term of a Trustee elected to fill such vacancy shall be set by a majority of the Board of Trustees prior to the date on which notice of the annual meeting of shareholders at which such vote is to occur or the special meeting of shareholders called for the purpose of such vote, as applicable, is given, by designating the new position as Group I, Group II or Group III, subject to the limitations contained in Section 5.2.2 of the Declaration of Trust. In the event the Trustees reduce the size of the Board of Trustees on or after the Distribution Date, the majority of the entire Board of Trustees shall reduce the size of one or more Group or Groups by the aggregate reduction in the number of the Trustees, subject to the limitations contained in Section 5.2.2 of the Declaration of Trust. On or prior to the Distribution Date, a majority of the entire Board of Trustees shall designate the Group of which each Trustee in office on the Distribution Date shall initially be a member. Section 3.14 Compensation; Financial Assistance. Section 3.14.1 Compensation. The Trustees shall be entitled to receive such reasonable compensation for their services as Trustees as the Trustees may determine from time to time. Trustees may be reimbursed for expenses of attendance, if any, at each annual, regular or special meeting of the Trustees or of any committee thereof; and for their expenses, if any, in connection with each property visit and any other service or activity performed or engaged in as Trustee. The Trustees shall be entitled to receive remuneration for services rendered to the Trust in any other capacity, and such services may include, without limitation, services as an officer of the Trust, services as an employee of the Advisor (as defined in Article XIII), legal, accounting or other professional services, or services as a broker, transfer agent or underwriter, whether performed by a Trustee or any person affiliated with a Trustee. Section 3.14.2 Financial Assistance to Trustees. The Trust may lend money to, guarantee an obligation of or otherwise assist a Trustee or a trustee of its direct or indirect subsidiary. The loan, guarantee or other assistance may be with or without interest, unsecured, or secured in any manner that the Board of Trustees approves, including a pledge of shares. Section 3.15 Removal of Trustees. The shareholders may, at any time, remove any Trustee in the manner provided in the Declaration of Trust. Section 3.16 Loss of Deposits. No Trustee shall be liable for any loss which may occur by reason of the failure of the bank, trust company, savings and loan association, or other institution with whom moneys or shares have been deposited. -9- Section 3.17 Surety Bonds. Unless specifically required by law, no Trustee shall be obligated to give any bond or surety or other security for the performance of any of his duties. Section 3.18 Reliance. Each Trustee, officer, employee and agent of the Trust shall, in the performance of his duties with respect to the Trust, be fully justified and protected with regard to any act or failure to act in reliance in good faith upon the books of account or other records of the Trust, upon an opinion of counsel or upon reports made to the Trust by any of its officers or employees or by the Advisor (as defined in Article XIII), accountants, appraisers or other experts or consultants selected by the Trustees or officers of the Trust, regardless of whether such counsel or expert may also be a Trustee. Section 3.19 Interested Trustee Transactions. Section 2-419 of the Maryland General Corporation Law (the "MGCL") shall be available for and apply to any contract or other transaction between the Trust and any of its Trustees or between the Trust and any other trust, corporation, firm or other entity in which any of its Trustees is a trustee or director or has a material financial interest. Section 3.20 Qualifying Shares Not Required. Trustees need not be shareholders of the Trust. Section 3.21 Certain Rights of Trustees, Officers, Employees and Agents. The Trustees shall have no responsibility to devote their full time to the affairs of the Trust. Any Trustee or officer, employee or agent of the Trust, in his personal capacity or in a capacity as an affiliate, employee, or agent of any other person, or otherwise, may have business interests and engage in business activities similar or in addition to those of or relating to the Trust. Section 3.22 Certain Transactions. Notwithstanding any other provision in the Bylaws, no determination shall be made by the Trustees nor shall any transaction be entered into by the Trust which would cause any shares or other beneficial interest in the Trust not to constitute "transferable shares" or "transferable certificates of beneficial interest" under Section 856(a)(2) of the Internal Revenue Code of 1986, as amended (the "Code") or which would cause any distribution to constitute a preferential dividend as described in Section 562(c) of the Code. ARTICLE IV COMMITTEES Section 4.1 Number; Tenure and Qualifications. The Board of Trustees may appoint from among its members an audit committee and other committees, composed of one (1) or more Trustees, to serve at the pleasure of the Board of Trustees. Section 4.2 Powers. The Trustees may delegate to committees appointed under Section 4.1 any of the powers of the Trustees, except as prohibited by law. Section 4.3 Meetings. In the absence of any member of any such committee, the members thereof present at any meeting, whether or not they constitute a quorum, may appoint another Trustee -10- to act in the place of such absent member. Notice of committee meetings shall be given in the same manner as notice for special meetings of the Board of Trustees. One-third, but not less than one, of the members of any committee shall be present in person at any meeting of such committee in order to constitute a quorum for the transaction of business at such meeting, and the act of a majority present at a meeting at the time of such vote if a quorum is then present shall be the act of such committee. The Board of Trustees may designate a chairman of any committee, and such chairman or any two members of any committee may fix the time and place of its meetings unless the Board shall otherwise provide. In the absence or disqualification of any member of any such committee, the members thereof present at any meeting and not disqualified from voting, whether or not they constitute a quorum, may unanimously appoint another Trustee to act at the meeting in the place of such absent or disqualified members. Each committee shall keep minutes of its proceedings and shall report the same to the Board of Trustees at the next succeeding meeting, and any action by the committee shall be subject to revision and alteration by the Board of Trustees, provided that no rights of third persons shall be affected by any such revision or alteration. Section 4.4 Telephone Meetings. Members of a committee of the Trustees may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting. Section 4.5 Informal Action by Committees. Any action required or permitted to be taken at any meeting of a committee of the Trustees may be taken without a meeting, if a consent in writing to such action is signed by each member of the committee and such written consent is filed with the minutes of proceedings of such committee. Section 4.6 Vacancies. Subject to the provisions hereof, the Board of Trustees shall have the power at any time to change the membership of any committee, to fill all vacancies, to designate alternate members to replace any absent or disqualified member or to dissolve any such committee. ARTICLE V OFFICERS Section 5.1 General Provisions. The officers of the Trust shall include a president, a secretary and a treasurer and may include a chairman of the board, a vice chairman of the board, a chief executive officer, a chief operating officer, a chief financial officer, one or more vice presidents, one or more assistant secretaries and one or more assistant treasurers. In addition, the Trustees may from time to time appoint such other officers with such powers and duties as they shall deem necessary or desirable. The officers of the Trust shall be elected annually by the Trustees at the first meeting of the Trustees held after each annual meeting of shareholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as may be convenient. Each officer shall hold office until his successor is elected and qualifies or until his death, resignation or removal in the manner hereinafter provided. Any two or more offices except -11- president and vice president may be held by the same person. In their discretion, the Trustees may leave unfilled any office except that of president and secretary. Election of an officer or agent shall not of itself create contract rights between the Trust and such officer or agent. Section 5.2 Removal and Resignation. Any officer or agent of the Trust may be removed by the Trustees if in their judgment the best interests of the Trust would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Any officer of the Trust may resign at any time by giving written notice of his resignation to the Trustees, the chairman of the board, the president or the secretary. Any resignation shall take effect at any time subsequent to the time specified therein or, if the time when it shall become effective is not specified therein, immediately upon its receipt. The acceptance of a resignation shall not be necessary to make it effective unless otherwise stated in the resignation. Such resignation shall be without prejudice to the contract rights, if any, of the Trust. Section 5.3 Vacancies. A vacancy in any office may be filled by the Trustees for the balance of the term. Section 5.4 Chief Executive Officer. The Trustees may designate a chief executive officer from among the elected officers. The chief executive officer shall have responsibility for implementation of the policies of the Trust, as determined by the Trustees, and for the administration of the business affairs of the Trust. In the absence of both the chairman and vice chairman of the board, the chief executive officer shall preside over the meetings of the Trustees at which he shall be present. The Managing Trustees, or either of them, may be designated to function as the chief executive officer of the Trust. Section 5.5 Chief Operating Officer. The Trustees may designate a chief operating officer from among the elected officers. Said officer will have the responsibilities and duties as set forth by the Trustees or the chief executive officer. Section 5.6 Chief Financial Officer. The Trustees may designate a chief financial officer from among the elected officers. Said officer will have the responsibilities and duties as set forth by the Trustees or the chief executive officer. Section 5.7 Chairman and Vice Chairman of the Board. The chairman of the board shall preside over the meetings of the Trustees and of the shareholders at which he shall be present and shall in general oversee all of the business and affairs of the Trust. In the absence of the chairman of the board, the vice chairman of the board shall preside at such meetings at which he shall be present. The chairman and the vice chairman of the board may execute any deed, mortgage, bond, contract or other instrument, except in cases where the execution thereof shall be expressly delegated by the Trustees or by these Bylaws to some other officer or agent of the Trust or shall be required by law to be otherwise executed. The chairman of the board and the vice chairman of the board shall perform such other duties as may be assigned to him or them by the Trustees. In the absence of a chairman and vice chairman or none is appointed, the Managing Trustees, or either of them, shall act as chairman. -12- Section 5.8 President. The president shall preside over the meetings of the shareholders at which he shall be present. The president may execute any deed, mortgage, bond, contract or other instrument, except in cases where the execution thereof shall be expressly delegated by the Trustees or by these Bylaws to some other officer or agent of the Trust or shall be required by law to be otherwise executed; and in general shall perform all duties incident to the office of president and such other duties as may be prescribed by the Trustees from time to time. Section 5.9 Vice Presidents. In the absence of the president or in the event of a vacancy in such office, the vice president (or in the event there be more than one vice president, the vice presidents in the order designated at the time of their election or, in the absence of any designation, then in the order of their election) shall perform the duties of the president and when so acting shall have all the powers of and be subject to all the restrictions upon the president; and shall perform such other duties as from time to time may be assigned to him by the president or by the Trustees. The Trustees may designate one or more vice presidents as executive vice president, senior vice president or as vice president for particular areas of responsibility. Section 5.10 Secretary. The secretary shall (a) keep the minutes of the proceedings of the shareholders, the Trustees and committees of the Trustees in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these Bylaws or as required by law; (c) be custodian of the trust records and of the seal of the Trust; (d) keep a register of the post office address of each shareholder which shall be furnished to the secretary by such shareholder; (e) maintain at the principal office of the Trust a share register, showing the ownership and transfers of ownership of all shares of the Trust, unless a transfer agent is employed to maintain and does maintain such a share register; and (f) in general perform such other duties as from time to time may be assigned to him by the chief executive officer, the president or by the Trustees. Section 5.11 Treasurer. The treasurer shall have the custody of the funds and securities of the Trust and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Trust and shall deposit all moneys and other valuable effects in the name and to the credit of the Trust in such depositories as may be designated by the Trustees. He shall disburse the funds of the Trust as may be ordered by the Trustees, taking proper vouchers for such disbursements, and shall render to the president and Trustees, at the regular meetings of the Trustees or whenever they may require it, an account of all his transactions as treasurer and of the financial condition of the Trust. Section 5.12 Assistant Secretaries and Assistant Treasurers. The assistant secretaries and assistant treasurers, in general, shall perform such duties as shall be assigned to them by the secretary or treasurer, respectively, or by the president or the Trustees. The assistant treasurers shall, if required by the Trustees, give bonds for the faithful performance of their duties in such sums and with such surety or sureties as shall be satisfactory to the Trustees. -13- ARTICLE VI CONTRACTS, LOANS, CHECKS AND DEPOSITS Section 6.1 Contracts. The Trustees may authorize any officer or agent to enter into any contract or to execute and deliver any instrument in the name of and on behalf of the Trust and such authority may be general or confined to specific instances. Any agreement, deed, mortgage, lease or other document executed by one or more of the Trustees or by an authorized person shall be valid and binding upon the Trustees and upon the Trust when authorized or ratified by action of the Trustees. Section 6.2 Checks and Drafts. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Trust shall be signed by such officer or agent of the Trust in such manner as shall from time to time be determined by the Treasurer or by the Trustees. Section 6.3 Deposits. All funds of the Trust not otherwise employed shall be deposited from time to time to the credit of the Trust in such banks, trust companies or other depositories as the Treasurer or the Trustees may designate. ARTICLE VII SHARES Section 7.1 Certificates. Ownership of shares shall be evidenced by certificates. Each shareholder shall be entitled to a certificate or certificates, in such form as the Trustees shall from time to time approve, which shall represent and certify the number of shares of each class of beneficial interests held by him in the Trust. Unless otherwise determined by the Trustees, such certificates shall be signed by the chief executive officer, the president or a vice president and countersigned by the secretary or an assistant secretary or the treasurer or an assistant treasurer and may be sealed with the seal, if any, of the Trust. The signatures may be either manual or facsimile. Certificates shall be consecutively numbered; and if the Trust shall from time to time issue several classes of shares, each class may have its own number series. A certificate is valid and may be issued whether or not an officer who signed it is still an officer when it is issued. There shall be filed with each transfer agent a copy of the form of certificate as approved by the Trustees, certified by the chairman, president or secretary, and such form shall continue to be used unless and until the Trustees approve some other form. Each certificate representing shares which are restricted as to their transferability or voting powers, which are preferred or limited as to their dividends or as to their allocable portion of the assets upon liquidation or which are redeemable at the option of the Trust, shall have a statement of such restriction, limitation, preference or redemption provision, or a summary thereof, plainly stated on the certificate. In lieu of such statement or summary, the Trust may set forth upon the face or back of the certificate a statement that the Trust will furnish to any shareholder, upon request and without charge, a full statement of such information. Section 7.2 Transfers. Certificates shall be treated as negotiable and title thereto and to the shares they represent shall be transferred by delivery thereof to the same extent as those of a -14- Maryland stock corporation. Upon surrender to the Trust or the transfer agent of the Trust of a share certificate duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, the Trust shall issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. The Trust shall be entitled to treat the holder of record of any share or shares as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Maryland. Notwithstanding the foregoing, transfers of shares of beneficial interest of the Trust will be subject in all respects to the Declaration of Trust and all of the terms and conditions contained therein. Section 7.3 Replacement Certificate. Any officer designated by the Trustees may direct a new certificate to be issued in place of any certificate previously issued by the Trust alleged to have been lost, stolen or destroyed upon the making of an affidavit of that fact by the person claiming the certificate to be lost, stolen or destroyed. When authorizing the issuance of a new certificate, an officer designated by the Trustees may, in his discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or the owner's legal representative to advertise the same in such manner as he shall require and/or to give bond, with sufficient surety, to the Trust to indemnify it against any loss or claim which may arise as a result of the issuance of a new certificate. Section 7.4 Closing of Transfer Books or Fixing of Record Date. The Trustees may set, in advance, a record date for the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or determining shareholders entitled to receive payment of any dividend or the allotment of any other rights, or in order to make a determination of shareholders for any other proper purpose. In lieu of fixing a record date, the Trustees may provide that the share transfer books shall be closed for a stated period but not longer than twenty (20) days. If the share transfer books are closed for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such books shall be closed for at least ten (10) days before the date of such meeting. If no record date is fixed and the share transfer books are not closed for the determination of shareholders, (a) the record date for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the day on which the notice of meeting is mailed or the 30th day before the meeting, whichever is the closer date to the meeting; and (b) the record date for the determination of shareholders entitled to receive payment of a dividend or an allotment of any other rights shall be the close of business on the day on which the resolution of the Trustees, declaring the dividend or allotment of rights, is adopted. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof. -15- Section 7.5 Share Ledger. The Trust shall maintain at its principal office or at the office of its counsel, accountants or transfer agent, a share ledger containing the name and address of each shareholder and the number of shares of each class held by such shareholder. Section 7.6 Fractional Shares; Issuance of Units. The Trustees may issue fractional shares or provide for the issuance of scrip, all on such terms and under such conditions as they may determine. Notwithstanding any other provision of the Declaration of Trust or these Bylaws, the Trustees may issue units consisting of different securities of the Trust. Any security issued in a unit shall have the same characteristics as any identical securities issued by the Trust, except that the Trustees may provide that for a specified period securities of the Trust issued in such unit may be transferred on the books of the Trust only in such unit. ARTICLE VIII FISCAL YEAR The Fiscal year of the Trust shall be the calendar year. ARTICLE IX DISTRIBUTIONS Section 9.1 Authorization. Dividends and other distributions upon the shares of beneficial interest of the Trust may be authorized and declared by the Trustees, subject to the provisions of law and the Declaration of Trust. Dividends and other distributions may be paid in cash, property or shares of the Trust, subject to the provisions of law and the Declaration of Trust. Section 9.2 Contingencies. Before payment of any dividends or other distributions, there may be set aside out of any funds of the Trust available for dividends or other distributions such sum or sums as the Trustees may from time to time, in their absolute discretion, think proper as a reserve fund for contingencies or for any other purpose as the Trustees shall determine to be in the best interest of the Trust, and the Trustees may modify or abolish any such reserve in the manner in which it was created. ARTICLE X SEAL Section 10.1 Seal. The Trustees may authorize the adoption of a seal by the Trust. The seal shall have inscribed thereon the name of the Trust and the year of its formation. The Trustees may authorize one or more duplicate seals and provide for the custody thereof. Section 10.2 Affixing Seal. Whenever the Trust is permitted or required to affix its seal to a document, it shall be sufficient to meet the requirements of any law, rule or regulation relating to a seal to place the word "(SEAL)" adjacent to the signature of the person authorized to execute the document on behalf of the Trust. -16- ARTICLE XI INDEMNIFICATION AND ADVANCE OF EXPENSES To the maximum extent permitted by Maryland law in effect from time to time, the Trust shall indemnify (a) any Trustee, officer or shareholder or any former Trustee, officer or shareholder (including among the foregoing, for all purposes of this Article XI and without limitation, any individual who, while a Trustee, officer or shareholder and at the express request of the Trust, serves or has served another real estate investment trust, corporation, partnership, joint venture, trust, employee benefit plan or any other enterprise as a director, officer, shareholder, partner or trustee of such real estate investment trust, corporation, partnership, joint venture, trust, employee benefit plan or other enterprise) who has been successful, on the merits or otherwise, in the defense of a proceeding to which he was made a party by reason of service in such capacity, against reasonable expenses incurred by him in connection with the proceeding, (b) any Trustee or officer or any former Trustee or officer against any claim or liability to which he may become liable or subject by reason of such status or actions in such capacity and (c) each shareholder or former shareholder against any claim or liability to which he may become subject by reason of such status. In addition, the Trust shall, without requiring a preliminary determination of the ultimate entitlement to indemnification, pay or reimburse, in advance of final disposition of a proceeding, reasonable expenses incurred by a Trustee, officer or shareholder or former Trustee, officer or shareholder made a party to a proceeding by reason such status, provided that, in the case of a Trustee or officer, the Trust shall have received (i) a written affirmation by the Trustee or officer of his good faith belief that he has met the applicable standard of conduct necessary for indemnification by the Trust as authorized by Maryland law and (ii) a written undertaking by him or on his behalf to repay the amount paid or reimbursed by the Trust if it shall ultimately be determined that the applicable standard of conduct was not met. The Trust may, with the approval of its Trustees, provide such indemnification or payment or reimbursement of expenses to any Trustee, officer or shareholder or any former Trustee, officer or shareholder who served a predecessor of the Trust and to any employee or agent of the Trust or a predecessor of the Trust. Neither the amendment nor repeal of this Article, nor the adoption or amendment of any other provision of the Declaration of Trust or these Bylaws inconsistent with this Article, shall apply to or affect in any respect the applicability of this Article with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption. Any indemnification or payment or reimbursement of the expenses permitted by these Bylaws shall be furnished in accordance with the procedures provided for indemnification or payment or reimbursement of expenses, as the case may be, under Section 2-418 of the MGCL for directors of Maryland corporations. The Trust may provide to Trustees, officers and shareholders such other and further indemnification or payment or reimbursement of expenses, as the case may be, to the fullest extent permitted by the MGCL, as in effect from time to time, for directors of Maryland corporations. -17- ARTICLE XII WAIVER OF NOTICE Whenever any notice is required to be given pursuant to the Declaration of Trust or Bylaws or pursuant to applicable law, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Neither the business to be transacted at nor the purpose of any meeting need be set forth in the waiver of notice, unless specifically required by statute. The attendance of any person at any meeting shall constitute a waiver of notice of such meeting, except where such person attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. ARTICLE XIII THE ADVISOR Section 13.1 Employment of Advisor. The Trustees are not and shall not be required personally to conduct the business of the Trust, and the Trustees shall have the power to appoint, employ or contract with any person (including one or more of themselves or any corporation, partnership, or trust in which one or more of them may be Trustees, officers, stockholders, partners or trustees) as the Trustees may deem necessary or proper for the transaction of the business of the Trust. The Trustees may therefore employ or contract with such person (herein referred to as the "Advisor") and may grant or delegate such authority to the Advisor as the Trustees may in their sole discretion deem necessary or desirable without regard to whether such authority is normally granted or delegated by boards of trustees or boards of directors of business corporations. The Advisor shall be required to use its best efforts to supervise the operation of the Trust in a manner consistent with the investment policies and objectives of the Trust as established from time to time by the Trustees. The Trustees shall have the power to determine the terms and compensation of the Advisor or any other person whom it may cause the Trust to employ or with whom it may cause the Trust to contract for advisory services. The Trustees may exercise broad discretion in allowing the Advisor to administer and regulate the operations of the Trust, to act as agent for the Trust, to execute documents on behalf of the Trustees and to make executive decisions which conform to general policies and general principles previously established by the Trustees. Section 13.2 Other Activities of Advisor. The Advisor shall not be required to administer the Trust as its sole and exclusive function and may have other business interests and may engage in other activities similar or in addition to those relating to the Trust, including the rendering of advice or services of any kind to other investors or any other persons (including other real estate investment trusts) and the management of other investments. The Trustees may request the Advisor to engage in certain other activities which complement the Trust's investments, and the Advisor may receive compensation or commissions therefor from the Trust or other persons. Neither the Advisor nor any affiliate of the Advisor shall be obligated to present any particular investment opportunities to the Trust, even if such opportunities are of a character such -18- that, if presented to the Trust, they could be taken by the Trust, and, subject to the foregoing, each of them shall be protected in taking for its own account or recommending to others any such particular investment opportunity. ARTICLE XIV AMENDMENT OF BYLAWS Except for any change for which the Declaration or these Bylaws require approval by more than a majority vote of the Trustees, these Bylaws may be amended or repealed or new or additional Bylaws may be adopted only by the vote or written consent of a majority of the Trustees. ARTICLE XV MISCELLANEOUS Section 15.1 References to Declaration of Trust. All references to the Declaration of Trust shall include any amendments thereto. Section 15.2 Inspection of Bylaws. The Trustees shall keep at the principal office for the transaction of business of the Trust the original or a copy of the Bylaws as amended or otherwise altered to date, certified by the Secretary, which shall be open to inspection by the shareholders at all reasonable times during office hours. -19- EX-8.1 4 Exhibit 8.1 SULLIVAN & WORCESTER LLP ONE POST OFFICE SQUARE BOSTON, MASSACHUSETTS 02109 (617) 338-2800 FAX NO. 617-338-2880 IN WASHINGTON, D.C. IN NEW YORK CITY 1025 CONNECTICUT AVENUE, N.W. 767 THIRD AVENUE WASHINGTON, D.C. 20036 NEW YORK, NEW YORK 10017 (202) 775-8190 (212) 486-8200 FAX NO. 202-293-2275 FAX NO. 212-758-2151 March 30, 2000 Senior Housing Properties Trust 400 Centre Street Newton, Massachusetts 02458 Ladies and Gentlemen: In connection with the filing by Senior Housing Properties Trust, a Maryland real estate investment trust (the "Company"), of its Annual Report on Form 10-K for the year ended December 31, 1999 (the "Form 10-K"), under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the following opinion is furnished to you to be filed with the Securities and Exchange Commission (the "SEC") as Exhibit 8.1 to the Form 10-K. We have acted as counsel for the Company in connection with the preparation of its Form 10-K, and we have examined originals or copies, certified or otherwise identified to our satisfaction, of corporate records, certificates and statements of officers and accountants of the Company and of public officials, and such other documents as we have considered relevant and necessary in order to furnish the opinion hereinafter set forth. Specifically, and without limiting the generality of the foregoing, we have reviewed: (i) the declaration of trust, as amended and restated, and the by-laws of the Company, as amended and restated; and (ii) the sections in the Company's Form 10-K captioned "Federal Income Tax Considerations" and "ERISA Plans, Keogh Plans and Individual Retirement Accounts." With respect to all questions of fact on which such opinions are based, we have assumed the accuracy and completeness of and have relied on the information set forth in the Form 10-K and in the documents incorporated therein by reference, and on representations made to us by officers of the Company. We have not independently verified such information. The opinion set forth below is based upon the Internal Revenue Code of 1986, as amended, the Treasury Regulations issued thereunder, published administrative interpretations thereof, and judicial decisions with respect thereto, all as of the date hereof (collectively, the "Tax Laws"), and upon the Employee Retirement Income Security Act of 1974, as amended, the Department of Labor regulations issued thereunder, published administrative interpretations thereof, and judicial decisions with respect thereto, all as of the date hereof (collectively, the Senior Housing Properties Trust March 30, 2000 Page 2 "ERISA Laws"). No assurance can be given that the Tax Laws or the ERISA Laws will not change. In preparing the discussions with respect to Tax Laws and ERISA Laws matters in the sections of the Annual Report captioned "Federal Income Tax Considerations" and "ERISA Plans, Keogh Plans and Individual Retirement Accounts," we have made certain assumptions and expressed certain conditions and qualifications therein, all of which assumptions, conditions and qualifications are incorporated herein by reference. Based upon and subject to the foregoing, we are of the opinion that the discussions with respect to Tax Laws and ERISA Laws matters in the sections of the Annual Report captioned "Federal Income Tax Considerations" and "ERISA Plans, Keogh Plans and Individual Retirement Accounts," in all material respects are accurate and fairly summarize the Tax Laws issues and ERISA Laws issues addressed therein, and hereby confirm that the opinions of counsel referred to in said sections represent our opinions on the subject matter thereof. We hereby consent to the incorporation of this opinion by reference as an exhibit to the Form 10-K and to the reference of our firm therein. In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the Act or under the rules and regulations of the SEC promulgated thereunder. Very truly yours, /s/ SULLIVAN & WORCESTER LLP SULLIVAN & WORCESTER LLP EX-10.1 5 Exhibit 10.1 ADVISORY AGREEMENT THIS AGREEMENT is entered into effective as of October 12, 1999, by and among Senior Housing Properties Trust, a Maryland real estate investment trust (the "Company"), Reit Management & Research, Inc., a Delaware corporation (the "Advisor"), and, solely with respect to certain non-competition covenants in Section 14 of this Agreement, Barry M. Portnoy and Gerard M. Martin. WHEREAS, the Advisor is a corporation organized for the purpose of providing management and administrative services with respect to the ownership of real property and interests in real property; WHEREAS, in connection with its investments, the Company desires to make use of the advice and assistance of the Advisor and information available to the Advisor, and to have the Advisor undertake the duties and responsibilities hereinafter set forth, on behalf of and subject to the supervision of the Company's Board of Trustees (the "Trustees"), all as provided herein; WHEREAS, the Advisor is willing to render such services, subject to the supervision of the Trustees, on the terms and conditions hereinafter set forth; and WHEREAS, the Company has qualified and intends to continue to qualify as a real estate investment trust as defined in the Internal Revenue Code of 1986, as amended (said Code, as in effect from time to time, together with any regulations and rulings thereunder, being hereinafter referred to as the "Internal Revenue Code"). NOW, THEREFORE, in consideration of the mutual agreements herein set forth, the parties hereto agree as follows: 1. General Duties of the Advisor. The Advisor shall use its best efforts to present to the Company a continuing and suitable investment program consistent with the investment policies and objectives of the Company. Subject to the supervision of the Trustees and under their direction, and consistent with the provisions of the Declaration of Trust, the Advisor shall: (a) serve as the Company's investment advisor, with its obligations to include providing research and economic and statistical data in connection with the Company's investments and recommending changes in the Company's investment policies, when appropriate; (b) investigate and evaluate investment, financing and refinancing opportunities and make recommendations concerning these opportunities to the Trustees; (c) manage the Company's short-term investments, including the acquisition and sale of money market instruments in accordance with the Company's policies; (d) administer the day-to-day operations of the Company; (e) investigate, negotiate and enter into appropriate contracts on behalf of the Company with individuals, corporations and other entities (i) for the purchase, lease or servicing of real estate and related interests and otherwise in furtherance of the investment activities of the Company and (ii) for the financing and refinancing of investments and otherwise in furtherance of the financing activities of the Company; (f) upon request of the Trustees, act as attorney-in-fact or agent in acquiring and disposing of investments and funds of the Company and in handling, prosecuting and settling any claims of the Company; (g) obtain for the Company, when appropriate, the services of property managers or management firms to perform customary property management services with regard to the real estate properties owned by or in the possession of the Company, and perform such supervisory or monitoring services on behalf of the Company with respect to the activities of those property managers or management firms as would be performed by a prudent owner, including but not limited to supervising the activities of property managers or management firms, visiting the properties, participating in property management budgeting, reviewing the accounting of property income and expenses, reporting on the financial status of the properties and reviewing and approving marketing plans, but excluding the actual on-site property management functions performed by said property managers or management firms; (h) obtain for the Company other services as may be required for other activities relating to the investment portfolio of the Company; (i) administer the day-to-day bookkeeping and accounting functions as are required for the proper management of the assets of the Company, contract for audits and prepare or cause to be prepared reports as may be required by any governmental authority in connection with the ordinary conduct of the Company's business, including without limitation, periodic reports, returns or statements required under the Securities Exchange Act of 1934, as amended, the Internal Revenue Code, the securities and tax statutes of any jurisdiction in which the Company is obligated to file such reports, or the rules and regulations promulgated under any of the foregoing; (j) provide office space, office equipment and the use of accounting or computing equipment when required, and provide personnel necessary for the performance of the foregoing services; and (k) from time to time, or at any time requested by the Trustees, make reports to the Trustees of its performance of the foregoing services to the Company. -2- In performing its services under this Agreement, the Advisor may utilize facilities, personnel and support services of various of its Affiliates (as defined below). The Advisor shall be responsible for paying such Affiliates for their personnel and support services and facilities out of its own funds. Notwithstanding the above, the Company may request, and will pay for the direct costs of, services provided by Affiliates of the Advisor provided that such request is approved by a majority vote of the Trustees who are not Affiliates of the Advisor (the "Independent Trustees"). As used in this Agreement, the term "Affiliate" means, as to the Advisor, (i) any other Person (as defined below) directly or indirectly controlling, controlled by or under common control with the Advisor, (ii) any other Person that owns beneficially, directly or indirectly, five percent (5%) or more of the outstanding capital stock, shares or equity interests of the Advisor, or (iii) any officer, director, trustee, employee or general partner of the Advisor or of any Person controlling, controlled by or under common control with the Advisor. The term "Person" means and includes individuals, corporations, limited partnerships, general partnerships, limited liability companies, joint stock companies or associations, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts and other entities. 2. Bank Accounts. The Advisor shall establish and maintain one or more bank accounts in its own name or in the name of the Company, and shall collect and deposit into the account or accounts and disburse therefrom any monies on behalf of the Company; provided that no funds in any account shall be commingled with any funds of the Advisor or any other Person. The Advisor shall from time to time render an appropriate accounting of collections and payments to the Trustees and to the auditors of the Company. 3. Records. The Advisor shall maintain appropriate books of account and records relating to services performed pursuant to this Agreement, which books of account and records shall be available for inspection by representatives of the Company upon reasonable notice during ordinary business hours. 4. Information Furnished Advisor. The Trustees shall at all times keep the Advisor fully informed with regard to the investment policies of the Company, the capitalization policy of the Company, and generally the Trustees' then-current intentions as to the future of the Company. In particular, the Company shall notify the Advisor promptly of its intention to sell or otherwise dispose of any of the Company's investments or to make any new investment. The Company shall furnish the Advisor with a certified copy of all financial statements, a signed copy of each report prepared by independent certified public accountants and other information with regard to its affairs as the Advisor may from time to time reasonably request. The Company shall retain legal counsel and accountants to provide legal and accounting advice and services as the Advisor or the Trustees shall deem necessary or appropriate to adequately perform the functions of the Company, and shall have legal or accounting opinions and advice as the Advisor shall reasonably request. 5. REIT Qualification. Anything else in this Agreement to the contrary notwithstanding, the Advisor shall refrain from any action (including, without limitation, the furnishing or rendering of services to tenants of property or managing real property) which, in its judgment made in good faith, or in the judgment of the Trustees as transmitted to the Advisor in writing, would (a) adversely -3- affect the status of the Company as a real estate investment trust as defined and limited in the Internal Revenue Code or which would make the Company subject to the Investment Company Act of 1940, as amended, or (b) violate any law, rule, regulation or statement of policy or any governmental body or agency having jurisdiction over the Company or over its securities, or (c) otherwise not be permitted by the Declaration of Trust or Bylaws of the Company, as in effect from time to time, except if the action shall be ordered by the Trustees, in which event the Advisor shall promptly notify the Trustees of the Advisor's judgment that the action would adversely affect the Company's status or violate any law, rule or regulation or the Declaration of Trust or Bylaws of the Company and shall refrain from taking the action pending further clarification or instructions from the Trustees. In addition, the Advisor shall take affirmative steps which, in its judgment made in good faith, or in the judgment of the Trustees as transmitted to the Advisor in writing, would prevent or cure any action described in (a), (b) or (c) above. 6. Self-Dealing. Neither the Advisor nor any Affiliate of the Advisor shall, directly or indirectly, sell any property or assets to the Company or purchase any property or assets from the Company, lease any property from the Company or borrow any money from the Company, except as approved by a majority of the Independent Trustees. In addition, except as otherwise provided in Sections 1, 9 or 10 hereof, or except as approved by a majority of the Independent Trustees, neither the Advisor nor any Affiliate of the Advisor shall receive any commission or other remuneration, directly or indirectly, in connection with the activities of the Company or any joint venture or partnership in which the Company is a party. The foregoing prohibitions shall not apply to the leases affecting three nursing homes between the Company and an Affiliate of the Advisor, which leases were entered into by the Company's predecessor in interest prior to the date of this Agreement. 7. No Partnership or Joint Venture. The Company and the Advisor are not partners or joint venturers with each other and neither the terms of this Agreement nor the fact that the Company and the Advisor have joint interests in any one or more investments shall be construed so as to make them such partners or joint venturers or impose any liability on either of them. 8. Fidelity Bond. The Advisor shall not be required to obtain or maintain a fidelity bond in connection with the performance of its services hereunder. 9. Compensation. The Advisor shall be paid an advisory fee (the "Advisory Fee") for the services rendered by it to the Company pursuant to this Agreement. The Advisory Fee for each full fiscal year of the Company shall equal the sum of one-half of one percent (0.5%) of the Annual Average Transferred Assets (as defined below), plus seven-tenths of one percent (0.7%) of the Annual Average Invested Capital (as defined below) up to $250,000,000, plus one-half of one percent (0.5%) of the Annual Average Invested Capital equal to or exceeding $250,000,000. The Advisory Fee shall be prorated for any partial fiscal year of the Company during the term of this Agreement. In addition, the Advisor shall be paid an annual incentive fee (the "Incentive Fee") for each fiscal year of the Company, commencing with the Company's fiscal year ending December 31, 2000, consisting of a number of shares of the Company's common shares of beneficial interest ("Common Shares") with an aggregate value (determined as provided below) equal to fifteen percent (15%) of the product of (i) the weighted average Common Shares of the Company outstanding on -4- a diluted basis during such fiscal year and (ii) the excess if any of FFO Per Share (as defined below) for such fiscal year over the FFO Per Share for the preceding fiscal year; provided however, in no event shall the Incentive Fee payable in respect of any fiscal year exceed $.02 multiplied by the weighted average number of Common Shares outstanding on a diluted basis during such fiscal year. (The Advisory Fee and Incentive Fee are hereinafter collectively referred to as the "Fees"). No Incentive Fee shall be payable for the Company's fiscal year ending December 31, 1999. For purposes of this Agreement: "Annual Average Transferred Assets" of the Company, for any fiscal year, means the daily weighted average during such fiscal year (or, in the case of the Company's fiscal year ending December 31, 1999, during the period commencing with the date hereof and ending on December 31, 1999) of the aggregate book value of the Transferred Assets, before depreciation, reserves for bad debts and other similar noncash items. "Annual Average Invested Capital" of the Company, for any fiscal year, means the daily weighted average during such fiscal year (or, in the case of the Company's fiscal year ending December 31, 1999, during the period commencing with the date hereof and ending on December 31, 1999) of the aggregate book value of the consolidated assets of the Company, excluding the Transferred Assets, invested, directly or indirectly, in equity interests in and loans secured by real estate and personal property owned in connection with such real estate, before depreciation, reserves for bad debts and other similar noncash items. "FFO Per Share," for any fiscal year, means (i) the Company's consolidated net income, computed in accordance with generally accepted accounting principles, before gain or loss on sale of properties and extraordinary items, depreciation and other non-cash items, including the Company's pro rata share of the funds from operations (determined in accordance with this clause) for such fiscal year of (A) any unconsolidated subsidiary and (B) any entity for which the Company accounts by the equity method of accounting, divided by (ii) the weighted average number of Common Shares outstanding on a diluted basis during such fiscal year; and "Transferred Assets" means the assets owned by the Company and its subsidiaries on the date hereof. FFO Per Share for the Company's fiscal year ending December 31, 1999 shall be calculated on a pro forma basis adjusted as if the transactions described in the notes to the unaudited pro forma consolidated financial statements of the Company contained in the Company's Registration Statement No. 333- 69703 filed with the Securities and Exchange Commission (as amended through the date hereof) had occurred as of January 1, 1999. The Advisory Fee shall be computed and paid by the Company on a year to date basis within thirty (30) days following the end of each fiscal month. These computations shall be based upon the Company's monthly or quarterly financial statements, as the case may be, and shall be in reasonable detail. The Incentive Fee shall be computed and paid by the Company within thirty (30) days following the public availability of the Company's annual audited financial statements for each fiscal year. A copy of the computations shall promptly be delivered to the Advisor accompanied by payment of the Fees shown thereon to be due and payable. The aggregate Fees paid for each fiscal year shall be subject to adjustment as of the end of each that year. On or before the 30th day after public availability of the Company's annual audited financial statements for each fiscal year, the Company shall deliver to the Advisor an Officer's Certificate (a "Certificate") reasonably acceptable to the Advisor and certified by an authorized officer of the Company setting forth (i) the Annual Average Transferred Assets, the Annual Average -5- Invested Capital and FFO Per Share for the Company's fiscal year ended upon the immediately preceding December 31, and (ii) the Company's computation of the Fees payable for the fiscal year. The Certificate shall be accompanied by an examination of the calculation of Annual Average Invested Capital and FFO Per Share by the Company's independent certified public accountants. If the aggregate Fees payable for any fiscal year as shown in the Certificate exceed the aggregate amounts previously paid by the Company, the Company shall pay the deficit to the Advisor at the time of delivery of the Certificate. If the aggregate Fees payable for any fiscal year as shown in the Certificate are less than the aggregate amounts previously paid by the Company, the Company shall specify in the Certificate whether the Advisor should (i) refund to the Company an amount equal to the difference or (ii) grant the Company a credit against the Fees next coming due in the amount of the difference until that amount has been fully paid or otherwise discharged. Payment of the Incentive Fee shall be made by issuance of Common Shares. The number of shares to be issued in payment of the Incentive Fee shall be the whole number of shares (disregarding any fraction) equal to the value of the Incentive Fee, as provided above, divided by the average closing price of the Common Shares on the New York Stock Exchange during the month before the end of the fiscal year for which the computation is made. 10. Compensation for Additional Services. If, and to the extent that, the Company shall request the Advisor to render services on behalf of the Company other than those required to be rendered by the Advisor in accordance with the terms of this Agreement, those additional services shall be compensated separately on terms to be agreed upon between the Advisor and the Company from time to time. In addition, the Company may make awards to the employees of the Advisor and others under the Company's 1999 Incentive Share Award Plan or any plan adopted by the Company from time to time in replacement thereof. 11. Expenses of the Advisor. Without regard to the compensation received by the Advisor from the Company pursuant to this Agreement, the Advisor shall bear the following expenses incurred in connection with the performance of its duties under this Agreement: (a) employment expenses of the personnel employed by the Advisor, including but not limited to, salaries, wages, payroll taxes and the cost of employee benefit plans; (b) fees and travel and other expenses paid to directors, officers and employees of the Advisor, except fees and travel and other expenses of persons who are Trustees or officers of the Company incurred in their capacities as Trustees or officers of the Company; (c) rent, telephone, utilities, office furniture, equipment and machinery (including computers, to the extent utilized) and other office expenses of the Advisor, except to the extent those expenses may relate solely to an office maintained by the Company separate from the office of the Advisor, if any; and -6- (d) miscellaneous administrative expenses incurred in supervising, monitoring and inspecting real property and other investments of the Company or relating to performance by the Advisor of its obligations hereunder. 12. Expenses of the Company. Except as expressly otherwise provided in this Agreement, the Company shall pay all its expenses not payable by the Advisor, and, without limiting the generality of the foregoing, it is specifically agreed that the following expenses of the Company shall be paid by the Company and shall not be paid by the Advisor: (a) the cost of borrowed money; (b) taxes on income and taxes and assessments on real property, if any, and all other taxes applicable to the Company; (c) legal, auditing, accounting, underwriting, brokerage, listing, reporting, registration and other fees, and printing, engraving and other expenses and taxes incurred in connection with the issuance, distribution, transfer, trading, registration and stock exchange listing of the Company's securities, including transfer agent's, registrar's and indenture trustee's fees and charges; (d) expenses of organizing, restructuring, reorganizing or terminating the Company, or of revising, amending, converting or modifying the Company's organizational documents; (e) fees and travel and other expenses paid to Trustees and officers of the Company in their capacities as such (but not in their capacities as officers or employees of the Advisor) and fees and travel and other expenses paid to advisors, contractors, mortgage servicers, consultants, and other agents and independent contractors employed by or on behalf of the Company; (f) expenses directly connected with the acquisition, disposition or ownership of real estate interests or other property (including the costs of foreclosure, insurance premiums, legal services, brokerage and sales commissions, maintenance, repair, improvement and local management of property), other than expenses with respect thereto of employees of the Advisor, to the extent that those expenses are to be borne by the Advisor pursuant to Section 11 above; (g) all insurance costs incurred in connection with the Company (including officer and trustee liability insurance) or in connection with any officer and trustee indemnity agreement to which the Company is a party; (h) expenses connected with payments of dividends or interest or contributions in cash or any other form made or caused to be made by the Trustees to holders of securities of the Company; -7- (i) all expenses connected with communications to holders of securities of the Company and other bookkeeping and clerical work necessary to maintaining relations with holders of securities, including the cost of printing and mailing certificates for securities and proxy solicitation materials and reports to holders of the Company's securities; (j) legal, accounting and auditing fees and expenses; and (k) expenses relating to any office or office facilities maintained by the Company separate from the office of the Advisor. 13. Limits of Advisor Responsibility. The Advisor assumes no responsibility other than to render the services described herein in good faith and shall not be responsible for any action of the Trustees in following or declining to follow any advice or recommendation of the Advisor. The Advisor, its shareholders, directors, officers, employees, agents and Affiliates will not be liable to the Company, its shareholders, or others, except by reason of acts constituting bad faith, willful or wanton misconduct or gross negligence. The Company shall reimburse, indemnify and hold harmless the Advisor, its shareholders, directors, officers and employees, agents and Affiliates for and from any and all expenses, losses, damages, liabilities, demands, charges and claims of any nature whatsoever in respect of or arising from any acts or omissions of the Advisor undertaken in good faith and in accordance with the standard set forth above pursuant to the authority granted to it by this Agreement. 14. Other Activities of the Advisor and its Stockholders. Nothing herein shall prevent the Advisor from engaging in other activities or businesses or from acting as advisor to any other Person (including other real estate investment trusts) even though that Person has investment policies and objectives similar to those of the Company; provided, however, that neither the Advisor nor Barry M. Portnoy or Gerard M. Martin shall provide advisory services to, make competitive direct investment in or, in the case of Messrs. Portnoy and Martin, serve as a director or officer of, any other real estate investment trust which is principally engaged in the business of ownership of senior apartments, congregate communities, assisted living or nursing home properties without the consent of a majority of the Independent Trustees. The Advisor shall be free from any obligation to present to the Company any particular investment opportunity which comes to the Advisor. In addition, except as expressly provided herein, nothing herein shall prevent any stockholder or Affiliate of the Advisor from engaging in any other business or from rendering services of any kind to any other corporation, partnership or other entity (including competitive business activities). Without limiting the foregoing provisions, the Advisor agrees, upon the request of any Trustee of the Company, to disclose certain investment information concerning the Advisor or certain of its Affiliates, provided, however, that the disclosure shall be required only if it does not constitute a breach of any fiduciary duty or obligation of Advisor. Directors, officers, employees and agents of the Advisor or of its Affiliates may serve as Trustees, officers, employees, agents, nominees or signatories of the Company. When executing documents or otherwise acting in capacities for the Company, these persons shall use their respective titles in the Company. -8- 15. Term, Termination. This Agreement shall continue in force and effect until December 31, 1999 (the "Initial Term"), and is renewable periodically thereafter by the Company, if a majority of the Independent Trustees determine that the Advisor's performance has been satisfactory. Paragraph 18 hereof shall govern the rights, liabilities and obligations of the parties upon termination of this Agreement; and, except as provided in paragraph 18, a termination shall be without further liability of either party to the other than for breach or violation of this Agreement prior to termination. 16. Assignment. The Company may terminate this Agreement at any time in the event of its assignment by the Advisor except an assignment to a corporation, partnership, trust or other successor entity which may take over the property and carry on the affairs of the Advisor; provided that, following a permitted assignment, the persons who controlled the operations of the Advisor immediately prior to the assignment shall control the operation of the successor, including the performance of its duties under this Agreement, and this successor shall be bound by the same restrictions by which the Advisor was bound prior to such assignment. A permitted assignment or any other assignment of this Agreement by the Advisor shall bind the assignee hereunder in the same manner as the Advisor is bound hereunder. This Agreement shall not be assignable by the Company without the prior written consent of the Advisor, except in the case of any assignment by the Company to a trust, corporation, partnership or other entity which is the successor to the Company, in which case the successor shall be bound hereby and by the terms of said assignment in the same manner and to the same extent as the Company is bound hereby. 17. Default, Bankruptcy, Etc. of the Advisor. At the sole option of the Company, this Agreement may be terminated immediately by written notice from the Trustees to the Advisor if any of the following events shall have occurred: (a) the Advisor shall have violated any provision of this Agreement and, after written notice from the Trustees of the violation, shall have failed to cure the default within thirty (30) days; (b) a petition shall have been filed against the Advisor for an involuntary proceeding under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, and that petition shall not have been dismissed within ninety (90) days of filing; or a court having jurisdiction shall have appointed a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Advisor for any substantial portion of its property, or ordered the winding up or liquidation of its affairs, and that appointment or order shall not have been rescinded or vacated within ninety (90) days of the appointment or order; or (c) the Advisor shall have commenced a voluntary proceeding under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or shall have made any general assignment for the benefit of creditors, or shall have failed generally to pay its debts as they became due. -9- The Advisor agrees that, if any of the events specified in paragraphs (b) or (c) of this Section 17 occur, it will give written notice thereof to the Trustees within seven (7) days following the occurrence of the event. 18. Action Upon Termination. From and after the effective date of any termination of this Agreement pursuant to Sections 15, 16 or 17 hereof, the Advisor shall be entitled to no compensation for services rendered hereunder for the remainder of the then-current term of this Agreement but shall be paid, on a pro rata basis, all compensation due for services performed prior to termination, including, without limitation, a pro rata portion of the then current year's Incentive Fee. Upon termination, the Advisor immediately shall: (a) pay over to the Company all monies collected and held for the account of the Company by it pursuant to this Agreement, after deducting therefrom any accrued and unpaid Fees (including, without limitation, a pro rata portion of the then current year's Incentive Fee, and reimbursements for its expenses to which it is then entitled); (b) deliver to the Trustees a full and complete accounting, including a statement showing all sums collected by it and a statement of all sums held by it for the period commencing with the date following the date of its last accounting to the Trustees; and (c) deliver to the Trustees all property and documents of the Company then in its custody or possession. The amount of Fees paid to the Advisor upon termination shall be subject to adjustment pursuant to the following mechanism. On or before the 30th day after public availability of the Company's annual audited financial statements for the fiscal year in which termination occurs, the Company shall deliver to the Advisor a Certificate reasonably acceptable to the Advisor and certified by an authorized officer of the Company setting forth (i) the Annual Average Transferred Assets, the Annual Average Invested Capital and FFO Per Share for the Company's fiscal year ended upon the immediately preceding December 31, and (ii) the Company's computation of the Fees (including, without limitation, a pro rata portion of the then current year's Incentive Fee) payable upon the date of termination. The Certificate shall be accompanied by a review of the calculation of the Annual Average Transferred Assets, the Annual Average Invested Capital and FFO Per Share by the Company's independent certified public accountants. If the annual Fees owed upon termination as shown in the Certificate exceed the Fees paid by the Company upon termination, the Company shall include its check for the deficit and deliver the same to the Advisor with the Certificate. The Incentive Fee for any partial fiscal year will be determined by multiplying the Incentive Fee for such year (assuming this Agreement were in effect for the entire year) by a fraction, the numerator of which is the number of days in the portion of such year during which this Agreement was in effect, and the denominator of which shall be 365. -10- If the annual Fees owed upon termination as shown in the Certificate are less than the Fees paid by the Company upon termination, the Advisor shall remit to the Company its check in an amount equal to the difference. 19. Trustee Action. Wherever action on the part of the Trustees is contemplated by this Agreement, action by a majority of the Trustees, including a majority of the Independent Trustees, shall constitute the action provided for herein. 20. Arbitration. The Company and the Advisor agree that any and all disputes and disagreements arising out of or relating to this Agreement, other than actions or claims for injunctive relief or claims raised in actions or proceedings brought by third parties, shall be resolved through negotiations or, if the dispute is not so resolved, through binding arbitration conducted in Boston, Massachusetts under the J.A.M.S./Endispute Comprehensive Arbitration Rules and Procedures, with the following amendments to those rules. First, the parties agree that in no event shall the arbitration from commencement to issuance of an award take longer than 180 days. Second, the parties agree that the arbitration tribunal shall consist of three arbitrators and that the parties elect not to have the optional appeal procedure provided for in Rule 23. Third, in lieu of the depositions permitted in Rule 15(E) and (F), the parties agree that the only depositions shall be a single deposition to last no longer than one six-hour day that each party may take of the opposing party or an individual under the control of the opposing party. Judgment on the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. 21. TRUSTEES AND SHAREHOLDERS NOT LIABLE. THE DECLARATION OF TRUST OF THE COMPANY, A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS, IS DULY FILED IN THE OFFICE OF THE STATE DEPARTMENT OF ASSESSMENTS AND TAXATION OF MARYLAND PROVIDES THAT THE NAME SENIOR HOUSING PROPERTIES TRUST REFERS TO THE TRUSTEES COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY. 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. 22. Notices. Any notice, report or other communication required or permitted to be given hereunder shall be in writing unless some other method of giving the notice, report or other communication is accepted by the party to whom it is given, and shall be given by being delivered at the following addresses to the parties hereto: If to the Company: Senior Housing Properties Trust 400 Centre Street Newton, Massachusetts 02458 Attention: President -11- If to the Advisor: Reit Management & Research, Inc. 400 Centre Street Newton, Massachusetts 02458 Attention: President Such notice shall be effective upon its receipt by the party to whom it is directed. Either party hereto may at any time give notice to the other party in writing of a change of its address for purposes of this paragraph 22. 23. Amendments. The Agreement shall not be amended, changed, modified, terminated, or discharged in whole or in part except by an instrument in writing signed by each of the parties hereto, or by their respective successors or assigns, or otherwise as provided herein. 24. Successors and Assigns. This Agreement shall be binding upon any successors or permitted assigns of the parties hereto as provided herein. 25. Governing Law. The provisions of this Agreement shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts. 26. Captions. The captions included herein have been inserted for ease of reference only and shall not be construed to affect the meaning, construction or effect of this Agreement. 27. Entire Agreement. This Agreement constitutes the entire agreement of the parties hereto with respect to the subject matter hereof and supersedes and cancels any pre-existing agreements with respect to its subject matter. 28. Attorneys' Fees. If any legal action is brought for the enforcement of this Agreement, or because of an alleged dispute, breach, default or misrepresentation in connection with any of the provisions of this Agreement, the successful or prevailing party or parties shall be entitled to recover reasonable attorneys' fees and other costs incurred in that action in addition to any other relief to which it or they may be entitled. 29. Survival. The provisions of Sections 13, 14, 18, 20, 21, 22 and 28 of this Agreement shall survive the termination hereof. [Remainder of page intentionally left blank.] -12- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as an instrument under seal by their duly authorized officers, as of the day and year first above written. SENIOR HOUSING PROPERTIES TRUST By: /s/ David J. Hegarty Its: President, Chief Operating Officer and Secretary REIT MANAGEMENT & RESEARCH, INC. By: /s/ John Popeo Its: Treasurer and Chief Financial Officer SOLELY AS TO SECTION 14 HEREOF: /s/ Gerard M. Martin Gerard M. Martin /s/ Barry M. Portnoy Barry M. Portnoy -13- EX-12.1 6 Exhibit 12.1
SENIOR HOUSING PROPERTIES TRUST COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in thousands, except ratio amounts) Year Ended December 31, ---------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---------------- --------------- --------------- -------------- ------------ Net income $14,834 $46,236 $44,723 $36,441 $31,062 Fixed charges 18,768 19,293 16,958 14,719 16,937 ---------------- --------------- --------------- -------------- ------------ Adjusted Earnings $33,602 $65,529 $61,681 $51,160 $47,999 ================ =============== =============== ============== ============ Fixed Charges: Interest expense $18,768 $19,293 $16,958 $14,719 $16,937 ---------------- --------------- --------------- -------------- ------------ Total Fixed Charges $18,768 $19,293 $16,958 $14,719 $16,937 ================ =============== =============== ============== ============ Ratio of Earnings to Fixed Charges 1.8x 3.4x 3.6x 3.5x 2.8x ================ =============== =============== ============== ============
EX-21 7 Exhibit 21.1 SENIOR HOUSING PROPERTIES TRUST SUBSIDIARIES OF THE REGISTRANT HRES1 Properties Trust (Maryland) HRES2 Properties Trust (Maryland) SHOPCO-AZ, LLC (Delaware) SHOPCO-CA, LLC (Delaware) SHOPCO-COLORADO, LLC (Delaware) SHOPCO-CT, LLC (Delaware) SHOPCO-GA, LLC (Delaware) SHOPCO-IA, LLC (Delaware) SHOPCO-KS, LLC (Delaware) SHOPCO-LA, LLC (Delaware) SHOPCO-MA, LLC (Delaware) SHOPCO-MI, LLC (Delaware) SHOPCO-MO, LLC (Delaware) SHOPCO-NC, LLC (Delaware) SHOPCO-NE, LLC (Delaware) SHOPCO-PA, LLC (Delaware) (Doing business as SHOPCO-PENNSYLVANIA, LLC in Pennsylvania) SHOPCO-SD, LLC (Delaware) SHOPCO-WI, LLC (Delaware) SHOPCO-WY, LLC (Delaware) SNH-IOWA, INC. (Delaware) SNH-MASSACHUSETTS, INC. (Delaware) (Doing business as MASSACHUSETTS-SNH, INC. in Massachusetts) SNH-MICHIGAN, INC. (Delaware) SNH-NEBRASKA, INC. (Delaware) SPTBROOK Properties Trust (Maryland) SPTGEN Properties Trust (Maryland) SPTIHS Properties Trust (Maryland) SPTMISC Properties Trust (Maryland) SPTMNR Properties Trust (Maryland) SPTMRT Properties Trust (Maryland) SPTSUN Properties Trust (Maryland) SPTSUN II Properties Trust (Maryland) EX-27 8
5 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 17,091 0 22,939 0 0 0 708,739 108,709 654,000 0 200,000 0 0 260 409,146 654,000 0 90,790 0 75,956 0 0 18,768 14,834 0 14,834 0 0 0 14,834 0.57 0.57
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