-----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, NtJ0WDoHXoESncOF4H6NDgThutCi/btKFbTcGlb4umHQfJHfNsCPHaXJooTzRWf5 J5BQOcXZ7FtVWs1UrVD2qg== 0000908737-01-000102.txt : 20010409 0000908737-01-000102.hdr.sgml : 20010409 ACCESSION NUMBER: 0000908737-01-000102 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SENIOR HOUSING PROPERTIES TRUST CENTRAL INDEX KEY: 0001075415 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 043445278 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-15319 FILM NUMBER: 1590126 BUSINESS ADDRESS: STREET 1: 400 CENTRE STREET CITY: NEWTON STATE: MA ZIP: 02458 BUSINESS PHONE: 6173323990 10-K405 1 0001.txt 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, 2000 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. [X] The aggregate market value of the voting stock of the registrant held by non-affiliates was $134.9 million based on the $10.40 closing price per share for such stock on the New York Stock Exchange on March 23, 2001. For purposes of this calculation, 12,809,237 shares held by HRPT Properties Trust and an aggregate of 132,106 shares held directly or by affiliates of 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, $0.01 par value ("Shares"), outstanding as of March 23, 2001: 25,916,100. 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 10, 2001. 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 and concern our ability to successfully operate properties which we took back from financially troubled tenants, the possible expansion of our portfolio, the performance of our tenants and properties, our ability to make distributions, our policies and plans regarding investments, financings and other matters, 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 other statements or implications arising from such statements or otherwise referencing our intent, belief or expectations. Readers are cautioned that any such forward looking statements are not guarantees of future performance and involve risks and uncertainties. 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 policies within the health care industry, changes in financing terms, competition within the health care and senior housing industries, 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," identify 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 2000 FORM 10-K ANNUAL REPORT Table of Contents Part I Page Item 1. Business................................................................................ 1 Item 2. Properties.............................................................................. 30 Item 3. Legal Proceedings....................................................................... 32 Item 4. Submission of Matters to a Vote of Security Holders..................................... 32 Part II Item 5. Market for Registrant's Common Stock and Related Shareholder Matters.................... 33 Item 6. Selected Financial Data................................................................. 34 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................... 35 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............................. 40 Item 8. Financial Statements and Supplementary Data............................................. 40 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................................. 40 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 10, 2001, to be filed pursuant to Regulation 14A. Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................... 41
References in this Annual Report on Form 10-K to the "Company," "Senior Housing," "we" or "us" include Senior Housing Properties Trust and its consolidated subsidiaries, unless the context indicates otherwise. PART I Item 1. Business The Company. Senior Housing Properties Trust (the "Company," "Senior Housing," "we" or "us") is a Maryland real estate investment trust ("REIT") which invests in senior housing real estate, including apartment buildings for aged residents, assisted living facilities, congregate care communities and nursing homes. We were organized on December 16, 1998, as a 100% owned subsidiary of HRPT Properties Trust ("HRPT"), a REIT which now invests principally in office buildings. On October 12, 1999, HRPT distributed 13.2 million common shares of Senior Housing to HRPT shareholders (the "Spin-Off") to create Senior Housing as a separate public REIT. Our principal executive offices are located at 400 Centre Street, Newton, Massachusetts 02458, and its telephone number is (617) 796-8350. As of December 31, 2000, we owned 86 properties located in 23 states. On that date our undepreciated carrying value of these properties, net of impairment losses, was $593.4 million. Number of Undepreciated Location of Properties by State Properties Carrying Value - ------------------------------- ---------- -------------- (in thousands) Arizona 5 $28,012 California 7 48,991 Colorado 7 27,805 Connecticut 3 14,710 Florida 5 131,990 Georgia 4 12,308 Illinois 1 36,742 Iowa 7 11,377 Kansas 1 1,320 Maryland 1 33,080 Massachusetts 5 73,422 Michigan 2 9,086 Missouri 2 3,788 Nebraska 15 13,437 New Jersey 1 13,007 Ohio 1 3,445 Pennsylvania 1 15,598 South Dakota 3 7,589 Texas 1 12,410 Virginia 3 57,666 Washington 1 5,192 Wisconsin 8 25,175 Wyoming 2 7,245 -- -------- Total Investments 86 $593,395 == ======== We believe that the aging of the United States population will increase the demand for existing senior apartments, congregate care communities, assisting living facilities 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. 1 Our current operating environment is challenging. Our historical investments have been approximately 50% in nursing homes and the nursing home industry has been financially devastated by Medicare payment reductions, increased governmental regulation, increasing amounts of tort litigation, rapid growth of the competing assisting living industry and tight capital markets. The current difficulties being faced by the nursing home industry have severely affected some of our tenants. Our present 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 usually restricted on the basis of age. Purpose built properties may have special function rooms, concierge services, high levels of security and assistance call systems for emergency use. Tenants at these properties who need healthcare or assistance with the activities of daily living are expected to contract independently for these services with homemakers or home healthcare companies. Congregate Communities. Congregate communities also provide high levels 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 basis. In some congregate communities, separate parts of the property are dedicated to assisted living or nursing services. Assisted Living Facilities. Assisted living facilities are typically comprised of one bedroom suites which include private bathrooms and efficiency kitchens. Services bundled within one charge 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 purpose built assisted living facilities. 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 chose assisted living facilities often previously had been the most profitable residents in the nursing homes. These residents required a lesser amount of care and 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 nursing homes. Implementation of this Medicare prospective payment program began on July 1, 1998. Prior to the prospective payment program, Medicare generally 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 has been and will be to reduce the profitability of Medicare services in nursing homes. This belief is based upon 2 our observation of the impact of similar Medicare changes that were implemented for hospitals during the 1980s. Tenants. Our financial condition depends, in part, on the financial condition of our tenants. Marriott. About 65% of our current rents are received from Marriott International, Inc. and some of its subsidiaries ("Marriott"). Our properties leased to Marriott predominantly offer congregate care and assisted living services; and almost all of the revenues of these properties are paid by residents from private resources. We own 14 congregate care communities and assisted living facilities located in seven states with 4,137 units that are leased to 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 currently approximately $30 million, which is 65% of our current total annual rent, and the lease provides for rent increases equal to 4.5% of increases in gross revenues of these properties. Marriott has guaranteed all of these lease obligations. Our historic investment in these properties is $325.5 million. The current lease expires in 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 Form 10-K for the three years ended December 29, 2000. Summary Financial Information of Marriott International, Inc. (in millions) As of or for the year ended ------------------------------------------ December 29, December 31, January 1, 2000 1999 1999 ------------ ------------ ---------- Sales........................ $10,017 $8,739 $7,968 Net income................... 479 400 390 Total assets................. 8,237 7,324 6,233 Debt......................... 2,016 1,676 1,267 Equity....................... 3,267 2,908 2,570 Other Tenants. As previously announced, two former large tenants, Integrated Health Services, Inc. ("IHS") and Mariner Post-Acute Network, Inc. ("Mariner"), which on a combined basis represented about 48% of our historical rents in 1999, filed for bankruptcy in early 2000. During 2000, we negotiated settlements with both of these lessees to surrender their leasehold interests to us and exchanged other consideration so that we can operate the properties for our own account under the Internal Revenue Code ("IRC") foreclosure property rules applicable to REITs. The leases for five nursing homes containing 762 beds that were previously operated by IHS were assumed by a subsidiary of HEALTHSOUTH Corporation ("HEALTHSOUTH"), a NYSE listed company which was a historical co-obligor under these leases. Our historic investment in these properties is $73.4 million. These leases expire on January 1, 2006, and total annual rent is approximately $10 million or 22% of our current total annual rent. The leases provide for annual rental increases equal to 3% of net patient revenues in excess of net patient revenues for the year ended May 31, 2000. These leases have renewal options, but we do not expect HEALTHSOUTH to exercise these options. We own one nursing home with 150 beds that is leased to a subsidiary of Genesis Health Ventures, Inc. ("Genesis"). Genesis is a publicly owned company whose major businesses are operating nursing homes, congregate care communities and assisting living facilities. The annual rent under this lease is $1.5 million, which is 3% of our current total annual rent, and the lease provides for annual rent increases of $13,000. Our historic investment in this property is $13 million. This lease expires in 2005, and Genesis has two renewal 3 options for ten years each and one for five years. Genesis filed for bankruptcy on June 22, 2000, but has continued to pay rent to us for this nursing home at the contractual rate. In addition to the tenants described above, we currently lease seven nursing homes and assisted living facilities located in five states with 964 units to five separate private companies and one nursing home with 140 beds to IHS. These leases require total annual rent of $4.2 million. These leases are currently being paid according to their contractual terms, but as discussed below, some of these contracts with IHS and with former subtenants of now bankrupt tenants have recently been renegotiated. Lease Terms. 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. Lease terms generally include the following: 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, alterations and additions to any leased property which exceed threshold amounts 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 at the expiration of the lease, subject in some cases to our obligation to pay to the tenants unamortized costs. At the end of the leases, tenants are required to surrender the leased properties in substantially the same condition as existed on the commencement dates of the leases, subject to 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 the leased property and from any violations or alleged violations of applicable environmental laws or regulations. 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 for our properties covering: o comprehensive general liability for damage to property or injury arising out of the ownership, use, occupancy or maintenance of the property; 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. 4 Damage, Destruction or Condemnation. If 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. 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 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. Default 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 occupy and use 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 lease and the rent received under the reletting; o make any payment or perform any act required to be performed by the tenant under its lease; and o require the defaulting tenant 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 the tenants to pay and perform all obligations arising under these ground leases. These ground leases terminate in 2079 and 2086. The annual rents payable under these ground leases in 2000 totaled approximately $140,100. 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. Foreclosure Properties. At the beginning of 2000, we leased 27 nursing homes, including three with some adjacent senior apartments, located in nine states and had mortgage investments secured by 12 nursing homes in three states all of which were operated by IHS. IHS stopped paying rent and debt service to us in January 2000 and filed for bankruptcy on February 2, 2000. After the IHS bankruptcy we negotiated a settlement of IHS' obligations to us as follows: IHS surrendered to us its leasehold for 26 of our properties, IHS gave us deeds in lieu of foreclosure for 11 of the 12 properties which we had mortgage financed, IHS gave us deeds to nine nursing homes (including one of which was closed) and various parcels of land which it had owned debt free and IHS paid us some of our rental arrearages. In exchange, we released IHS from its obligations for the 26 surrendered leaseholds and the 11 mortgaged properties, we released our mortgage for one property which was retained by IHS and the rent for one of our properties which IHS continues to operate was lowered and the lease term extended for a new 10 year period. This settlement was approved by the Bankruptcy Court on July 7, 2000, with an effective date of July 1, 2000. At the beginning of 2000, we also leased 26 nursing homes to Mariner, four of which were subleased to other nursing home operators. On January 18, 2000, Mariner filed for bankruptcy, but continued to pay its rent 5 to us. We negotiated a settlement agreement with Mariner whereby Mariner forfeited a $15 million cash security deposit, 1,000,000 common shares of HRPT, 100,000 of our common shares and their leasehold interest in 17 of the nursing homes. The 1,000,000 HRPT shares and 100,000 of our shares were previously pledged to us to secure Mariner's lease obligations. We became direct lessors of the four subleased properties and deeded five nursing homes to Mariner. This settlement agreement was approved by the Bankruptcy Court on June 29, 2000, with an effective date of July 1, 2000. As a result of these two lease termination and foreclosure situations, we took over the operations of 57 nursing homes and one vacant nursing home on July 1, 2000. Under applicable IRC provisions, within 90 days of taking over the properties after foreclosures and lease terminations, a REIT is required to engage an independent third party manager to manage the properties. See "Federal Income Tax Considerations - REIT Qualification Requirements." We hired Five Star Quality Care, Inc. ("Five Star") to manage the properties. Five Star is a newly formed entity owned by Gerard M. Martin and Barry M. Portnoy, our Managing Trustees. Until we receive licenses and provider agreements, IHS and Mariner remain ultimately responsible under their licenses for the facilities' operations with Five Star as a submanager, and the net profit or loss is reflected as Other Real Estate Income in our Consolidated Statements of Income. As of April 2, 2001, we have received all licenses required to operate 50 of the 57 affected nursing homes. Investment Policies Our investment policies are established by our Board of Trustees and may be changed by the Board of Trustees at any time without shareholder approval. Acquisitions. Our present investment goals are to acquire additional senior apartments, congregate care communities, assisted living facilities and nursing homes, primarily for income and secondarily for their appreciation potential. In making 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; 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 with respect to tenants, types of services provided and locations. However, 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. Form of Investments. We prefer 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 6 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. Other Types of Real Estate. During the past year we have on several occasions considered investing in real estate different from senior housing properties. We have focused upon purpose built specialized real estate which is triple net leased for long terms. To date we have not made any such investments, but we may continue to explore such alternative investments. Completed Acquisitions. During 2000 we completed only one new investment, as follows: When we began operations as a separate public company in October 1999, HRPT transferred substantially all of its senior housing investments to us. At that time, we entered a transaction agreement with HRPT which, in part, governs future potential competition between us and HRPT. By its terms, the transaction agreement does not apply to several mortgage receivables secured by senior housing properties which were retained by HRPT. During 2000, one of these mortgages with a principal balance of $2.4 million went into default and HRPT foreclosed. Although it may not have been required to do so under the specific terms of the transaction agreement, HRPT offered to sell this property to us; and in October 2000 we purchased from HRPT this 90-bed assisted living facility in California for its appraised value of $2.3 million. Disposition Policies From time to time we consider the sale of one or more properties. Disposition decisions are 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 capital needs; and o the requirements for our continued qualification as a REIT under the IRC. On October 31, 2000, we sold four independent living properties previously leased to Brookdale Living Communities, Inc. ("Brookdale") for $123 million. HRPT acquired these properties in December 1996 and May 1997 for a total investment of $101.9 million. Proceeds from the sale were used to reduce amounts outstanding under our bank credit facility. We decided to sell these properties because of the attractive sales price and because of a change in Brookdale's business plan. In addition, on February 24, 2000, we sold three nursing homes previously leased to Sun Healthcare Group, Inc. ("Sun") and sublet to The Frontier Group, Inc. ("Frontier") for $13 million. Both Sun and Frontier filed for bankruptcy in 1999. After applying the proceeds to various professional fees incurred and rental arrearages, a nominal gain was recorded from the sale. We used the net proceeds from the sale to reduce amounts outstanding on our bank credit facility. We decided to sell these properties because we were unable to locate an acceptable new tenant after Sun and Frontier defaulted. As explained above, we assumed nursing home operations at 57 properties as a result of lease terminations and foreclosures arising from two tenant bankruptcies in 2000. Under applicable IRC REIT 7 provisions, we are required to dispose of these operations within three years, subject to extension periods for up to an additional three years. As these operations are stabilized we expect to offer these properties for lease or sale or to otherwise separate these operations from our continuing qualified REIT business activities. Financing Policies We have a $270 million bank credit facility. The facility requires payment of interest only at LIBOR plus a premium until maturity on September 15, 2002. Outstanding borrowings under the facility were $97 million at December 31, 2000. The bank credit facility capacity was reduced from $350 million to $270 million upon our sale of the four properties in October 2000, which were part of the collateral security for this facility. This bank credit facility is secured by first mortgages upon, and a collateral assignment of leases for, the 14 Marriott 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 our total capital. We may use our 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 affecting the market value of our 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, 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. 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. Our Investment Advisor and Other Operating Arrangements We have no employees. Services which would be provided to us by employees are provided by our investment advisor, REIT Management & Research, Inc. ("RMR"). RMR is a Delaware corporation owned by Gerard M. Martin and Barry M. Portnoy. RMR's principal executive offices are located at 400 Centre Street, Newton, Massachusetts 02458, and its telephone number is (617) 928-1300. The Directors of RMR are Gerard M. Martin, Barry M. Portnoy and David J. Hegarty. The officers of RMR are David J. Hegarty, President and Secretary, John G. Murray, Executive Vice President, John C. Popeo, Treasurer, and Evrett W. Benton, 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 is one of our officers. As noted above, IRC REIT provisions require that we engage an independant contractor to manage the nursing home operations which we assumed as a result of our settlements with bankrupt former tenants. We have engaged Five Star as our manager for these nursing homes. Five Star is a Delaware corporation owned by 8 Gerard M. Martin and Barry M. Portnoy, our Managing Trustees. The Directors of Five Star are Gerard M. Martin and Barry M. Portnoy. The officers of Five Star are Evrett W. Benton, President, Rosemary Esposito, Vice President and Chief Operating Officer, David J. Hegarty, Acting Treasurer, Gretchen A. Holtz, Maryann Hughes, Larry W. Smith and Beth S. Witte, Vice Presidents and John R. Hoadley, Controller. IHS was unable or unwilling to pay us in money for the damages we incurred as a result of its lease terminations and mortgage defaults. As part of the settlement approved by the IHS Bankruptcy Court, IHS delivered to us title to nine nursing homes which it previously owned debt free in partial satisfaction of our claims against IHS. Because we did not own or mortgage these properties prior to the IHS bankruptcy, these properties were not foreclosure properties as defined in applicable IRC regulations. Accordingly, we created new subsidiaries to take title to these properties and assume these operations, which subsidiaries were 99% beneficially owned by us with no voting control and 0.5% beneficially owned with 50% voting control by each of our Managing Trustees, Gerard M. Martin and Barry M. Portnoy. Effective January 1, 2001, the IRC laws concerning permissible REIT activities were changed and we acquired 100% ownership interests of these entities from Messrs. Martin and Portnoy at their cost, and these nursing homes are now owned by our taxable REIT subsidiaries and managed for us by Five Star. The same ownership arrangements were used by us for the 90-bed assisted living facility which we acquired from HRPT during 2000. Employees As of March 23, 2001, we had no employees. RMR, which administers our day-to-day operations, had about 200 full-time employees. As of that date, Five Star had approximately 7,000 employees, including approximately 75 in its headquarters and regional offices and approximately 6,900 in the nursing homes which it manages for us. Regulation and Reimbursement Our own and our tenants' operations of our properties must comply with numerous federal, state and local statutes and regulations. 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 senior apartments 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 9 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 licensing regulations, and if the facilities receive Medicaid or Medicare funds, to certification standards. 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, by June 2000, 38 states provided 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 eight other states were planning some Medicaid funding by implementing assisted living pilot programs or demonstration projects. Because rates paid to assisted living property operators are lower than rates paid to nursing home operators, some states use Medicaid funding of assisted living as a means of lowering the cost of services for residents who may not need the higher intensity of health-related services 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. In light of the large number of states using Medicaid to purchase services at assisted living properties and the growth of assisted living, a majority of states have adopted licensing standards applicable to assisted living facilities. The National Academy for State Health Policy reported in July 2000 that 29 states had implemented licensing standards specifically for assisted living. Eighteen states have revised their licensing regulations since June 1998, and 25 states reported they were drafting or revising their regulations in 2000. 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. Also, the National Academy for State Health Policy found that nine states require certificates of need from state health planning authorities before new assisted living properties may be developed. 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 may decline in value because Medicaid rates may fail to keep up with increasing costs. 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 may increase in value because these limitations upon development may help ensure higher occupancy and higher non-governmental rates. Two federal government studies 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 on consumer information and quality of care issues in 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 consumers often receive 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 Study of Assisted Living for the Frail Elderly, was funded by the U.S. Department of Health and Human Services Assistant Secretary for Planning and Evaluation and is expected to result in additional reports on the assisted living industry, including reports on quality of care and financing. A report by the National Academy for State Health Policy in 1998, a 1999 national survey of assisted living facilities and a June 2000 report on residents leaving assisted living, 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 10 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 58% of all nursing home revenues in the U.S. in 1998 came from government Medicare and Medicaid programs, including about 46% from Medicaid programs. Nursing homes are among the most highly regulated businesses in the country. The federal and state governments regularly monitor the quality of care provided at nursing homes. State health departments conduct surveys of resident care and inspect the physical condition of nursing home properties. These periodic inspections and occasional changes in 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 Medicare prospective payment system, PPS, which began being phased in for cost reporting years starting on or after July 1, 1998, capital costs are part of the prospective rate and are not facility specific. Medicare PPS and other recent legislative and regulatory actions with respect to state Medicaid rates 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, 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. In December 2000, Congress provided some relief by providing limited increases to Medicare PPS rates. 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 a July 1998 General Accounting Office investigation which found inadequate care in a significant proportion of California nursing homes and HCFA's July 1998 report to Congress on the effectiveness of the survey and enforcement system. In 1999, HCFA's Office of Inspector General issued several reports concerning quality of care in nursing homes, and the GAO issued reports in 1999 and 2000 which recommended that HCFA and the states strengthen their compliance and enforcement practices to better ensure that nursing homes provide adequate care. In 1998, 1999 and 2000, the Senate Special Committee on Aging held hearings on these issues. HCFA is taking steps to focus more survey and enforcement efforts on nursing homes with findings of substandard care or repeat violations of Medicare/Medicaid standards and to identify chain-operated facilities with patterns of noncompliance. HCFA is increasing its oversight of state survey agencies and requiring state agencies to use enforcement sanctions and remedies more promptly when substandard care or repeat violations are identified, to investigate complaints more promptly, and to survey facilities more consistently. In addition HCFA has adopted regulations expanding federal and state authority to impose civil money penalties in instances of noncompliance. Medicare survey results for each nursing home are being posted on the internet. In 2000, HCFA issued a report on its study linking nursing staffing levels with quality of care, and HCFA is assessing the impact that minimum staffing requirements would have on facility costs and operations. Federal efforts to target fraud and abuse and violations of anti-kickback laws by Medicare and Medicaid providers have also increased. In March 2000, the HHS Office of Inspector General issued compliance guidelines for nursing facilities, to assist them to develop voluntary compliance programs to prevent fraud and abuse. Also, new HCFA rules governing the use and disclosure of individually identified health information are currently scheduled to become final in 2001 and to require compliance in 2003, with civil and criminal sanctions for noncompliance. An adverse determination concerning our or any of our tenants' license or eligibility for Medicare or Medicaid reimbursement or compliance with applicable federal or state regulations could adversely affect our finances or our Tenant's ability to pay rent. 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. 11 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. Competition We compete with other real estate investment trusts. We also compete with banks, non-bank finance companies, leasing companies and insurance companies which invest in real estate. Some of these competitors have resources that are greater than ours and have lower costs of capital. FEDERAL INCOME TAX CONSIDERATIONS The following summary of federal income tax 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 other than the one private ruling request summarized below in respect of our taxable REIT subsidiaries, 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 acquirer 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. Your 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; 12 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. Taxation as a REIT We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code, commencing with our taxable year ending December 31, 1999. Our REIT election, assuming continuing compliance with the 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 made on our preferred shares, and thereafter to distributions made 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 and 2000 taxable years, 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 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 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. 13 o If we have net income from the sale or other disposition of our "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%. We estimate there will be no federal income tax liability for foreclosure property income for 2000. 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. 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. o As explained below, effective for our taxable year 2001 and thereafter, we are permitted within limits to own stock and securities of a "taxable REIT subsidiary." A taxable REIT subsidiary of ours will be taxed on its net income as a C corporation that is separate from us, and will be subject to limitations on the deductibility of interest expense paid to us. If it is determined that transactions between and among us, our tenants, and our taxable REIT subsidiaries are not at arm's length we will be subject to a 100% tax on redetermined rents, deductions and excess interest expense. 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 except to the extent of taxes due on "taxable REIT subsidiary" income, 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 or elect not to qualify as a REIT in any taxable year, then we will be subject to federal tax in the same manner as an ordinary corporation. Any distributions to our shareholders in a year in which we fail to qualify as a REIT will not be deductible by us, nor will these distributions be required under the Internal Revenue Code. In that event, to the extent of our current and accumulated earnings and profits, any 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, 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 reduction or elimination of distributions to our shareholders, or in our incurring substantial indebtedness or liquidating substantial investments in order to pay the resulting corporate-level taxes. 14 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; (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 neither condition (5) nor (6) need 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, 2000, 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 restricts transfers of our shares. In addition, if we comply with applicable Treasury regulations to ascertain the ownership of our 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). However, our failure to comply with these regulations for ascertaining ownership may result in a penalty of $25,000, or $50,000 for intentional violations. Accordingly, we intend to comply with these 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, REIT shares 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 may be taxed on a portion of the dividends received from the REIT. Our Wholly-Owned Subsidiaries and Our Investments through Partnerships. Except in respect of taxable REIT subsidiaries as discussed below, 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 for federal tax purposes. 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- 15 owned subsidiaries, other than the taxable REIT subsidiaries discussed below, 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, except for the taxable REIT subsidiaries discussed below, 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 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 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. Taxable REIT Subsidiaries. Effective for taxable year 2001 and thereafter, we are permitted to own any or all of the securities of a "taxable REIT subsidiary" as defined in Section 856(l) of the Internal Revenue Code, provided that no more than 20% of our assets is comprised of our investments in the stock or securities of our taxable REIT subsidiaries. Among other requirements, a taxable REIT subsidiary must: (1) be a non-REIT corporation for federal income tax purposes in which we directly or indirectly own shares; (2) join with us in making a taxable REIT subsidiary election; (3) not directly or indirectly operate or manage a lodging facility or a health care facility; and (4) not directly or indirectly provide to any person, under a franchise, license, or otherwise, rights to any brand name under which any lodging facility or health care facility is operated, except that in limited circumstances a subfranchise, sublicense or similar right can be granted to an independent contractor to operate or manage a lodging facility. In addition, a corporation other than a REIT in which a taxable REIT subsidiary directly or indirectly owns more than 35% of the voting power or value will automatically be treated as a taxable REIT subsidiary. Subject to the discussion below, we believe that we and each of our taxable REIT subsidiaries, if any, have complied with, and will continue to comply with, the requirements for taxable REIT subsidiary status, and we believe that the same will be true for any taxable REIT subsidiary that we later form or acquire. Our ownership of stock and securities in taxable REIT subsidiaries is exempt from the 10% and 5% REIT asset tests discussed below. Also, as discussed below, taxable REIT subsidiaries can perform services for our tenants without disqualifying the rents we receive from those tenants under the 75% gross income test or the 95% gross income test. Moreover, because taxable REIT subsidiaries are taxed as C corporations that are separate from us, their assets, liabilities and items of income, deduction and credit are not imputed to us for purposes of the REIT qualification requirements described in this summary. Therefore, taxable REIT subsidiaries can undertake third-party management and development activities and activities not related to real estate. 16 Restrictions are imposed on taxable REIT subsidiaries so as to ensure that they will be subject to an appropriate level of federal income taxation. For example, a taxable REIT subsidiary may not deduct interest payments made in any year to an affiliated REIT to the extent that the interest payments exceed, generally, 50% of the taxable REIT subsidiary's adjusted taxable income for that year. However, the taxable REIT subsidiary may carry forward the disallowed interest expense to a succeeding year, and deduct the interest in that later year subject to that year's 50% adjusted taxable income limitation. In addition, if a taxable REIT subsidiary pays interest, rent, or other amounts to its affiliated REIT in an amount that exceeds what an unrelated third party would have paid in an arm's length transaction, then the REIT generally will be subject to an excise tax equal to 100% of the excessive portion of the payment. Finally, if in comparison to an arm's length transaction, a tenant has overpaid rent to the REIT in exchange for underpaying the taxable REIT subsidiary for services rendered, then the REIT may be subject to an excise tax equal to 100% of the overpayment. There can be no assurance that arrangements involving our taxable REIT subsidiaries will not result in the imposition of one or more of these deduction limitations or excise taxes, but we do not believe that we are or will be subject to these impositions. In our 2000 taxable year, we took title to several healthcare facilities, valued in the aggregate at less than $9 million, through corporate subsidiaries in which we owned 99% of the outstanding common stock, all of which was nonvoting, and in which individual shareholders owned 1% of the outstanding common stock, all of which was voting. We could not take direct title to these particular facilities and operate them under the "foreclosure property" rules discussed below, because the facilities were not leased by or mortgaged to us at the time of our tenant-mortgagor's default. Nor could we lease these facilities on suitable terms because of distressed market conditions. Accordingly, our 99% subsidiaries took title to these particular facilities and retained an independent contractor to oversee the day-to-day operation and management of the facilities. Although there can be no assurance in this regard, we believe that these 99% subsidiaries' ownership and operational structure during our 2000 taxable year satisfied the then applicable REIT asset tests discussed below, because we never owned more than 10% of the voting securities of the 99% subsidiaries. As of January 1, 2001, we acquired 100% ownership of the formerly 99% owned corporate subsidiaries, and filed a taxable REIT subsidiary election for these subsidiaries effective January 1, 2001. These subsidiaries continue to retain the independent contractor to oversee the day-to-day operation and management of their healthcare facilities. We have submitted a private letter ruling request to the IRS to confirm that these subsidiaries comply with the requirement that prohibits the direct or indirect operation or management of a healthcare facility by a taxable REIT subsidiary. In the event that the IRS rules that these subsidiaries are ineligible for taxable REIT subsidiary status, we believe that the subsidiaries would be qualified REIT subsidiaries under Section 856(i) of the Internal Revenue Code because we own 100% of them and they are not properly classified as taxable REIT subsidiaries. As our qualified REIT subsidiaries, the gross income from the subsidiaries' healthcare facilities would be treated as our own, and as a general matter would be nonqualifying income for purposes of the 75% gross income test and the 95% gross income test discussed below. Although there can be no assurance in this regard, in the event of an adverse IRS determination on our private letter ruling request, we expect either that we will be able to satisfy the 75% and 95% gross income tests in spite of the additional nonqualifying income imputed to us, or that we will make alternate arrangements in a timely manner--for example, a lease of the healthcare facilities--whereby the healthcare facilities will yield us qualifying income under the 75% and 95% gross income tests or otherwise not hinder us in meeting the federal income tax requirements for REIT qualification described in this summary. 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 17 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 tenants, would result in that tenant'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% affiliated tenant rule. Furthermore, there can be no assurance that we will be able to monitor and enforce these restrictions, nor will our shareholders necessarily be aware of ownership of shares attributed to them under the Internal Revenue Code's attribution rules. o For our 2001 taxable year and thereafter, there is a limited exception to the above prohibition on earning "rents from real property" from a 10% affiliated tenant, if the tenant is a taxable REIT subsidiary. If at least 90% of the leased space of a property is leased to tenants other than taxable REIT subsidiaries and 10% affiliated tenants, and if the taxable REIT subsidiary's rent for space at that property is substantially comparable to the rents paid by nonaffiliated tenants for comparable space at the property, then otherwise qualifying rents paid by the taxable REIT subsidiary to the REIT will not be disqualified on account of the rule prohibiting 10% affiliated tenants. 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 or, for our 2001 taxable year and thereafter, through one of our taxable REIT subsidiaries. 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 18 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. For our taxable years through December 31, 2000, 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 our 2001 taxable year and thereafter, 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. In our 2000 taxable year, we reduced to possession several healthcare facilities, including both the real property and the incidental personal property at these facilities, in each case after a default or imminent default on either a loan secured by the facility or a lease of the facility. In the absence of "foreclosure property" treatment under Section 856(e) of the Internal Revenue Code, gross operating income from these repossessed facilities would not qualify under the 75% and 95% gross income tests, and would likely disqualify us from being a REIT. As foreclosure property, however, gross operating income from our repossessed facilities will qualify under the 75% and 95% gross income tests. Further, any gain we recognize on the sale of foreclosure property, plus any income we receive from foreclosure property that would not qualify under the 75% gross income test in the absence of foreclosure property treatment, reduced by our expenses directly connected with the production of those items of income, will be subject to tax at the maximum corporate rate, currently 35%. We believe that we are eligible, pursuant to Section 856(e) of the Internal Revenue Code, to treat our repossessed facilities as "foreclosure property," and we intend to make an election to that effect with our 2000 federal income tax return. However, a repossessed facility's status as foreclosure property will cease upon the earlier of: o the end of our 2003 taxable year, unless an extension is granted by the Secretary of the Treasury; o the date we begin to lease the facility on terms that give rise to income that does not qualify under the 75% gross income test, or the date we begin to receive or accrue income pursuant to a lease, directly or indirectly, that does not qualify under the 75% gross income test; o the first day after repossession on which construction takes place, other than completion of a building or other improvement where more than 10% of the construction was completed before our tenant's or debtor's default became imminent; or o the first day more than 90 days after repossession that we do not retain an independent contractor, from whom we do not derive or receive any income, to operate the facility on our behalf. We have retained an independent contractor from whom we do not derive or receive any income to oversee the day-to-day operation of our repossessed facilities, and although there can be no assurance in this regard, we 19 believe that our repossessed facilities have qualified, and will continue to qualify, as foreclosure property under Section 856(e) of the Internal Revenue Code. Accordingly, we believe that gross operating income from these repossessed facilities has qualified, and will continue to qualify, under the 75% and 95% gross income tests. 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 adversely affect 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 under certain relief provisions. Even if these relief provisions 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 these asset percentage tests in order to qualify as a REIT for federal income tax purposes: 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 our 2001 taxable year and thereafter, 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. o For our 2001 taxable year and thereafter, our stock and securities in a taxable REIT subsidiary are exempted from the preceding 10% and 5% asset tests. However, no more than 20% of our total assets may be represented by stock or securities of taxable REIT subsidiaries. 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 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. 20 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 90% 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 90% 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. Prior to our 2001 taxable year, the preceding 90% percentages were 95%. 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. If a dividend is declared in October, November, or December to shareholders of record during one of those months, and if the dividend is paid during the following January, then for federal income tax purposes the dividend 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 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% or 90% distribution requirements, we may find it necessary to arrange for new debt or equity financing or sell properties 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. 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. 21 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 that spin-off was an exchange under Section 351(a) of the Internal Revenue Code. We believe that Section 351(a) treatment was appropriate. Therefore, 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 obtained 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) of the Internal Revenue Code, 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) of the Internal Revenue Code. We intend to comply with the annual REIT distribution requirements regardless of whether the deemed exchange was an exchange under Section 351(a) of the Internal Revenue Code. 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. 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 or upon changes in a reasonable price index. Therefore, the additional rent provisions in our leases that are based on a fixed percentage of lessee receipts or changes in a reasonable price index 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 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. 22 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 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. 23 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 of 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. 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, 24 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 of 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 generally 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 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. 25 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 prior 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 encouraged 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 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 26 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 withholding agent may 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. 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, new regulations, revisions to existing regulations, and revised interpretations of established concepts are issued 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 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. For example, if a state has not updated its REIT taxation provisions to permit taxable REIT subsidiaries, then our use of a taxable REIT subsidiary may disqualify us from favorable taxation as a REIT in that state. 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, 2000, we had real estate investments totaling $593.4 million, at cost and after an impairment loss write-down, in 86 properties that were leased to tenants or operated for our account by Five Star. At December 31, 2000, 14 properties with an aggregate cost of $325.5 million were mortgaged to secure our bank credit facility. The following table summarizes some information about our properties as of December 31, 2000. All dollar amounts are in thousands. See "Item 1. Business."
Built/ Invest Location Property Type Renovated(1) Units/Beds(2) -ment(3) - --------------------------------------- ---------------------- ---------------- ---------------- -------------- Triple Net Leases: Marriott International, Inc. Scottsdale, AZ Assisted Living 1990 148 $9,877 Sun City, AZ Assisted Living 1990 149 11,916 Laguna Hills, CA Congregate Care 1991 403 31,791 Boca Raton, FL Congregate Care 1999 372 44,836 Deerfield Beach, FL Congregate Care 1986 288 16,935 Fort Myers, FL Congregate Care 1987 470 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 501 33,080 Bellaire, TX Assisted Living 1991 145 12,410 Arlington, VA Congregate Care 1992 421 18,889 Charlottesville, VA Congregate Care 1991 316 29,829 Virginia Beach, VA Assisted Living 1990 114 8,948 ---------------- -------------- 4,137 325,472 HEALTHSOUTH Corporation Boston, MA Nursing Home 1985 201 24,978 Hyannis, MA Nursing Home 1982 142 8,292 Middleboro, MA Nursing Home 1987 124 17,523 North Andover, MA Nursing Home 1985 122 3,860 Worcester, MA Nursing Home 1990 173 18,769 ---------------- -------------- 762 73,422 Integrated Health Services, Inc. (4) Canonsburg, PA Nursing Home 1990 140 15,598 ---------------- -------------- 140 15,598 Genesis Health Ventures, Inc./ Multicare Companies, Inc. (4) Burlington, NJ Nursing Home 1994 150 13,007 ---------------- -------------- 150 13,007 Private Company Tenants Fresno, CA Nursing Home 1985 180 3,503 Grove City, OH Nursing Home 1965 200 3,445 St. Joseph, MO Nursing Home 1976 120 1,333 Huron, SD Nursing Home 1977 163 3,256 Huron, SD Assisted Living 1968 59 1,014 Sioux Falls, SD Nursing Home 1979 139 3,319 Seattle, WA Nursing Home 1964 103 5,192 ---------------- -------------- 964 21,062 30 Built/ Invest Location Property Type Renovated(1) Units/Beds(2) -ment(3) - --------------------------------------- ---------------------- ---------------- ---------------- -------------- Properties Managed by Five Star: Phoenix, AZ Nursing Home 1984 127 3,185 Yuma, AZ Nursing Home 1984 128 2,326 Yuma, AZ Congregate Care 1984 80 708 Arleta, CA Assisted Living 1976 90 2,300 Lancaster, CA Nursing Home 1994 99 3,488 Stockton, CA Nursing Home 1991 116 3,136 Thousand Oaks, CA Nursing Home 1970 124 3,454 Van Nuys, CA Nursing Home 1984 58 1,319 Canon City, CO Nursing Home/ Senior Apartments 1984 85 3,008 Colorado Springs, CO Nursing Home 1996 100 2,450 Delta, CO Nursing Home 1978 90 3,737 Grand Junction, CO Nursing Home 1986 96 4,408 Grand Junction, CO Nursing Home 1995 82 3,905 Lakewood, CO Nursing Home 1985 175 4,721 Littleton, CO Nursing Home 1965 230 5,576 Cheshire, CT Nursing Home 1971 140 3,747 New Haven, CT Nursing Home 1971 150 5,716 Waterbury, CT Nursing Home 1974 150 5,247 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 Des Moines, IA Nursing Home 1997 93 750 Glenwood, IA Nursing Home 1982 128 2,420 Pacific Junction, IA Nursing Home 1978 12 343 Winterset, IA Nursing Home/ Senior Apartments 1995 99 2,703 Ellinwood, KS Nursing Home 1972 55 1,320 Farmington, MI Nursing Home 1991 153 4,156 Howell, MI Nursing Home 1985 176 4,930 Tarkio, MO Nursing Home 1996 95 2,455 Ainsworth, NE Nursing Home 1995 50 445 Ashland, NE Nursing Home 1996 101 1,851 Blue Hill, NE Nursing Home 1996 68 1,119 Campbell, NE (5) Nursing Home 1969 45 -- Central City, NE Nursing Home 1999 70 940 Columbus, NE Nursing Home 1978 48 650 Edgar, NE Nursing Home 1995 54 139 Exeter, NE Nursing Home 1972 56 630 Grand Island, NE Nursing Home 1996 74 1,934 Gretna, NE Nursing Home 1995 63 940 Lyons, NE Nursing Home 1974 82 810 Milford, NE Nursing Home 1970 60 904 Sutherland, NE Nursing Home 1995 62 1,270 Utica, NE Nursing Home 1988 41 590 31 Built/ Invest Location Property Type Renovated(1) Units/Beds(2) -ment(3) - --------------------------------------- ---------------------- ---------------- ---------------- -------------- Waverly, NE Nursing Home 1995 51 1,215 Brookfield, WI Nursing Home 1995 226 6,145 Clintonville, WI Nursing Home 1965 68 1,761 Clintonville, WI Nursing Home 1969 107 1,747 Madison, WI Nursing Home 1987 73 1,887 Milwaukee, WI Nursing Home 1983 215 4,160 Milwaukee, WI (6) Nursing Home 1997 -- 307 Pewaukee, WI Nursing Home 1969 237 3,416 Waukesha, WI Nursing Home 1995 105 5,752 Laramie, WY Nursing Home 1986 144 4,022 Worland, WY Nursing Home/ Senior Apartments 1996 87 3,223 ---------------- -------------- 5,760 144,834 ---------------- -------------- Total Portfolio 11,913 $593,395 ================ ============== (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 the investment shown in the last column. (2) Units/beds are a customary measure of property values used in the senior housing industry. (3) Represents Senior Housing's costs before depreciation and, in some cases, is net of impairment loss write-downs. (4) Tenant in bankruptcy proceedings. (5) Five Star is currently operating for our account one leased property in Campbell, NE which was transferred to us by IHS during 2000. This property is leased from a municipality through 2006. No rent is paid for this property, except a $3,000/month replacement reserve. (6) This facility was closed in November 2000 and is expected to be sold in 2001.
Item 3. Legal Proceedings In the ordinary course of business we are and may become involved in legal proceedings. We are not aware of any pending or threatened legal proceedings affecting us or any of our properties the outcome of which we expect to have a material impact upon us. 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. 32 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 periods indicated the high and low closing sale prices for our Shares as reported in the New York Stock Exchange Composite Transactions reports. 2000 High Low ---- ---- --- Fourth Quarter............................... $10.31 $8.81 Third Quarter................................ 9.56 7.94 Second Quarter............................... 10.25 7.33 First Quarter................................ 13.56 8.19 1999 ---- Fourth Quarter 1999 (from October 12, 1999) 16.31 11.06 The closing price of our Shares on the New York Stock Exchange on March 23, 2001, was $10.40. As of March 23, 2001, there were approximately 4,365 record holders of our Shares, and we estimate that as of that date there were in excess of 77,000 beneficial owners of our Shares. The following table sets forth the amount of distributions paid and payable in 2000 and 1999 and the respective annualized rates. Common Annualized Distribution Common Date Paid Per Share Distribution Rate --------- --------- ----------------- 2000 ---- January 24, 2001...................... $0.30 $1.20 November 21, 2000..................... 0.30 1.20 August 24, 2000....................... 0.30 1.20 May 25, 2000.......................... 0.30 1.20 February 24, 2000..................... 0.60 2.40 1999 ---- November 22, 1999..................... 0.60 2.40 A distribution of $0.30 per Share, or $1.20 per Share on an annualized rate, was declared in December 2000 and paid in January 2001. This distribution is included in the foregoing table as a 2000 distribution. The 2000 distributions are classified for tax purposes as 12.95% ordinary income and 87.05% capital gain (of which, 30.1% was unrecaptured depreciation). The 1999 distribution was classified as 100% ordinary income. In order to qualify for the beneficial tax treatment accorded to REITs by Sections 856 through 860 of the IRC, we are required to make distributions to shareholders which equal annually at least 90% (2000 and prior, 95%) of our taxable income. All distributions are made at the discretion of our Board of Trustees. Our Board of Trustees determines the amounts of distributions based upon our earnings, our cash flow available for distribution, our financial condition and other factors that the Trustees deem relevant. 33 Item 6. Selected Financial Data Set forth below is selected financial data for the periods and dates indicated. 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 for all periods. 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 our shares were outstanding for all periods prior to October 12, 1999. The following table includes pro rata allocations of HRPT's 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 public company separate from HRPT. Accordingly, the net income and funds from operations shown are not necessarily indicative of results that we would have realized as a separate company. Additionally, year to year comparisons 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 in this Annual Report on Form 10-K. Amounts are in thousands, except per share information.
Income Statement Data: Year Ended December 31, ---------------------------------------------------------------------- 2000 1999 1998 1997 1996 ---------------------------------------------------------------------- Total revenues (1) $75,522 $90,790 $88,306 $84,171 $70,442 Income before gain on sale of properties (2) 31,022 14,834 46,236 44,723 36,441 Net income (3) 58,437 14,834 46,236 44,723 36,441 Funds from operations (4) 47,638 67,091 64,533 62,549 51,824 Distributions 46,722 15,601 -- -- -- Weighted average shares outstanding 25,958 26,000 26,000 26,000 26,000 Per share: Income before gain on sale of properties (2) $1.20 $0.57 $1.78 $1.72 $1.40 Net income (3) 2.25 0.57 1.78 1.72 1.40 Funds from operations (4) 1.84 2.58 2.48 2.41 1.99 Distributions 1.80 0.60 -- -- -- Balance Sheet Data: At December 31, ---------------------------------------------------------------------- 2000 1999 1998 1997 1996 ---------------------------------------------------------------------- Real estate properties, at cost $593,395 $708,739 $732,393 $720,987 $692,034 Real estate mortgages receivable, net -- 22,939 37,826 38,134 38,270 Total assets 530,573 654,000 686,296 692,586 679,201 Total indebtedness 97,000 200,000 -- -- -- Total shareholders' equity 422,310 409,406 642,069 646,938 664,492 (1) Includes a gain on foreclosures and lease terminations of $7.1 million ($0.27 per share) in 2000. (2) Includes a gain on foreclosures and lease terminations of $7.1 million ($0.27 per share ) and $3.5 million ($0.14 per share) of non-recurring expenses related to the foreclosures and lease terminations in 2000, and an impairment loss write-down and loan loss reserve totaling $30 million ($1.15 per share) in 1999. (3) Includes a gain on sale of properties of $27.4 million ($1.06 per share) in 2000. (4) Funds from operations or "FFO," is defined in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" on the next page.
34 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following information should be read in conjunction with the consolidated financial statements included as Item 14 of this Annual Report on Form 10-K. This discussion includes references to Funds from Operations ("FFO"). FFO is net income computed in accordance with Generally Accepted Accounting Principles ("GAAP"), before extraordinary and non-recurring items, plus depreciation and amortization and after adjustment for unconsolidated partnerships and joint ventures. We consider 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. The way we calculate FFO may not be comparable to FFO reported by other REITs that define the term 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. RESULTS OF OPERATIONS Year Ended December 31, 2000, Compared to Year Ended December 31, 1999 Total revenues for the year ended December 31, 2000, were $75.5 million, compared to total revenues of $90.8 million for the year ended December 31, 1999. Rental income decreased by $20.5 million and interest and other income decreased by $4.4 million. These decreases are the result of the tenant bankruptcies and the sale of properties during 2000. Included in total revenues for the year ended December 31, 2000, is Other Real Estate Income of $2.5 million, which represents the net operating income from nursing home operations that we assumed as of July 1, 2000. Also included in total revenues for the year ended December 31, 2000, is a gain on foreclosures and lease terminations of $7.1 million which represents the excess of the security deposits forfeited, properties received and acceleration of deferred revenues, over the professional fees incurred, third party liabilities incurred, fixed asset impairment write-downs and a reserve for funds to cure deferred maintenance, arising from the foreclosures and lease terminations settled in 2000, as discussed below. Total expenses for the year ended December 31, 2000, were $44.5 million, compared to total expenses of $76.0 million for the year ended December 31, 1999. Interest expense was $3.4 million lower in 2000 compared to 1999 because actual interest expense incurred during 2000 was less than HRPT's interest expense allocated to us in 1999. This decline also reflects the fact that we used the net proceeds of property sales to pay down debt. Depreciation expense decreased in 2000 by $2.1 million compared to 1999, due to the sale of properties in 2000, a reduction in asset values as a result of impairment losses recorded in 1999, and the net effect of the assets disposed of versus the assets acquired from the settlement agreements with our bankrupt former tenants. Recurring general and administrative expense increased by $534,000 for 2000, compared to 1999, because actual expenses incurred during 2000 were greater than HRPT's general and administrative expenses allocated to us in 1999. During 2000, we incurred nonrecurring general and administrative costs totaling $3.5 million as a consequence of the foreclosures and lease terminations. Also included in the 1999 period is $30 million of losses resulting from the impairment of some of our properties and previously held mortgage investments. In 1999 and 2000 several of our tenants filed for bankruptcy. Sun Healthcare Group, Inc. ("Sun") filed for bankruptcy in October 1999 and The Frontier Group, Inc. ("Frontier") filed for bankruptcy in July 1999. We previously leased four nursing homes to Sun, which subleased three of these properties to Frontier and the fourth property to a private company. As a result of these bankruptcies, some rents due to us for all four properties were unpaid. In 2000 we sold the three properties subleased to Frontier for $13 million and reached an agreement with a court appointed receiver for Frontier 35 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued and with Sun for some past due rents. We recently reached an agreement with the subtenant for the fourth property previously leased to Sun whereby that subtenant will enter a new 10 year lease directly with us and pay some of its rental arrearages over a two year period; but that agreement has not yet been fully consummated. Mariner Post-Acute Network, Inc. ("Mariner") which previously leased 26 healthcare facilities from us filed for bankruptcy in January 2000. In 2000, we entered a settlement agreement with Mariner, effective July 1, 2000. As a result of this settlement agreement, leases for all 26 nursing homes between Mariner and us were terminated. Five of these properties were transferred to Mariner to be operated by Mariner for its own account. Subject to the receipt of necessary healthcare licenses, we assumed operating responsibility for 17 of the 26 properties. Mariner subleased the remaining four properties to two separate private companies that now pay rent to us directly. In addition, we retained a $15 million security deposit, 1,000,000 common shares of HRPT and 100,000 of our common shares, which had previously been pledged to us to secure Mariner's lease obligations and related guarantees. The lease for one of the properties that was subleased was renegotiated to a new fifteen year lease directly between us and the subtenant. We previously leased or mortgaged 39 nursing facilities to Integrated Health Services, Inc. ("IHS"). In February 2000, IHS filed for bankruptcy. During 2000 we reached a settlement agreement with IHS that affected 27 nursing facilities owned by us and originally leased to IHS and 12 nursing facilities originally owned by IHS and mortgaged to us. In accordance with this settlement agreement: (i) we released IHS from one of its mortgage obligations to us and IHS conveyed to us title to the remaining 11 nursing facilities that it had mortgaged to us; (ii) one of the leased properties will continue to be leased by IHS from us pursuant to an amended lease agreement; (iii) IHS transferred nine nursing homes to us which it owned free of debt; (iv) four of the nursing homes which were previously leased to IHS and one nursing home delivered to us by IHS, were leased to HEALTHSOUTH Corporation; (v) IHS paid us $600,000 per month for the use and occupancy of our properties and other liabilities to third parties from the date of its bankruptcy through June 30, 2000, and (vi) subject to the receipt of necessary healthcare licenses, we assumed operating responsibility for a total of 40 properties, consisting of 22 properties previously leased by IHS, 11 properties previously subject to mortgages with us, and seven of the nine properties conveyed to us by IHS. One property conveyed to us by IHS was not in operation and is being held for sale and the other property conveyed to us was leased to HEALTHSOUTH. The full implementation of these settlement agreements requires receipt of healthcare licenses and provider agreements permitting us to operate the affected facilities and to receive payment for services from the federal and state governments. In 2000, we entered into management arrangements with Five Star Quality Care, Inc. ("Five Star"), pursuant to which Five Star will manage the properties for us following relicensing. Mariner and IHS agreed with Five Star and us to perform transition services for a period until licenses are obtained. As of December 31, 2000, many of the required approvals had not been received and the net income from the operations of these facilities was reported as Other Real Estate Income on our Consolidated Statements of Income, and the capital we invested in these operations was included in Net Investment in Facilities' Operations on our Consolidated Balance Sheets. Our 2000 revenues and net income were adversely impacted by the settlement agreements described above, compared to the rental income and mortgage interest income we previously received from Sun, Frontier, Mariner and IHS; and we expect future revenues and net income to also be adversely impacted compared to historical results. The following chart summarizes our total portfolio of properties and the impact upon our revenues from property sales, tenant bankruptcies and the settlement agreements with Mariner and IHS for the years ended December 31, 2000 and 1999 (dollars in thousands): 36 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued
Year Ended December 31, 2000 Year Ended December 31, 1999 --------------------------------- -------------------------------- No. of No. of Tenant Properties Revenues1 Properties Revenues1 - ------------------------------------------------------------------------------------ -------------------------------- Marriott International, Inc. 14 $30,141 14 $30,893 Brookdale Living Communities, Inc. 2 -- 9,366 4 11,174 Genesis Health Ventures, Inc./Multicare Companies, Inc. 3 1 1,459 1 1,449 Two private company tenants 2 684 2 651 Sun Healthcare Group, Inc. 3 The Frontier Group, Inc. 3, 4 -- 360 3 2,160 One subtenant 1 720 1 686 Mariner Post-Acute Network, Inc. 3 -- 7,006 26 15,449 Two subtenants 4 1,735 -- -- Integrated Health Services, Inc. 3 1 1,200 39 26,615 Settlement agreement revenues -- 2,500 -- -- HEALTHSOUTH Corporation 5 5 9,267 -- -- Operating facilities (other real estate income) 6 58 2,520 -- -- --------------------------------- -------------------------------- Totals 86 $66,958 90 $89,077 ================================= ================================ 1. The 2000 and 1999 periods include $61 and $4,196 of mortgage interest income, respectively. 2. These properties were sold in October 2000. 3. Tenant in bankruptcy. 4. These properties were sold in February 2000. 5. Properties formerly leased to IHS are now leased HEALTHSOUTH. HEALTHSOUTH was a co-obligor on the IHS lease for these properties. 6. Includes properties formerly leased or mortgaged to Mariner and IHS where we assumed operations effective July 1, 2000, subject to appropriate licensure.
Net income was $58.4 million for the year ended December 31, 2000, compared to $14.8 million for the same period in 1999. The increase in net income for the 2000 period is due primarily to a gain of $27.4 million recognized from the sale of four independent living properties that were leased to Brookdale Living Communities, Inc. ("Brookdale"), a net gain of $7.1 million from the foreclosures and lease terminations that occurred in 2000 and $30 million of impairment losses recognized in 1999. FFO for the year ended December 31, 2000, was $47.6 million, or $1.84 per share, compared to $67.1 million, or $2.58 per share, for the same period in 1999. The FFO decrease of $19.5 million, or $0.74 per share, is due primarily to the consequences of the settlement agreements with Mariner and IHS. Distributions paid or payable for the years ended December 31, 2000 and 1999, were $46.7 million, or $1.80 per share, and $15.6 million, or $0.60 per share, respectively. Cash flows provided by operating activities and cash available for distribution may not necessarily equal FFO as cash flows are affected by factors not included in the FFO calculation, such as changes in assets and liabilities. Year Ended December 31, 1999, Compared to Year Ended December 31, 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 million charge to income consisting of write-downs for the impairment of assets and a loan loss reserve. In addition, depreciation expense increased by $4 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, 37 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued 1999. During the period ending December 31, 1998, net income was $46.2 million, and on a pro forma 26 million average shares outstanding, net income was $1.78 per share. FFO 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 consisting of $30 million of impairment losses and a loan reserve were excluded from the 1999 calculation of FFO. 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 FFO calculation, such as changes in assets and liabilities. LIQUIDITY AND CAPITAL RESOURCES Total assets at December 31, 2000, were $530.6 million, compared to $654 million at December 31, 1999. The decrease is due primarily to the sale of some properties in 2000 and the net effect that the foreclosures and lease terminations with Mariner and IHS had on our assets. At December 31, 2000, we had a $270 million, interest only, secured, bank credit facility. The interest rate is LIBOR plus a premium (8.71% per annum at December 31, 2000). This 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. In October 2000, we sold four properties formerly leased to Brookdale for $123 million. All of the proceeds from this sale were used to reduce amounts outstanding under our bank credit facility. The Brookdale properties were part of the collateral for our bank credit facility and accordingly, the maximum amount available under this facility was reduced from $350 million to $270 million. On December 31, 2000, $97 million was outstanding and $173 million was available for borrowing under this bank credit facility. As a result of the bankruptcy settlements with Mariner and IHS, we paid certain costs and expenses and may have to pay additional amounts to obtain nursing home licenses, to settle some historical obligations arising from the nursing home operations which we assumed and otherwise. We retained collateral previously pledged to us to secure the lease and mortgage obligations which were defaulted, and we also received other property as partial compensation for these defaults. The values transferred to us under these agreements, net of the values which we transferred to Mariner and IHS, were sufficient to cover our charges arising from these transactions and resulted in a gain for financial statement purposes of $7.1 million. However, the revenues and net income which we expect to receive in the future will be less than the rental income and mortgage interest income which we previously received from these bankrupt tenants. The working capital required to pay charges and for facility operations which we assumed as a result of these transactions has been provided by drawings under our revolving bank credit facility. We believe that additional bank drawings and cash flow from operating activities will be sufficient to meet the additional capital needs resulting from these transactions. At December 31, 2000, we had cash and cash equivalents of $515,000. For the years ended December 31, 2000, 1999 and 1998, cash provided by operating activities was $31 million, $64.1 million and $60.2 million, respectively; cash provided by investing activities was $94.3 million, $387,000 and $306,000, respectively; and cash used for financing activities was $141.9 million, $47.5 million and $60.4 million, respectively. We expect that our current cash, cash equivalents, future cash from operating activities and availability under our bank credit facility will be sufficient to meet our short-term and long-term capital requirements, including distributions payable to our shareholders. 38 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - continued Impact of Inflation Inflation might have both positive and negative impacts upon our business. Inflation might cause the value of our real estate investments to increase. In an inflationary environment, the percentage rents which we receive based upon a percentage of our tenants' revenues should increase. Similarly, inflation may tend to increase patient revenues and Medicare and Medicaid rates at the facilities which we operate. Offsetting these benefits, inflation might cause our costs of equity and debt capital to increase and wages and other operating costs at the facilities we operate to increase. An increase in our capital costs or in our operating costs will result in decreased earnings unless it is offset by increased revenues. In periods of rapid inflation, nursing home operating costs usually increase faster than revenues and this fact has an adverse impact upon operating income. We do not believe it will be possible to eliminate the adverse impact of rapid inflation upon the results of the facilities' operations which we have undertaken. To mitigate the adverse impact of increased costs of debt capital in the event of material inflation we previously have purchased an interest rate cap agreement and we may enter into similar interest rate hedge arrangements in the future. The decision to enter into these agreements was and will be based on the amount of floating rate debt outstanding and our belief that material interest rate increases are likely to occur and upon requirements of our borrowing arrangements. Certain Considerations THIS 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 EXPECTATIONS CONCERNING PROJECTIONS, PLANS, FUTURE EVENTS AND PERFORMANCE. THE ESTIMATES, ASSUMPTIONS, STATEMENTS AND IMPLICATIONS, SUCH AS THOSE RELATING TO OUR ABILITY TO SUCCESSFULLY OPERATE NURSING HOMES, THE POSSIBILITY THAT WE WILL OBTAIN ALL LICENSES AND GOVERNMENTAL APPROVALS NECESSARY FOR OPERATION OF OUR NURSING HOMES, OUR ABILITY TO EXPAND OUR PORTFOLIO, THE PERFORMANCE OF OUR ASSETS, THE ABILITY TO APPROPRIATELY BALANCE THE USE OF DEBT AND EQUITY AND TO ACCESS CAPITAL MARKETS, DEPEND UPON VARIOUS FACTORS OVER WHICH WE HAVE OR MAY HAVE LIMITED OR NO CONTROL. THOSE FACTORS INCLUDE, WITHOUT LIMITATION, THE STATUS OF THE ECONOMY, THE STATUS OF THE CAPITAL MARKETS (INCLUDING PREVAILING INTEREST RATES), COMPLIANCE WITH, AND 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, ASSUMED OR IMPLIED IN THIS DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS. WE BELIEVE THAT OUR ESTIMATES AND ASSUMPTIONS ARE REASONABLE AT THIS TIME. HOWEVER, READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE UPON OUR ESTIMATES, ASSUMPTIONS AND OTHER FORWARD LOOKING STATEMENTS. 39 Item 7A. Quantitative and Qualitative Disclosures About Market Risk We are exposed to risks arising from market changes in interest rates. Because interest on all of 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 $97 million at December 31, 2000, was 8.71% per annum. An immediate 10% change in that interest rate, or 87.1 basis points, would increase or decrease our costs by $844,000, or $0.03 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, 2000 8.71% $97,000 $8,449 10% reduction 7.84% 97,000 7,605 10% increase 9.58% 97,000 9,293 The foregoing table presents a so-called "shock" analysis, which assumes that the interest rate changes by 10%, or 87.1 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 year, short-term U.S. dollar based interest rates have fluctuated. We are unable to predict the direction or amount of interest rate changes during the next year. As required by our revolving bank credit facility, we purchased an interest rate cap agreement on our current debt to protect against LIBOR 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. Item 8. Financial Statements and Supplementary Data The information required by this item is included in 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. 40 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 The following consolidated financial statements and financial statement schedules of Senior Housing Properties Trust are included on the pages indicated: Page Report of Ernst & Young LLP, Independent Public Accountants F-1 Consolidated Balance Sheets as of December 31, 2000 and 1999 F-2 Consolidated Statements of Income for each of the three years in the period ended December 31, 2000 F-3 Consolidated Statements of Shareholders' Equity for each of the three years in the period ended December 31, 2000 F-4 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2000 F-5 Notes to Consolidated Financial Statements F-7 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 2000, we filed the following Current Reports on Form 8-K: (i) Current Report on Form 8-K, dated October 31, 2000, relating to the sale by SPTBROOK Properties Trust of four independent living properties for $123 million cash consideration to a designee of Brookdale Living Communities, Inc., the parent of the lessees of the properties (Item 2). (c) Exhibits 3.1 Amended and Restated Declaration of Trust, dated September 20, 1999. (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1999.) 3.2 Articles Supplementary, dated May 11, 2000. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000.) 3.3 Amended and Restated Bylaws, dated May 11, 2000. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000.) 4.1 Form of common share certificate. (Filed herewith.) 8.1 Opinion of Sullivan & Worcester LLP as to certain tax matters. (Filed herewith.) 41 10.1 Advisory Agreement, dated as of October 12, 1999, between the Company and REIT Management & Research, Inc. (+) (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1999.) 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 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.) 10.4 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.) 10.5 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.) 10.6 Form of Master Management Agreement, dated as of October 1, 2000, between Five Star Quality Care, Inc., and SHOPCO-AZ, LLC, SHOPCO-CA, LLC, SHOPCO-COLORADO, LLC, SHOPCO-CT, LLC, SHOPCO-GA, LLC, SHOPCO-IA, LLC, SHOPCO-KS, LLC, SHOPCO-MI, LLC, SHOPCO-MO, LLC, SHOPCO-NE, LLC, SHOPCO-WY, LLC, SNH-NEBRASKA, INC., SNH-IOWA, INC., SNH-CALIFORNIA, INC. and SNH-MICHIGAN, INC. (+) (Filed herewith.) 10.7 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.) 10.8 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.) 10.9 First Amendment to Master Lease Agreement and Incidental Documents, dated as of May 7, 1997, 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.) 10.10 Purchase and Sale Agreement, dated July 26, 2000, between SPTBROOK Properties Trust, as Seller, and Brookdale Living Communities, Inc., as Purchaser. (Incorporated by reference to the Company's Current Report on Form 8-K filed on November 15, 2000.) 10.11 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.) 42 10.12 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.) 10.13 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.) 10.14 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.) 10.15 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.) 10.16 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.) 10.17 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.) 10.18 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.) 10.19 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.) 10.20 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.) 10.21 Third Amendment of Lease, dated August 4, 2000, between SPTMRT Properties Trust and Marriott Living Services, Inc. (Filed herewith.) 10.22 Representative Fourth Amendment of Lease for properties leased to subsidiaries of Marriott International, Inc. (Filed herewith.) 10.23 Representative Fifth Amendment of Lease for properties leased to subsidiaries of Marriott International, Inc. (Filed herewith.) 10.24 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.) 10.25 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.) 43 10.26 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.) 10.27 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.) 10.28 Amendment to AMS Properties, Inc. Master Lease Document and 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.) 10.29 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.) 10.30 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.) 10.31 Master Lease Agreement, dated as of June 30, 1992, 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.) 10.32 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.) 10.33 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.) 10.34 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.) 10.35 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.) 10.36 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.) 10.37 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.) 10.38 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.) 10.39 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 44 Properties Trust. (Incorporated by reference to the Company's Registration Statement on Form S-11, File No. 333-69703.) 10.40 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.) 10.41 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.) 10.42 Settlement Agreement, dated as of March 20, 2000, among the Company, SPTMNR Properties Trust, Five Star Quality Care, Inc., SHOPCO-AZ, LLC, SHOPCO-CA, LLC, SHOPCO-COLORADO, LLC, SHOPCO-WI, LLC, Mariner Post-Acute Network, Inc., GranCare, Inc., AMS Properties, Inc. and GCI Health Care Centers, Inc. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000.) 10.43 Order of the United States Bankruptcy Court for the District of Delaware, dated May 10, 2000, in re: Mariner Post-Acute Network, Inc., a Delaware Corporation, and affiliates, Debtors. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.) 10.44 Letter Agreement, dated as of June 30, 2000, amending Settlement Agreement dated as of March 20, 2000, among Senior Housing Properties Trust, SPTMNR Properties Trust, Five Star Quality Care, Inc., SHOPCO-AZ, LLC, SHOPCO-CA, LLC, SHOPCO-COLORADO, LLC, SHOPCO-WI, LLC, Mariner Post-Acute Network, Inc., Grancare, Inc., AMS Properties, Inc. and GCI Health Care Centers, Inc. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.) 10.45 Interim Management Agreement, dated as of July 1, 2000, among Mariner Post-Acute Network, Inc., AMS Properties, Inc., GCI Health Care Centers, Inc., SHOPCO-AZ, LLC, SHOPCO-CA, LLC, SHOPCO-COLORADO, LLC, SHOPCO-WI, LLC and Five Star Quality Care, Inc. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.) 10.46 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.) 10.47 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.) 10.48 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.) 10.49 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 10.50 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.) 10.51 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.) 10.52 Amended and Restated Lease Agreement, dated as of January 1, 2000, between HRES1 Properties Trust and IHS Acquisition 135, Inc. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.) 10.53 Guaranty, dated as of January 1, 2000, made by Integrated Health Services, Inc. in favor of HRES1 Properties Trust. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.) 10.54 Settlement Agreement, dated as of April 11, 2000, among the Company, SPTIHS Properties Trust, HRES1 Properties Trust, HRES2 Properties Trust, SHOPCO-COLORADO, LLC, SHOPCO-CT, LLC, SHOPCO-GA, LLC, SHOPCO-IA, LLC, SHOPCO-KS, LLC, SHOPCO-MA, LLC, SHOPCO-MI, LLC, SHOPCO-MO, LLC, SHOPCO-NE, LLC, SHOPCO-WY, LLC, SNH-NEBRASKA, INC., SNH-IOWA, INC., SNH-MASSACHUSETTS, INC., SNH-MICHIGAN, INC., Five Star Quality Care, Inc., Advisors Healthcare Group, Inc., Integrated Health Services, Inc., Community Care of America, Inc., ECA Holdings, Inc., Community Care of Nebraska, Inc., W.S.T. Care, Inc., Quality Care of Lyons, Inc., CCA Acquisition I, Inc., MARIETTA/SCC, Inc., Glenwood/SCC, Inc., Dublin/SCC, Inc., College Park/SCC, 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 154, Inc., IHS Acquisition No. 155, Inc., IHS Acquisition No. 175, Inc., Integrated Health Services at Grandview Care Center, Inc., ECA Properties, Inc., CCA of Midwest, Inc. and Quality Care of Columbus, Inc. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000.) 10.55 Amendment to Settlement Agreement, dated as of June 29, 2000, among Integrated Health Services, Inc., Community Inc., Community Care of America, Inc., ECA Holdings, Inc., Community Care of Nebraska, Inc., W.S.T. Care, Inc., Quality Care of Lyons, Inc., CCA Acquisition I, Inc., Marietta/SCC, Inc., Glenwood/SCC, Inc., Dublin/SCC, Inc., College Park/SCC, 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., Integrated Health Services at Grandview Care Center, Inc., ECA Properties, Inc., CCA of Midwest, Inc., Quality Care of Columbus, Inc., Senior Housing Properties Trust, SPTIHS Properties Trust, HRES1 Properties Trust, HRES2 Properties Trust, SHOPCO-COLORADO, LLC, SHOPCO-CT, LLC, SHOPCO-GA, LLC, SHOPCO-IA, LLC, SHOPCO-KS, LLC, SHOPCO-MA, LLC, SHOPCO-MI, LLC, SHOPCO- 11 MO, LLC, SHOPCO-NE, LLC, SHOPCO-WY, LLC, SNH-Nebraska, Inc., SNH-Iowa, Inc., SNH-Massachusetts, Inc., SNH-Michigan, Inc., Advisors Healthcare Group, Inc. and Five Star 46 Quality Care, Inc. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.) 10.56 Order of the United States Bankruptcy Court for the District of Delaware, dated July 7, 2000, in re: Integrated Health Services, Inc., et al., Debtors. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.) 10.57 Management and Servicing Agreement, dated as of July 10, 2000, among Integrated Health Services, Inc., ECA Holdings, Inc., ECA Properties, Inc., Community Care of Nebraska, Inc., W.S.T. Care, Inc., Quality Care of Lyons, Inc., Integrated Health Services at Grandview Care Center, Inc., Quality Care of Columbus, Inc., Marietta/SCC, Inc., Glenwood/SCC, Inc., Dublin/SCC, Inc., College Park/SCC, Inc., IHS Acquisition No. 112, Inc., IHS Acquisition No. 113, Inc., IHS Acquisition No. 175, Inc., Senior Housing Properties Trust, Five Star Quality Care, Inc., SHOPCO-COLORADO, LLC, SHOPCO-CT, LLC, SHOPCO-GA, LLC, SHOPCO-IA, LLC, SHOPCO-KS, LLC, SHOPCO-MI, LLC, SHOPCO-MO, LLC, SHOPCO-NE, LLC, SHOPCO-WY, LLC and Advisors Healthcare Group, Inc. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.) 21.1 List of Subsidiaries. (Filed herewith.) 23.1 Consent of Sullivan & Worcester LLP. (Contained In Exhibit 8.1.) ---------------------- (+) Management contract or compensatory plan or arrangement. 47 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, 2000 and 1999, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial 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 and schedules 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 consolidated financial position of Senior Housing Properties Trust and subsidiaries as of December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, 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, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Boston, Massachusetts March 22, 2001 F-1
SENIOR HOUSING PROPERTIES TRUST CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) December 31, ------------------------------ 2000 1999 ------------ ------------ ASSETS Real estate properties, at cost: Land $ 60,060 $ 69,673 Buildings and improvements 533,335 639,066 --------- --------- 593,395 708,739 Less accumulated depreciation 106,681 108,709 --------- --------- 486,714 600,030 Real estate mortgages receivable, net of loan loss reserve of $14,500 in 1999 -- 22,939 Cash and cash equivalents 515 17,091 Net investment in facilities' operations 29,046 -- Other assets 14,298 13,940 --------- --------- $ 530,573 $ 654,000 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Bank notes payable $ 97,000 $ 200,000 Deferred rents 56 26,715 Security deposits 235 15,235 Distribution payable 7,775 -- Other liabilities 3,184 2,317 Due to affiliate 13 327 Commitments and contingencies -- -- Shareholders' equity: Common shares of beneficial interest, $0.01 par value: 50,000,000 shares authorized, 25,916,100 shares and 26,001,500 shares issued and outstanding at December 31, 2000 and 1999, respectively 259 260 Additional paid-in capital 444,638 444,511 Cumulative net income (loss) 38,673 (19,764) Cumulative distributions (62,323) (15,601) Unrealized gain on investments 1,063 -- --------- --------- Total shareholders' equity 422,310 409,406 --------- --------- $ 530,573 $ 654,000 ========= =========
See accompanying notes F-2
SENIOR HOUSING PROPERTIES TRUST CONSOLIDATED STATEMENTS OF INCOME (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Year Ended December 31, ----------------------------------------- 2000 1999 1998 --------- --------- --------- Revenues: Rental income $64,377 $84,881 $82,542 Other real estate income 2,520 -- -- Interest and other income 1,520 5,909 5,764 Gain on foreclosures and lease terminations 7,105 -- -- ------- ------- ------- Total revenues 75,522 90,790 88,306 ------- ------- ------- Expenses: Interest 15,366 18,768 19,293 Depreciation 20,140 22,247 18,297 General and administrative - Recurring 5,475 4,941 4,480 - Related to foreclosures and lease terminations 3,519 -- -- Loan loss reserve -- 14,500 -- Impairment of assets -- 15,500 -- ------- ------- ------- Total expenses 44,500 75,956 42,070 ------- ------- ------- Income before gain on sale of properties 31,022 14,834 46,236 Gain on sale of properties 27,415 -- -- ------- ------- ------- Net income $58,437 $14,834 $46,236 ======= ======= ======= Weighted average shares outstanding (Note 2) 25,958 26,000 26,000 ======= ======= ======= Basic and diluted earnings per share: Income before gain on sale of properties $ 1.20 $ 0.57 $ 1.78 ======= ======= ======= Net income $ 2.25 $ 0.57 $ 1.78 ======= ======= =======
See accompanying notes F-3
SENIOR HOUSING PROPERTIES TRUST CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS) Ownership Interest Accumulated Additional Cumulative of HRPT Other Number Common Paid-in Net Income Cumulative Properties Comprehensive of Shares Shares Capital (Loss) Distributions Trust Income Total ---------- -------- ---------- ---------- ------------- ----------- ------------- ---------- Balance at December 31, 1997 -- $-- $-- $-- $-- $ 646,938 $-- $ 646,938 Net income -- -- -- -- -- 46,236 -- 46,236 Owner distribution, -- -- -- -- -- (51,369) -- (51,369) net 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, -- -- -- -- -- (31,919) -- (31,919) net Cancellation of shares (374,760) (4) -- -- -- 4 -- -- Distribution of shares to HRPT -- -- 444,488 -- -- (644,488) -- (200,000) shareholders 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 Comprehensive income: Net income -- -- -- 58,437 -- -- -- 58,437 Other comprehensive gain: Unrealized gain on -- -- -- -- -- -- 1,063 1,063 investments -- -- -- -- -- -- -- -- Total comprehensive income -- -- -- 58,437 -- -- 1,063 59,500 ----------- ------ --------- ----------- ----------- ----------- --------- ----------- Distributions -- -- -- -- (46,722) -- -- (46,722) Cancellation of shares (100,000) (1) 1 -- -- -- -- -- Issuance of shares 14,600 -- 126 -- -- -- -- 126 ----------- ------ --------- ----------- ----------- ----------- --------- ----------- Balance at December 31, 2000 25,916,100 $ 259 $ 444,638 $ 38,673 $ (62,323) $-- $ 1,063 $ 422,310 =========== ====== ========= =========== =========== =========== ========= ===========
See accompanying notes F-4
SENIOR HOUSING PROPERTIES TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) Year Ended December 31, ------------------------------------- 2000 1999 1998 ----------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 58,437 $ 14,834 $ 46,236 Adjustments to reconcile net income to cash provided by operating activities: Other real estate income (2,520) -- -- Depreciation 20,140 22,247 18,297 Impairment of assets and loan loss reserve -- 30,000 -- Gain on sale of properties (27,415) -- -- Gain on foreclosures and lease terminations (7,105) -- -- Changes in assets and liabilities: Other assets 339 (3,363) (2,876) Deferred rents (7,612) (1,551) (1,455) Other liabilities (2,927) 1,591 34 Due to affiliate (314) 327 -- --------- --------- --------- Cash provided by operating activities 31,023 64,085 60,236 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of real estate, net 135,178 -- -- Real estate acquisitions and improvements (2,300) -- (2) Repayments of real estate mortgages receivable -- 387 308 Investment in facilities' operations (38,530) -- -- --------- --------- --------- Cash provided by investing activities 94,348 387 306 --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Owner's net distribution -- (31,919) (60,403) Distributions to shareholders (38,947) (15,601) -- Proceeds from borrowings 49,000 200,000 -- Repayments on borrowings (152,000) -- -- Repayment of formation debt due to HRPT Properties Trust -- (200,000) -- --------- --------- --------- Cash used for financing activities (141,947) (47,520) (60,403) --------- --------- --------- (Decrease) increase in cash and cash equivalents (16,576) 16,952 139 Cash and cash equivalents at beginning of period 17,091 139 -- --------- --------- --------- Cash and cash equivalents at end of period $ 515 $ 17,091 $ 139 ========= ========= =========
See accompanying notes F-5
SENIOR HOUSING PROPERTIES TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) Year Ended December 31, ------------------------------------------------- 2000 1999 1998 ----------- ----------- ----------- SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ 15,344 $ 2,446 $-- NON-CASH INVESTING ACTIVITIES: Real estate acquisitions $-- $-- $ (9,298) Real estate and related property received (27,869) -- -- Real estate and related property conveyed, net 10,759 -- -- Real estate mortgage receivable conveyed, net 4,277 -- -- Real estate mortgages receivable foreclosed 17,779 -- -- Shares of HRPT Properties Trust received 6,500 -- -- NON-CASH FINANCING ACTIVITIES: Formation debt due to HRPT Properties Trust $-- $200,000 $-- Owner's contribution -- -- 9,298 Issuance of common shares 126 23 --
See accompanying notes F-6 SENIOR HOUSING PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Organization Senior Housing Properties Trust ("Senior Housing"), a Maryland real estate investment trust ("REIT"), was organized on December 16, 1998, as a 100% owned subsidiary of HRPT Properties Trust ("HRPT"). On October 12, 1999, HRPT distributed 50.7% of its ownership in Senior Housing to HRPT shareholders (the "Spin-Off"). These consolidated financial statements are presented as if Senior Housing was a separate legal entity from HRPT prior to the Spin-Off, although no such entity existed until October 12, 1999. At December 31, 2000, Senior Housing owned 86 properties in 23 states and operated in a single segment. Note 2. Summary of Significant Accounting Policies BASIS OF PRESENTATION. Subsequent to the Spin-Off, the consolidated financial statements include the accounts of Senior Housing and all of its subsidiaries. All intercompany transactions have been eliminated. Prior to the Spin-Off, all of Senior Housing was owned by HRPT and transactions are presented on HRPT's historical basis. Substantially all of the rental income and mortgage interest income received by HRPT from Senior Housing's tenants and mortgagors was deposited in and commingled with HRPT's general funds. Funds for capital investments and other cash required by Senior Housing were provided by HRPT. 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 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 for periods prior to the Spin-Off are reasonable. It is not practicable to estimate additional costs that would have been incurred by Senior Housing as a separate entity. Effective July 1, 2000, Senior Housing assumed the operations of 57 healthcare facilities from bankrupt tenants pursuant to negotiated settlement agreements. The operations of these facilities are subject to obtaining licenses from state agencies and entering into payor agreements with the federal and state governments. Senior Housing had not received substantially all of the required licenses as of December 31, 2000. As a result, the operations of the facilities are accounted for using the equity method of accounting and the net income from the facilities' operations is reported as Other Real Estate Income in the Consolidated Statements of Income and the capital invested in the operations by Senior Housing is included in Net Investment in Facilities' Operations in the Consolidated Balance Sheets. REAL ESTATE PROPERTIES. 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. As a result, net income and net income per share for the period ended December 31, 1999, was reduced by $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 such 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. INVESTMENT IN HRPT PROPERTIES TRUST. One of Senior Housing's bankrupt tenants had pledged 1,000,000 common shares of HRPT to secure its lease obligations. As part of Senior Housing's settlement with this tenant, Senior Housing received these shares on July 1, 2000. This ownership of HRPT shares is in Other Assets and is classified as an investment available for sale and carried at fair value, with unrealized gains and F-7 SENIOR HOUSING PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) losses reported as a separate component of shareholders' equity. At December 31, 2000, and March 22, 2001, Senior Housing's investment in HRPT had a fair value of $7.6 million and $8.1 million and unrealized gains since July 1, 2000 of $1.1 million and $1.6 million, respectively. INTEREST RATE CAP AGREEMENTS. Senior Housing has an interest rate cap agreement to limit its exposure to the risk of rising interest rates. This arrangement has a notional amount of $200 million and expires in December 2001. Senior Housing is entitled to receive payments by a counterparty if LIBOR increases above a threshold amount. At December 31, 2000, the interest rate cap agreement had a carrying value and a fair market value of zero. REVENUE RECOGNITION. Rental income from operating leases is recognized on a straight-line basis over the life of lease agreements. Interest income is recognized as earned over the terms of real estate mortgages. Percentage rent and supplemental mortgage interest income are recognized as earned in accordance with Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). Senior Housing adopted SAB 101 beginning January 1, 2000, without restatement of prior periods. SAB 101 had no impact on Senior Housing's annual results of operations. The adoption of SAB 101 required the Company to defer percentage rental income from the first, second and third quarters to the fourth quarter within the year. For the years ended December 31, 2000, 1999 and 1998, percentage rent and supplemental mortgage interest income aggregated $3 million, $4 million and $2.9 million, respectively. EARNINGS PER COMMON SHARE. Earnings per common share is 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. Because Senior Housing's operations were included in the consolidated financial statements of HRPT prior to the Spin-Off, there were no shareholder equity accounts for Senior Housing prior to October 12, 1999. Common shares outstanding of 26 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. 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 ("IRC"). 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 some state and local taxes on their income and property. NEW ACCOUNTING PRONOUNCEMENTS. In June 1998 and June 2000, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No. 138 "Accounting for Certain Derivative Instruments and Hedging Activities" which are effective for fiscal years beginning after June 15, 2000. These statements require companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives will be reported in the statement of operations or as a deferred item, depending on the use of the derivatives and whether they qualify for hedge accounting. The key criterion for hedge accounting is that the derivative must be highly effective in achieving offsetting changes in fair value or cash flows of the hedged items during the term of the hedge. Senior Housing does not believe this pronouncement will have a material effect on its financial statements. F-8 SENIOR HOUSING PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Note 3. Report of Tenants' Financial Conditions In 1999 and 2000 several of Senior Housing's tenants filed for bankruptcy. Sun Healthcare Group, Inc. ("Sun") filed for bankruptcy in October 1999 and The Frontier Group, Inc. ("Frontier") filed for bankruptcy in July 1999. Senior Housing previously leased four properties to Sun, which subleased three of the properties to Frontier and the fourth property to a private company. The three properties leased to Frontier were sold in February 2000 for $13 million. The fourth property remains leased to a private company. In 2000 Senior Housing reached agreements with Sun and the private company whereby all past due rents are expected to be paid over the next two years and a new ten year lease will be entered directly with this operator. As of March 22, 2001, the agreement with Sun has been completed but the agreement with the private company has not yet been consummated. The transaction is awaiting approval from that company's lender. Mariner Post-Acute Network, Inc. ("Mariner") which previously leased 26 healthcare facilities from Senior Housing filed for bankruptcy in January 2000. During 2000 Senior Housing and Mariner reached an agreement that was approved by the Bankruptcy Court in June 2000. The terms of the settlement agreement, which were effective July 1, 2000, are as follows: o Mariner's leases for all 26 properties owned by Senior Housing and previously leased by Mariner were terminated. o Senior Housing retained $15 million in cash, 1,000,000 common shares of HRPT and 100,000 common shares of Senior Housing, which had previously been pledged to Senior Housing to secure Mariner's lease obligations and related guarantees. o Subject to the receipt of necessary healthcare licenses, Senior Housing assumed operating responsibility for 17 of the 26 properties. o Ownership of five of the 26 properties was transferred to Mariner. o Mariner previously subleased the remaining four properties to two private companies. These subtenants will continue to occupy and operate these properties and pay rents directly to Senior Housing. Integrated Health Services, Inc. ("IHS") filed for bankruptcy in February 2000. In July 2000 the Bankruptcy Court approved a settlement agreement between Senior Housing and IHS. The IHS settlement affected 27 nursing facilities owned by Senior Housing and previously leased to IHS, and 12 nursing facilities previously owned by IHS and mortgaged to Senior Housing. The terms of this settlement agreement are as follows: o IHS paid Senior Housing $600,000 per month for the use and occupancy of Senior Housing's properties and other liabilities to third parties from the date of IHS' bankruptcy until June 30, 2000. o The lease for one property was amended to provide for a new 10-year term and annual rent of $1.2 million, effective January 1, 2000. IHS is currently paying this rent. o One of Senior Housing's real estate mortgage investments was cancelled as of July 1, 2000, and ownership of the property that secured the mortgage was retained by IHS. o IHS' leases for 26 properties owned by Senior Housing were terminated, and IHS' mortgage obligations to Senior Housing for the remaining 11 properties were terminated and title to those properties were transferred to Senior Housing, all as of July 1, 2000. o IHS conveyed nine properties (one of which was vacant), which were previously owned by IHS free of debt, to Senior Housing, effective July 1, 2000. o In addition, a subsidiary of HEALTHSOUTH Corporation ("HEALTHSOUTH") was a co-obligor of the lease for four of the properties owned by Senior Housing and leased to IHS. HEALTHSOUTH assumed the tenancy for these four properties and for one of the nine properties that were conveyed F-9 SENIOR HOUSING PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) to Senior Housing by IHS. Annual minimum rents under these five leases total approximately $10 million. These leases expire in 2006 and provide for rental increases based on increases in net patient revenues. o Subject to the receipt of necessary healthcare licenses, Senior Housing assumed operating responsibility for 22 properties previously leased by IHS, 11 properties previously owned by IHS and subject to mortgages with Senior Housing, and seven of the nine properties conveyed to Senior Housing, effective July 1, 2000. Senior Housing released Mariner and IHS from their obligations under all existing leases, management agreements and mortgage documents, including unpaid rent and interest, the principal amounts of the mortgage loans secured by the mortgaged properties and liquidated damages payable under the leases. In addition, Senior Housing released Mariner and IHS from all claims by Senior Housing, and Mariner and IHS in turn released Senior Housing from all claims by them, in both instances to the extent such claims arose out of an event or condition that occurred or was in existence prior to the closing of the settlement transactions. Senior Housing's future revenues and net income are expected to be adversely impacted by the settlement agreements described above, compared to the rental income and mortgage interest income previously received from Mariner and IHS. In 2000 and 1999, Senior Housing concluded that impairment indicators were present with respect to certain properties previously leased to Mariner and IHS and recorded impairment losses of $9.7 million, as discussed in Note 4 below, and $15.5 million, respectively. In addition, $14.5 million was recorded in 1999 as a loan loss reserve related to one of Senior Housing's real estate mortgage investments with IHS. These losses were based on cash flow projections prepared for the real estate mortgage investment and for each of the leased properties. For purposes of these projections, Senior Housing assumed that rents on some properties were modified and that some of the leases were terminated after which Senior Housing would operate the properties for a period of time and ultimately, sell them. Cash flows during the period in which Senior Housing would operate the properties were estimated based on the historical performance of each property, excluding rent paid to Senior Housing. Projected sale prices were based on an estimated per bed value consistent with industry practice and reflected prices that Senior Housing had observed in historical recent transactions. In addition, a third party not in bankruptcy, HEALTHSOUTH, was responsible for the lease obligations of some of the properties operated by IHS. Senior Housing assumed that HEALTHSOUTH would honor its lease obligations. In June 2000, Multicare Companies, Inc., a non-consolidated subsidiary of Genesis Health Ventures, Inc. ("Multicare"), filed for bankruptcy. Multicare leases one property from Senior Housing. Senior Housing's annual rent from this property is $1.5 million. As of December 31, 2000, Multicare was current on its obligations to Senior Housing. Note 4. Gain on Foreclosures and Lease Terminations In connection with the foreclosures and lease terminations discussed in Note 3, Senior Housing retained a forfeited $15 million security deposit, 1,000,000 common shares of HRPT valued at $6.5 million, 100,000 common shares of Senior Housing, nine properties valued at $10.1 million and the personal property at all of the foreclosed properties and terminated leased properties. In addition, recognition of rental income previously deferred related to these properties totaling $19 million was accelerated. These income items were offset by the value of the properties deeded to Mariner, the forgiveness of mortgage debt on one IHS facility, legal and professional costs, licensing costs, and impairment write-downs of $9.7 million related to certain of the properties and a reserve for repairs and deferred maintenance at these properties of $10 million. The net result of assets received and accelerated deferred income over the assets traded to Mariner and IHS, various costs, the impairment write-downs and the repairs and maintenance reserve was recorded in 2000 as a $7.1 million gain on foreclosures and lease terminations. F-10 SENIOR HOUSING PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Note 5. Real Estate Properties During October 2000, Senior Housing sold four independent living properties that were leased to Brookdale Living Communities, Inc. for $123 million and recognized a gain of $27.4 million. In February 2000, Senior Housing also sold three nursing homes that were leased to Sun and subleased to Frontier for $13 million. A nominal gain was realized on the sale of these three nursing homes. Net proceeds from these sales were used to reduce amounts outstanding under Senior Housing's bank credit facility. Senior Housing acquired a 90-bed assisted living facility in October 2000 from HRPT for $2.3 million. Senior Housing's properties that are leased to third parties are generally leased on a triple net basis, pursuant to noncancellable, fixed term, operating leases expiring between 2001 and 2015. 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 cost and the carrying value of the properties leased were $448.6 million and $363.4 million at December 31, 2000, respectively. The future minimum lease payments to be received during the current terms of Senior Housing's leases as of December 31, 2000, are approximately $43.5 million in 2001, $44.9 million in 2002, $44.9 million in 2003, $44.5 million in 2004, $44.6 million in 2005 and $243.9 million thereafter. Note 6. Real Estate Mortgages Receivable, Net At December 31, 1999, Senior Housing had mortgage notes receivable due between January 2006 and December 2016 totaling $37.4 million. A loan loss reserve of $14.5 million was established at December 31, 1999, for these loans. During 2000, Senior Housing terminated all of these real estate mortgages incident to the settlements with Mariner and IHS. Pursuant to the settlement agreement with IHS discussed in Note 3, one real estate mortgage with a carrying value of $4.3 million was cancelled as of July 1, 2000. This real estate mortgage was secured by one property and the ownership of that property was retained by IHS. Senior Housing received deeds in lieu of foreclosure for the remaining real estate mortgages and assumed operating responsibility for the 11 properties that secured these mortgages effective July 1, 2000. Note 7. Net Investment in Facilities' Operations As discussed in Note 3, Senior Housing assumed operating responsibility for 17 Mariner facilities and 40 IHS facilities effective July 1, 2000, pending final regulatory approvals which are required in the healthcare industry. Senior Housing entered into management arrangements with Five Star Quality Care, Inc. ("Five Star"), an affiliate of REIT Management & Research, Inc. ("RMR"), the advisor to Senior Housing, pursuant to which Five Star will manage the properties for Senior Housing following relicensing. Mariner and IHS agreed with Senior Housing and Five Star to perform transition services with respect to the nursing facilities formerly operated by them until appropriate licenses are received by Senior Housing and Five Star. At December 31, 2000, all approvals had not been received. Since such approvals were not received, Senior Housing reported the net income from these facilities as Other Real Estate Income in the Consolidated Statements of Income for the year ended December 31, 2000. The capital invested in these operations by Senior Housing is included in Net Investment in Facilities' Operations in the Consolidated Balance Sheets at December 31, 2000. F-11 SENIOR HOUSING PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Summary financial data for these facilities' operations is as follows (dollars in thousands):
July 1 through December 31, December 31, 2000 2000 ------------------ ----------------- Current assets $55,938 Revenues $114,483 Property and equipment, net 2,399 Expenses 111,963 ------------------ ----------------- $58,337 Other real ================== estate income $2,520 ================= Current liabilities $29,291 Net investment in facilities' operations 29,046 ------------------ $58,337 ==================
Note 8. Shareholders' Equity Senior Housing originally 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 the year ended December 31, 2000, 13,100 common shares were awarded to officers of Senior Housing and certain employees of RMR pursuant to this plan. In addition, Senior Housing's Independent Trustees are each awarded 500 common shares annually as part of their annual fees. The shares awarded to the Trustees vest immediately. The shares awarded to Senior Housing's officers and certain employees of RMR vest over a three-year period. At December 31, 2000, 1,283,900 of Senior Housing's common shares remain reserved for issuance under the Award Plan. In December 2000, Senior Housing declared a distribution of $0.30 per share, which was paid on January 24, 2001, to shareholders of record on December 29, 2000. Distributions paid or payable by Senior Housing for the years ended December 31, 2000 and 1999, were $1.80 per share, and $0.60 per share, respectively. In connection with the settlement agreement with Mariner discussed in Note 3, Senior Housing received 100,000 of its own common shares and, effective July 1, 2000, these shares were cancelled. Note 9. Commitments and Contingencies The settlement agreements entered by Senior Housing with Mariner and IHS were contingent, in part, upon Senior Housing obtaining licenses and other government approvals necessary to operate the affected healthcare facilities. Senior Housing applied for all of the required licenses and as of December 31, 2000, the required licenses for 26 of these facilities had been received. Required licenses for an additional 22 facilities were received in January 2001 and two more licenses were received in February 2001. The required licenses for the remaining seven facilities, which are located in one state are pending. If Senior Housing is unable to obtain the licenses necessary to operate these healthcare facilities, the settlement agreements with Mariner and IHS may have to be renegotiated or Senior Housing may have to identify another licensed operator to lease or purchase these properties with possible adverse financial conditions. A substantial majority of the revenues at the nursing homes now operated by Senior Housing is received from the Federal Medicare program and from various state Medicaid programs. Until Senior Housing received or receives the required licenses to operate these nursing homes, billings for these patients were and are made through Mariner and IHS as licensees, respectively. As of December 31, 2000, approximately $18 million received by IHS and Mariner since July 1, 2000, which is due to Senior Housing is included on Senior Housing's Consolidated Balance Sheets as Net Investment in Facilities' Operations. At March 22, 2001, the F-12 SENIOR HOUSING PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) receivable balance due from Mariner has been paid in full and approximately $8.5 million remained due from IHS. Senior Housing believes these funds will be paid by IHS pursuant to its contractual obligation approved by its Bankruptcy Court. However, IHS remains in bankruptcy proceedings and its record keeping and payment processing has not been timely. Applicable provisions of Federal and some state laws allow paying agents for these Medicare and Medicaid programs to recoup amounts owed by Mariner and IHS to these programs for historical overpayments from current payments despite the bankruptcy filings by Mariner and IHS. Also, some state nursing home licensing agencies have in the past required that a successor nursing home licensee, such as Senior Housing, agree to assume financial responsibility for a predecessor licensee's obligations due to those state Medicaid programs. Senior Housing has negotiated agreements with the U.S. Department of Justice and understandings with all state Medicaid agencies, except one, to limit Senior Housing's liabilities for obligations of Mariner and IHS to the Federal Medicare and state Medicaid programs. Eight nursing homes delivered to Senior Housing by IHS were not previously owned or mortgaged by Senior Housing. These properties were transferred to Senior Housing by IHS as partial compensation for its defaults under leases and mortgages. Because these properties were not owned or mortgaged by Senior Housing they do not constitute foreclosure property under IRC provisions which permit REITs to operate nursing homes. To comply with laws applicable to REITs, these nursing homes were operated during 2000 by corporations which were 99% beneficially owned by Senior Housing and 1% beneficially owned by Senior Housing's Managing Trustees, Barry M. Portnoy and Gerard M. Martin, who also control 100% of the voting power of these corporations. On January 1, 2001, the laws concerning Senior Housing's ability to own and operate these properties changed and Senior Housing purchased Messrs. Portnoy and Martin's ownership interests in these entities. Senior Housing has applied for an Internal Revenue Service ruling in order to clarify its ability to continue operating these properties which were received as compensation for losses it suffered as a result of IHS' bankruptcy. If this revenue ruling is denied Senior Housing may have to lease or sell these properties with possible adverse financial consequences. Under IRC laws and regulations applicable to REITs, after a 90 day transition period, Senior Housing is required to engage a third party contractor to manage the nursing home operations which it acquired from Mariner and IHS. Also, under IRC laws applicable to REITs, Senior Housing may continue to operate nursing homes which are categorized as "foreclosure properties" for only up to three years (subject to extensions in certain circumstances). RMR and Messrs. Martin and Portnoy organized Five Star to serve as an independent contractor to operate nursing homes for Senior Housing. If Five Star is unable for any reason to continue to manage these nursing homes, Senior Housing may be unable to find a qualified operator to assume these management responsibilities, and, in those circumstances, Senior Housing may lose its IRC status as a REIT or otherwise suffer adverse financial consequences. Similarly, if Senior Housing is unable to sell or lease these properties to a financially qualified operator within applicable time periods, Senior Housing may cease to be a REIT or otherwise suffer adverse financial consequences. Note 10. Transactions with Affiliates Senior Housing has an agreement for RMR to provide investment advice and administrative services to Senior Housing. RMR is owned by Messrs. Martin and Portnoy, who are Senior Housing's Managing Trustees. RMR is compensated annually based on a formula amount of gross invested real estate assets. RMR is also entitled to an incentive fee beginning with the year ended December 31, 2000, which is based on a formula and paid in restricted shares of Senior Housing. Investment advisory fees paid to RMR for the years ended December 31, 2000, 1999 and 1998 were $3.7 million, $3.9 million and $3.8 million, respectively. To date, Senior Housing had not paid and RMR is not due any incentive fees. As a result of the nursing home bankruptcies and settlements discussed above, Senior Housing assumed operating responsibilities for 57 healthcare facilities effective July 1, 2000. Nursing care and other services are provided at these properties to approximately 5,000 residents. Under IRC laws and regulations applicable to F-13 REITs, Senior Housing is required to engage a contractor to manage these properties after a 90 day transition period. Senior Housing has entered into management agreements with Five Star to provide these services. Five Star is owned by Messrs. Martin and Portnoy, Senior Housing's Managing Trustees. Under these management agreements, during the first 90 days Five Star was paid its costs and expenses incurred in managing the facilities for Senior Housing and thereafter it is paid a fee equal to five percent of patient revenues at the managed nursing homes. During 2000 the fees paid to Five Star by Senior Housing totaled $5.1 million. This amount includes fees with respect to all services provided by Five Star to Senior Housing including those described in this paragraph and in the next three paragraphs. Prior to July 1, 2000, Senior Housing leased three nursing homes to Advisors Healthcare Group, Inc. ("AHG"). AHG is owned by Senior Housing's Managing Trustees, Messrs. Martin and Portnoy. AHG assumed responsibility as the licensee of these properties to facilitate a transfer of operations among predecessors of IHS. Prior to July 1, 2000, IHS managed these nursing homes and was financially responsible for the rent due Senior Housing. IHS filed for bankruptcy in February 2000 and, pursuant to the settlement approved by the IHS Bankruptcy Court as described in Note 3, the IHS management agreements and the AHG leases for these three nursing homes were cancelled effective July 1, 2000. No payments have been made between AHG and Senior Housing with respect to these leases or their cancellation. Since July 1, 2000, Five Star has managed these nursing homes' operations for Senior Housing. As part of the bankruptcy settlement agreement between Senior Housing and IHS described in Note 3, in partial satisfaction of its financial obligations to Senior Housing, IHS conveyed nine nursing homes free of debt to Senior Housing. Under IRC laws and regulations applicable to REITs during 2000, Senior Housing was unable to operate nursing homes that were not previously owned and leased or mortgaged by Senior Housing. Accordingly, new corporations were created to take title to and operate these nine nursing homes, and Messrs. Martin and Portnoy each purchased 0.5% of the beneficial ownership and 50% of the voting control while Senior Housing retained 99% of the beneficial ownership and no voting control (the "99-1 Corporation"). Effective January 1, 2000, applicable laws were changed to permit REITs to have voting control of taxable REIT subsidiaries ("TRSs"). Effective January 1, 2001, Messrs. Martin and Portnoy sold their beneficial ownership and voting control of the 99-1 Corporations to Senior Housing for their historical investment. The nursing homes owned by these 99-1 Corporations and TRSs have been and are managed by Five Star. When Senior Housing was organized, HRPT transferred substantially all its nursing home investments to Senior Housing. However, HRPT retained several mortgage receivables which were secured by nursing homes and assisted living facilities. During 2000 one of these mortgages with a principal balance outstanding of $2.4 million went into default and HRPT foreclosed. During 2000 a 99-1 Corporation owned by Senior Housing and Messrs. Martin and Portnoy purchased this assisted living facility from HRPT for its appraised value of $2.3 million. Effective January 1, 2001, a TRS owned by Senior Housing purchased Messrs. Martin's and Portnoy's interest in this nursing home for their historical costs. This facility has been managed by Five Star since its acquisition by Senior Housing. Note 11. Indebtedness Senior Housing has a $270 million, interest only, bank credit facility. The bank credit facility is secured by 14 properties with a carrying value of $277.9 at December 31, 2000 and matures in 2002. The bank credit facility bears interest at LIBOR plus a premium. The interest rate at December 31, 2000, was 8.71%. The bank credit facility is available for acquisitions, working capital and for general business purposes. As discussed in Note 5, Senior Housing sold seven properties in 2000. Four of the sold properties were included in the properties that originally secured this bank credit facility; and, after this sale, the maximum capacity on Senior Housing's bank credit facility was reduced from $350 million to $270 million. F-14 SENIOR HOUSING PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Note 12. Fair Value of Financial Instruments and Commitments The financial statements presented include mortgage investments, rents receivables, other liabilities and security deposits. Except as follows, the fair values of the financial instruments and commitments were not materially different from their carrying values at December 31, 2000 and 1999:
2000 1999 ------------------------------- ------------------------------- Carrying Carrying Amount Fair Value Amount Fair Value ------------ --------------- ------------- -------------- (dollars in thousands) (dollars in thousands) Real estate mortgages receivable, net $-- $-- $22,939 $23,722 Commitments -- -- -- 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 cash flow analyses and currently prevailing market rates. The fair value of the commitments represent the actual amounts committed. Note 13. 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, 2000 and 1999 (dollars in thousands):
Year Ending December 31, 2000 December 31, 2000 ----------------------------- ------------------------------- % of Investment (1) Total Revenue (2) % of Total --------------- --------- -------------- ------------- Marriott International, Inc. $325,472 73% $30,141 47% Brookdale Living Communities, Inc. -- -- 9,366 14 HEALTHSOUTH Corporation 73,422 16 9,267 14 Mariner Post-Acute Network, Inc. -- -- 7,006 11 Integrated Health Services, Inc. 15,598 3 3,700 6 All others 34,069 8 4,958 8 --------------- -------- -------------- ------------- $448,561 100% $64,438 100% =============== ======== ============== ============= Year Ending December 31, 1999 December 31, 1999 ----------------------------- ------------------------------- % of Investment (1) Total Revenue (2) % of Total --------------- --------- -------------- ------------- 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 The Frontier Group, Inc. 15,492 2 2,160 2 All others 22,977 3 2,786 3 --------------- -------- -------------- ------------- $731,678 100% $89,077 100% =============== ======== ============== ============= (1) Historical costs before previously recorded depreciation and, in certain instances, after impairment losses and loan loss reserves. (2) Included in revenue is $61 and $4,196 of mortgage interest income in 2000 and 1999, respectively.
F-15 SENIOR HOUSING PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Note 14. Selected Quarterly Financial Data (unaudited) The following is a summary of the unaudited quarterly results of operations of Senior Housing for 2000 and 1999 (dollars in thousands, except per share amounts):
2000 --------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter --------------------------------------------------------- Revenues (1) $18,597 $18,632 $15,208 $23,085 Income before gain on sale of properties 7,560 7,268 4,374 11,820 Gain on sale of properties -- -- -- 27,415 Net income 7,560 7,268 4,374 39,235 Per share data: Income before gain on sale of properties 0.29 0.28 0.17 0.46 Net income 0.29 0.28 0.17 1.51 1999 --------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter --------------------------------------------------------- Revenues $22,668 $22,622 $22,621 $22,879 Income (loss) before gain on sale of properties 10,971 10,861 11,176 (18,174) Gain on sale of properties -- -- -- -- Net income (loss) (2) 10,971 10,861 11,176 (18,174) Per share data: Income (loss) before gain on sale of properties 0.42 0.42 0.43 (0.70) Net income (loss) (2) 0.42 0.42 0.43 (0.70) (1) Includes a gain on foreclosures and lease terminations during the fourth quarter, as described in Note 4. (2) Includes an impairment loss during the fourth quarter, as described in Note 3.
Note 15. Pro Forma Information (unaudited) As of March 22, 2001, Senior Housing had received required operating licenses for 50 of the 57 nursing home operations which it assumed pursuant to the bankruptcy settlements with Mariner and IHS described in Note 3. The following unaudited pro forma condensed consolidated statements of income are presented as if Senior Housing had obtained all required healthcare licenses, the acquisition of the 57 healthcare facility operations and the sale of the four independent living facilities discussed in Note 5 had occurred at the beginnings of the periods presented. This unaudited pro forma information is not necessarily indicative of the operating results that would have occurred had the acquisition of the 57 facilities' operations and the sale of the four independent living facilities been consummated as of the assumed dates, nor is it indicative of future results of operations. F-16 SENIOR HOUSING PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Condensed Pro Forma Consolidated Statements of Income (unaudited) (amounts in thousands, except per share amounts) Years Ended December 31, ------------------------------ 2000 1999 ----------- ----------- Revenues: Rental income $ 45,655 $ 53,333 Net patient revenues 222,516 216,976 Interest and other income 2,567 3,478 --------- --------- Total revenues 270,738 273,787 --------- --------- Expenses: Depreciation 20,306 26,135 Patient operating expenses (1) 207,440 198,858 General and administrative 11,547 13,543 Interest 6,780 11,890 Loan loss reserve -- 14,500 Impairment of assets (1) -- 171,829 --------- --------- Total expenses 262,743 436,755 --------- --------- Net income (loss) $ 7,995 $(162,968) ========= ========= Net income (loss) per share $ 0.31 $ (6.29) ========= ========= (1) For 2000 and 1999, includes non-recurring losses and impairment write downs of $16,670 and $156,329, respectively, incurred by IHS and Mariner in the periods prior to July 1, 2000. F-17
SENIOR HOUSING PROPERTIES TRUST SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2000 (Dollars in Thousands) Gross Amount Carried at Close Initial Cost to Company of Period 12/31/00 ------------------------ ---------------------------- Costs Buildings Capitalized Buildings (2) (3) Original and Subsequent to and Accumulated Date Construction Location State Land Equipment Acquisition Impairment Land Equipment Total(1) Depreciation Aquired Date - ------------------------------------------------------------------------------------------------------------------------------------ Yuma AZ $103 $604 $1 $-- $103 $605 $708 $146 06/30/92 1984 Phoenix AZ 655 2,525 5 -- 655 2,530 3,185 616 06/30/92 1963 Yuma AZ 223 2,100 3 -- 223 2,103 2,326 504 06/30/92 1984 Scottsdale (4) AZ 979 8,807 91 -- 941 8,936 9,877 1,479 05/16/94 1990 Sun City (4) AZ 1,174 10,569 173 -- 1,189 10,727 11,916 1,754 06/17/94 1990 Arleta CA 230 2,070 -- -- 230 2,070 2,300 9 11/01/00 1976 Fresno CA 738 2,577 188 -- 738 2,765 3,503 808 12/28/90 1963 Van Nuys CA 716 378 225 -- 718 601 1,319 195 12/28/90 1969 Thousand Oaks CA 622 2,522 310 -- 622 2,832 3,454 802 12/28/90 1965 Lancaster CA 601 1,859 1,028 -- 601 2,887 3,488 781 12/28/90 1969 Stockton CA 382 2,750 4 -- 382 2,754 3,136 663 06/30/92 1968 Laguna Hills (4) CA 3,132 28,184 475 -- 3,172 28,619 31,791 4,503 09/09/94 1975 Littleton CO 185 5,043 348 -- 185 5,391 5,576 1,533 12/28/90 1965 Lakewood CO 232 3,766 723 -- 232 4,489 4,721 1,219 12/28/90 1972 Grand Junction CO 204 3,875 329 -- 204 4,204 4,408 913 12/30/93 1968 Grand Junction CO 6 2,583 1,316 -- 136 3,769 3,905 734 12/30/93 1978 Colorado Springs CO 245 5,236 -- (3,031) 245 2,205 2,450 -- 09/26/97 1972 Delta CO 167 3,570 -- -- 167 3,570 3,737 294 09/26/97 1963 Canon City CO 292 6,228 -- (3,512) 292 2,716 3,008 -- 09/26/97 1970 Cheshire CT 520 7,380 1,559 (5,712) 520 3,227 3,747 270 11/01/87 1963 Waterbury CT 1,003 9,023 915 (5,694) 1,003 4,244 5,247 900 05/11/92 1974 New Haven CT 1,681 14,953 1,236 (12,154) 1,681 4,035 5,716 1,101 05/11/92 1971 Deerfield Beach (4) FL 1,664 14,972 299 -- 1,690 15,245 16,935 2,524 05/16/94 1986 Palm Harbor (4) FL 3,327 29,945 591 -- 3,379 30,484 33,863 5,047 05/16/94 1992 Boca Raton (4) FL 4,404 39,633 799 -- 4,474 40,362 44,836 6,682 05/20/94 1994 Port St. Lucie (4) FL 1,223 11,009 219 -- 1,242 11,209 12,451 1,856 05/20/94 1993 Fort Myers (4) FL 2,349 21,137 419 -- 2,385 21,520 23,905 3,430 08/16/94 1984 Marietta GA 300 2,702 35 -- 300 2,737 3,037 372 05/15/96 1967 Dublin GA 442 3,982 80 -- 442 4,062 4,504 552 05/15/96 1968 Glenwood GA 174 1,564 4 -- 174 1,568 1,742 205 05/15/96 1972 College Park GA 300 2,702 23 -- 300 2,725 3,025 388 05/15/96 1985 S-1 SENIOR HOUSING PROPERTIES TRUST SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2000 (Dollars in Thousands) Gross Amount Carried at Close Initial Cost to Company of Period 12/31/00 ------------------------ ---------------------------- Costs Buildings Capitalized Buildings (2) (3) Original and Subsequent to and Accumulated Date Construction Location State Land Equipment Acquisition Impairment Land Equipment Total(1) Depreciation Aquired Date - ------------------------------------------------------------------------------------------------------------------------------------ Mediapolis IA 94 1,776 251 -- 94 2,027 2,121 428 12/30/93 1973 Winterset IA 111 2,099 493 -- 111 2,592 2,703 532 12/30/93 1973 Clarinda IA 77 1,453 293 -- 77 1,746 1,823 362 12/30/93 1968 Pacific Junction IA 32 306 5 -- 32 311 343 48 04/01/95 1978 Council Bluffs IA 225 893 99 -- 225 992 1,217 213 04/01/95 1963 Des Moines IA 123 627 -- -- 123 627 750 9 07/01/00 1965 Glenwood IA 322 2,098 -- -- 322 2,098 2,420 30 07/01/00 1964 Arlington Heights (4)IL 3,621 32,587 534 -- 3,665 33,077 36,742 5,204 09/09/94 1986 Ellinwood KS 130 1,137 53 -- 130 1,190 1,320 185 04/01/95 1972 Middleboro MA 1,771 15,752 -- -- 1,771 15,752 17,523 5,762 05/01/88 1970 Worcester MA 1,829 15,071 1,869 -- 1,829 16,940 18,769 7,679 05/01/88 1970 Boston MA 2,164 20,836 1,978 -- 2,164 22,814 24,978 9,799 05/01/89 1968 Hyannis MA 829 7,463 -- -- 829 7,463 8,292 2,756 05/11/92 1972 North Andover MA 410 3,450 -- -- 410 3,450 3,860 40 07/01/00 1973 Farmington MI 474 3,682 -- -- 474 3,682 4,156 48 07/01/00 1969 Howell MI 703 4,227 -- -- 703 4,227 4,930 56 07/01/00 1966 Silver Spring (4) MD 3,229 29,065 786 -- 3,301 29,779 33,080 4,808 07/25/94 1992 St. Joseph MO 111 1,027 195 -- 111 1,222 1,333 215 06/04/93 1976 Tarkio MO 102 1,938 415 -- 102 2,353 2,455 480 12/30/93 1970 Grand Island NE 119 1,446 369 -- 119 1,815 1,934 241 04/01/95 1963 Ainsworth NE 25 420 -- -- 25 420 445 10 07/01/00 1966 Ashland NE 28 1,823 -- -- 28 1,823 1,851 27 07/01/00 1965 Blue Hill NE 56 1,063 -- -- 56 1,063 1,119 15 07/01/00 1967 Central City NE 21 919 -- -- 21 919 940 13 07/01/00 1969 Edgar NE 1 138 -- -- 1 138 139 3 07/01/00 1971 Exeter NE 4 626 -- -- 4 626 630 10 07/01/00 1965 Gretna NE 267 673 -- -- 267 673 940 13 07/01/00 1972 Lyons NE 13 797 -- -- 13 797 810 13 07/01/00 1969 Milford NE 24 880 -- -- 24 880 904 15 07/01/00 1967 Columbus NE 89 561 -- -- 89 561 650 8 07/01/00 1955 Palmer NE 7 243 -- (250) -- -- -- -- 07/01/00 1975 S-2 SENIOR HOUSING PROPERTIES TRUST SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2000 (Dollars in Thousands) Gross Amount Carried at Close Initial Cost to Company of Period 12/31/00 ------------------------ ---------------------------- Costs Buildings Capitalized Buildings (2) (3) Original and Subsequent to and Accumulated Date Construction Location State Land Equipment Acquisition Impairment Land Equipment Total(1) Depreciation Aquired Date - ------------------------------------------------------------------------------------------------------------------------------------ Sutherland NE 19 1,251 -- -- 19 1,251 1,270 18 07/01/00 1970 Utica NE 21 569 -- -- 21 569 590 8 07/01/00 1966 Waverly NE 529 686 -- -- 529 686 1,215 13 07/01/00 1989 Burlington NJ 1,300 11,700 7 -- 1,300 11,707 13,007 1,538 09/29/95 1994 Grove City OH 332 3,081 32 -- 332 3,113 3,445 586 06/04/93 1965 Canonsburg PA 1,499 13,493 606 -- 1,518 14,080 15,598 5,578 03/01/91 1985 Huron SD 45 968 1 -- 45 969 1,014 231 06/30/92 1968 Sioux Falls SD 253 3,062 4 -- 253 3,066 3,319 733 06/30/92 1960 Huron SD 144 3,108 4 -- 144 3,112 3,256 742 06/30/92 1968 Bellaire (4) TX 1,223 11,010 177 -- 1,238 11,172 12,410 1,850 05/16/94 1991 Virginia Beach (4) VA 881 7,926 141 -- 893 8,055 8,948 1,334 05/16/94 1990 Charlottesville (4) VA 2,936 26,422 471 -- 2,976 26,853 29,829 4,391 06/17/94 1991 Arlington (4) VA 1,859 16,734 296 -- 1,885 17,004 18,889 2,745 07/25/94 1992 Seattle WA 256 4,869 67 -- 256 4,936 5,192 1,092 11/01/93 1964 Brookfield WI 834 3,849 8,014 (6,552) 834 5,311 6,145 545 12/28/90 1964 Clintonville WI 49 1,625 87 -- 30 1,731 1,761 485 12/28/90 1965 Clintonville WI 14 1,695 38 -- 14 1,733 1,747 486 12/28/90 1960 Madison WI 144 1,633 110 -- 144 1,743 1,887 487 12/28/90 1920 Waukesha WI 68 3,452 2,232 -- 68 5,684 5,752 1,342 12/28/90 1958 Milwaukee WI 277 3,883 -- -- 277 3,883 4,160 997 03/27/92 1969 Milwaukee WI 232 1,368 1 (1,294) 232 75 307 64 09/10/98 1970 Pewaukee WI 984 2,432 -- -- 984 2,432 3,416 660 09/10/98 1963 Worland WY 132 2,503 588 -- 132 3,091 3,223 619 12/30/93 1970 Laramie WY 191 3,632 199 -- 191 3,831 4,022 835 12/30/93 1964 ------------------------------------------------------------------------------------ Grand Totals $59,506 $540,275 $31,813 ($38,199) $60,060 $533,335 $593,395 $106,681 ==================================================================================== (1) Aggregate cost for federal income tax purposes is approximately $649,201. (2) Depreciation is provided for on buildings and improvements for periods ranging up to 40 years and on equipment up to 12 years. (3) Includes acquisition dates of HRPT Properties Trust, our predecessor. (4) These properties are collateral for our $270 million revolving credit facility.
S-3 Reconciliation of the carrying amount of real estate and equipment and accumulated depreciation during the period: Real Estate and Accumulated Equipment Depreciation --------------- --------------- Balance at January 1, 1998 $ 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 Additions 30,169 20,140 Disposals (130,968) (17,273) Impairment (14,545) (4,895) --------- --------- Balance at December 31, 2000 $ 593,395 $ 106,681 ========= ========= S-4
SENIOR HOUSING PROPERTIES TRUST SCHEDULE IV MORTGAGE LOANS ON REAL ESTATE December 31, 2000 (Dollars in Thousands) Principal Amount of Loans Subject to Final Face Value of Carrying Value of Delinquent Principal or Location Interest Rate Maturity Date Periodic Payment Terms Mortgage Mortgage Interest - ---------------------------------------------------------------------------------------------------------------------------------- None
Reconciliation of the carrying amount of mortgage loans during the period: Balance at January 1, 1998 $ 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 Mortgage cancellations, net of loan loss reserve (22,939) -------- Balance at December 31, 2000 $-- ======== S-5 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: April 2, 2001 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 April 2, 2001 David J. Hegarty Operating Officer /s/ John R. Hoadley Controller and Chief April 2, 2001 John R. Hoadley Accounting Officer /s/ Bruce M. Gans, M.D. Trustee April 2, 2001 Bruce M. Gans, M.D. /s/ Arthur G. Koumantzelis Trustee April 2, 2001 Arthur G. Koumantzelis /s/ John L. Harrington Trustee April 2, 2001 John L. Harrington /s/ Gerard M. Martin Trustee April 2, 2001 Gerard M. Martin /s/ Barry M. Portnoy Trustee April 2, 2001 Barry M. Portnoy EX-4.1 2 0002.txt Exhibit 4.1 [FRONT OF CERTIFICATE] COMMON SHARES COMMON SHARES $.01 PAR VALUE $.01 PAR VALUE [Picture of doctor holding beaker, businessman holding clipboard and nurse holding caduceus, standing over urban landscape.] THIS CERTIFICATE IS TRANSFERABLE [CUSIP NUMBER] IN BOSTON OR IN NEW YORK CITY SEE REVERSE FOR IMPORTANT NOTICE ON TRANSFER RESTRICTIONS AND OTHER INFORMATION SENIOR HOUSING PROPERTIES TRUST A MARYLAND REAL ESTATE INVESTMENT TRUST THIS CERTIFIES THAT --SPECIMEN-- is the registered holder of FULLY PAID AND NONASSESSABLE COMMON SHARES OF BENEFICIAL INTEREST IN [Superimposed over the following paragraph are the words "COMMON SHARES"] Senior Housing Properties Trust (the "Trust"), a Maryland real estate investment trust established by Declaration of Trust made as of December 16, 1998, as amended from time to time, a copy of which, together with all amendments thereto (the "Declaration"), is on file with the State Department of Assessments and Taxation of Maryland. The provisions of the Declaration and the Bylaws of the Trust, and all amendments thereto, are hereby incorporated in and made a part of this certificate as fully as if set forth herein in their entirety, to all of which provisions the holder and every transferee or assignee hereof by accepting or holding the same agrees to be bound. See reverse for existence of Trustees authority to determine preferences and other rights of subsequent series of shares, and of restriction on transfer provisions governing the shares evidenced by this certificate. This certificate and the shares evidenced hereby are negotiable and transferable on the books of the Trust by the registered holder hereof in person or by its duly authorized agent upon surrender of this certificate properly endorsed or assigned to the same extent as a stock certificate and the shares of a Maryland corporation. This certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar. Witness the facsimile seal of the Trust and the facsimile signature of its duly authorized officers. Dated: COUNTERSIGNED AND REGISTERED STATE STREET BANK AND TRUST COMPANY (BOSTON) [Signature of Ajay Saini] [Signature of David J. Hegarty] TRANSFER AGENT AND REGISTRAR BY AUTHORIZED SIGNATURE TREASURER PRESIDENT [The left side of the front of the Certificate contains a graphic design, at the top of which is a box labeled "NUMBER" and at the bottom of which is a facsimile of the Trust's seal and a box.] [The right side of the front of the Certificate contains a graphic design, at the top of which is a box labeled "SHARES".] [REVERSE OF CERTIFICATE] SENIOR HOUSING PROPERTIES TRUST ------------------- IMPORTANT NOTICE ------------------- THE TRUST WILL FURNISH TO ANY SHAREHOLDER, ON REQUEST AND WITHOUT CHARGE, A FULL STATEMENT OF THE INFORMATION REQUIRED BY SECTION 8-203(d) OF THE CORPORATIONS AND ASSOCIATIONS ARTICLE OF THE ANNOTATED CODE OF MARYLAND WITH RESPECT TO THE DESIGNATIONS AND ANY PREFERENCES, CONVERSION AND OTHER RIGHTS, VOTING POWERS, RESTRICTIONS, LIMITATIONS AS TO DIVIDENDS AND OTHER DISTRIBUTIONS, QUALIFICATIONS, AND TERMS AND CONDITIONS OF REDEMPTION OF THE SHARES OF EACH CLASS OF BENEFICIAL INTEREST WHICH THE TRUST HAS AUTHORITY TO ISSUE AND, IF THE TRUST IS AUTHORIZED TO ISSUE ANY PREFERRED OR SPECIAL CLASS IN SERIES, (i) THE DIFFERENCES IN THE RELATIVE RIGHTS AND PREFERENCES BETWEEN THE SHARES OF EACH SERIES TO THE EXTENT SET, AND (ii) THE AUTHORITY OF THE BOARD OF TRUSTEES TO SET SUCH RIGHTS AND PREFERENCES OF SUBSEQUENT SERIES. THE FOREGOING SUMMARY DOES NOT PURPORT TO BE COMPLETE AND IS SUBJECT TO AND QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE DECLARATION OF TRUST OF THE TRUST, A COPY OF WHICH WILL BE SENT WITHOUT CHARGE TO EACH SHAREHOLDER WHO SO REQUESTS. SUCH REQUEST MUST BE MADE TO THE SECRETARY OF THE TRUST AT ITS PRINCIPAL OFFICE OR TO THE TRANSFER AGENT. IF NECESSARY TO EFFECT COMPLIANCE BY THE TRUST WITH REQUIREMENTS OF THE INTERNAL REVENUE CODE RELATING TO REAL ESTATE INVESTMENT TRUSTS, OWNERSHIP OF THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE RESTRICTED BY THE TRUST AND/OR THE TRANSFER THEREOF MAY BE PROHIBITED ALL UPON THE TERMS AND CONDITIONS SET FORTH IN THE DECLARATION OF TRUST. THE TRUST WILL FURNISH A COPY OF SUCH TERMS AND CONDITIONS TO THE REGISTERED HOLDER OF THIS CERTIFICATE UPON REQUEST AND WITHOUT CHARGE. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common UNIF GIFT MIN ACT-_____Custodian______ TEN ENT - as tenants by the entireties (Cust) (Minor) JT TEN - as joint tenants with right under Uniform Gifts to Minors of survivorship and not as Act_________________ tenants in common (State) Additional abbreviations may also be used though not in the above list For value received _____________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF NEW OWNER [Box] _______________________________________________________________________ ______________________________________________________________________________ PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE. ______________________________________________________________________________ ______________________________________________________________________________ Shares of Beneficial Interest represented by the within Certificate, and do hereby irrevocably constitute and appoint _______________________________________________________________________ Attorney to transfer the said shares on the books of the within-named Trust with full power of substitution in the premises. Dated ____________________ (Sign here)_________________________________ NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. SIGNATURE(S) GUARANTEED: _____________________________________________________ THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVING AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. EX-8.1 3 0003.txt 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 April 2, 2001 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, 2000 (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 opinions hereinafter set forth. Specifically, and without limiting the generality of the foregoing, we have reviewed: (i) the declaration of trust and the by-laws of the Company, each 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 "ERISA Laws"). No assurance can be given that the Tax Laws or the ERISA Laws will not Senior Housing Properties Trust April 2, 2001 Page 2 change. In preparing the discussions with respect to Tax Laws and ERISA Laws matters in the sections of the Form 10-K 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 Form 10-K 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-10.6 4 0004.txt Exhibit 10.6 Form of MASTER MANAGEMENT AGREEMENT by and between CERTAIN AFFILIATES OF SENIOR HOUSING PROPERTIES TRUST AND FIVE STAR QUALITY CARE, INC. AS OF October 1, 2000
Table of Contents Page ARTICLE 1 DEFINITIONS.....................................................................................1 1.1 Agreement.......................................................................................1 1.2 Approved Budgets................................................................................1 1.3 Business Day....................................................................................1 1.4 Company.........................................................................................1 1.5 EntitY..........................................................................................2 1.6 Facilities......................................................................................2 1.7 Facilities Accounts.............................................................................2 1.8 Facilities Expenses.............................................................................2 1.9 Facility Leases.................................................................................2 1.10 Facilities Records..............................................................................2 1.11 Fiscal Year.....................................................................................2 1.12 Management Fee..................................................................................2 1.13 Net Patient Revenues............................................................................3 1.14 Person..........................................................................................3 1.15 Prior Arrangements..............................................................................3 ARTICLE 2 APPOINTMENT; DUTIES.............................................................................3 2.1 Appointment of the Manager......................................................................3 2.2 Acceptance; General Description of Duties.......................................................4 2.3 Certain Specific Duties.........................................................................5 ARTICLE 3 INSURANCE.......................................................................................8 3.1 Maintenance of Companies' Insurance.............................................................8 3.2 Manager's Insurance.............................................................................8 3.3 Indemnification of Manager......................................................................8 ARTICLE 4 REPORTING AND RECORDKEEPING.....................................................................9 4.1 Maintenance of Records, Etc.....................................................................9 4.2 Companies' Property; Continuing Access..........................................................9 4.3 Companies' Audit Rights.........................................................................9 4.4 Required Reports, Etc..........................................................................10 4.5 Supporting Documentation.......................................................................10 ARTICLE 5 BANK ACCOUNTS..................................................................................11 5.1 Facilities Accounts............................................................................11 5.2 Access to Accounts, Etc........................................................................11 ARTICLE 6 PAYMENT OF EXPENSES............................................................................11 6.1 Costs Eligible for Payment from Facilities Account, Etc........................................11 6.2 Excluded Manager Costs.........................................................................11 6.3 Insufficient Funds.............................................................................12 ARTICLE 7 COMPENSATION; TERM; TERMINATION................................................................12 i Table of Contents (continued) Page 7.1 Management Fee.................................................................................12 7.2 Term...........................................................................................13 7.3 Fees on Termination or Expiration..............................................................13 7.4 Orderly Transition.............................................................................13 ARTICLE 8 MISCELLANEOUS..................................................................................13 8.1 Limitation on Assignment.......................................................................13 8.2 Other Business, Etc............................................................................13 8.3 Notices........................................................................................13 8.4 Successors and Assigns, Etc....................................................................15 8.5 Severability...................................................................................15 8.6 Entire Contract................................................................................15 8.7 Headings; Counterparts.........................................................................15 8.8 Relationship of Parties........................................................................15 8.9 Governing Law..................................................................................15 8.10 Modification of Agreement......................................................................16 8.11 Effective Date.................................................................................16
ii MASTER MANAGEMENT AGREEMENT THIS MASTER MANAGEMENT AGREEMENT is made as of October 1, 2000, by and among FIVE STAR QUALITY CARE, INC., a Delaware corporation (the "Manager"), and each of the parties identified on the signature page of this Agreement (each, a "Company" and collectively, the "Companies"). W I T N E S S E T H : WHEREAS, the Companies are the owners or tenants of those facilities described on Exhibit A (each, a "Facility" and collectively, the "Facilities"); and WHEREAS, the Companies desire to retain the Manager, and the Manager is willing to serve, as manager and operator of the Facilities, subject to and upon the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, the mutual receipt and legal sufficiency of which are hereby acknowledged, the Companies and the Manager hereby agree as follows: ARTICLE 1 DEFINITIONS Capitalized terms used in this Agreement shall have the meanings set forth below or in the section of this Agreement referred to below. 1.1 "Agreement" shall mean this Master Management Agreement, together with Exhibit A attached hereto, as they may be amended from time to time as herein provided. 1.2 "Approved Budgets" shall have the meaning given such term in Section 4.4. 1.3 "Business Day" shall mean any day other than Saturday, Sunday, or any other day on which banking institutions in The Commonwealth of Massachusetts are authorized by law or executive action to close. 1.4 "Company" shall have the meaning given such term in the preambles to this Agreement. 1.5 "Entity" shall mean any corporation, general or limited partnership, limited liability company, stock company or association, joint venture, association, company, trust, bank, trust company, land trust, business trust, any government or agency or political subdivision thereof or any other entity. 1.6 "Facilities" shall have the meaning given such term in the recitals to this Agreement. 1.7 "Facilities Accounts" shall have the meaning given such term in Section 5.1. 1.8 "Facilities Expenses" shall mean all costs, expenses and cash disbursements of any type relating to or arising out of the ownership or operation of the Facilities, including, without limitation, taxes, capital improvements, rental and other payments under any Facility Lease, debt service (interest and principal) on any indebtedness, expenses of operating, maintaining and repairing the Facilities and funding necessary reserves. 1.9 "Facility Leases" shall mean, collectively, any ground or space leases or any other occupancy agreements from time to time in effect with respect to any of the Facilities other than residency agreements with patients and/or residents of the Facilities. 1.10 "Facilities Records" shall mean all records, books and accounts, vouchers, statements, receipts, invoices, plans, specifications, permits, approvals, contracts and other documents relating to the ownership, management or operation of the Facilities or otherwise relating to performance by the Manager of its services with respect to the Facilities hereunder. 1.11 "Fiscal Year" shall mean each twelve (12) month period during the term of this Agreement commencing January 1. 1.12 "Management Fee" shall mean (i) with respect to any Facility subject to the Prior Arrangements, (x) for the first ninety (90) days that the Manager shall act as manager of such Facility, whether pursuant to this Agreement or the Prior Arrangements, an amount equal to all costs and expenses incurred by, or allocable to, the Manager's performance of its services hereunder or thereunder during such period, and (y) thereafter, a per annum fee equal to five percent (5%) of Net Patient Revenues of such Facility; and (ii) with respect to any Facility which is not subject to the Prior Arrangements, a per annum fee -2- equal to five percent (5%) of Net Patient Revenues of such Facility. 1.13 "Net Patient Revenues" shall mean, with respect to any Facility, for any period, the aggregate amount of all revenues (determined in accordance with generally accepted accounting principles, consistently applied), received by, or by reason of the operation of, such Facility during such period, including, without limitation, all rents and/or residency fees received, patient or client revenues received for the use of or otherwise by reason of all rooms, beds and other facilities provided, meals served, services performed or provided, space or facilities leased or subleased or goods sold at such Facility, but excluding revenues from professional fees or charges by physicians and unaffiliated providers of ancillary services to the extent such charges are paid over to, or separately billed by, such physicians and unaffiliated providers. 1.14 "Person" shall mean any individual or Entity, and the heirs, executors, administrators, legal representatives, successors and assigns of such Person where the context so admits. 1.15 "Prior Arrangements" shall mean, collectively, (i) an Interim Management Agreement, dated as of July 1, 2000, among the Manager, certain of the Companies, and others, as amended from time to time, and (ii) a Management and Servicing Agreement, dated as of July 10, 2000, among the Manager, certain of the Companies, and others, as amended from time to time. ARTICLE 2 APPOINTMENT; DUTIES 2.1 Appointment of the Manager. The Companies hereby engage the Manager to manage, supervise and operate the Facilities with the objective of providing high quality skilled nursing, intermediate, resident care, senior housing and/or assisted living services to patients and/or residents of the Facilities, as the case may be, and to carry out general management functions with respect to the Facilities. Each Facility shall be operated subject to the direction and control of the Company licensed to operate such Facility and, in connection therewith, such Company (i) shall retain ultimate authority over the business, policies, operations and assets of its Facility and (ii) shall remain the responsible licensee of its Facility and, as such, be fully liable and -3- legally accountable at all times to all patients, governmental agencies and third parties for all patient care and funds, and all other aspects of the operation and maintenance of its Facility. 2.2 Acceptance; General Description of Duties. The Manager accepts such engagement and agrees to provide all services necessary to provide and maintain such high quality care and management, including, without limitation, the following: (a) Supervising the performance of all administrative functions as may be necessary in the management and operation of the Facilities; (b) Selecting, hiring, training, supervising, monitoring the performance of and terminating all personnel involved in the administration and day-to-day operations of the Facilities, including, without limitation, professional personnel, custodial, cleaning, maintenance, and other operational personnel, and secretarial and bookkeeping personnel; (c) Providing accounting, billing, purchasing and bill payment functions for the Facilities; (d) Establishing systems of accounts and supervising the maintenance of ledgers and other primary accounting records by personnel of the Facilities; (e) Supervising the financial affairs of the Facilities; (f) Establishing and supervising the implementation of operating budgets and establishing and administering financial controls over the operations and management of the Facilities; (g) Developing and establishing financial standards and norms by which the income, costs, and operations of the Facilities may be evaluated; (h) Serving as adviser and consultant in connection with policy decisions to be made by the Companies; (i) Furnishing such reports to the Companies as the Companies -4- may request, and providing the Companies with economic and statistical data in connection with or relative to the operation and management of the Facilities; (j) Representing the Facilities in all dealings with regulatory authorities, creditors, patients, personnel, agents for collection and insurers; (k) Acting as agent for the Companies in disbursing or collecting the funds of the Facilities, in paying the debts and fulfilling the obligations of the Facilities; (l) Marketing the services of the Facilities; and (m) Generally seeing to the operations and management of the Facilities, the marketing of the services provided at the Facilities, planning for future operations and establishing and implementing policies for the Facilities. 2.3 Certain Specific Duties. In addition to the general duties set forth in Section 2.2 and the other obligations of the Manager set forth in this Agreement, the Manager shall have the following specific responsibilities, all of which shall be performed in a manner consistent with the Approved Budgets: 2.3.1 Employees. The Manager shall recruit, evaluate and select qualified nursing home administrators who shall be responsible for the functional operation of the Facilities and supervision of personnel at the Facilities, on a day-to-day basis, as well as all on-site professional, custodial, food service, cleaning, maintenance, clerical, secretarial, bookkeeping, management, collection and other administrative personnel for the day-to-day operations of the Facilities. All such personnel shall be employees of the Manager and the salary and wages, payroll taxes, insurance, workmen's compensation and other benefits of such administrators and other personnel shall be the responsibility of, and paid by, the Manager, subject to reimbursement as Facilities Expenses. The Manager shall establish such personnel policies, wage structures and staff schedules as it deems necessary and advisable. The Manager shall maintain payroll records and shall prepare payrolls and returns of withholding taxes. For purposes of those Facilities located in the State of California, this Agreement is intended to serve as an outside resources contract pursuant to California -5- Administrative Code Title 22, Section 72511 and a copy of this Agreement shall remain at each such Facility and shall remain readily available for inspection and review by the Department of Health Services in accordance with Section 72511 as aforesaid. 2.3.2 Purchasing. The Manager shall purchase all supplies, foodstuffs, materials, appliances, tools and equipment necessary in the operation of the Facilities. The Manager shall use commercially reasonable efforts to limit purchasing costs and to maintain such costs at a level reasonably calculated to allow the Facilities to operate profitably. The Manager may make such purchases in bulk under a centralized purchasing system established by it for multiple facilities under its management in order to minimize costs to the Companies and all such costs may be allocated among the managed facilities. The Manager shall arrange for all contracts for electricity, gas, telephone, and any other utility or service necessary for the operation of the Facilities. The Manager shall, on behalf of the Companies, contract for and supervise the making of any necessary repairs, alterations and improvements to the Facilities; provided, however, that in the case of any major repair, alteration or improvement (other than in the event of emergency), the Manager shall obtain the approval of the Companies, unless the same is authorized by the Approved Budgets. 2.3.3 Collections, Accounts, Disbursements and Investments. The Manager shall prepare and submit bills and collect, for the account of the Companies, any and all moneys owing to the Companies, whether from patients, residents or third party payors. 2.3.4 Marketing. The Manager shall market the services of the Facilities in order to maintain the patient/resident census at the Facilities in such numbers and of such categories as, in the Manager's judgment, will tend to maintain the financial stability of the Facilities. 2.3.5 Technical and Professional Services. The Manager shall secure such engineering, legal and other specialized technical and professional services as may be necessary to advise or to represent the Companies in connection with any matter involving or arising out of the operation of the Facilities; provided, however, that the providers of any such services shall be subject to the approval of the Companies. -6- 2.3.6 Patient Care and Quality Assurance. The Manager shall establish and develop written policies and procedures to assure protection of patient rights, make recommendations concerning, and assist in the establishment and maintenance of, standards for quality control relating to the services and treatment of residents and patients. The Manager may conduct practice inspections and surveys to assure the continuance of high standards. 2.3.7 Dietary. The Manager shall recommend, develop, inaugurate and carry out practices and procedures with respect to purchasing and dietary control consistent with appropriate standards of health care, modern business and management techniques. 2.3.8 Plant Maintenance. The Manager shall monitor and review practices and procedures of the maintenance, engineering, security, housekeeping and related services and shall implement, maintain and supervise inspections (interior and exterior) and preventative maintenance programs with respect to the Facilities. 2.3.9 Accounting. The Manager shall review and make recommendations concerning claims filings, patient billings, admissions policies concerning credit, deposits and uncompensated care agreements and provide for payment of accounts payable, employee payrolls, taxes, insurance premiums and other obligations of the Facilities. The Manager shall establish an accounting system to record all business activity in order to provide financial reporting as required by Article 4. The Manager will prepare or arrange for timely reporting to governmental agencies and to the Companies as may be required by law, for reimbursement purposes or as the Companies may from time to time reasonably require. 2.3.10 Compliance with Law. The Manager shall keep in full force and effect all licenses, permits, approvals, authorizations, provider agreements and certificates or determinations of need necessary for the Companies and the Manager to occupy and operate the Facilities. The Manager shall not take or omit to take any action which jeopardizes any such licenses, permits, approvals, authorizations, provider agreements or certificates or determinations of need. 2.4 Standard of Care. The Manager shall use commercially reasonable efforts and act in good faith and in a professional -7- manner in rendering the services called for hereunder in accordance with prevailing standards of the health care /congregate care/assisted living industry, as the case may be, and shall render the services called for hereunder in good faith and with a duty of care. 2.5 Authority of the Manager. Subject to the terms and conditions set forth in this Agreement, the parameters established by the Approved Budgets and the policies from time to time established by the Companies, the Manager shall have the authority, control and discretion with regard to the operation, administration and management of the business, policies, and assets of the Facilities (including, without limitation, the exercise of its rights and performance of its duties provided for in Sections 2.1, 2.2 and 2.3) and the right to determine all operating policies affecting the appearance, maintenance, personnel, standards of operation, quality of services, and any other matter affecting the Facilities or the operation of the Facilities. ARTICLE 3 INSURANCE 3.1 Maintenance of Companies' Insurance. The Manager shall obtain, on behalf of the Companies and as an expense of the Facilities, all necessary liability and property insurance covering the Facilities, any equipment used in connection with the Facilities, and the Companies, including, without limitation, all insurance required to be maintained by the Companies under any Facility Leases in accordance with the terms and provisions thereof. 3.2 Manager's Insurance. The Manager shall maintain such insurance as is customarily obtained by prudent managers of facilities similar to the Facilities, including, without limitation, workmen's compensation insurance covering the employees at the Facilities. 3.3 Indemnification of Manager. The Companies shall indemnify, defend and hold harmless the Manager for, from and against any cost, loss, damage or expense (including, but not limited to, reasonable attorneys' fees and all court costs and other expenses of litigation, whether or not taxable under local law) unless arising from the gross negligence or willful misconduct in carrying out the Manager's duties under this Agreement, whether on the part of the Manager or its officers, employees, agents or representatives, except that such -8- indemnification shall apply to instances of gross negligence and/or willful misconduct to the extent such matters are insurable. ARTICLE 4 REPORTING AND RECORDKEEPING 4.1 Maintenance of Records, Etc. As a part of the Facilities Records, the Manager shall develop and maintain on a current basis a system of accounts, data processing and payroll processing systems and a document filing system, as well as procedures for recording accounts payable and receivable, with respect to the Facilities and performance of the Manager's obligations under this Agreement, which systems and procedures shall at all times be reasonably satisfactory to the Companies. All Facilities Records shall be maintained at the Facilities, at the Manager's principal place of business or regional offices, or at such other location as may be mutually agreed upon by the Manager and the Companies. 4.2 Companies' Property; Continuing Access. All Facilities Records received and/or maintained by the Manager pursuant to this Agreement are and shall remain the property of the Companies and, upon termination or expiration of this Agreement for any reason whatsoever, shall be promptly turned over to the Companies. For the time and to the extent required by applicable law, the Manager shall retain and permit the Comptroller General of the United States, the United States Department of Health and Human Services, and their respective duly authorized representatives access to examine or copy this Agreement and to such books, documents and records as are reasonably necessary to verify the nature and extent of the costs of the services supplied under this Agreement. In the event the Manager provides any of its services under this Agreement pursuant to a subcontract and if (x) the services provided pursuant to the subcontract have a value or cost of Ten Thousand Dollars ($10,000) or more over a twelve (12) month period and (y) the subcontract is with a related organization, the Manager shall cause such subcontract to contain a clause requiring the subcontractor to retain and allow access to its records on the same terms and conditions as required by the Manager pursuant to this Section 4.2. This provision shall be null and void should it be determined that Section 1861(V)(1)(I) of the Social Security Act is not applicable to this Agreement. 4.3 Companies' Audit Rights. The Manager shall cooperate with, and make all Facilities Records available to, any auditor, -9- independent accountant, agent or other person designated from time to time by the Companies and the Companies shall at all times have the right to conduct, or cause to be conducted, audits and examinations of the Facilities Records. The cost of all such audits and examinations shall be Facilities Expenses. 4.4 Required Reports, Etc. (a) Annual Budget. The Manager shall prepare and submit to the Companies for the Companies' approval, prior to the start of each Fiscal Year for the ensuing Fiscal Year, with respect to each Facility, an operating budget, on an accrual basis, with respect to such Facility during the ensuing calendar year. The Companies shall have the opportunity to review such operating budgets and the Manager shall make such changes and adjustments thereto as the Companies may require (such operating budgets, upon approval thereof by the Companies, collectively, the "Approved Budgets"). The Manager agrees to use commercially reasonable efforts to manage and operate each Facility in accordance with the applicable Approved Budget with respect to such Facility. The Manager shall further prepare and propose for the Companies' approval from time to time such additional revisions to the Approved Budgets as may reasonably be required to reflect changes in costs or expenditures in management and operation of the Facilities. (b) Other Reports. The Manager shall prepare and furnish to the Companies, with respect to each Facility, such information with respect thereto as the Companies may from time to time reasonably require. 4.5 Supporting Documentation. As additional support to required reporting information under this Agreement, the Manager shall, at the Company's request, provide copies of (a) all bank statements and reconciliations, (b) detailed cash receipts and disbursement records, (c) general ledger listings, (d) copies of invoices for expenditures, (e) summaries of adjusting journal entries, (f) copies of all paid bills, (g) all information required to prepare state and federal tax returns on a timely basis, and (h) such other supporting documentation as the Companies may reasonably require. -10- ARTICLE 5 BANK ACCOUNTS 5.1 Facilities Accounts. Except as otherwise directed by the Companies, the Manager shall deposit all revenues received by the Manager with respect to the Facilities, and pay all Facilities Expenses from, one or more bank accounts established for the Facilities (collectively, the "Facilities Accounts"). The system of accounts for the Facilities and the applicable depository institution(s) shall be approved by the Companies and the Companies shall be given written notice of the account number and location of each such account. In no event shall any Facilities Account be commingled with any account of the Manager. The Facilities Accounts may be commingled one with the other in order to facilitate efficient pooled cash management, provided the depository institution or the Manager maintains records showing the separate value of each Company's ownership of these accounts. The Companies may direct the Manager to change any depository institution or depository arrangement at any time. 5.2 Access to Accounts, Etc. Authorized representatives of the Companies shall at all times have access to the Facilities Accounts and the contents thereof. The Companies shall notify the Manager of any withdrawals made by the Companies from such bank accounts. The Manager's authority to draw against the Facilities Accounts may be terminated by the Companies without notice to the Manager upon any termination of this Agreement or, if earlier, upon the occurrence of any default with respect to the Manager. ARTICLE 6 PAYMENT OF EXPENSES 6.1 Costs Eligible for Payment from Facilities Account, Etc. The Manager shall pay, directly from the Facilities Account, all Facilities Expenses. 6.2 Excluded Manager Costs. The following expenses and costs incurred by or on behalf of the Manager shall be at the sole cost and expense of the Manager and shall not be paid from the Facilities Accounts except as otherwise provided with respect to the Prior Arrangements: (a) the training and hiring expenses and any costs of salary and wages, payroll taxes, insurance, workmen's -11- compensation and other benefits of the Manager's home office and regional staff except for the portion of such costs as are properly allocable to the Facilities; (b) the cost of the Manager's overhead, including, without limitation, office rent, telephone, telecopy, courier, expedited delivery and postage charges, office supplies and equipment, and miscellaneous expenses; provided, however, that telephone, courier and expedited delivery expenses and costs incurred with respect to matters specific to the Facilities (such as the cost, of required Medicaid/Medicare reports and the Companies' and the Facilities' tax returns), properly attributable to the operation of the Facilities, as distinguished from the Manager's overall operations, may, to the extent separately itemized, be paid from the Facilities Accounts; and (c) political or charitable contributions, unless approved by the Companies. The Manager shall indemnify and hold the Companies harmless from any and all liability with respect to any of the above costs and expenses. 6.3 Insufficient Funds. If, at any time, the Manager determines that there are not, or are projected not to be within the next thirty (30) days, sufficient funds within the Facilities Account to pay all Facilities Expenses which may be incurred, the Manager shall promptly inform the Companies. The Manager shall have no obligation to expend its own funds in payment of expenses and liabilities with respect to the Facilities (other than those costs and expenses specified in Section 6.2 hereof to be the Manager's costs and expenses), and the Manager shall not be in default under this Agreement by reason of any failure to pay any such expenses and liabilities or take any action due to a lack of funds in the Facilities Account. ARTICLE 7 COMPENSATION; TERM; TERMINATION 7.1 Management Fee. As compensation for the services to be rendered by the Manager during the term of this Agreement, the Manager shall receive the Management Fee. The Management Fee shall be payable monthly, in arrears, on the last day of each calendar month. -12- 7.2 Term. This Agreement shall commence on the date hereof and, unless sooner terminated as herein provided, shall expire December 31, 2001. Thereafter, this Agreement shall be automatically renewed for successive one-year periods. Notwithstanding the foregoing, either party may terminate this Agreement, with respect to one or more of the Facilities, by the giving of thirty (30) days prior written notice thereof to the non-terminating party. Any notice of termination shall designate the Facilities as to which such termination shall apply and the effective date of termination. 7.3 Fees on Termination or Expiration. In the event of termination or expiration of this Agreement, the Manager shall be entitled to receive any Management Fee accrued and unpaid through the date of termination plus the unamortized costs of all capital expenditures made by the Manager in order to provide services under this Agreement. 7.4 Orderly Transition. The Manager shall cooperate with the Companies to assist in an orderly transition of the management and operation of the Facilities to a successor or to any representative of the Companies. ARTICLE 8 MISCELLANEOUS 8.1 Limitation on Assignment. Neither the Manager nor any of the Companies shall suffer or permit any, direct or indirect, transfer of or encumbrance upon its interest in this Agreement. 8.2 Other Business, Etc. The Manager may manage facilities for third parties (other than the Companies), which may include, without limitation, management of facilities which may be competitive with the Facilities. The Companies and their affiliates may use any other managers to manage the Facilities or other facilities owned or leased by the Companies or their affiliates, as the Companies may, from time to time, in their sole discretion, determine. 8.3 Notices. (a) Any and all written notices, demands, consents, approvals, offers, elections and other communications required or permitted under this Agreement shall be deemed adequately given if in writing and the same shall be delivered either in hand, by telecopier with confirmed -13- receipt, or by mail or Federal Express or similar expedited commercial carrier, addressed to the recipient of such notice, postpaid and registered or certified with return receipt requested (if by mail), or with all freight charges prepaid (if by Federal Express or similar carrier). (b) All written notices required or permitted to be sent hereunder shall be deemed to have been given for all purposes of this Agreement upon the date of confirmed receipt, in the case of a notice by telecopier, and, in all other cases, upon the date of receipt or refusal, except that whenever under this Agreement a notice is either received on a day which is not a Business Day or is required to be delivered on or before a specific day which is not a Business Day, the day of receipt or required delivery shall automatically be extended to the next Business Day. (c) All such notices shall be addressed: if to any Company, to: 400 Centre Street Newton, MA 02458 Attn: Mr. David J. Hegarty [Telecopier No. (617) 796-8349] if to the Manager, to: 400 Centre Street Newton, MA 02458 Attn: Mr. Evrett Benton [Telecopier No. (617)796-8385] (d) By notice given as herein provided, the parties hereto and their respective successors and assigns shall have the right from time to time and at any time during the term of this Agreement to change their respective addresses effective upon receipt by the other parties of such notice and each shall have the right to specify as its address any other address within the United States of America. (e) If under this Agreement the failure of the recipient to respond to any notice within a specified period of time is intended to constitute deemed consent, approval, disapproval or other action by such recipient, it shall be a condition of the effectiveness of such notice that the same include a conspicuous statement of the -14- applicable response period and the effect of a failure to respond within such period. 8.4 Successors and Assigns, Etc. Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such party and all covenants and agreements which are contained in this Agreement shall be binding upon and inure to the benefit of the respective successors and assigns of the parties hereto. 8.5 Severability. In case any one or more of the provisions contained in this Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby, but this Agreement shall be reformed and construed and enforced to the maximum extent permitted by applicable law. 8.6 Entire Contract. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and shall supersede and take the place of any other instruments purporting to be an agreement of the parties hereto relating to the subject matter hereof. 8.7 Headings; Counterparts. Headings in this Agreement are for purposes of reference only and shall not limit or otherwise affect the meaning hereof. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument, and in pleading or proving any provision of this Agreement, it shall not be necessary to produce more than one of such counterparts. 8.8 Relationship of Parties. The Manager is an independent contractor and is not to be considered a partner, joint venturer or other type of principal with respect to ownership of any portion of or interest in the Facilities or any right, title or interest of the Companies therein. 8.9 Governing Law. This Agreement shall be interpreted, construed, applied and enforced in accordance with the laws of The Commonwealth of Massachusetts applicable to contracts between residents of Massachusetts which are to be performed entirely within Massachusetts, regardless of (i) where this Agreement is executed or delivered; or (ii) where any payment or other performance required by this Agreement is made or required to be made; or (iii) where any breach of any provision of this -15- Agreement occurs, or any cause of action otherwise accrues; or (iv) where any action or other proceeding is instituted or pending; or (v) the nationality, citizenship, domicile, principal place of business, or jurisdiction of organization or domestication of any party; or (vi) whether the laws of the forum jurisdiction otherwise would apply the laws of a jurisdiction other than The Commonwealth of Massachusetts; or (vii) any combination of the foregoing. Notwithstanding the foregoing, the laws of the jurisdiction where a Facility is located shall apply, to the extent required by the laws of such jurisdiction, to matters relating to interests in real property or title thereto. To the maximum extent permitted by applicable law, any action to enforce, arising out of, or relating in any way to, any of the provisions of this Agreement may be brought and prosecuted in such a court or courts located in The Commonwealth of Massachusetts as is provided by law; and the parties consent to the jurisdiction of said court or courts located in The Commonwealth of Massachusetts and to service of process by registered mail, return receipt requested, or by any other manner provided by law. 8.10 Modification of Agreement. This Agreement may not be modified, altered or amended in any manner except by an amendment in writing duly executed by the parties hereto. Additional facilities may be added to the scope of this Agreement by substituting for Exhibit A to this Agreement a revised Exhibit A including such facilities, provided that such replacement Exhibit A shall be initialed by the Companies and the Manager. 8.11 Effective Date. The effective date of this Agreement with respect to any Facility shall be the date on which such Facility shall be included in Exhibit A. Additional Persons constituting Companies may be added to this Agreement provided that such new Person signs the signature page to this Agreement and such signature is acknowledged by the Manager. IN WITNESS WHEREOF, the parties hereto have executed this Agreement under seal as of the date above first written. -16- COMPANIES: [Names of Companies] MANAGER: FIVE STAR QUALITY CARE, INC. By: _____________________________ Its (Vice) President -17- Exhibit A Facilities Effective Dates - ---------- --------------- EX-10.21 5 0005.txt Exhibit 10.21 THIRD AMENDMENT OF LEASE This Third Amendment of Lease (this "Amendment") is made this 4 day of August, 2000, between SPTMRT Properties Trust, a Maryland real estate investment trust ("Landlord"), and Marriott Senior Living Services, Inc., a Delaware corporation ("Tenant"). Recitals: A. Whereas, HMH PROPERTIES, INC., a Delaware corporation ("HMH") as Landlord and Marriott Senior Living Services, Inc. ("MSLS") as Tenant entered into that certain Facilities Lease Agreement for the Marriott Senior Living Services Facilities of Boca Pointe, Palm Beach County, Boca Raton, Florida, on October 8, 1993, which Facilities Lease Agreement was amended on May 16, 1994 and October 10, 1997 (said Facilities Lease Agreement, as so amended hereinafter referred to as the "Lease"); and B. Whereas, pursuant to the terms of that certain Assignment and Assumption of Leases, Guarantees and Permits between HMH and HRPT Properties Trust, formally known as Health and Retirement Properties Trust, a Maryland real estate investment trust ("HRPT"), dated May 13, 1994, HRPT assumed all of HMH's rights, title and interest in and to the Lease; and C. Whereas, on or about June 30, 1999, HRPT assigned the Lease to Landlord; and D. Whereas, subsequent to the Commencement Date, Tenant constructed certain Improvements on the Land that was an Expansion and the parties are desirous of selecting a date for the commencement of construction of said Expansion and amending the Lease on the terms and conditions set forth herein. Now, therefore, in consideration of the mutual obligations and agreements set forth below, the sufficiency and receipt of which are hereby acknowledged, Landlord and Tenant agree as follows: 1. Section 5.06(B) of the Lease is hereby modified by the following: "Expansion Rental shall be paid in lieu of Percentage Rental commencing with Fiscal Year 1999 and continuing throughout the remaining Term of the Lease. For Fiscal Year 1999 and for Fiscal Year 2000, the Expansion Rental shall be calculated as if the commencement of construction of the Expansion occurred in Fiscal Year 1996. Commencing with Fiscal Year 2001 and thereafter, Expansion Rental shall be calculated as if the commencement of construction of the Expansion occurred in Fiscal Year 1997. 2. Section 5.03 shall be amended by adding the following new section: "C. Commencing with the third Fiscal Quarter of 2000, Tenant shall, within forty-five (45) days of the end of each Fiscal Quarter furnish to Landlord a report, for the immediately preceding Fiscal Quarter and year to date, which shall include the following: A. A schedule of revenue by type of unit (i.e., assisted living, specialcare, and nursing) and by source (i.e., Medicare or private pay); B. A schedule of the occupancy and number of each type of unit at the Premises (i.e., assisted living, special care and nursing); C. A schedule of operating expenses by category including real estate taxes; and D. Such other financial information that Landlord may reasonably request from time to time, provided however, that such additional financial information requested by Landlord must be of the type and nature that Tenant generally provides to other Owners of its leased senior living communities. Attached hereto as Exhibit A is the form of reporting that Tenant currently provides to its owners and will serve as the initial form for the reporting to Landlord pursuant to this Section 5.03(C)." 3. All capitalized terms not defined herein shall have the meaning set forth on the Lease; and 4. Any conflict between the terms and conditions of this Amendment and the Lease shall be resolved in favor of this Amendment; and 5. Other than as modified herein, all of the terms and provisions of this Lease shall remain in full force and effect. IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this Amendment on the date first hereinabove set forth. TENANT Attest: Marriott Senior Living Services, Inc. a Delaware corporation By: /s/ Michael J. Stein By: /s/ Michael J. Giacopelli, Jr. --------------------------------- ----------------------------------- Name: Michael J. Stein Name: Michael J. Giacopelli, Jr. Title: Assistant Secretary Title: Vice President [SEAL] LANDLORD Attest: SPTMRT Properties Trust a Maryland real estate trust By: /s/ Jennifer B. Clark By: /s/ David J. Hegarty --------------------------------- ----------------------------------- Name: Its: President [SEAL] GUARANTOR Attest: Marriott International, Inc. a Delaware corporation By: /s/ Edward L. Bednarz By: /s/ Myron D. Walker --------------------------------- ----------------------------------- Name: Edward L. Bednarz Name: Myron D. Walker Title: Assistant Secretary Title: Vice President [SEAL] EX-10.22 6 0006.txt Exhibit 10.22 FOURTH AMENDMENT OF LEASE This Fourth Amendment of Lease (this "Amendment") is made this 4 day of August, 2000, between SPTMRT Properties Trust, a Maryland real estate investment trust ("Landlord"), and Marriott Senior Living Services, Inc., a Delaware corporation ("Tenant"). Recitals: A. Whereas, HMC Retirement Properties, Inc., a Delaware corporation ("HMC"), as Landlord and Marriott Senior Living Services, Inc. ("MSLS") as Tenant entered into that certain Facilities Lease Agreement for the Marriott Senior Living Services Facilities of Bellaire/Houston, Harris County, Houston, Texas, on October 8, 1993, which Facilities Lease Agreement was amended on January 19, 1994, May 16, 1994 and October 10, 1997 (said Facilities Lease Agreement, as so amended hereinafter referred to as the "Lease"); and B. Whereas, pursuant to the terms of that certain Assignment and Assumption of Leases, Guarantees and Permits between HMC and HRPT Properties Trust, formally known as Health and Retirement Properties Trust, a Maryland real estate investment trust ("HRPT"), dated May 13, 1994, HRPT assumed all of HMC's rights, title and interest in and to the Lease; and C. Whereas, on or about June 30, 1999, HRPT assigned the Lease to Landlord; and D. Whereas Landlord and Tenant now wish to provide for the amendment of the Lease on the terms and conditions set forth herein. Now, therefore, in consideration of the mutual obligations and agreements set forth below, the sufficiency and receipt of which are hereby acknowledged, Landlord and Tenant agree as follows: 1. Section 5.03 shall be amended by adding the following new section: "C. Commencing with the third Fiscal Quarter of 2000, Tenant shall, within forty-five (45) days of the end of each Fiscal Quarter furnish to Landlord a report, for the immediately preceding Fiscal Quarter and year to date, which shall include the following: A. A schedule of revenue by type of unit (i.e., assisted living, special care, and nursing) and by source (i.e., Medicare or private pay); B. A schedule of the occupancy and number of each type of unit at the Premises (i.e., assisted living, special care and nursing); C. A schedule of operating expenses by category including real estate taxes; and D. Such other financial information that Landlord may reasonably request from time to time, provided however, that such additional financial information requested by Landlord must be of the type and nature that Tenant generally provides to other Owners of its leased senior living communities. Attached hereto as Exhibit A is the form of reporting that Tenant currently provides to its owners and will serve as the form for the reporting to Landlord pursuant to this Section 5.03(C)." 2. All capitalized terms not defined herein shall have the meaning set forth on the Lease; and 3. Any conflict between the terms and conditions of this Amendment and the Lease shall be resolved in favor of this Amendment; and 4. Other than as modified herein, all of the terms and provisions of this Lease shall remain in full force and effect. IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this Amendment on the date first hereinabove set forth. TENANT Attest: Marriott Senior Living Services, Inc. a Delaware corporation By: /s/ Michael J. Stein By: /s/ Michael J. Giacopelli, Jr. --------------------------------- ----------------------------------- Name: Michael J. Stein Name: Michael J. Giacopelli, Jr. Title: Assistant Secretary Title: Vice President [SEAL] LANDLORD Attest: SPTMRT Properties Trust a Maryland real estate trust By: /s/ Jennifer B. Clark By: /s/ David J. Hegarty --------------------------------- ----------------------------------- Name: Its: President [SEAL] GUARANTOR Attest: Marriott International, Inc. a Delaware corporation By: /s/ Edward L. Bednarz By: /s/ Myron D. Walker --------------------- ----------------------------------- Name: Edward L. Bednarz Name: Myron D. Walker Title: Assistant Secretary Title: Vice President [SEAL] Schedule to Exhibit 10.22 Pursuant to Instruction 2 to Item 601(a) of Regulation S-K, the following Fourth Amendments of Leases, which are substantially identical in all material respects to the Fourth Amendment of Lease concerning the Facilities Lease Agreement for the Marriott Senior Living Services Facilities of Bellaire/Houston, Houston, TX, filed herewith, are omitted. The following list sets forth the material differences in the premises leased and the tenants.
Leased Premises Tenant (1) Marriott Senior Living Services Facilities of Marriott Senior Living Services, Inc. Scottsdale, Scottsdale, AZ (2) Marriott Senior Living Services Facilities of Marriott Senior Living Services, Inc. Sun City, Sun City, AZ (3) Marriott Senior Living Services Facilities of Marriott Senior Living Services, Inc. Villa Valencia, Laguna Hills, CA (4) Marriott Senior Living Services Facilities of Marriott Senior Living Services, Inc. Deerfield Beach/Horizon Club, Deerfield Beach, FL (5) Marriott Senior Living Services Facilities of Marriott Senior Living Services, Inc. Palm Harbour, Palm Harbor, FL (6) Marriott Senior Living Services Facilities of Marriott Senior Living Services, Inc. Port St. Lucie, Port St. Lucie, FL (7) Marriott Senior Living Services Facilities of Marriott Continuing Care, LLC Bedford Court, Silver Spring, MD (8) Marriott Senior Living Services Facilities of Marriott Senior Living Services, Inc. The Jefferson, Arlington, VA (9) Marriott Senior Living Services Facilities of Marriott Continuing Care, LLC The Colonnades, Charlottesville, VA (Subtenant) (10) Marriott Senior Living Services Facilities of Marriott Senior Living Services, Inc. Virginia Beach, Virginia Beach, VA
EX-10.23 7 0007.txt Exhibit 10.23 FIFTH AMENDMENT OF LEASE This Fifth Amendment of Lease (this "Amendment") is made this 4 day of August, 2000, between SPTMRT Properties Trust, a Maryland real estate investment trust ("Landlord"), and Marriott Continuing Care, LLC, a Delaware limited liability company ("Tenant"). Recitals: A. Whereas, HMC Retirement Properties, Inc., a Delaware corporation ("HMC"), as Landlord and Marriott Senior Living Services, Inc. ("MSLS") as Tenant entered into that certain Facilities Lease Agreement for the Marriott Senior Living Services Facilities of Church Creek, Cook County, Arlington Heights, Illinois, on October 8, 1993, which Facilities Lease Agreement was amended on January 19, 1994, May 16, 1994, June 30, 1994 and October 10, 1997 (said Facilities Lease Agreement, as so amended hereinafter referred to as the "Lease"); and B. Whereas, pursuant to the terms of that certain Assignment and Assumption of Leases, Guarantees and Permits between HMC and Church Creek Corporation, a Massachusetts corporation ("Church Creek"), dated September 7, 1994, Church Creek assumed all of HMC's rights, title and interest in and to the Lease; and C. Whereas, pursuant to the terms of that certain Assignment and Assumption of Lease between MSLS and Marriott Continuing Care, Inc., a Delaware Corporation ("MCC, Inc.") dated October 7, 1998, MCC, Inc. assumed all of MSLS' rights, title and interest in and to the Lease; and D. Whereas, pursuant to the terms of that certain Bill of Sale, Assignment and Assumption of Leases, Contracts and Agreements dated June 30, 1999, Church Creek assigned the Lease to Landlord; and E. Whereas, on April 20, 2000 MCC, Inc. converted to a Delaware limited liability company ("MCC, LCC"); and F. Whereas Landlord and Tenant now wish to provide for the amendment of the Lease on the terms and conditions set forth herein. Now, therefore, in consideration of the mutual obligations and agreements set forth below, the sufficiency and receipt of which are hereby acknowledged, Landlord and Tenant agree as follows: 1. Section 5.03 shall be amended by adding the following new section: "C. Commencing with the third Fiscal Quarter of 2000, Tenant shall, within forty-five (45) days of the end of each Fiscal Quarter furnish to Landlord a report, for the immediately preceding Fiscal Quarter and year to date, which shall include the following: A. A schedule of revenue by type of unit (i.e., assisted living, special care, and nursing) and by source (i.e., Medicare or private pay); B. A schedule of the occupancy and number of each type of unit at the Premises (i.e., assisted living, special care and nursing); C. A schedule of operating expenses by category including real estate taxes; and D. Such other financial information that Landlord may reasonably request from time to time, provided however, that such additional financial information requested by Landlord must be of the type and nature that Tenant generally provides to other Owners of its leased senior living communities. Attached hereto as Exhibit A is the form of reporting that Tenant currently provides to its owners and will serve as the initial form for the reporting to Landlord pursuant to this Section 5.03(C)." 2. All capitalized terms not defined herein shall have the meaning set forth on the Lease; and 3. Any conflict between the terms and conditions of this Amendment and the Lease shall be resolved in favor of this Amendment; and 4. Other than as modified herein, all of the terms and provisions of this Lease shall remain in full force and effect. IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this Amendment on the date first hereinabove set forth. TENANT Attest: Marriott Continuing Care, LLC a Delaware limited liability company By: /s/ W. David Mann By: Marriott Senior Living Services, Inc. ---------------------------- a Delaware Corporation Name: W. David Mann Sole Member Title: Secretary By: /s/ Bruce L. Robertson --------------------------------- Name: Bruce L. Robertson Title: Treasurer [SEAL] LANDLORD Attest: SPTMRT Properties Trust a Maryland real estate trust By: /s/ Jennifer B. Clark By: /s/ David J. Hegarty ---------------------------- ------------------------------------ Name: Its: President [SEAL] GUARANTOR Attest: Marriott International, Inc. a Delaware corporation By: /s/ Edward L. Bednarz By: /s/ Myron D. Walker ---------------------------- ------------------------------------ Name: Edward L. Bednarz Name: Myron D. Walker Title: Assistant Secretary Title: Vice President [SEAL] Schedule to Exhibit 10.23 Pursuant to Instruction 2 to Item 601(a) of Regulation S-K, the following Fifth Amendment of Lease, which is substantially identical in all material respects to the Fifth Amendment of Lease concerning the Facilities Lease Agreement for the Marriott Senior Living Services Facilities of Church Creek, Arlington Heights, IL, filed herewith, is omitted. The material difference in the premises leased is as follows: Premises (1) Marriott Senior Living Services Facilities of Calusa Harbour, Ft. Myers, FL EX-21.1 8 0008.txt Exhibit 21.1 SENIOR HOUSING PROPERTIES TRUST SUBSIDIARIES OF THE REGISTRANT HRES1 Properties Trust (Maryland) HRES2 Properties Trust (Maryland) SHOPCO Holdings, Inc. (Delaware) 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) SHOPCO-SD, LLC (Delaware) SHOPCO-WI, LLC (Delaware) SHOPCO-WY, LLC (Delaware) SNH-CALIFORNIA, INC. (Delaware) SNH-IOWA, INC. (Delaware) SNH Holding Co., Inc. (Delaware) SNH-MICHIGAN, INC. (Delaware) SNH-NEBRASKA, INC. (Delaware) 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) -----END PRIVACY-ENHANCED MESSAGE-----