-----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, JDLyqBlVMwqnIda7J/l96Fly953/gGwTlNeviw1VeZJQwjSR7/456L23lqajvpWW n+Vq/YuDqxsXQdyjKMvr8Q== 0000908737-96-000067.txt : 19960401 0000908737-96-000067.hdr.sgml : 19960401 ACCESSION NUMBER: 0000908737-96-000067 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEALTH & RETIREMENT PROPERTIES TRUST CENTRAL INDEX KEY: 0000803649 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 046558834 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09317 FILM NUMBER: 96541781 BUSINESS ADDRESS: STREET 1: 400 CENTRE ST CITY: NEWTON STATE: MA ZIP: 02158 BUSINESS PHONE: 6173323990 MAIL ADDRESS: STREET 1: 400 CENTRE STREET CITY: NEWTON STATE: MA ZIP: 02158 FORMER COMPANY: FORMER CONFORMED NAME: HEALTH & REHABILITATION PROPERTIES TRUST DATE OF NAME CHANGE: 19920703 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the Fiscal Year Ended December 31, 1995 OR [ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ______________ to ______________ Commission File Number 1-9317 HEALTH AND RETIREMENT PROPERTIES TRUST (Exact name of registrant as specified in its charter) Maryland 04-6558834 - ------------------------------------- -------------------------------- (State or other jurisdiction (IRS Employer Identification No.) of incorporation) 400 Centre Street, Newton, Massachusetts 02158 -------------------------------------------------- (Address of principal executive offices) (Zip Code) 617-332-3990 -------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered - ---------------------------------------------- ------------------------ Common Shares of Beneficial Interest New York Stock Exchange Floating Rate Senior Notes, Series A, Due 1999 New York Stock Exchange Floating Rate Senior Notes, Series B, Due 1999 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 $1,067,850,542 based on the $17.125 closing price per share for such stock on the New York Stock Exchange on March 22, 1996. For purposes of this calculation, 3,791,416 shares held by HRPT Advisors, Inc. (the "Advisor"), including a total of 2,777,766 shares held by the Advisor solely in its capacity as voting Trustee under certain voting Trust agreements, and an aggregate of 17,514 shares held by the trustees and executive officers of the registrant, have been included in the number of shares held by affiliates. Number of the registrant's Common Shares of Beneficial Interest, $.01 par value ("Shares"), outstanding as of March 22, 1996: 66,165,166. DOCUMENTS INCORPORATED BY REFERENCE Part III of this Annual Report on Form 10-K is incorporated herein by reference from the Company's definitive Proxy Statement for the annual meeting of shareholders currently scheduled to be held on May 14, 1996. The financial statements and financial statement schedules for Marriott International, Inc. ("Marriott") are incorporated herein by reference to Marriott's Annual Report on Form 10-K for the year ended December 29, 1995, Commission File No. 1-12188. CERTAIN IMPORTANT FACTORS The Company's Annual Report on Form 10-K contains statements which constitute forward looking statements within the meaning of the Securities Litigation Reform Act of 1995. Those statements appear in a number of places in this Form 10-K and include statements regarding the intent, belief or expectations of the Company, its Trustees or its officers with respect to expansion of the Company's portfolio, its ability to pay dividends, its tax status as a real estate investment trust and the Company's access to debt or equity capital markets or to other sources of funds and statements of assumptions underlying such statements as to intent, belief or expectations. Readers are cautioned that any such forward looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially from those contained in the forward looking statement as a result of various factors. Such factors include the status of the economy, compliance with and changes to regulations and payment and reimbursement policies within the health care industry, competition within the health care industry, and changes to federal, state and local legislation. The accompanying information contained in this Form 10-K, including under the headings "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations", identifies other important factors that could cause such differences. THE AMENDED AND RESTATED DECLARATION OF TRUST OF THE COMPANY, DATED JULY 1, 1994, A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS THERETO (THE "DECLARATION"), IS DULY FILED IN THE OFFICE OF THE DEPARTMENT OF ASSESSMENTS AND TAXATION OF THE STATE OF MARYLAND, PROVIDES THAT THE NAME "HEALTH AND RETIREMENT PROPERTIES TRUST" REFERS TO THE TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF THE COMPANY SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, THE COMPANY. ALL PERSONS DEALING WITH THE COMPANY, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF THE COMPANY FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION. HEALTH AND RETIREMENT PROPERTIES TRUST 1995 FORM 10-K ANNUAL REPORT Table of Contents Part I Page Item 1. Business................................................... 1 Item 2. Properties................................................. 16 Item 3. Legal Proceedings.......................................... 18 Item 4. Submission of Matters to a Vote of Security Holders........ 19 Part II Item 5. Market for the Registrant's Common Stock and Related Stockholders Matters ........................... 20 Item 6. Selected Financial Data................................... 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 22 Item 8. Financial Statements and Supplementary Data............... 25 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................... 25 Part III To be incorporated by reference from the Company's definitive Proxy Statement for the annual meeting of shareholders currently scheduled to be held on May 14 , 1996, which is expected to be filed not later than 120 days after the end of the Company's fiscal year. Part IV Item 14. Exhibits, Financial Statement Schedules and Report on Form 8-K..................................... 26 PART I Item 1. Business. The Company. Health and Retirement Properties Trust (the "Company") was organized on October 9, 1986, as a Maryland real estate investment trust. The Company primarily invests in retirement communities, assisted living centers, long-term care facilities and other income producing healthcare related properties. The facilities in which the Company has made investments by mortgage, purchase lease or merger transactions are hereinafter referred to individually as a "Property" and collectively as "Properties". As of December 31, 1995, the Company owned 102 Properties acquired for an aggregate of $778.2 million and had mortgage investments in 57 Properties aggregating $141.3 million. The Company also has a 32% equity investment in Hospitality Properties Trust ("HPT") of approximately $100 million, for total real estate investments of approximately $1 billion. The Properties are described in "Business Developments Since January 1, 1995" and "Properties". Number of Total Investment State Properties at December 31, 1995 - ----- ---------- -------------------- (in thousands) Arizona ............................ 5 $ 28,062 California ......................... 15 77,262 Colorado ........................... 11 36,419 Connecticut ........................ 9 86,929 Florida ............................ 6 132,939 Georgia ............................ 1 1,830 Illinois ........................... 2 39,453 Iowa ............................... 13 20,428 Kansas ............................. 9 13,133 Kentucky ........................... 1 1,344 Louisiana .......................... 1 19,500 Maryland ........................... 1 33,080 Massachusetts ...................... 8 145,531 Michigan ........................... 2 9,400 Missouri ........................... 3 5,269 Nebraska ........................... 16 15,263 New Hampshire ...................... 1 3,689 New Jersey ......................... 1 13,001 North Carolina ..................... 11 24,187 Ohio ............................... 7 25,087 Pennsylvania ....................... 2 18,394 South Dakota ....................... 3 7,589 Texas .............................. 6 16,864 Vermont ............................ 8 29,763 Virginia ........................... 3 57,662 Washington ......................... 1 5,193 Wisconsin .......................... 9 43,901 Wyoming ............................ 4 8,346 ---------- ---------- Total Health Care Related Properties 159 $ 919,518 Investment in HPT .................. 37 99,959 ---------- ---------- Total All Properties ............... 196 $1,019,477 ========== ========== The Company's principal executive offices are located at 400 Centre Street, Newton, Massachusetts 02158, and its telephone number is (617) 332-3990. Investment Policy and Method of Operation. The Company's investment goals are current income for distribution to shareholders, capital growth resulting from appreciation in the residual value of owned Properties, and preservation and protection of shareholders' capital. The Company's income is derived primarily from minimum rent and minimum interest payments under its leases and mortgages and from additional rent and additional interest payments based upon revenue increases at the leased and mortgaged Properties. The Company's day-to-day operations are conducted by HRPT Advisors, Inc. (the "Advisor"), the Company's investment advisor. The Advisor originates and presents investment opportunities to the Company's Board of Trustees (the "Trustees"). In evaluating potential investments, the Company considers such factors as: the adequacy of current and anticipated cash flow from the property to meet operational needs and financing obligations and to provide a competitive market return on investment to the Company; the growth, tax and regulatory environments of the community in which the property is located; the quality, experience, and credit worthiness of the property's operator; an appraisal of the property, if available; occupancy and demand for similar health care facilities in the same or nearby communities; the mix of private and government sponsored patients; the mix of cost-based and charge-based revenues; the construction quality, condition and design of the property; and the geographic area and type of property. The Trustees have established a policy that the Company will not purchase or mortgage finance properties for an amount which exceeds the appraised value of such properties. Prior to investing in properties, the Company obtains title commitments or policies of title insurance insuring that the Company holds title to or has mortgage interests in such properties, free of material liens and encumbrances. From time to time, the Trustees have made exception to, and may in the future modify or rescind, this policy when they have determined it to be in the best interests of the Company and its shareholders. The Company's investments may be structured using leases with minimum and additional rent and escalation provisions, loans with fixed or floating rates, joint ventures and partnerships with affiliated or unaffiliated parties, commitments or options to purchase interests in real estate, mergers or any combination of the foregoing that will best suit the particular investment. In connection with its revolving credit facility, the Company has agreed to obtain bank approval before exceeding certain investment concentrations. Among these are that no more than 40% of its properties be operated by any single tenant or mortgagor, that investment in rehabilitation treatment, acute care, medical office buildings, medical clinics and properties in the United Kingdom not exceed 40%, 15%, 15%, 25% and 10%, respectively, of total investments and that no new psychiatric care or hotel investments be made. In addition to these restrictions, the Trustees may establish limitations as they deem appropriate from time to time. No limits have been set on the number of properties in which the Company will seek to invest, or on the concentration of investments involving any one facility or geographical area; however, the Trustees consider concentration of investments in determining whether to make new or increase existing investments. The Company's Declaration of Trust (the "Declaration") and operating policies provide that any investment in facilities owned or operated by the Advisor, persons expressly permitted under the Declaration to own more than 8.5% of the Company's shares, or any company affiliated with any of the foregoing must be approved by a majority of the Trustees not affiliated with any of the foregoing (the "Independent Trustees"). The Company has in the past and may in the future consider, from time to time, the acquisition of or merger with other companies engaged in the same business as the Company; however, the Company has no present agreements or understandings concerning any such acquisition or merger. The Company has no intention of investing in the securities of others for the purpose of exercising control. Borrowing Policy. In addition to the use of equity, the Company utilizes short-term and long-term borrowings to finance investments. During 1994 the Company issued $200 million of floating rate notes. The notes were issued in two Series. The Series A notes may be called, at the Company's option, beginning in April 1995. The Series B notes, which were issued at a discount, may be called, at the Company's option, beginning in July 1996. The notes bear interest at a spread over LIBOR and mature in July 1999. At December 31, 1995, the Company had a revolving credit facility available to it totaling $250 million. As of March -2- 25, 1996, $70 million of this amount was outstanding, and $180 million was available to be drawn. All but $17.6 million of outstanding indebtedness is at variable interest rates based upon the London Interbank Offered Rate (LIBOR) plus a premium, prime or some other generally recognized interest rate standard. Fluctuations in interest rates on all of the outstanding term indebtedness have been limited by hedging arrangements so that the maximum average rates payable on $200 million of indebtedness is 6.24% per annum. The current hedge agreements mature in 1997. The Company's borrowing guidelines established by its Trustees and covenants in various debt agreements prohibit the Company from maintaining a debt to equity ratio of greater than 1 to 1. At December 31, 1995, the Company's debt to equity ratio was .39 to 1. The Declaration prohibits the Company from incurring secured and unsecured indebtedness which in the aggregate exceeds 300% of the net assets of the Company, unless approved by a majority of the Independent Trustees. There can be no assurance that debt capital will in the future be available at reasonable rates to fund the Company's operations or growth. Developments Since January 1, 1995 In January 1995, the Company purchased nine nursing homes located in Vermont and New Hampshire. The purchase price was approximately $31.9 million; of this amount approximately $24.4 million was paid with 1,777,766 Shares of the Company's stock. These nursing facility Properties were leased to an affiliate of the Company on terms generally similar to the Company's other existing leases. In January 1995, the Company provided $11.5 million of first mortgage financing due in 2007 , secured by four assisted living facilities located in North Carolina. In March 1995, the Company's then wholly owned subsidiary, HPT, acquired 21 Courtyard by Marriott(R) hotels for approximately $179.4 million. HPT's acquisition of these properties was funded by the Company under a demand loan (the "HRP Loan") of approximately $163.3 million. The Company funded this transaction with cash and by drawing $140 million on its revolving credit facility. In August, 1995, HPT completed its initial public offering (the "HPT IPO") of 8,350,000 shares at an offering price to the public of $25.00 per share. HPT used proceeds from the HPT IPO, in part, to repay amounts outstanding on the HRP Loan. Prior to the HPT IPO, the Company's investment in HPT was $1 million, representing 40,000 shares. Concurrent with the completion of the HPT IPO, the Company acquired an additional 3,960,000 shares of HPT at a per share price of $25.00 by canceling $99 million of the HRP Loan. The remaining balance of the HRP Loan was repaid to the Company during the fourth quarter of 1995. At December 31, 1995, the Company owned an aggregate of 4,000,000 shares of HPT, representing an equity interest in HPT of approximately 32%. In April 1995, the Company purchased or debt financed 14 nursing facility Properties located in Nebraska, Iowa, Kansas and Missouri for approximately $20 million. These Properties are leased to or mortgaged with Community Care of America, Inc., an existing tenant of the Company. In September 1995, the Company purchased two health care related office buildings for $48.3 million. The buildings are managed by M&P Partners Limited Partnership ("M&P"), an affiliate of the Company. In September 1995, the Company purchased a nursing facility Property located in New Jersey for $13 million. This Property is leased for 15 years to a New York Stock Exchange listed health care operator. In November 1995, the Company sold its only two psychiatric properties for approximately $12 million in cash. At December 31, 1994, the Company reserved $10 million for the loss on the sale of the properties. The realized loss on the disposition was $8.5 million. In December 1995, the Company acquired for $15 million a medical clinic, which is leased to the U.S. Department of Veterans' Affairs. This building is managed by M&P. In December 1995, the Company sold 6,500,000 Shares in a public offering and received net proceeds of approximately $97.9 million. The proceeds were used, in part, to prepay $96 million in outstanding indebtedness under the revolving credit facility. In January, 1996, the Company received additional net proceeds of approximately $7.2 million resulting from the underwriters' exercise of their overallotment option as to 475,000 Shares. -3- In February 1996, the Company purchased a medical building located in New York which is leased to Health Insurance Plan of New York for 20 years. In the ordinary course of its business the Company occasionally provides financing to tenants or mortgagors for improvements to properties owned or mortgaged by the Company. From January 1, 1995 through December 31, 1995, such financings aggregated approximately $7.6 million. When such financing is provided, the rent or interest payable to the Company is correspondingly increased. The Company receives regularly scheduled principal payments and occasional prepayments of its mortgage receivables. For the year ended December 31, 1995, these principal repayments and prepayments totaled $24.4 million. In January 1995, Horizon/CMS Healthcare Corporation ("Horizon/CMS"), one of the Company's tenants, exercised its purchase option affecting one of the healthcare facilities which it leased from the Company. The sale price was $24.5 million with $5 million paid in cash and the balance in a purchase money note secured by a first mortgage on this facility due in 2000; the Company recognized a gain of $2.5 million on this sale. During 1995, the Company increased its revolving bank credit facility to $250 million. The current facility matures in 1998, and funds may be drawn and repaid periodically during the term. The funding is provided by a bank syndicate, and borrowings under this credit facility are unsecured and bear interest, at the Company's option, at prime or a spread over LIBOR. The Company has plans to restructure its current revolving credit facility. In connection with the restructuring, the Company expects to recognize a loss on the early extinguishment of debt of approximately $3.0 million. In the ordinary course of its business, the Company regularly evaluates investment opportunities and enters into contracts to purchase and lease or mortgage finance health care related real estate. Several such possible investments are currently under consideration and at various stages of the contractual process. Similarly, the Company is regularly engaged in discussions with its existing tenants and mortgagors concerning lease and loan extensions and other modifications of the terms of existing leases and mortgages. The Company does not believe the consummation of any one or all of these various transactions is reasonably likely to have a material impact upon its financial condition or operations. During 1995, Mark J. Finkelstein resigned as President of the Company to form a company which leases certain nursing homes from the Company. David J. Hegarty, formerly Executive Vice President, was promoted to replace Mr. Finkelstein as President and Chief Operating Officer. Upon consummation of the initial public offering for HPT, John Murray resigned as the Company's Chief Financial Officer to assume a comparable position at HPT, and two Trustees of the Company, Arthur Koumantzelis and John Harrington, resigned to become Trustees of HPT. Mr. Murray was replaced as Chief Financial Officer of the Company by Ajay Saini, who had previously served as the Company's Chief Accounting Officer. Messrs. Koumantzelis and Harrington have been replaced on the Company's Board of Trustees by Bruce M. Gans, M.D. and Ralph J. Watts; Dr. Gans is President of the Detroit Rehabilitation Institute and Mr. Watts is President and Chief Executive Officer of Cardiovascular Ventures, Inc. The Advisor. The Advisor is a Delaware corporation owned by Barry M. Portnoy and Gerard M. Martin. The Advisor's principal place of business is 400 Centre Street, Newton, Massachusetts and its telephone number is (617) 332-3990. The Advisor provides management services and investment advice to the Company. The Advisor also acts as the investment advisor to HRP and has other business interests. The Directors of the Advisor are Gerard M. Martin, Barry M. Portnoy and David J. Hegarty. The officers of the Advisor are David J. Hegarty, President and Secretary, John G. Murray, Executive Vice President and Chief Financial Officer, John A. Mannix, Vice President, Adam D. Portnoy, Vice President and Ajay Saini, Treasurer. Effective April 1, 1995, Mark J. Finkelstein resigned as President and Director to pursue his interests in operating nursing homes and became president of Subacute Management Corporation of America, Inc. Messrs. Hegarty and Saini are also officers of the Company. -4- Employees. As of March 29, 1996, the Company had no employees. The Advisor, which administers the day-to-day operations of the Company, has twenty five full-time employees and three active directors. Regulation and Reimbursement. Compliance with federal, state and local statutes and regulations governing health care facilities is a prerequisite to continuation of the Company's business. 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. Certificate of Need and Licensure. Most states in which the Company has or may invest require certificates of need ("CONs") prior to expansion of beds or services, certain capital expenditures, and in some states, a change in ownership. CON requirements are not uniform throughout the United States. Changes in CON requirements may affect competition, profitability of the Properties and the Company's opportunities for investment in health care facilities. State licensure requirements, including regulations providing that commonly controlled facilities are subject to delicensure if one such facility is delicensed, also affect facilities in which the Company invests. The Company believes that each facility in which it has invested is appropriately licensed. Although each of the facilities may from time to time receive notices of non-compliance with certain standards, and certain facilities in Connecticut and Massachusetts are subject to provisional or probationary licenses, the Company believes that such actions have not, in fiscal year 1995 and through the date hereof, had any material adverse effect on the operations of the Company. Horizon/CMS Healthcare Corp.'s ("Horizon/CMS) licenses to operate the Massachusetts facilities leased to it are probationary subject to certain conditions. Federal Regulation. A number of legislative proposals that would effect major reforms of the health care system have been introduced in Congress. Such proposals include universal health coverage, employer mandated health insurance, and a single government health insurance plan. Following the failure of the Clinton administration's proposed Health Security Act or other major health care reform legislation to become law in 1994 or 1995, legislative proposals for more incremental reforms have also been introduced, such as group health insurance plans for small businesses, health insurance industry reforms, health care anti-fraud legislation, and Medicare and Medicaid reforms and cost containment measures, including proposals that Medicaid be administered through block grants to the states. The Company cannot predict whether any such legislative proposals will be adopted and, if adopted, what effect, if any, such proposals would have on the business of the Company or its lessees or mortgagors. New regulations adopted by the Health Care Finance Administration governing Medicare and Medicaid nursing facility surveys, certification, and enforcement became effective on July 1, 1995. Under the regulations states have begun to implement a wide range of enforcement remedies, and penalties for noncompliance with Medicare/Medicaid standards may increase in the future. An adverse determination concerning any operator's licensure or eligibility for government reimbursement could materially adversely affect that operator, its affiliates and the Company. In addition, federal and state civil and criminal anti-fraud and anti-kickback laws and regulations govern financial activities of health care providers. Enforcement proceedings under such laws and regulations have increased. Horizon/CMS, one of the Company's tenants and manager of three facilities leased to an affiliate of the Advisor, has recently disclosed that it is being investigated for possible Medicare billing fraud by the U.S. Justice Department and the U.S. Department of Health and Human Services, in connection with Medicare related co-insurance billings submitted by Horizon/CMS retroactively for services provided by Greenery Rehabilitation Group, Inc. If any operator of the Company's Properties were found to have violated such laws or regulations, it, and therefore the Company, could be materially adversely affected unless and until any such Property or Properties were returned to compliance or the Company were able to re-lease or sell the affected Property or Properties on favorable terms. Reimbursement. Reimbursement for health care services derives principally form the following sources: Medicare, a federal health insurance program for the aged and certain chronically disabled individuals; Medicaid, a medical assistance program for indigent persons operated by individual states with the financial participation of the federal government; health and other insurance plans, -5- including health maintenance organizations; and private funds. These reimbursement sources are generally contingent upon compliance with state CON and licensure regulations and with extensive federal requirements for Medicare and Medicaid participation. Medicaid programs provide significant current revenues of nursing facilities. Medicare is not presently a major source of revenue for the Company's lessees and mortgagors. The Medicaid program is subject to change and affected by state and federal budget shortfalls and funding restrictions which may materially decrease rates of payment or delay payment. There is no assurance that Medicaid or Medicare payments will remain constant or be sufficient to cover costs allocable to Medicare and Medicaid patients. The operators of the Properties appeal reimbursement rates from time to time. Such appeals, if decided adversely, could have a material effect upon the respective financial positions of the operators and the Company. Other. Federal law limits Medicare and Medicaid reimbursement for capital costs related to increases in the valuation of capital assets solely as a result of a change of ownership of nursing facilities, and numerous states use more restrictive standards to limit Medicaid reimbursement of capital costs. Effective in October of 1993, Medicare eliminated reimbursement of return on equity capital for Medicare skilled nursing homes. Some state Medicaid programs also do not provide for return on equity capital. In addition, a seller is liable to the Medicare program, and in certain states may also be liable to the Medicaid program, for recaptured depreciation. Such limitations may adversely affect the resale value of some Properties owned or financed by the Company. Effective in October of 1992, DHHS issued final regulations which limit the amount of Medicare reimbursement available to a facility for rental or lease expenses paid after a sale-leaseback transaction to that amount which would have been reimbursed as capital costs had the provider retained legal title to the facility. Limitations on rental expenses contained in the regulations may adversely affect the financial feasibility of future purchase lease transactions by denying Medicare and Medicaid reimbursement for additional rental expenses. It is not possible to predict the content, scope or impact of future legislation, regulations or changes in reimbursement or insurance coverage policies which might affect the health care industry. Competition. The Company is one of several REITs currently investing primarily in health care related real estate. The REITs compete with one another in that each is continually seeking attractive investment opportunities in health care facilities. The Company also competes with banks, non-bank finance companies, leasing companies and insurance companies to provide financing to facility operators and others in the health care industry. In addition, the Company competes with the operators of its Properties in connection with the expansion of their businesses. Although each of the operators may offer investment opportunities to the Company, each of the operators or its affiliates will, in fact, compete with the Company (as well as with others) for investment opportunities. The operators may own facilities that are not mortgaged or leased to the Company. An operator, or an affiliate thereof, could preferentially place patients or operate special service programs in facilities other than those included among the Properties. Such preferential treatment and/or new programs could adversely affect the revenues derived by the Company under its mortgages and leases. Federal Income Tax Considerations. The Company believes that it is and it intends to be and remain qualified as a real estate investment trust ("REIT") under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code") . These Code provisions are highly technical and complex. Each shareholder therefore is urged to consult his own tax advisor with respect to the federal income tax and other tax consequences of the purchase, holding and sale of shares of beneficial interest of the Company. The Company has obtained legal opinions that the Company has been organized in conformity with the requirements for qualification as a REIT, has qualified as a REIT for its taxable years 1987 through 1995 and that its current and anticipated investments and its plan of operation will enable it to continue to meet the requirements for qualification and taxation as a REIT under the Code. Actual qualification of the Company as a REIT, however, will depend upon the Company's continued ability to meet, and its meeting, through actual annual -6- operating results, the various qualification tests imposed under the Code. No assurance can be given that the actual results of the Company's operation for any one taxable year will satisfy such requirements. See "-- Failure to Qualify". Taxation of the Company. If the Company qualifies for taxation as a REIT and distributes to its shareholders at least 95% of its "real estate investment trust taxable income", it generally will not be subject to federal corporate income taxes on the amount distributed. However, a REIT is subject to special taxes on the net income derived from "prohibited transactions." In addition, property acquired by the Company as the result of a default or imminent default on a lease or mortgage is classified as "foreclosure property". Certain net income from foreclosure property held by the Company for sale is taxable to it at the highest corporate marginal tax rate then prevailing. Section 856(a) of the Code defines a REIT as a corporation, trust or association: (1) which 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) which would be taxable, but for Sections 856 through 859 of the Code, as a domestic corporation; (4) which is neither a financial institution nor an insurance company subject to certain provisions of the Code; (5) the beneficial ownership of which is held by 100 or more persons; (6) which is not closely held as determined under the personal holding company stock ownership test (as applied with one modification) ; and (7) which meets certain other tests, described below. Section 856(b) of the 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 proportionate part of a taxable year of less than 12 months. By reason of condition (6) above, the Company will fail to qualify as a REIT for a taxable year if at any time during the last half of such year more than 50% in value of its outstanding Shares are owned directly or indirectly by five or fewer individuals. To help maintain conformity with condition (6), the Company's Declaration of Trust (the "Declaration") contains certain provisions restricting share transfers and giving the Trustees power to redeem shares involuntarily. It is the expectation of the Company that it will have at least 100 shareholders during the requisite period for each of its taxable years. There can, however, be no assurance in this connection and, if the Company has fewer than 100 shareholders during the requisite period, condition (5) described above will not be satisfied, and the Company would not qualify as a REIT during such taxable year. For taxable years beginning after 1993, the rule that an entity will fail to qualify as a REIT for a taxable year if at any time during the last half of such year more than 50% in value of its outstanding shares is owned directly or indirectly by five or fewer individuals has been liberalized in the case of a qualified pension trust owning shares in a REIT. Under the new rule, the requirement is applied by treating shares in a REIT held by such a pension trust as held directly by its 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 its qualification as a REIT. However, if a REIT is a "pension-held REIT" as defined in the new law, each pension trust holding more than 10% of its shares (by value) generally will be taxable on a portion of the dividends it receives from the REIT, based on the ratio of the REIT's gross income for the year which would be unrelated trade or business income if the REIT were a qualified pension trust to the total gross income of the REIT for the year. A "pension-held REIT" is one in which at least one qualified pension trust holds more than 25% (by value) of the interests by value, or a combination of qualified pension trusts each of which owns more than 10% by value of the REIT together holds more than 50% of the REIT interests by value. To qualify as a REIT for a taxable year under the Code, the Company must elect to be so treated and must meet other requirements, certain of which are summarized below, including percentage tests relating to the sources of its gross income, the nature of the Company's assets, and the distribution of its income to shareholders. The Company has made such election for 1987 (its first full year of operations) and such election, assuming continuing compliance with the qualification tests discussed herein, continues in effect for subsequent years. Income Tests. There are three gross income requirements. First, at least 75% of the Company's gross income (excluding gross income from certain sales of property held primarily for sale) must be derived directly or indirectly from investments relating to real property (including "rents from real property") or mortgages on real property. When the Company receives new capital in exchange for its shares (other than dividend reinvestment amounts) or in a public offering of five-year or longer debt instruments, income attributable to the temporary investment of such new capital in stock or a debt instrument, if received or accrued within one year of the Company's receipt of such new capital, is qualifying income under the 75% test. There can be no assurance that -7- the Company will be able to find sufficient qualifying investments for all proceeds of such offerings. Second, at least 95% of the Company's gross income (excluding gross income from certain sales of property held primarily for sale) must be derived from such real property investments, dividends, interest, certain payments under interest rate swap or cap agreements, and gain from the sale or disposition of stock, securities, or real property or from any combination of the foregoing. Third, short-term gain from the sale or other disposition of stock or securities, including, without limitation, stock in other REITs, dispositions of interest rate swap or cap agreements and gain from certain prohibited transactions or other dispositions of real property held for less than four years (apart from involuntary conversions and sales of foreclosure property) must represent less than 30% of the Company's gross income. (This rule does not apply for a year in which the REIT is completely liquidated, as to dispositions occurring after the adoption of a plan of complete liquidation.) For purposes of these rules, income derived from a "shared appreciation provision" is treated as gain recognized on the sale of the property to which it relates. Even though the Company's present mortgages do not contain shared appreciation provisions, the Company may make mortgage loans which include such provisions. The Company temporarily invests working capital in short-term investments, including shares in other REITs. Although the Company will use its best efforts to ensure that its income generated by these investments will be of a type which satisfies the 75% and 95% gross income tests, there can be no assurance in this regard (see discussion above of the new capital rule). Moreover, the Company may realize short-term capital gain upon sale or exchange of such investments, and such short-term capital gain would be subject to the limitations imposed by the 30% gross income test. In order to qualify as "rents from real property," the amount of rent received generally must not be determined from the income or profits of any person, but may be based on receipts or sales. The Code also provides that rents will not qualify as "rents from real property" in satisfying the gross income tests, if the REIT owns 10% or more of the tenant, whether directly or under certain attribution rules. The Company intends not to lease property to any party if rents from such property would not so qualify. Application of the 10% ownership rule is, however, dependent upon complex attribution rules provided in the Code and circumstances beyond the control of the Company. Ownership, directly or by attribution, by an unaffiliated third party of more than 10% of the Company's shares and more than 10% of the stock of a lessee could result in lessee rents not qualifying as "rents from real property". The Declaration provides that transfers or purported acquisitions, directly or by attribution, of shares that could result in disqualification of the Company as a REIT are null and void and permits the Trustees to repurchase shares to the extent necessary to maintain the Company's status as a REIT. Nevertheless, there can be no assurance such provisions in the Declaration will be effective to prevent the Company's REIT status from being jeopardized under the 10% rule. Furthermore, there can be no assurance that the Company will be able to monitor and enforce such restrictions, nor will shareholders necessarily be aware of share holdings attributed to them under the attribution rules. In addition, the Company must not manage the property or furnish or render services to the tenants of such property, except through an independent contractor from whom the company derives no income. There is an exception to this rule permitting a REIT to perform certain customary tenant services of the sort which a tax-exempt organization could perform without being considered in receipt of "unrelated business taxable income." If rent attributable to personal property leased in connection with a lease of real property is greater than 15% of the total rent received under the lease, then the portion of rent attributable to such personal property will not qualify as "rents from real property." 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 property which is rented. If rent payments do not qualify, for the reasons discussed above, as rents from real property for the purposes of Section 856 of the Code, it will be more difficult for the Company to meet the 95% or 75% gross income tests and to qualify as a REIT. Finally, 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 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. If the Company fails to satisfy one or both of the 75% or 95% gross income tests for any taxable year, it may nevertheless qualify as a REIT for such year if its failure to meet such test was due to reasonable cause and not due to willful neglect, it attaches a schedule of the sources of its income to its -8- return, and any incorrect information on the schedule was not due to fraud with intent to evade tax. It is not possible, however, to state whether in all circumstances the Company would be entitled to the benefit of these relief provisions. If these relief provisions apply, a special tax generally equal to 100% is imposed upon the greater of the amount by which the Company failed the 75% test or the 95% test, less an amount which generally reflects the expenses attributable to earning the non-qualified income. Asset Tests. At the close of each quarter of the Company's taxable year, it must also satisfy three tests relating to the nature of its assets. First, at least 75% of the value of the Company's total assets must consist of real estate assets (including its allocable share of real estate assets held by joint ventures or partnerships in which the Company participates), cash, cash items and government securities. Second, not more than 25% of the Company's total assets may be represented by securities (other than those includable in the 75% asset class). Finally, of the investments included in the 25% asset class, the value of any one issuer's securities owned by the Company may not exceed 5% of the value of the Company's total assets, and the Company may not own more than 10% of any one issuer's outstanding voting securities. The Company's investment in HPT is subject to an exception from this provision of the Code. Where a failure to satisfy the 25% asset test results from an acquisition of securities or other property during a quarter, the failure can be cured by disposition of sufficient non-qualifying assets within 30 days after the close of such quarter. The Company intends to maintain adequate records of the value of its assets to maintain compliance with the 25% asset test, and to take such action as may be required to cure any failure to satisfy the test within 30 days after the close of any quarter. The Company, in order to qualify as a REIT, is required to distribute dividends (other than capital gain dividends) to its shareholders in an amount equal to or greater than the excess of (A) the sum of (i) 95% of the Company's "real estate investment trust taxable income" (computed without regard to the dividends paid deduction and the Company's net capital gain) and (ii) 95% of the net income, if any, (after tax) from foreclosure property, over (B) the sum of certain non-cash income (from certain imputed rental income and income from transactions inadvertently failing to qualify as like-kind exchanges). These requirements may be waived by the IRS if the 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 the Company does not distribute all of its net long-term capital gain and all of its "real estate investment trust taxable income", it will be subject to tax thereon. In addition, the Company will be subject to a 4% excise tax to the extent it fails within a calendar year to make "required distributions" to its shareholders of 85% of its ordinary income and 95% of its 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 such preceding calendar year. For this purpose, the term "grossed up required distribution" for any calendar year is the sum of the taxable income of the Company 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. Dividends declared in October, November, or December and paid during the following January will be treated as having been paid and received on December 31. It is possible that the Company, from time to time, may not have sufficient cash or other liquid assets to meet the 95% distribution requirements due to timing differences between the actual receipt of income and actual payment of deductible expenses or dividends on the one hand and the inclusion of such income and deduction of such expenses or dividends in arriving at "real estate investment trust taxable income" of the Company on the other hand. The problem of inadequate cash to make required distributions could also occur as a result of the repayment in cash of principal amounts due on the Company's outstanding debt, particularly in the case of "balloon" repayments or as a result of capital losses on short-term investments of working capital. Therefore, the Company might find it necessary to arrange for short-term, or possibly long-term, borrowing or new equity financing. If the Company were unable to arrange such borrowing or financing as might be necessary to provide funds for required distributions, its REIT status could be jeopardized. There can be no assurance that such borrowing or financing would be available on favorable terms. Under certain circumstances, the Company may be able to rectify a failure to meet the distribution requirement for a year by paying "deficiency dividends" to shareholders in a later year, which may be included in the Company's deduction for dividends paid for the earlier year. The Company may be able to avoid being taxed on amounts distributed as deficiency dividends; however, the Company may in certain circumstances remain liable for the 4% excise tax discussed above. -9- The Company is also required to request annually from record holders of certain significant percentages of its shares certain information regarding the ownership of such shares. Under the Declaration, shareholders are required to respond to such requests for information. Federal Income Tax Treatment of Leases. The availability to the Company of, among other things, depreciation deductions with respect to the facilities owned and leased by the Company will depend upon the treatment of the Company as the owner of the facilities and the classification of the leases of the facilities as true leases, rather than as sales or financing arrangements, for Federal income tax purposes. As to the approximately 5% of the leased facilities which constitutes personal property, it is less clear that the Company will be treated as the owner of such personal property and that the leases will be treated as true leases with respect to such property. The Company plans to insure its compliance with the 95% distribution requirement (and the "required distribution" requirement) by making distributions on the assumption that it is not entitled to depreciation deductions for the 5% of the leased facilities which constitute personal property, but to report the amount of income taxable to its shareholders by taking into account such depreciation. Other Issues. In the case of certain sale-leaseback arrangements, the IRS could assert that the Company realized prepaid rental income in the year of purchase to the extent that the value of a leased property exceeds the purchase price paid by the Company for that property. In litigated cases involving sale-leasebacks which have considered this issue, courts have concluded that buyers have realized prepaid rent where both parties acknowledged that the purported purchase price for the property was substantially less than fair market value and the purported rents were substantially less than the fair market rentals. Because of the lack of clear precedent, complete assurance cannot be given that the IRS could not successfully assert the existence of prepaid rental income. Additionally, it should be noted that Code Section 467 (concerning leases with increasing rents) would apply to the leases because many of the leases provide for rents that increase from one period to the next. Section 467 provides that in the case of a so-called "disqualified leaseback agreement," rental income must be accrued at a constant rate. If such constant rent accrual were required, the Company would recognize rental income in excess of cash rents and, as a result, may fail to meet the 95% dividend 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. Because Section 467 directs the Treasury to issue regulations providing that rents will not be treated as increasing for tax avoidance purposes where the increases are based upon a fixed percentage of lessee receipts, the additional rent provisions of the leases should not cause the leases to be "disqualified leaseback agreements". In addition, the legislative history of Section 467 indicates that the Treasury should issue regulations under which leases providing for fluctuations in rents by no more than a reasonable percentage from the average rent payable over the term of the lease will be deemed not motivated by tax avoidance; this legislative history indicated that a standard allowing a 10% fluctuation in rents may be too restrictive for real estate leases. Depreciation of Properties. For tax purposes, the Company's real property is depreciated on a straight-line basis over periods ranging up to 40 years and personal property owned by the Company generally is depreciated over periods ranging up to 12 years. Failure to Qualify. If the Company fails to qualify for taxation as a REIT in any taxable year, and the relief provisions do not apply, the Company will be subject to tax on its taxable income at regular corporate rates (plus any applicable minimum tax). Distributions to shareholders in any year in which the Company fails to qualify will not be deductible by the Company nor will they be required to be made. In such event, to the extent of current and accumulated earnings and profits, all distributions to shareholders will be taxable as ordinary income and, subject to certain limitations in the Code, eligible for the 70% dividends received deduction for corporations. Unless entitled to relief under specific statutory provisions, the Company will also be disqualified from taxation as a REIT for the following four taxable years. It is not possible to state whether in all circumstances the Company would be entitled to statutory relief from such disqualification. Failure to qualify for even one year could result in the Company's incurring substantial indebtedness (to the extent borrowings are feasible) or liquidating substantial investments in order to pay the resulting taxes. -10- Taxation of United States Shareholders--Generally. As long as the Company qualifies as a REIT, distributions (including reinvestments pursuant to the Company's dividend reinvestment plan) made to the Company's shareholders out of current or accumulated earnings and profits will be taken into account by them as ordinary income (which will not be eligible for the 70% dividends received deduction for corporations). Distributions that are designated as capital gain dividends will be taxed as long-term capital gains to the extent they do not exceed the Company's actual net capital gain for the taxable year although corporate shareholders may be required to treat up to 20% of any such capital gain dividend as ordinary income pursuant to Section 291 of the Code. For purposes of computing the Company's earnings and profits, depreciation on real estate is computed on a straight-line basis (over 40 years for property acquired after 1986). Distributions in excess of current or accumulated earnings and profits will not be taxable to a shareholder to the extent that they do not exceed the adjusted basis of the shareholder's shares, but will reduce the basis of the shareholder's shares. To the extent that such distributions exceed the adjusted basis of a shareholder's shares they will be included in income as long-term capital gain (or short-term capital gain if the shares have been held for not more than one year) assuming the shares are a capital asset in the hands of the shareholder. Shareholders may not include in their individual income tax returns any net operating losses or capital losses of the Company. Dividends declared by the Company in October, November or December of a taxable year to shareholders of record on a date in such month, will be deemed to have been received by such shareholders on December 31, provided the Company actually pays such dividends during the following January. The Company has, however, generally declared dividends for the quarter ended December 31 in January of the following year and paid these dividends in the following February. As a result, for tax purposes, the dividend for any calendar year will generally include the dividends for the first three quarters of that year plus the dividend for the fourth quarter of the prior year. For tax purposes, dividends per share paid in 1987, 1988, 1989, 1990, 1991, 1992, 1993, 1994 and 1995 aggregated $1.085, $.840, $1.13, $1.16, $1.22, $1.25, $1.29, $1.32 and $1.37 respectively, of which $.289, $.065, $.332, $.267, $.104, $.218, $.335, $.081 and $.161 respectively, represented a return of capital. A sale of a share will result in recognition of gain or loss to the holder in an amount equal to the difference between the amount realized and its adjusted basis. Such a gain or loss will be capital gain or loss, provided the share is a capital asset in the hands of the seller. In general, any loss upon a sale or exchange of shares by a shareholder who has held such shares for not more than one year (after applying certain rules), will be treated as a long-term capital loss to the extent of distributions from the Company required to be treated by such shareholders as long-term capital gain. Investors (other than certain corporations) who borrow funds to finance their acquisition of Shares in the Company could be limited in the amount of deductions allowed for the interest paid on the indebtedness incurred in such an arrangement. Under Code Section 163(d), 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 taxpayer's net investment income. An investor's net investment income will include the dividend and capital gain dividend distributions he receives from the Company; however, distributions treated as a nontaxable return of the shareholder's basis will not enter into the computation of net investment income. In Revenue Ruling 66-106, the IRS ruled that amounts distributed by a real estate investment trust to a tax-exempt employee's pension trust did not constitute "unrelated business taxable income". Revenue rulings are interpretive in nature and subject to revocation or modification by the IRS. However, based upon Revenue Ruling 66-106 and the analysis therein, the Company has received an opinion of counsel that distributions by the Company to qualified pension plans (including individual retirement accounts) and other tax-exempt entities should not constitute "unrelated business taxable income," except as explained above in the case of a pension trust which holds more than 10% by value of a "pension-held REIT". This Revenue Ruling may not apply if a shareholder has borrowed money to acquire shares. Under Section 469 of the Code, taxpayers (other than certain corporations) generally will not be entitled to deduct losses from so-called passive activities except to the extent of their income from passive activities. For purposes of these rules, distributions received by a shareholder from the Company will not be treated as income from a passive activity and thus will not be available to offset a shareholder's passive activity losses. -11- Tax preference and other items which are treated differently for regular and alternative minimum tax purposes are to be allocated between a REIT and its shareholders under regulations which are to be prescribed. It is likely that these regulations would require tax preference items to be allocated to the Company's shareholders with respect to any accelerated depreciation claimed by the Company, but the Company has not claimed accelerated depreciation with respect to its existing Properties. Special Tax Considerations for Foreign Shareholders. The rules governing United States income taxation of nonresident alien individuals, foreign corporations, foreign partnerships, and foreign trusts and estates (collectively, "Non-US Shareholders") are complex, and the following discussion is intended only as a summary of such rules. Prospective Non-US Shareholders should consult with their own tax advisors to determine the impact of Federal, state, and local income tax laws on an investment in the Company, including any reporting requirements. In general, a Non-US Shareholder will be subject to regular United States income tax with respect to its investment in the Company if such investment is "effectively connected" with the Non-US Shareholder's conduct of a trade or business in the United States, or if the Non-US Shareholder is a nonresident alien individual who is present in the United States for 183 days or more during the taxable year. A corporate Non-US Shareholder that receives income that is (or is treated as) effectively connected with a US trade or business may also be subject to the branch profits tax under Section 884 of the Code, which is payable in addition to regular United States corporate income tax. The following discussion will apply to Non-US Shareholders whose investment in the Company is not so effectively connected. A distribution by the Company that is not attributable to gain from the sale or exchange by the Company of a United States real property interest and that is not designated by the Company 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. Generally, unless the dividend is effectively connected with the Non-US. Shareholder's conduct of a trade or business, such a dividend will be subject to a United States withholding tax equal to 30% of the gross amount of the dividend unless such withholding is reduced by an applicable tax treaty. A distribution of cash in excess of the Company's earnings and profits will be treated first as a nontaxable return of capital that will reduce a Non-US Shareholder's basis in its shares (but not below zero) and then as gain from the disposition of such shares, the tax treatment of which is described under the rules discussed below with respect to disposition of shares. A distribution in excess of the Company's earnings and profits may be subject to 30% dividend withholding if at the time of the distribution it cannot be determined whether the distribution will be in an amount in excess of the Company's current and accumulated earnings and profits. If its subsequently determined that such distribution is, in fact, in excess of current and accumulated earnings and profits, the Non-US Shareholder may seek a refund from the IRS. The Company expects to withhold United States income tax at the rate of 30% on the gross amount of any such distributions made to a Non-US Shareholder unless (i) a lower tax treaty applies and the required form evidencing eligibility for that reduced rate is filed with the Company or (ii) the Non-US Shareholder files IRS Form 4224 with the Company claiming that the distribution is "effectively connected" income. For any year in which the Company qualifies as a REIT, distributions by the Company that are attributable to gain from the sale or exchange of a United States real property interest will be taxed to a Non-US Shareholder in accordance with the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under FIRPTA, such distributions are taxed to a Non-US Shareholder as if such distributions were gains "effectively connected" with a United States trade or business. Accordingly, a Non-US Shareholder will be taxed at the normal capital gain rates applicable to a US Shareholder (subject to any applicable alternative minimum tax and a special alternative minimum tax in the case of non-resident alien individuals). Distributions subject to FIRPTA may also be subject to a 30% branch profits tax in the hands of a foreign corporate shareholder that is not entitled to treaty exemption. The Company will be required to withhold from distributions to Non-US Shareholders, and remit to the IRS, 35% of the amount of any distribution that could be designated as capital gain dividends to the extent such dividends are attributable to the sale or exchange by the Company of United States real property interests. Tax treaties may reduce the Company's withholding obligations. If the amount of tax withheld by the Company with respect to a distribution to a Non-US Shareholder exceeds the shareholder's United States liability with respect to such distribution, the Non-US Shareholder may file for a refund of such excess -12- from the IRS. It should be noted that the 35% withholding tax rate on capital gain dividends corresponds to the maximum income tax rate applicable to corporations but is higher than the 28% maximum rate on capital gains of individuals. If the Shares fail to constitute a "United States real property interest" within the meaning of FIRPTA, a sale of the Shares by a Non-US Shareholder generally will not be subject to United States taxation unless (i) investment in the Shares is effectively connected with the Non-US Shareholder's United States trade or Business, in which case, as discussed above, the Non-US Shareholder would be subject to the same treatment as US Shareholders on such gain or (ii) the Non-US Shareholder is a nonresident alien individual who was present in the United States for 183 days or more during the taxable year, in which case the nonresident alien individual will be subject to a 30% tax on the individual's capital gains. The Shares will not constitute a United States real property interest if the Company is a "domestically controlled REIT". A domestically controlled REIT is a REIT in which at all times during a specified testing period less than 50% in value of its shares is held directly or indirectly by Non-US Shareholders. It is currently anticipated that the Company will be a domestically controlled REIT, and therefore that the sale of Shares will not be subject to taxation under FIRPTA. However, because the Shares will be publicly traded, no assurance can be given that the Company will continue to be a domestically controlled REIT. If the Company did not constitute a domestically controlled REIT, whether a Non-US Shareholder's sale of Shares would be subject to tax under FIRPTA as a sale of a United States real property interest would depend on whether the Shares were "regularly traded" (as defined by applicable Treasury Regulations) on an established securities market (e.g., the New York Stock Exchange, on which the Shares are listed) and on the size of the selling shareholder's interest in the Company. If the gain on the sale of the Shares were subject to taxation under FIRPTA, the Non-US Shareholder would be subject to the same treatment as a US Shareholder with respect to such gain (subject to applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals). In any event, a purchaser of Shares from a Non-US Shareholder will not be required under FIRPTA to withhold on the purchase price if the purchased Shares are "regularly traded" on an established securities market or if the Company is a domestically controlled REIT. Otherwise, under FIRPTA, the purchaser of Shares may be required to withhold 10% of the purchase price and to remit such amount to the IRS. Federal Estate Tax Shares owned or treated as owned by an individual who is not a citizen or resident (as defined for United States federal estate tax purposes) of the United States at the time of death will be included in the individual's gross estate for United States federal estate tax purposes unless an applicable estate tax treaty provides otherwise. Backup Withholding and Information Reporting Requirements. The Company must report annually to the IRS and to each Non-US Shareholder the amount of dividends paid to and the tax withheld with respect to such holder. These information reporting requirements apply regardless of whether withholding was reduced or eliminated by an applicable tax treaty. Copies of these information returns may also be made available under the provisions of a specific treaty or agreement to the tax authorities in the country in which the Non-US Shareholder resides. United States backup withholding tax (which generally is a withholding tax imposed at the rate of 31% on certain payments to persons that fail to furnish the information required under the United States information reporting requirements) will generally not apply to dividends paid on Shares to a Non-US Shareholder at an address outside the United States. The payment of the proceeds from the disposition of Shares to or through the United States office of a broker will be subject to information reporting and backup withholding at a rate of 31% unless the owner, under penalties of perjury, certifies, among other things, its status as a Non-US Shareholder, or otherwise establishes an exemption. The payment of the proceeds from the disposition of Shares to or through a non-US office of a broker generally will not be subject to backup withholding and information reporting. In the case of proceeds from a disposition of Shares paid to or through a non-US office of a US broker or paid to or through a non-US office of a non-US broker that is (i) a "controlled foreign corporation" for United States federal income tax purposes or (ii) a person 50% or more of whose gross income from all sources for a certain three-year period was effectively connected with a United States trade or business, (a) backup withholding will not apply unless the broker has actual knowledge that the owner is not a Non-US Shareholder, and (b) information reporting will not apply if the broker has documentary evidence in its files that the owner is a Non-US Shareholder (unless the broker has actual knowledge to the contrary). -13- Any amounts withheld under the backup withholding rules from a payment to a Non-US Shareholder will be refunded (or credited against the Non-US Shareholder's United States federal income tax liability, if any), provided that the required information is furnished to the IRS. Other Tax Consequences. The Company and its shareholders may be subject to state or local taxation in various state or local jurisdictions, including those in which it or they transact business or reside. There may be other Federal, state, local or foreign income, or estate and gift, tax considerations applicable to the circumstances of a particular investor. Shareholders should consult their own tax advisors with respect to such matters. 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") ("ERISA Plan") must consider whether their investment in the Company's shares satisfies the diversification requirements of ERISA, whether the investment is prudent in light of possible limitations on the marketability of the shares, whether such fiduciaries have authority to acquire such shares under the appropriate governing instrument and Title I of ERISA, and whether such investment is otherwise consistent with their fiduciary responsibilities. Any ERISA Plan fiduciary should also consider ERISA's prohibition on improper delegation of control over or responsibility for "plan assets." 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, such fiduciaries may be subject to a civil penalty of up to 20% of any amount recovered by the plan on account of such a violation (the "Fiduciary Penalty"). Also, fiduciaries of any Individual Retirement Account ("IRA"), Keogh Plan or other qualified retirement plan not subject to Title I of ERISA because it does not cover common law employees ("Non-ERISA Plan") should consider that such an IRA or Non-ERISA Plan may only make investments that are authorized by the appropriate governing instrument. Fiduciary shareholders should consult their own legal advisers if they have any concern as to whether the investment is inconsistent with any of the foregoing criteria. Prohibited Transactions. Fiduciaries of ERISA Plans and persons making the investment decision for an IRA or other Non-ERISA Plan should also consider the application of the prohibited transaction provisions of ERISA and the Code in making their investment decision. Sales and certain other transactions between an ERISA Plan or an IRA or other Non-ERISA Plan and certain persons related to it are prohibited transactions. The particular facts concerning the sponsorship, operations and other investments of an ERISA Plan or an IRA or other 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 Code or a penalty under ERISA upon the disqualified person or party in interest with respect to the ERISA or Non-ERISA Plan or IRA. If the disqualified person who engages in the transaction is the individual on behalf of whom an IRA is maintained (or his beneficiary), the IRA may lose its tax-exempt status and its assets may be deemed to have been distributed to such individual in a taxable distribution (and no excise tax will be imposed) on account of the prohibited transaction. Fiduciary shareholders should consult their own legal advisers if they have any concern as to whether the investment is a prohibited transaction. Special Fiduciary and Prohibited Transactions Considerations. On November 13, 1986 the Department of Labor ("DOL"), which has certain administrative responsibility over ERISA Plans as well as over IRAs and other Non-ERISA Plans, issued a final regulation defining "plan assets." The regulation generally provides that when an ERISA or Non-ERISA Plan or IRA 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 or Non-ERISA Plan's or IRA'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. -14- The regulation defines a 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 pursuant to 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). The Company's 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. 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, certain restrictions ordinarily will not, alone or in combination, affect a finding that such securities are freely transferable. The restrictions on transfer enumerated in the regulation as not affecting that finding include: any restriction on or prohibition against any transfer or assignment which would result in a termination or reclassification of the issuer for Federal or state tax purposes, or would otherwise violate any state or Federal law or court order; 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; any administrative procedure which establishes an effective date, or an event prior to which a transfer or assignment will not be effective; and any limitation or restriction on transfer or assignment which is not imposed by the issuer or a person acting on behalf of the issuer. The Company believes that the restrictions imposed under the Declaration on the transfer of shares do not result in the failure of the shares to be "freely transferable." Furthermore, the Company believes that at present there exist no other facts or circumstances limiting the transferability of the shares which are not included among those enumerated as not affecting their free transferability under the regulation, and the Company does not expect or intend to impose in the future (or to permit any person to impose on its behalf) any limitations or restrictions on transfer which would not be among the enumerated permissible limitations or restrictions. However, the final regulation only establishes a presumption in favor of a finding of free transferability, and no guarantee can be given that the DOL or the Treasury Department will not reach a contrary conclusion. Assuming that the shares will be "widely held" and that no other facts and circumstances exist which restrict transferability of the shares, the Company has received an opinion of counsel that the Shares should not fail to be "freely transferable" for purposes of the regulation due to the restrictions on transfer of the Shares under the Declaration and that under the regulation the Shares are publicly offered securities and the assets of the Company will not be deemed to be "plan assets" of any ERISA Plan or an IRA or other Non-ERISA Plan that invests in the shares. If the assets of the Company are deemed to be plan assets under ERISA, (i) the prudence standards and other provisions of Part 4 of Title I of ERISA would be applicable to investments made by the Company; (ii) the person or persons having investment discretion over the assets of ERISA Plans which invest in the Company would be liable under the aforementioned Part 4 of Title I of ERISA for investments made by the Company which do not conform to such ERISA standards, unless the Advisor registers as an investment adviser under the Investment Advisers Act of 1940 and certain other conditions are satisfied; and (iii) certain transactions that the Company might enter into in the ordinary course of its business and operation might constitute "prohibited transactions" under ERISA and the Code. -15- Item 2. Properties General. Approximately 50% of the Company's total investments are in long term care facilities, including 17% in nursing facilities with subacute services; 34% are in retirement and assisted living communities; 6% are in health care related office buildings, ambulatory health care facilities and related real estate and 10% is an equity investment in HPT. The Company believes that the physical plant of each of the facilities in which it has invested is suitable and adequate for its present use and any currently proposed uses. At December 31, 1995, the Company had real estate investments, at cost, totaling over $1 billion leased to or operated by over 30 separate companies. In September 1994, the Company purchased 14 retirement communities containing 3,952 residences or beds for $320 million. These communities are triple net leased through December 31, 2013 to a wholly owned subsidiary of Marriott International, Inc. ("Marriott"). The leases provide for fixed rent and additional rentals equal to a percentage of annual revenues from operations in excess of base amounts determined on a facility by facility basis. All of the leases are subject to cross default provisions and are guaranteed by Marriott. The following table summarizes certain information about the Properties as of December 31, 1995. All dollar figures are in thousands. INVESTMENT IN OWNED REAL ESTATE:
Number of Number of Investment Minimum Location Facilities Beds/Units Amount Rent - ------------------------------------------------------------------------------------------ Skilled Nursing Facilities with Subacute Services: Connecticut 4 660 $ 45,133 $ 5,709 Massachusetts 5 762 82,058 10,044 Pennsylvania 1 120 15,598 1,951 Retirement and Assisted Living Facilities: Arizona 2 296 21,842 1,655 California 1 402 31,789 3,319 Florida 5 1,522 131,991 9,986 Illinois 1 363 36,742 1,600 Maryland 1 351 33,080 4,054 South Dakota 1 59 1,014 127 Texas 1 145 12,411 1,213 Virginia 3 848 57,662 5,817 Long Term Care Facilities: Arizona 3 320 6,220 810 California 9 1,140 27,105 4,677 Colorado 6 756 21,837 2,942 Connecticut 5 867 40,231 4,779 Illinois 1 230 2,711 452 Iowa 13 862 20,428 2,226 Kansas 6 411 8,250 905 Missouri 3 305 5,269 774 Nebraska 1 80 1,483 165
-16-
Number of Number of Investment Minimum Location Facilities Beds/Units Amount Rent - ------------------------------------------------------------------------------------------ New Hampshire 1 108 3,689 430 New Jersey 1 140 13,001 1,418 Ohio 2 400 9,872 1,183 South Dakota 2 322 6,575 854 Vermont 8 808 29,763 3,317 Washington 1 143 5,193 611 Wisconsin 7 1,026 31,518 4,676 Wyoming 4 295 8,346 920 Health Care Related Office Buildings, Ambulatory Health Care Facilities and Related Real Estate: California 1 -- 3,927 516 Massachusetts 3 -- 63,473 6,958 ------------------------------------------------ Total Owned Real Estate 102 13,741 $778,211 $84,088 ------------------------------------------------
-17-
INVESTMENTS IN MORTGAGES AND NOTES: Number of Number of Investment Minimum Location Facilities Beds/Units Amount Interest Skilled Nursing Facilities with Subacute Services: Connecticut -- -- $ 1,565 $ 149 Louisiana 1 118 19,500 2,145 Michigan 1 189 5,100 587 Retirement and Assisted Living Facilities: California 3 110 12,309 1,385 North Carolina 4 405 11,500 1,305 Long Term Care Facilities: California 1 578 2,132 250 Colorado 5 389 14,582 1,564 Florida 1 58 948 121 Georgia 1 124 1,830 214 Kansas 3 346 4,883 731 Kentucky 1 90 1,344 180 Michigan 1 153 4,300 494 Nebraska 15 1,032 13,780 1,234 North Carolina 7 675 12,687 1,468 Ohio 5 719 15,215 2,042 Pennsylvania 1 120 2,796 313 Texas 5 496 4,453 544 Wisconsin 2 366 12,383 1,444 --------------------------------------------------------------------------------- Total Mortgages 57 5,968 $141,307 $16,170 --------------------------------------------------------------------------------- Investment in HPT 37 -- $ 99,959 -- --------------------------------------------------------------------------------- Total 196 19,709 $ 1,019,477 $100,258 ---------------------------------------------------------------------------------
Item 3. Legal Proceedings Early in 1995, the Company commenced a foreclosure action to enforce indemnities given in connection with the surrender of certain leaseholds to, and the purchase of certain properties by, the Company in 1992. In May 1995, the defendants in the foreclosure action and parties related to the Company's former tenants and sellers asserted claims against the Company, HRPT Advisors, Inc. ("Advisors"), two Trustees of the Company, Messrs. Portnoy and Martin and others. In November 1995, the Florida court dismissed the foreclosure defendants' counterclaims and third party complaints against all parties, except the Company, for lack of jurisdiction. At this time, the only matter pending in the Florida court appears to be the original foreclosure action by the Company. The Company and certain parties brought a declaratory judgment action in the Massachusetts Superior Court to have all matters raised in the counterclaims and third party complaints referred to arbitration. On December 4, 1995, an order was entered by the Massachusetts Superior Court granting the Company's motion for summary judgment and directing arbitration. On December 19, 1995, the foreclosure defendants and related parties filed a new complaint in the United States District Court for the District of Massachusetts realleging many of the same allegations made in the counterclaims and third-party complaints previously brought by them in response to the Company's original foreclosure action, and adding allegations of violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and violations of -18- RICO. Although the outcomes of the new litigation and the arbitration proceeding are currently indeterminable, the Company and, to the Company's knowledge, each other defendant named in the new action believes the claims which have been asserted against it are without merit and intends to defend and deny the allegations therein, and the Company intends to pursue the original foreclosure action. In addition to this action, the Company may be subject to routine litigation in the ordinary course of business. It is not presently subject to any other legal proceedings which would result in material losses to the Company. The Company knows of no proceedings contemplated by governmental authorities relating to the Company. 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 Form 10-K. -19- PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's Shares are traded on the New York Stock Exchange (symbol: HRP). The following table sets forth for the periods indicated the high and low sale prices for the Shares as reported in the New York Stock Exchange Composite Transactions reports. High Low ---- --- 1995 First Quarter $ 15 1/4 $ 13 1/4 Second Quarter 15 3/8 14 5/8 Third Quarter 16 3/8 14 7/8 Fourth Quarter 16 7/8 15 1/2 1994 First Quarter 16 3/8 14 3/8 Second Quarter 15 3/8 14 Third Quarter 15 3/4 14 1/4 Fourth Quarter 14 7/8 13 The closing price of the Shares on the New York Stock Exchange on March 22, 1996 was $17.125. As of March 25, 1996, there were 4,329 holders of record of the Shares and the Company estimates that as of such date there were in excess of 65,000 beneficial owners of the Shares. Dividends declared with respect to each period for the two most recent fiscal years and the amount of such dividends and the respective annualized rates are set forth in the following table. Dividend Annualized Per Share Dividend Rate --------- ------------- 1995 First Quarter $.34 $1.36 Second Quarter .34 1.36 Third Quarter .35 1.40 Fourth Quarter .35 1.40 1994 First Quarter .33 1.32 Second Quarter .33 1.32 Third Quarter .33 1.32 Fourth Quarter .34 1.36 All dividends declared have been paid. The Company intends to continue to declare and pay future dividends on a quarterly basis. In order to qualify for the beneficial tax treatment accorded to REITs by Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), the Company is required to make distributions to shareholders which annually will be at least 95% of the Company's "real estate investment trust taxable income" (as defined in the Code). All distributions will be made by the Company at the discretion of the Board of Trustees and will depend on the earnings of the Company, the cash flow available for distribution, the financial condition of the Company and such other factors as the Board of Trustees deems relevant. The Company has in the past distributed, and intends to continue to distribute, substantially all of its "real estate investment trust taxable income" to its shareholders. -20- Item 6. Selected Financial Data. Set forth below are selected financial data for the Company for the periods and dates indicated. This data should be read in conjunction with, and is qualified in its entirety by reference to, the financial statements and accompanying notes included elsewhere in this Form 10-K. Amounts are in thousands, except per Share information.
Year Ended December 31, ------------------------------------------------------------- 1995 1994 1993 1992 1991 Operating Statement Data: Total revenues $112,678 $ 86,683 $ 56,485 $ 48,735 $ 43,835 Income before gain (loss) on sale of properties and extraordinary items 61,760 57,878 37,738 27,243 22,079 Income before extraordinary items 64,236 51,872 37,738 27,423 22,079 Net income 64,236 49,919 33,417 27,243 22,079 Funds from operations (1) 87,967 73,846 47,578 36,853 30,059 Dividends declared 83,954 76,317 44,869 33,079 27,179 Per share amounts: Income before gain (loss) on sale of properties and extraordinary items $ 1.04 $ 1.10 $ 1.10 $ 1.02 $ 1.01 Income before extraordinary items 1.08 .98 1.10 1.02 1.01 Net income 1.08 .95 .97 1.02 1.01 Funds from operations (1) 1.49 1.40 1.38 1.38 1.38 Dividends declared (2) 1.38 1.33 1.30 1.26 1.23 Average shares outstanding 59,227 52,738 34,407 26,760 21,834 Balance Sheet Data: Real estate properties at cost $778,211 $673,083 $384,881 $337,076 $281,766 Real estate mortgages 141,307 133,477 157,281 47,173 31,760 Investment in HPT 99,959 --- --- --- --- Total assets 999,677 840,206 527,662 374,468 340,718 Total indebtedness 269,759 216,513 73,000 138,500 103,000 Total shareholders' equity 685,592 602,039 441,135 228,301 234,427 - --------------------- (1) Funds from operations is net income before gain (loss) on sale of properties and extraordinary items plus depreciation, amortization, other non-cash items and the Company's equity in funds from operations of HPT. (2) Distributions in excess of net income generally constitute a return of capital.
-21- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations Year Ended December 31, 1995 compared to Year Ended December 31, 1994 Total revenues for the year ended December 31, 1995 were $112.7 million, an increase of $26 million or 30% over the year ended December 31, 1994. Rental income increased to $89.6 million from $63.9 million and interest income increased to $23.1 million from $22.8 million. Rental income increased as a result of new purchase and lease investments during 1995 and from a full year's results on investments made during 1994. Interest income increased slightly due to interest income from new investments in mortgages and notes, offset by a reduction in interest income resulting from repayments of existing mortgages and notes. Total expenses for 1995 increased to $54 million, from $28.8 million, for the comparable 1994 period. The increase of $25.2 million was due primarily to increases in interest expense of $15.3 million, general and administrative expense of $1.8 million, and depreciation and amortization expense of $8.1 million. The increases in general and administrative and depreciation and amortization expenses are directly related to the Company's increased real estate investments whereas interest expense increased primarily due to higher amounts outstanding under the revolving credit facility and a full year of interest expense on $200 million senior notes issued in July 1994. Income before gain (loss) on sale of properties and extraordinary items for 1995 increased to $61.8 million, or $1.04 per share, from $57.9 million, or $1.10 per share, in 1994. Per share amounts decreased reflecting the issuance of 9 million new shares of the Company's stock in December 1994 and 6.5 million new shares issued in December 1995. Net income in 1995 and 1994 was $64.2 million or $1.08 per share and $49.9 million or $.95 per share, respectively. The Company's business plan is to maximize funds from operations rather than net income. The Company's Board of Trustees considers funds from operations, among other factors, when determining dividends to be paid to shareholders. Funds from operations means net income excluding gains or losses from debt restructuring and sales of property, plus depreciation, amortization and the Company's equity in funds from operations of HPT. Cash flow provided by operating activities may not necessarily equal funds from operations as the cash flow of the Company is affected by other factors not included in the funds from operations calculation such as changes in assets and liabilities. Funds from operations for the year ended December 31, 1995, was $88 million, or $1.49 per share, versus $73.9 million, or $1.40 per share, in 1994. Funds from operations for 1995 increased $14.1 million or 19.1% over the prior year. The increase is the result of new investments in 1995. Dividends declared for the years ended December 31, 1995 and 1994 were $1.38 per share and $1.33 per share, respectively. Dividends in excess of net income constitute a return of capital. For 1995, the return of capital portion reported was 11.8% of dividends and 5.9% of dividends was considered a long term capital gain. Cash flow provided by (used for) operating, investing and financing activities were $81.3 million, ($189.3 million) and $68.8 million, respectively, for the year ended December 31, 1995 and $76.4 million, ($261.8 million) and $229.4 million, respectively, for 1994. Year Ended December 31, 1994 compared to Year Ended December 31, 1993 Total revenues for the year ended December 31, 1994 were $86.7 million, an increase of $30.2 million or 53% over the year ended December 31, 1993. Rental income increased to $63.9 million from $46.1 million and interest income increased to $22.8 million from $10.4 million. Rental income increased as a result of new purchase and lease investments, primarily $33.4 million transaction in December 1993 and the $320 million retirement community transaction with Marriott International, Inc. in 1994. The growth in interest income is primarily the result of the full-year impact of three loan pool acquisitions in 1993 and a mortgage transaction of $26.6 million in December 1993. -22- Total expenses for 1994 increased to $28.8 million, from $18.7 million, in the comparable 1993 period. The increase of $10.1 million was due primarily to increases in interest expense of $2.7 million, general and administrative expense of $1.7 million, and depreciation and amortization expense of $5.6 million. The increases in general and administrative and depreciation and amortization expenses are directly related to the Company's increased investments whereas interest expense increased due to both higher interest rates during the second half of 1994 and the issuance of $200 million senior notes in July 1994 to fund the Marriott transaction. Income before gain (loss) on sale of properties and extraordinary items for 1994 increased to $57.9 million, or $1.10 per share, from $37.7 million, or $1.10 per share, in 1993. Per share amounts remained flat reflecting the issuance of nine million new shares of the Company's stock in December 1993 and 13.3 million new shares in 1994, as well as negative interest arbitrage resulting from unusually high cash balances caused by timing differences between receipt of proceeds from the note offering and the investment of those proceeds in real estate. Income before extraordinary items and net income in 1994 was $51.9 million or $.98 per share and $49.9 million or $.95 per share, respectively, versus $37.7 million or $1.10 per share and $33.4 million or $.97 per share, respectively, in 1993. On a per share basis, income before extraordinary items and net income decreased during 1994 primarily as a result of the new share issuance and negative arbitrage noted above and the $10 million provision for the potential loss on the sale of two psychiatric hospitals. These two hospitals were HRP's only investments in the psychiatric industry and the loss is due to the general decline in the value of this type of property. Funds from operations for the year ended December 31, 1994, was $73.9 million, or $1.40 per share, versus $47.6 million, or $1.38 per share, in 1993. Funds from operations for 1994 increased $26.3 million or 55% over the prior year. However, funds from operations per share increased only slightly as a result of nine million new shares of the Company's stock issued in December 1993 and 13.3 million new shares issued in 1994 and the negative arbitrage from large cash balances previously discussed. Dividends declared for the years ended December 31, 1994 and 1993 were $1.33 per share and $1.30 per share, respectively. Dividends in excess of net income constitute a return of capital. For 1994, the return of capital portion was 6.1% of dividends and 12.6% of dividends was considered a long term capital gain. Cash flow provided by (used for) operations, investing and financing activities were $76.4 million, ($261.8 million) and $229.4 million, respectively, for the year ended December 31, 1994, and $47.2 million, ($175.4 million) and $128.0 million, respectively, in 1993. Liquidity and Capital Resources Assets increased to $999.7 million as of December 31, 1995 from $840.2 million as of December 31, 1994. The increase of $159.5 million or 19% is primarily attributable to increases in the Company's real estate investments and the equity investment in HPT. On March 24, 1995, the Company's then wholly owned subsidiary, HPT, acquired 21 Courtyard by Marriott(R) hotels for approximately $179.4 million. HPT's acquisition of these properties was principally funded by the Company under a demand loan (the "HRP Loan") of approximately $163.3 million. The Company funded this transaction with cash and by drawing $140 million on its revolving credit facility. In August 1995, HPT completed its initial public offering (the "IPO") of 8,350,000 shares. HPT used proceeds from the IPO, in part, to repay amounts outstanding on the HRP Loan. Prior to the IPO, the Company's investment in HPT was $1 million, representing 40,000 shares. Concurrent with the completion of the IPO, the Company acquired an additional 3,960,000 shares of HPT at a per share price of $25.00 by canceling $99 million of the HRP Loan. The remaining balance of the HRP Loan was repaid to the Company during the fourth quarter of 1995. At December 31, 1995 the Company owned 4,000,000 shares of HPT, representing an equity interest in HPT of approximately 32%. Since the IPO, the Company's investment in HPT has been accounted for using the equity method. Prior to the IPO, operating results of HPT were included in the Company's results of operations. Most recently, HPT has entered into letters of intent to acquire 45 hotels for approximately $485 million. The Company does not expect to provide any of the funding required by HPT for these transactions. -23- During the year ended December 31, 1995, the Company acquired 20 nursing properties and three medical office buildings for a purchase price of approximately of $123.6 million in five separate transactions. In addition, the Company provided improvement financing at existing owned properties of approximately $5.9 million. Nine of the nursing properties were acquired, in part, by the issuance of 1,777,766 shares of the Company's stock. Lease obligations on eleven of the nursing properties recently acquired are secured by a $3.6 million cash security deposit. The Company sold one nursing property for $24.5 million and realized a gain of approximately $2.5 million. The company received cash of $5 million and a mortgage note of $19.5 million. The Company provided debt financing totaling $17.4 million secured by mortgages on four assisted living and three nursing properties. Existing mortgages secured by six nursing properties were refinanced for a net new investment of $5.4 million. The Company also provided improvement financing for existing mortgage facilities of $1.6 million and a loan to an affiliate of $1.6 million. During 1995, the Company received regular principal payments on real estate mortgages of $1.5 million and proceeds of $24.6 million, net of discounts, from the prepayment of mortgage loans. The Company sold two properties for approximately $12 million in cash. At December 31, 1994, the Company reserved $10 million for the loss on the sale of the properties. During December 1995, the Company issued 6,500,000 common shares of beneficial interest and received net proceeds of approximately $97.9 million. The proceeds were used to repay $96 million on the Company's revolving credit facility. In January 1996, the underwriters exercised a portion of the over-allotment option for 475,000 shares resulting in additional net proceeds of approximately $7.2 million. At December 31, 1995, the Company had $18.6 million of cash and cash equivalents. The Company had drawn $53 million of the $250 million revolving credit facility at December 31, 1995. The facility matures in 1998 and bears interest at a spread over LIBOR. At December 31, 1995, interest rates on of the Company's outstanding debt were capped by the use of interest rate cap agreements. The interest rate cap agreements provide for maximum weighted average interest rates of approximately 6.24% on $200 million of its variable rate debt though 1997. The Company has plans to restructure its current revolving credit facility. In connection with the restructuring, the Company expects to recognize a loss on the early extinguishment of debt of approximately $3.0 million. As of December 31, 1995, the Company had commitments to provide financing totaling approximately $17.8 million. The Company intends to fund these commitments with a combination of cash on hand, amounts available under its existing credit facilities and/or proceeds of mortgage prepayments, if any. In February 1996, the Company acquired a medical office building for $12 million by drawing on its existing credit facility. The Company continues to seek new investments to expand and diversify its portfolio of leased and mortgaged health care related real estate. The Company believes that the transactions described above improve the security of its future cash flow and dividends. The Company intends to balance the use of debt and equity in such a manner that the long term cost of funds borrowed to acquire or mortgage finance facilities is appropriately matched, to the extent practicable, with the terms of the investments made with such borrowed funds. As of December 31, 1995, the Company's debt as a percentage of total market capitalization was approximately 20%. Impact of Inflation Management believes that the Company is not adversely affected by inflation. In the real estate market, inflation tends to increase the value of the Company's underlying real estate which may be realized at the end of the lessees' fixed rent terms. In the health care industry inflation increases the lessees' and mortgagors' revenues, thereby increasing the Company's additional rent or interest. -24- Certain Considerations The discussion and analysis of the Company's financial condition and results of operations requires the Company to make certain estimates and assumptions and contains certain statements of the Company's beliefs, intent or expectations concerning projections, plans, future events and performance. The estimates, assumptions and statements, such as those relating to the Company's ability to expand its portfolio, performance of its assets, the ability to pay dividends from FFO, its tax status as a "real estate investment trust", the ability to appropriately balance the use of debt and equity and to access the capital markets, depend upon various factors, over which, the Company and/or the Company's lessors and mortgagors have or may have limited or no control. Those factors include, without limitation, the status of the economy, capital markets (including prevailing interest rates), compliance with and changes to regulations within the health care industry, competition, changes to federal, state and local legislation and other factors described in this report. The Company cannot presently predict the impact of these factors, if any. However, these factors could cause the Company's actual results for subsequent periods to be different from those stated, estimated or assumed in this discussion and analysis of the Company's financial condition and results of operations. The Company believes that these estimates and assumptions are reasonable and prudent. Item 8. Financial Statements and Supplementary Data The financial statements and related notes and report of independent auditors for the Company are included following Part IV, beginning on page F-1, and identified in the index appearing at Item 14(a). The financial statements and financial statement schedules for Marriott are incorporated by reference to Marriott's Annual Report on Form 10-K for the year ended December 29, 1995, Commission File No. 1-12188. Item 9. Changes in and Disagreements 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 the Company's definitive Proxy Statement, which is expected to be filed not later than 120 days after the end of the Company's fiscal year. -25- PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) Index to Financial Statements and Financial Statement Schedules HEALTH AND RETIREMENT PROPERTIES TRUST Page Report of Independent Auditors F-1 Balance Sheets as of December 31, 1995 and 1994 F-2 Statements of Income for the years ended December 31, 1995, 1994 and 1993 F-3 Statements of Shareholders' Equity for the years ended December 31, 1995, 1994, and 1993 F-4 Statements of Cash Flows for the years ended December 31, 1995, 1994, and 1993 F-5 Notes to Financial Statements F-6 The following schedules are included: III -- Real Estate and Accumulated Depreciation S-1 IV -- Mortgage Loans on Real Estate S-6 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. Exhibits: 3.1 -July 1994 Amended and Restated Declaration of Trust (3) 3.2 -Amended and Restated By-Laws (11) 4.1 -Form of Series A Note (2) 4.2 -Form of Series B Note (2) 4.3 -Shawmut Bank, N.A. Indenture dated as of June 1, 1994 (2) 4.4 -Supplemental Shawmut Bank, N.A., Indenture dated as of June 29, 1994(2) 9.1 -AMS Voting Trust Agreement (9) 9.2 -Amended and Restated AMS Voting Trust Agreement (4) 10.1 -Advisory Agreement, as amended.(10) (+) 10.2 -Second Amendment to Advisory Agreement.(5) (+) 10.3 -Incentive Share Award Plan.(6)(+) 10.4 -Master Lease Document (8) 10.5 -HRPT Shares Pledge Agreement (8) 10.6 -AMS Properties Security Agreement (8) 10.7 -AMS Subordination Agreement (8) 10.8 -AMS Guaranty (8) 10.9 -AMS Pledge Agreement (pledging shares of AMSP) (8) 10.10 -AMS Holding Co. Pledge Agreement (pledging shares of AMS) (7) 10.11 -Amended and Restated Renovation Funding Agreement (7) 10.12 -Amendment to AMS Transaction Documents (7) 10.13 -GCI Master Lease Document (6) 10.14 -Amended and Restated HRP Shares Pledge Agreement (6) 10.15 -Guaranty, Cross-Default and Cross-Collateralization Agreement (6) 10.16 -CSC $8,000,000 Working Capital Promissory Note (6) 10.17 -Marriott Senior Living Services Purchase and Sale Agreement (5) 10.18 -Connecticut Subacute Corporation II Lease Document Waterbury (11) 10.19 -Connecticut Subacute Corporation II Lease Document Cheshire (11) 10.20 -Connecticut Subacute Corporation II Lease Document New Haven (11) 10.21 -Vermont Subacute/New Hampshire Subacute Corporation Master Lease A greement (Chapple) (11) 10.22 -Amended and Restated Agreement and Plan of Reorganization (Chapple) (11) 10.23 -March 1995 Second Amended and Restated Revolving Loan Agreement (11) 10.24 -Courtyard by Marriott Purchase and Option Agreement(12) 12.1 -Earnings to Fixed Charges (1) 21.1 -Subsidiaries of the Registrant (1) 23.1 -Consent of Ernst & Young (1) 24.1 -Powers of Attorney(1) 27.1 -Financial Data Schedule (1) -26- (+) Management contract or compensatory plan or arrangement. (1) Filed herewith (2) Incorporated by reference to the Company's Registration Statement on Form 8-A dated July 11, 1994. (3) Incorporated by reference to the Company's Current Report on Form 8-K dated July 1, 1994 and- amendments thereto. (4) Incorporated by reference to the Company's Registration Statement No. 33-53173 on Form S-3 dated June 2, 1994. (5) Incorporated by reference to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 1993. (6) Incorporated by reference to the Company's Registration Statement No. 33-55684 on Form S-11 dated December 23, 1992 and amendments thereto. (7) Incorporated by reference to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 1991. (8) Incorporated by reference to the Company's Current Report on Form 8-K dated December 28, 1990 and amendments thereto. (9) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the Quarter ended September 30, 1990 and amendments thereto. (10) Incorporated by reference to the Company's Registration Statement No. 33-16799 on Form S-11 dated August 27, 1987 and amendments thereto. (11) Incorporated by reference to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 1994. (12) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the Quarter ended March 31, 1995 (b) Reports on Form 8-K (i) The Company filed a current report on Form 8-K, dated December 18, 1995, relating to consents in connection with the sale of 6.5 million shares of the Company's stock and legal proceedings arising in the course of the Company's business. (ii) The Company filed a current report on Form 8-K, dated December 20, 1995, relating to the underwriting agreement in connection with the sale of 6.5 million shares of the Company's stock and legal proceedings arising in the course of the Company's business. -27- REPORT OF INDEPENDENT AUDITORS To the Trustees and Shareholders Health and Retirement Properties Trust We have audited the accompanying balance sheets of Health and Retirement Properties Trust as of December 31, 1995 and 1994, and the related statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. Our audits also included the financial statement 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Health and Retirement Properties Trust at December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Boston, Massachusetts February 9, 1996 F-1 HEALTH AND RETIREMENT PROPERTIES TRUST BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
December 31, 1995 1994 ASSETS Real estate properties, at cost (including properties leased to affiliates with a cost of $103,324 and $69,545, respectively): Land $ 72,124 $ 63,186 Buildings and improvements 706,087 609,897 -------------------------------------- 778,211 673,083 Less accumulated depreciation 55,855 39,570 -------------------------------------- 722,356 633,513 Real estate mortgages and notes, net (including note to affiliate of $1,565 in 1995) 141,307 133,477 Investment in Hospitality Properties Trust 99,959 - Cash and cash equivalents 18,640 57,877 Interest and rents receivable 7,895 4,712 Deferred interest and finance costs, net, and other assets 9,520 10,627 ---------------------------------------- $999,677 $840,206 ======================================== LIABILITIES AND SHAREHOLDERS' EQUITY Bank notes payable $ 53,000 $ - Senior notes and bonds payable, net 216,759 216,513 Accounts payable and accrued expenses 11,597 16,107 Security deposits 7,386 3,800 Due to affiliate 2,351 1,747 Dividends payable 22,992 - Commitments and contingencies - - Shareholders' equity: Preferred shares of beneficial interest, $.01 par value: 50,000,000 shares authorized, none issued - - Common shares of beneficial interest, $.01 par value: 100,000,000 shares authorized, 65,690,166 shares and 57,385,000 shares issued and outstanding, respectively 657 574 Additional paid-in capital 775,688 652,989 Cumulative net income 233,044 168,808 Dividends (323,797) (220,332) ---------------------------------------- Total shareholders' equity 685,592 602,039 --------------------------------------- $999,677 $840,206 =======================================
See accompanying notes F-2 HEALTH AND RETIREMENT PROPERTIES TRUST STATEMENTS OF INCOME (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31, 1995 1994 1993 Revenues: Rental income $ 89,602 $ 63,856 $ 46,069 Interest income 23,076 22,827 10,416 ------------------------------------------ Total revenues 112,678 86,683 56,485 ----------------------------------------- Expenses: Interest 24,274 8,965 6,217 Depreciation and amortization 22,849 14,724 9,087 General and administrative 6,914 5,116 3,443 ------------------------------------------ Total expenses 54,037 28,805 18,747 ----------------------------------------- Income before equity in earnings of Hospitality Properties Trust, gain (loss) on sale of properties and extraordinary items 58,641 57,878 37,738 Equity in earnings of Hospitality Properties Trust 3,119 - - ------------------------------------------ Income before gain (loss) on sale of properties and extraordinary item 61,760 57,878 37,738 Provision for loss on sale of properties - (10,000) - Gain on sale of properties 2,476 3,994 - ------------------------------------------ Income before extraordinary items 64,236 51,872 37,738 Extraordinary items - early extinguishment of debt - (1,953) (4,321) ------------------------------------------ Net income $ 64,236 $ 49,919 $ 33,417 ========================================= Weighted average shares outstanding 59,227 52,738 34,407 ========================================= Per share amounts: Income before gain (loss) on sale of properties and extraordinary items $ 1.04 $ 1.10 $ 1.10 ========================================= Income before extraordinary items $ 1.08 $ .98 $ 1.10 ========================================= Net income $ 1.08 $ .95 $ .97 =========================================
See accompanying notes F-3 HEALTH AND RETIREMENT PROPERTIES TRUST STATEMENTS OF SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
Additional Cumulative Number of Common Paid-in Net Shares Shares Capital Income Dividends Total Balance at December 31, 1992 26,763,500 $ 268 $ 246,459 $ 85,472 $ (103,898) $228,301 Redemption of shares (2,000,000) (20) (20,580) - - (20,600) Issuance of shares 19,350,000 193 244,599 - - 244,792 Stock grants 7,500 - 94 - - 94 Net income - - - 33,417 - 33,417 Dividends - - - - (44,869) (44,869) -------------------------------------------------------------------------------------- Balance at December 31, 1993 44,121,000 441 470,572 118,889 (148,767) 441,135 Issuance of shares 13,251,500 133 182,233 - - 182,366 Stock grants 12,500 - 184 - - 184 Net income - - - 49,919 - 49,919 Dividends - - - (71,565) (71,565) -------------------------------------------------------------------------------------- Balance at December 31, 1994 57,385,000 574 652,989 168,808 (220,332) 602,039 Issuance of shares to acquire real estate 1,777,766 18 24,426 - - 24,444 Issuance of shares 6,500,000 65 97,879 - - 97,944 Stock grants 27,400 - 394 - - 394 Net income - - - 64,236 - 64,236 Dividends - - - (103,465) (103,465) -------------------------------------------------------------------------------------- Balance at December 31, 1995 65,690,166 $ 657 $ 775,688 $ 233,044 $ (323,797) $685,592 =====================================================================================
See accompanying notes F-4 HEALTH AND RETIREMENT PROPERTIES TRUST STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
Year Ended December 31, 1995 1994 1993 Net income $ 64,236 $ 49,919 $ 33,417 Adjustments to reconcile net income to cash provided by operating activities: Gain on sale of properties (2,476) (3,994) - Equity in earnings of Hospitality Properties Trust (3,119) - - Extraordinary items - 1,953 4,321 Depreciation and amortization 22,849 14,724 9,087 Provision for loss on real estate - 10,000 - Amortization of deferred interest costs 1,529 864 700 Change in assets and liabilities: Increase in interest and rents receivable and other assets (1,639) (5,148) (6,156) Increase (decrease) in security deposits 3,586 (4,500) 3,800 Increase (decrease) in accounts payable and accrued expenses (4,508) 11,828 1,554 Increase in due to affiliate 843 799 506 ------------------------------------------------ Cash provided by operating activities 81,301 76,445 47,229 ------------------------------------------------ Cash flows from investing activities: Real estate acquisitions (267,470) (324,554) (47,735) Investments in mortgage loans (24,375) (9,372) (143,935) Proceeds from repayment of notes and mortgage loans 38,107 48,762 16,227 Proceeds from sale of real estate 5,000 23,318 - Proceeds from Hospitality Properties Trust initial public offering 60,000 - - Dividend from Hospitality Properties Trust 960 - - Loans to affiliate (1,565) - - ------------------------------------------------ Cash used for investing activities (189,343) (261,846) (175,443) ------------------------------------------------ Cash flows from financing activities: Proceeds from issuance of common shares 97,944 182,366 244,792 Proceeds from borrowings 219,000 333,770 98,700 Payments on borrowings (166,000) (208,000) (164,200) Deferred finance costs (1,666) (7,180) (583) Termination costs of debt and interest rate hedging arrangements - - (2,843) Payment related to stock surrender - - (3,000) Dividends paid (80,473) (71,565) (44,869) ------------------------------------------------ Cash provided by financing activities 68,805 229,391 127,997 ------------------------------------------------ Increase (decrease) in cash (39,237) 43,990 (217) Cash and cash equivalents at beginning of period 57,877 13,887 14,104 ------------------------------------------------ Cash and cash equivalents at end of period $ 18,640 $ 57,877 $ 13,887 ================================================ Supplemental cash flow information: Interest paid $ 22,783 $ 5,677 $ 6,522 =============================================== Non-cash investing and financing activities: Exchange of real estate mortgages $ - $ - $ 17,600 Investment in real estate mortgages (19,500) (5,100) - Exchange of common shares - - (17,600) Assumption of bonds payable - 17,620 - Real estate acquisitions (24,444) (17,620) - Sale of real estate 19,500 5,100 - Issuance of common shares 24,444 - - Investment in Hospitality Properties Trust (100,000) - -
See accompanying notes F-5 HEALTH AND RETIREMENT PROPERTIES TRUST NOTES TO FINANCIAL STATEMENTS (Dollars in Thousands, except per share amounts) Note 1. Organization Health and Retirement Properties Trust (formerly known as Health and Rehabilitation Properties Trust), a Maryland real estate investment trust (the "Company"), was organized on October 9, 1986. The Company invests in income-producing real estate, primarily retirement housing and health care related properties. As of December 31, 1995, the Company has investments in 159 properties located in 28 states. The properties include 121 long-term care facilities, 22 retirement and assisted living communities, 12 nursing homes with subacute services and four medical office buildings and clinics. In addition, at December 31, 1995, the Company had a 32% equity investment in Hospitality Properties Trust ("HPT"). HPT owns 37 hotels in 20 states. The Company is dependent upon its lessees' and mortgagors' compliance with regulations within the health care industry. Future changes to these regulations may affect the health care industry, the Company's lessees and mortgagors and as a result the Company. Note 2. Summary of Significant Accounting Policies Basis of Presentation. The Company's investment in 50% or less owned companies is accounted for using the equity method. Real Estate Properties and Mortgages. Real estate properties and mortgages are recorded at cost. Depreciation is provided for on a straight-line basis over the estimated useful lives ranging up to 40 years. If the estimated net realizable value of an investment is less than the carrying value, an allowance for possible investment loss is established. The determination of net realizable value includes consideration of many factors including income to be earned from the investment, holding costs, estimated selling prices, and prevailing economic conditions. In March 1995, the FASB issued Statement No. 121, Accounting for the Impairment of Long Lived Assets. The Company has adopted this statement and the effect of adoption is not material. Cash and Cash Equivalents. Cash, over-night repurchase agreements and short-term investments with maturities of three months or less at the date of purchase are carried at cost plus accrued interest. Deferred Interest and Finance Costs. Costs incurred to secure certain borrowings are capitalized and amortized over the terms of their respective loans. Interest Rate Hedging Arrangements. The Company enters into interest rate hedging arrangements to limit its exposure to increasing interest rates with respect to its bank borrowings and notes payable. Their cost is included in interest expense ratably over the terms of the respective agreements. Amounts receivable from hedging arrangements are accrued as an adjustment to interest expense. The unamortized cost of these agreements is included in other assets. Revenue Recognition. Rental income from operating leases is recognized on a straight line basis over the life of the lease agreements. Interest income is recognized as earned over the terms of the real estate mortgages. Additional rent and interest revenue is recognized as earned. Net Income Per Share. Net income per share is computed using the weighted average number of shares outstanding during the period. Supplemental earnings per share for the years ended December 31, 1995 and 1994, was $1.11 and $.93, respectively, based on the assumption that the issuance of shares in the Company's public offerings during 1995 and 1994, and the related repayment of outstanding bank borrowings, took place at the beginning of each year. F-6 HEALTH AND RETIREMENT PROPERTIES TRUST NOTES TO FINANCIAL STATEMENTS (Dollars in Thousands, except per share amounts) Reclassifications. Certain reclassifications have been made to the prior years' financial statements to conform with the current year's presentation. Federal Income Taxes. The Company is a real estate investment trust under the Internal Revenue Code of 1986, as amended. Accordingly, the Company expects not to be subject to federal income taxes on amounts distributed to shareholders provided it distributes at least 95% of its real estate investment trust taxable income and meets certain other requirements for qualifying as a real estate investment trust. Use of Estimates. Preparation of these financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that may affect the amounts reported in these financial statements and related notes. The actual results could differ from these estimates. Note 3. Real Estate Properties During the year ended December 31, 1995, the Company acquired 20 nursing properties and three medical office buildings for purchase prices aggregating approximately of $123,558, in five separate transactions. In addition, the Company provided improvement financing at existing properties of approximately $5,946. Nine of the nursing properties are leased to an affiliate and were acquired by the issuance of 1,777,766 shares of the Company's stock and cash. Lease obligations on eleven of the nursing properties acquired are secured by a $3,586 cash security deposit. The three medical office buildings are managed by M&P Partners Limited Partnership ("M&P"), an affiliate of the Company. In February 1996, the Company acquired a medical clinic for $12,000. The Company sold one nursing property for $24,500 and realized a gain of approximately $2,476. The Company received cash of $5,000 and a mortgage note of $19,500. The Company's real estate properties are leased pursuant to noncancellable, fixed term operating leases expiring from 1997 to 2013. Generally, the Company's leases to a single tenant are cross-collateralized, cross-defaulted and cross-guaranteed. The leases generally provide for renewal terms at existing rates followed by several market rate renewal terms. The majority of the leases are triple net leases and generally require the lessee to pay minimum rent, additional rent based upon increases in net patient revenues, real estate taxes, and all operating costs associated with the leased property. Additional rent and interest for the years ended December 31, 1995, 1994 and 1993 were $3,768, $2,768 and $2,312, respectively. The future minimum lease payments to be received by the Company during the current terms of the leases as of December 31, 1995, are approximately $85,228 in 1996, $83,836 in 1997, $83,332 in 1998, $78,876 in 1999, $77,883 in 2000 and $642,592 thereafter. Note 4. Investment in Hospitality Properties Trust On March 24, 1995, the Company's then wholly owned subsidiary, HPT, acquired 21 Courtyard by Marriott(R) hotels for approximately $179,400. HPT's acquisition of these properties was principally funded by the Company under a demand loan (the "HRP Loan") for approximately $163,300. The Company funded this transaction with cash on hand and by drawing $140,000 on its revolving credit facility. In August 1995, HPT completed its initial public offering (the "IPO") of 8,350,000 shares at $25 per share. HPT used proceeds from the IPO, in part, to repay amounts outstanding on the HRP Loan. Prior to the IPO, the Company's investment in HPT was $1,000, representing 40,000 shares. Concurrent with the completion of the IPO, the Company acquired an additional 3,960,000 shares of HPT at a per share price of $25 by cancelling $99,000 of the HRP Loan. The remaining balance of the HRP Loan was repaid to the Company during the fourth quarter of 1995. At December 31, 1995, the Company owned 4,000,000 shares of HPT, representing an equity interest in HPT of approximately 32% and a market value of $107,000. Since the IPO, the Company's investment in HPT has been accounted for using the equity method. Prior to the IPO, operating results of HPT were included in the Company's results of operations. Summarized financial data of HPT is as follows: F-7 HEALTH AND RETIREMENT PROPERTIES TRUST NOTES TO FINANCIAL STATEMENTS (Dollars in Thousands, except per share amounts)
February 7, 1995 (inception) to December 31, 1995 December 31, 1995 ----------------- ----------------- Real estate properties, net $ 326,752 Revenues $ 23,642 Other assets, net 12,195 Expenses 12,293 --------- ------ $ 338,947 Net Income $ 11,349 ========= ======== Security deposit $ 32,900 Average shares 4,515 ----- Other liabilities 8,096 Net income per share $ 2.51 ========= Shareholders' equity 297,951 --------- $ 338,947 Note 5. Real Estate Mortgages and Notes Receivable, Net
December 31, ------------------------------- 1995 1994 ---- ---- Mortgage notes receivable, net of discounts of $3,875 and $5,817, respectively, and net of reserves of $1,550 in 1995, due January 1996 through December 2016 $ 62,065 $ 87,443 Mortgage note receivable due December 2010 19,500 -- Mortgage notes receivable due December 2016 14,582 13,600 Mortgage note receivable due December 2002 12,309 -- Mortgage note receivable due December 2010 11,500 8,800 Mortgage note receivable due April 2007 11,500 -- Mortgage note receivable due December 2016 7,792 6,000 Investment held for sale, sold November 1995 -- 9,947 Collateralized note receivable due December 2016 -- 7,000 Other collateralized notes receivable due July 1998 494 687 Loan to an affiliate due June 1996 1,565 -- --------- --------- $ 141,307 $ 133,477 ======== ========
At December 31, 1995, the interest rates on the mortgages and notes receivable ranged from 8.1% to 13.75% per annum. During 1995, the Company provided debt financing totaling $17,357 secured by mortgages on four assisted living and three nursing properties. Existing mortgages secured by six nursing properties were refinanced for a net new investment of $5,404. The Company also provided improvement financing for existing facilities of $1,614 and a loan to an affiliate of $1,565. During 1995, the Company received principal payments on real estate mortgages of $1,510 and proceeds of $24,597, net of discounts, from the prepayment of mortgage loans. The Company sold two properties for approximately $12,000 in cash. At December 31, 1994, these properties were classified as mortgages and the Company reserved $10,000 for the loss on the sale of the properties. The realized loss on the disposition was $8,450. F-8 HEALTH AND RETIREMENT PROPERTIES TRUST NOTES TO FINANCIAL STATEMENTS (Dollars in Thousands, except per share amounts) Note 6. Shareholders' Equity During December 1995, the Company issued 6,500,000 common shares of beneficial interest and received net proceeds of approximately $97,944. In January 1996, the underwriters exercised the over-allotment option for 475,000 shares resulting in additional net proceeds of approximately $7,196. Dividends per share paid by the Company for 1995, 1994 and 1993 were $1.37, $1.32 and $1.29, respectively. The Company has reserved 1,000,000 shares of the Company's stock, under the terms of the 1992 Incentive Share Award Plan (the "Award Plan"). During 1995, 1994 and 1993, 8,500, 11,000 and 6,000 shares, respectively, were granted to officers of the Company and certain employees of HRPT Advisors, Inc. (the "Advisor"), an affiliate. The three independent Trustees, as part of their annual fee, are each granted 500 common shares annually. The shares granted to the Trustees vest immediately. The shares granted to the officers and certain employees of the Advisor vest over a three year period. At December 31, 1995, 945,100 shares of the Company's shares remain reserved for issuance under the Award Plan. Note 7. Commitments and Contingencies At December 31, 1995, the Company had total commitments aggregating $17,833 to finance improvements to certain properties leased or mortgaged by the Company and to purchase a medical clinic. The medical clinic was purchased in February 1996. Note 8. Transactions with Affiliates The Company has an agreement with the Advisor whereby the Advisor provides investment, management and administrative services to the Company. The Advisor is owned by Gerard M. Martin and Barry M. Portnoy, who also serve as Managing Trustees of the Company. Messrs. Martin and Portnoy are directors of Horizon/CMS Healthcare Corporation ("Horizon"), principal shareholders of Connecticut Subacute Corporation ("CSC"), Connecticut Subacute Corporation II, New Hampshire Subacute Corporation and Vermont Subacute Corporation (collectively the "Subacute Entities") and were formerly directors of Greenery Rehabilitation Group, Inc. ("Greenery"), which merged with Horizon in 1994. Horizon and the Subacute Entities are lessees of the Company. The Company has extended a $4,000 line of credit to CSC until June 30, 1996. At December 31, 1995, there was $1,565 outstanding under this agreement. The lease and mortgage transactions with the Subacute Entities and Horizon are based on market terms and are generally similar to the Company's lease and mortgage agreements with unaffiliated companies. The former president of the Company is the president of the Subacute Entities. Mr. Portnoy is a partner in the law firm which provides legal services to the Company. The Advisor is the general partner of M&P, which provides management services for the Company's recently acquired medical office buildings. The Advisor is compensated at an annual rate equal to .7% of the Company's real estate investments up to $250 million and .5% of such investments thereafter. The Advisor is entitled to an incentive fee comprised of restricted shares of the Company's common stock based on a formula. Advisory fees for the years ended December 31, 1995, 1994 and 1993 were $5,183, $3,839 and $2,591, respectively. Incentive fees for the years ended December 31, 1995 and 1994 were $580 and $239, which represent approximately 35,560 and 17,400 common shares respectively. At December 31, 1995, the Advisor owned 1,013,650 common shares. Amounts resulting from transactions with affiliates included in the accompanying statements of income, shareholders' equity and cash flows are as follows:
Years Ended December 31, ------------------------------------------ 1995 1994 1993 ----- ----- ----- Dividends paid to the Advisor $ 1,383 $ 1,315 $ 1,285 Rent from Greenery -- 2,689 22,527 Rent and interest income from Subacute Entities 12,015 8,481 4,483 Interest expense paid to Greenery -- -- 270 Management fee paid to M&P 17 -- --
F-9 HEALTH AND RETIREMENT PROPERTIES TRUST NOTES TO FINANCIAL STATEMENTS (Dollars in Thousands, except per share amounts) Note 9. Indebtedness
December 31, ----------------------------- 1995 1994 ---- ---- $250,000 unsecured revolving bank credit facility, due March 1998, at LIBOR plus a premium $ 53,000 $ - Senior Notes, Series A, due July 1999 at LIBOR plus a premium 75,000 75,000 Senior Notes, Series B, due July 1999 at LIBOR plus a premium 125,000 125,000 Revenue Refunding Bonds, Series 1991A, due August 2010 at 7.75% 13,950 13,950 Revenue Refunding Bonds, Series 1991B, due August 2009 at 7.75% 3,670 3,670 -------------- -------------- 270,620 217,620 Less unamortized discount (861) (1,107) ============== ============== $269,759 $216,513 ============== ==============
The Revenue Refunding Bonds are secured by a $17,802 letter of credit. The letter of credit is secured by a first mortgage lien on one property with a net book value of $35,673. The Senior Notes Series A and Series B may be called at the Company's option beginning in April 1995 and July 1996, respectively. During 1995, the Company increased its revolving bank credit facility (the "Credit Facility") to $250,000. The premiums on LIBOR borrowings range from .72% to 1.25%. At December 31, 1995, the Company had interest rate hedging agreements which cap interest rates on a maximum of $200,000 of borrowings under the Senior Notes through 1997. The maximum average rates payable on such borrowings under these arrangements is 6.24% per annum. The required principal payments for the next five years of $200,000 are due in 1999. The Company has plans to restructure its current Credit Facility. In connection with the restructuring, the Company expects to recognize a loss on the early extinguishment of debt of approximately $3,000. Note 10. Fair Value of Financial Instruments The Company's financial instruments include cash and cash equivalents, mortgage notes receivable, rents receivable, an equity investment, interest rate hedging agreements, notes and bonds payable, accounts payable and other accrued expenses, and security deposits. Except as follows, the fair value of the financial instruments were not materially different from their carrying values at December 31, 1995.
Carrying Amount Fair Value Real estate mortgages and notes $ 141,307 $ 142,153 Investment in HPT 99,959 107,000 Interest rate hedging agreements 2,265 1,144 Notes and bonds payable 216,759 217,826 Letter of credit - 267 Commitments - 17,833
F-10 The fair values of the real estate mortgages and notes and the notes and bonds payable are based on estimates using discounted cash flow analysis and currently prevailing rates. The fair value of the investment in HPT is based on the per share price of $26.75 at December 31, 1995. Interest rate hedging agreements are based on quoted market prices. The fair value of the letter of credit is based on fees currently charged to enter into similar agreements taking into account the remaining term and the counter party's credit standing. The fair value of commitment represents actual amount committed. Note 11. Concentration of Credit Risk The Company's assets are primarily invested in income producing health care related real estate located throughout the United States. At December 31, 1995, the Company's significant lessees, mortgagors and equity investment are as follows:
Equity Investment, Notes, Mortgages and 1995 Equity Earnings, Rent and Real Estate Properties, Net Mortgage Interest Revenue ------------------------------------------- --------------------------------- Amount % of Total Amount % of Total Marriott International, Inc. $ 314,544 33% $ 29,482 26% Horizon/CMS Healthcare Corporation 117,698 12 16,149 14 Equity investment in HPT 99,959 10 12,445 11 GranCare, Inc. 89,180 9 15,408 14 Other 342,241 36 40,005 35 ------- ---- ------ -- $963,622 100% $113,489 100% ======== === ======== ===
Note 12. Selected Quarterly Financial Data (Unaudited) The following is a summary of the unaudited quarterly results of operations of the Company for 1995 and 1994. The amounts are in thousands except for the per share amounts.
1995 ------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter Revenues $ 25,992 $ 30,498 $ 28,959 $ 27,229 Income before equity in earnings of HPT and gain (loss) on sale of property 15,832 15,668 15,154 11,987 Equity in earnings of HPT -- -- 898 2,221 Income before gain (loss) on sale of property 15,832 15,668 16,052 14,208 Net income 18,308 15,668 16,052 14,208 Per share data: Income before equity earnings and gain (loss) on sale of property .27 .26 .26 .20 Income before gain (loss) on sale of property .27 .26 .27 .25 Net income .31 .26 .27 .25
F-11 HEALTH AND RETIREMENT PROPERTIES TRUST NOTES TO FINANCIAL STATEMENTS (Dollars in Thousands, except per share amounts) Note 13. Selected Quarterly Financial Data (Unaudited) - continued
1994 ------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter Revenues $ 17,547 $ 19,916 $ 23,816 $ 25,404 Income before gain (loss) on sale of properties and extraordinary items 12,650 14,334 15,588 15,306 Income before extraordinary items 16,644 14,334 15,588 5,306 Extraordinary items -- (1,953) -- -- Net income 16,644 12,381 15,588 5,306 Per share data: Income before gain (loss) on sale of properties and extraordinary items .28 .28 .27 .27 Income before extraordinary items .37 .28 .27 .09 Net income .37 .24 .27 .09
Note 14. Pro Forma Information (Unaudited) The following unaudited condensed Pro Forma Statements of Income assumes the transactions described in Notes 3, 4, 5 and 6 had occurred on January 1, 1994 and give effect to the Company's borrowing rate throughout the periods indicated. The condensed Pro Forma Balance Sheet is intended to present the financial position of the Company as if the transactions subsequent to December 31, 1995, described in Notes 3 and 6 had occurred on December 31, 1995. These pro forma statements are not necessarily indicative of the expected results of operations or the Company's financial position for any future period. Differences could result from, but are not limited to, additional property investments, changes in interest rates and changes in the debt and/or equity structure of the Company.
Condensed Pro Forma Statements of Income (unaudited) Years Ended December 31, -------------------------------------- 1995 1994 ---- ---- Total revenues $ 109,038 $ 110,575 Total expenses 49,342 45,736 -------- ------ Income before equity earnings 59,696 64,839 Equity in earnings of HPT 8,938 8,938 -------- ----- Net income $ 68,634 $ 73,777 ======== ======= Weighted average shares outstanding 66,165 66,165 Net income per share $ 1.04 $ 1.12 ======== ========
Condensed Pro Forma Balance Sheet (unaudited) December 31, 1995, Real estate properties, net $ 734,356 Real estate mortgages and notes, net 141,307 Investments in HPT 99,959 Other assets 43,251 --------- Total assets $ 1,018,873 ========= Indebtedness $ 281,759 Other liabilities 44,326 Shareholders' equity 692,788 --------- Total liabilities and shareholders' equity $ 1,018,873 =========
F-12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HEALTH AND RETIREMENT PROPERTIES TRUST By:/s/ David J. Hegarty David J. Hegarty President and Chief Operating Officer Dated: March 29, 1996 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 March 29, 1996 David J. Hegarty Chief Operating Officer /s/ Ajay Saini Treasurer and March 29, 1996 Ajay Saini Chief Financial Officer /s/Bruce M. Gans, M.D.* Trustee March 29, 1996 Bruce M. Gans, M.D. Trustee Ralph J. Watts /s/ Justinian Manning, C.P.* Trustee March 29, 1996 Rev. Justinian Manning,C.P. Trustee Gerard M. Martin /s/ Barry M. Portnoy* Trustee March 29 ,1996 Barry M. Portnoy *By: /s/David J. Hegarty Attorney-in-fact F-13 HEALTH AND RETIREMENT PROPERTIES TRUST SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1995 (Dollars in thousands)
Gross Amount Initial Cost to Carried at Close of Company Period 12/31/95 ---------------- --------------------------- Cost Capitalized Accumulated Original Building & Subsequent to Building & Deprecia- Date Construction Location State Land Equipment Acquisition Land Equipment Total (1) tion (2) Acquired Date - ------------------------- ---------------------------------------------------------------------------------- ---------------------- Long-Term Care Facilities: Phoenix AZ $655 $2,525 $5 $655 $2,530 $3,185 $254 6/30/92 1963 Yuma AZ 223 2,100 4 223 2,104 2,327 208 6/30/92 1984 Yuma AZ 103 604 1 103 605 708 60 6/30/92 1984 Fresno CA 738 2,577 188 738 2,765 3,503 401 12/28/90 1968 Lancaster CA 601 1,859 1,029 601 2,888 3,489 353 12/28/90 1963 Newport Beach CA 1,176 1,729 1,223 1,176 2,952 4,128 340 12/28/90 1962 Palm Springs CA 103 1,264 982 103 2,246 2,349 245 12/28/90 1969 San Diego CA 1,114 1,073 480 1,114 1,553 2,667 224 12/28/90 1969 Stockton CA 382 2,750 4 382 2,754 3,136 273 6/30/92 1968 Tarzana CA 1,277 977 806 1,278 1,782 3,060 246 12/28/90 1969 Thousand Oaks CA 622 2,522 310 622 2,832 3,454 394 12/28/90 1965 Van Nuys CA 716 378 225 718 601 1,319 92 12/28/90 1969 Colorado Springs CO 23 777 184 26 958 984 39 11/1/94 1960 Grand Junction CO 6 2,583 1,253 136 3,706 3,842 181 12/30/93 1978 Grand Junction CO 204 3,875 279 204 4,154 4,358 256 12/30/93 1968 Lakewood CO 232 3,766 724 232 4,490 4,722 598 12/28/90 1972 Littleton CO 185 5,043 349 185 5,392 5,577 760 12/28/90 1965 Paonia CO 115 2,179 60 115 2,239 2,354 140 12/30/93 1981 Cheshire CT 520 7,380 111 520 7,491 8,011 1,723 11/1/87 1963 Killingly CT 240 5,360 460 240 5,820 6,060 1,455 5/15/87 1972 New Haven CT 1,681 14,953 94 1,681 15,047 16,728 1,657 5/11/92 1971 Waterford CT 86 4,714 453 87 5,166 5,253 1,339 5/15/87 1965 Willimantic CT 134 3,566 479 166 4,013 4,179 962 5/15/87 1965 Clarinda IA 77 1,453 82 77 1,535 1,612 96 12/30/93 1968 Council Bluffs IA 50 467 40 50 507 557 31 6/4/93 1970 Council Bluffs IA 225 2,125 16 225 2,141 2,366 37 4/1/95 1963 Glenwood IA 45 2,155 10 45 2,165 2,210 38 4/1/95 1964 Mediapolis IA 94 1,776 175 94 1,951 2,045 117 12/30/93 1973 S-1 HEALTH AND RETIREMENT PROPERTIES TRUST SCHEDULE III- continued REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1995 (Dollars in thousands) Gross Amount Initial Cost to Carried at Close of Company Period 12/31/95 ---------------- --------------------------- Cost Capitalized Accumulated Original Building & Subsequent to Building & Deprecia- Date Construction Location State Land Equipment Acquisition Land Equipment Total (1) tion (2) Acquired Date - ------------------------- ---------------------------------------------------------------------------------- ---------------------- Long-Term Care Facilities-continued Muscatine IA 246 4,683 348 245 5,032 5,277 307 12/30/93 1964 Pacific Junction IA 32 368 1 32 369 401 7 04/01/95 1978 Toledo IA 153 2,907 246 153 3,153 3,306 193 12/30/93 1975 Winterset IA 111 2,099 444 111 2,543 2,654 140 12/30/93 1973 Nashville IL 75 2,556 80 75 2,636 2,711 377 12/28/90 1964 Arma KS 47 1,953 69 47 2,022 2,069 35 04/01/95 1970 Ellinwood KS 130 1,420 4 130 1,424 1,554 25 04/01/95 1972 Smith Center KS 111 2,099 86 111 2,185 2,296 136 12/30/95 1971 Topeka KS 110 890 8 110 898 1,008 16 04/01/95 1963 Topeka KS 137 913 16 137 929 1,066 16 4/1/95 1970 Topeka KS 18 232 7 18 239 257 4 4/1/95 1968 Oak Grove MO 119 1,831 1 119 1,832 1,951 32 4/1/95 1976 St. Joseph MO 111 1,027 32 111 1,059 1,170 67 6/4/93 1976 Tarkio MO 102 1,938 108 102 2,046 2,148 126 12/30/93 1970 Grand Island NE 119 1,331 33 119 1,364 1,483 24 4/1/95 1963 Rochester NH 466 3,219 4 466 3,223 3,689 77 1/30/95 1972 Burlington NJ 1,300 11,700 1 1,300 11,701 13,001 74 9/28/95 1994 Akron OH 330 5,370 727 330 6,097 6,427 1,536 5/15/87 1971 Grove City OH 332 3,081 32 332 3,113 3,445 197 6/4/93 1965 Huron SD 144 3,108 4 144 3,112 3,256 305 6/30/92 1968 Sioux Falls SD 253 3,062 4 253 3,066 3,319 302 6/30/92 1960 Barre VT 261 4,530 133 389 4,535 4,924 109 1/30/95 1979 Barre VT 129 3,825 3 129 3,828 3,957 91 1/30/95 1972 Bennington VT 160 4,385 4 160 4,389 4,549 105 1/30/95 1971 Burlington VT 791 5,985 409 872 6,313 7,185 148 1/30/95 1968 Springfield VT 50 747 1 50 748 798 18 1/30/95 1976 Springfield VT 89 3,724 157 242 3,728 3,970 89 1/30/95 1971 St. Albans VT 154 710 1 154 711 865 17 1/30/95 1900 S-2 HEALTH AND RETIREMENT PROPERTIES TRUST .SCHEDULE III - continued REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1995 (Dollars in thousands) Gross Amount Initial Cost to Carried at Close of Company Period 12/31/95 ---------------- --------------------------- Cost Capitalized Accumulated Original Building & Subsequent to Building & Deprecia- Date Construction Location State Land Equipment Acquisition Land Equipment Total (1) tion (2) Acquired Date - ------------------------- ---------------------------------------------------------------------------------- ---------------------- Long-Term Care Facilities-continued St. Johnsbury VT 95 3,416 4 95 3,420 3,515 82 1/30/95 1978 Seattle WA 256 4,869 68 256 4,937 5,193 325 11/1/93 1972 Brookfield WI 834 3,849 7,852 834 11,701 12,535 885 12/28/90 1954 Clintonville WI 49 1,625 88 30 1,732 1,762 244 12/28/90 1965 Clintonville WI 14 1,695 37 14 1,732 1,746 243 12/28/90 1960 Madison WI 144 1,633 109 144 1,742 1,886 243 12/28/90 1920 Milwaukee WI 277 3,883 0 277 3,883 4,160 427 3/27/92 1969 Milwaukee WI 116 3,438 123 116 3,561 3,677 498 12/28/90 1960 Waukesha WI 68 3,452 2,232 68 5,684 5,752 578 12/28/90 1958 Laramie WY 191 3,632 131 191 3,763 3,954 236 12/30/93 1964 Saratoga WY 13 1,487 150 14 1,636 1,650 67 11/1/94 1974 Worland WY 132 2,503 107 132 2,610 2,742 162 12/30/93 1970 ---------------- ---------- ------------------------------- ----------- Subtotal 19,896 197,705 23,890 20,408 221,083 241,491 21,082 ---------------- ---------- ------------------------------- ----------- Retirement and Assited Living Facilities: Scottsdale AZ 979 8,807 140 990 8,936 9,926 362 5/16/94 1990 Sun City AZ 1,174 10,569 173 1,189 10,727 11,916 413 6/17/94 1990 Laguna Hills CA 3,132 28,184 473 3,172 28,617 31,789 926 9/9/94 1975 Boca Raton FL 4,404 39,633 797 4,474 40,360 44,834 1,637 5/20/94 1994 Deerfield Beach FL 1,664 14,972 298 1,690 15,244 16,934 618 5/16/94 1986 Ft. Myers FL 2,349 21,137 419 2,385 21,520 23,905 740 8/16/94 1984 Palm Harbor FL 3,327 29,945 595 3,379 30,488 33,867 1,236 5/16/94 1992 Port St. Lucie FL 1,223 11,009 219 1,242 11,209 12,451 455 5/20/94 1993 Arlington Heights IL 3,621 32,587 534 3,665 33,077 36,742 1,070 9/9/94 1986 Silver Spring MD 3,229 29,065 786 3,301 29,779 33,080 1,085 7/25/94 1992 Huron SD 45 968 1 44 970 1,014 95 6/30/92 1968 Bellaire TX 1,223 11,010 178 1,238 11,173 12,411 453 5/16/94 1991 Arlington VA 1,859 16,734 295 1,885 17,003 18,888 620 7/25/94 1992 Charlottesville VA 2,936 26,422 472 2,976 26,854 29,830 1,034 6/17/94 1991 Virginia Beach VA 881 7,926 137 893 8,051 8,944 327 5/16/94 1990 ---------------- ---------- ------------------------------- ----------- Subtotal 32,046 288,968 5,517 32,523 294,008 326,531 11,071 ---------------- ---------- ------------------------------- ----------- S-3 HEALTH AND RETIREMENT PROPERTIES TRUST SCHEDULE III - continued REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1995 (Dollars in thousands) Gross Amount Initial Cost to Carried at Close of Company Period 12/31/95 ---------------- --------------------------- Cost Capitalized Accumulated Original Building & Subsequent to Building & Deprecia- Date Construction Location State Land Equipment Acquisition Land Equipment Total (1) tion (2) Acquired Date - ------------------------- ---------------------------------------------------------------------------------- ---------------------- Nursing Homes with Subacute Services: Wallingford CT 557 11,043 1,023 557 12,066 12,623 3,074 12/23/86 1974 Waterbury CT 514 10,186 742 630 10,812 11,442 2,814 12/23/86 1971 Forestville CT 465 9,235 1,342 476 10,566 11,042 2,613 12/23/86 1972 Waterbury CT 1,003 9,023 0 1,003 9,023 10,026 1,008 5/11/92 1974 Boston MA 2,164 20,836 1,977 2,163 22,814 24,977 4,278 5/1/89 1968 Worchester MA 1,829 15,071 1,869 1,829 16,940 18,769 3,626 5/1/88 1970 Hyannis MA 829 7,463 0 829 7,463 8,292 834 5/11/92 1972 Middleboro MA 1,771 15,752 0 1,771 15,752 17,523 1,741 5/11/92 1975 North Andover MA 1,448 11,049 0 1,448 11,049 12,497 1,234 5/11/92 1985 Canonsburg PA 1,499 13,493 606 1,518 14,080 15,598 2,037 3/1/91 ---------------- ---------- ------------------------------- ----------- Subtotal 12,079 123,151 7,559 12,224 130,565 142,789 23,259 1985 ---------------- ---------- ------------------------------- ----------- Medical Office Buildings and Clinics: Boston MA 3,378 30,397 42 3,378 30,439 33,817 222 9/28/95 1985 Boston MA 1,447 13,028 17 1,447 13,045 14,492 95 9/28/95 1993 Boston MA 1,500 13,500 164 1,500 13,664 15,164 14 12/18/95 1988 Sacramento CA 644 3,206 77 644 3,283 3,927 112 8/30/94 1984 ---------------- ---------- ------------------------------- ---------- Subtotal 6,969 60,131 300 6,969 60,431 67,400 443 ---------------- ---------- ------------------------------- ---------- Total Real Estate $70,990 $669,955 $37,266 $72,124 $706,087 $778,211 $55,855 ================ ========== =============================== ========== (1) Aggregate cost for federal income tax purposes is approximately $751,965. (2) Depreciation is provided for on buildings and improvements ranging up to 40 years, equipment ranging up to 12 years.
S-4 HEALTH AND RETIREMENT PROPERTIES TRUST SCHEDULE III - continued REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1995 (Dollars in thousands)
Real Estate and Accumulated Equipment Depreciation -------------- ------------ Balance at January 1, 1993 $337,076 $26,194 Additions 47,735 8,775 ---------- --------- Balance at December 31, 1993 384,811 34,969 Additions 341,610 13,594 Disposals (53,338) (8,993) ---------- --------- Balance at December 31, 1994 673,083 39,570 Additions 309,853 21,047 Disposals (24,376) (2,352) Real estate investments of Hospitality Properties Trust (180,349) (2,410) ---------- --------- Balance at December 31, 1995 $778,211 $55,855 ========== =========
S-5 HEALTH AND RETIREMENT PROPERTIES TRUST SCHEDULE IV MORTGAGE LOANS ON REAL ESTATE December 31, 1995 (Dollars in thousands)
Principal Amount of (1) Loans Subject to Final Face Carry Delinquent Interest Maturity Value of Value of Principal Location Rate Date Periodic Payment Terms Mortgage Mortgage or Interest -------- --------- ----------- ---------------------- -------- -------- ----------- FARMINGTON, MI 11.50% 12/31/00 Interest only, principal and $4,300 $4,300 interest starting in 1996, -- payable monthly in arrears. $4.1 million due at maturity HOWELL, MI 11.50% 12/31/00 Interest only, principal and 5,100 5,100 interest starting in 1996, -- payable monthly in arrears. $4.9 million due at maturity MEDINA, OH 10.13% 2/1/98 Principal & interest payable 5,942 5,675 -- monthly in arrears. $5.7 million due at maturity. AINSWORTH, NE 9.00% 12/31/16 Interest only, principal and 7,792 7,792 ASHLAND, NE interest starting in 1996, GRETNA, NE payable monthly in arrears. $2.0 WAVERLY, NE million due at maturity. SUTHERLAND, NE BLUE HILL, NE CENTRAL CITY, NE MILWAUKEE, WI 11.50% 12/31/10 Interest only, principal and 11,500 11,500 -- PEWAUKEE, WI interest starting in 1997, payable monthly in arrears. $9.6 million due at maturity. S-6 HEALTH AND RETIREMENT PROPERTIES TRUST SCHEDULE IV - continued MORTGAGE LOANS ON REAL ESTATE December 31, 1995 (Dollars in thousands) Principal Amount of (1) Loans Subject to Final Face Carry Delinquent Interest Maturity Value of Value of Principal Location Rate Date Periodic Payment Terms Mortgage Mortgage or Interest -------- --------- ----------- ---------------------- -------- -------- ----------- MARION, NC 11.35% 4/30/07 Interest only, principal and 11,500 11,500 KING, NC interest starting in 1997, -- ABERDEEN, NC payable monthly in arrears. NEW BERN, NC $9.6 million due at maturity. TORRANCE, CA 10.00% 12/31/02 Interest only, principal and 12,309 12,309 TORRANCE, CA interest starting in 1997, -- ANAHEIM, CA payable monthly in arrears. $11.5 million due at maturity CANON CITY, CO 11.50% 12/31/16 Interest only, principal and 14,582 14,582 -- COLORADO SPRINGS, CO interest starting in 1996, DELTA, CO payable monthly in arrears. $5.4 million due at maturity. SLIDELL, LA 11.00% 12/31/10 Interest only, principal and 19,500 19,500 -- interest starting in 1996, payable monthly in arrears. $13.8 million due at maturity. 30 MORTGAGES 8.10%-13.75% 4/96-12/16 Interest only or principal and 52,148 46,990 4,105 interest payable monthly in arrears ------------------------------------------------ TOTAL $ 144,673 $ 139,248 $ 4,105 ================================================ (1) Also represents cost for federal income tax purposes.
S-7 HEALTH AND RETIREMENT PROPERTIES TRUST SCHEDULE IV- continued MORTGAGE LOANS ON REAL ESTATE December 31, 1995 (Dollars in thousands) Reconciliation of the carrying amount of mortgage loans at the beginning of the period: Balance at January 1, 1993 $ 47,173 New mortgage loans................................. 133,939 Collections of principal........................... (33,827) Amortization of discounts.......................... 965 ------------------- Balance at December 31, 1993............................ 148,250 New mortgage loans................................. 11,772 Collections of principal........................... (48,775) Amortization of discounts.......................... 4,597 Reclassification of real estate investment......... 9,947 ------------------- Balance at December 31, 1994............................ 125,791 New mortgage loans................................. 40,064 Collection of principal............................ (28,560) Amortization of discounts.......................... 1,953 =================== Balance at December 31, 1995............................ $ 139,248 S-8 EX-12.1 2 HEALTH AND RETIREMENT PROPERTIES TRUST EXHIBIT 12.1 Computation of Earnings to Fixed Charges (dollars in thousands) Years Ended December 31, ---------------------------- Earnings 1991 1992 1993 1994 1995 ---- ---- ---- ---- ---- Income before gain on sale of properties and extraordinary items $22,079 $27,243 $37,738 $57,878 $61,760 Adjustment for fixed charges 12,305 10,419 6,529 10,096 26,218 ------- ------- ------- ------- ------- Total Earnings $34,384 $37,662 $44,267 $67,974 $87,978 Fixed Charges: Interest expense $11,741 $ 9,466 $ 6,217 $ 8,965 $24,274 Amortization 564 953 312 1,131 1,944 ------- ------- ------- ------- ------- Total Fixed Charges $12,305 $10,419 $ 6,529 $10,096 $26,218 Ratio of Earnings to Fixed Charges 2.8x 3.6x 6.8x 6.7x 3.4x EX-23.1 3 Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report dated February 16, 1996 included in Marriott International, Inc.'s annual report on Form 10-K for the year ended December 29, 1995 (File No. 1-12188) in Health and Retirement Properties Trust's Form 10-K, and into Health and Retirement Properties Trust's previously filed Registration Statements File Nos. 33-53173 and 33-62135, and to all references to our Firm included in these registration statements. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Washington, D.C. March 29, 1996 EX-23.2 4 Exhibit 23.2 Consent of Independent Auditors We consent to the incorporation by reference in Amendment No. 1 to the Registration Statement (Form S-3 No. 33-53173) of Health and Retirement Properties Trust and in the related Prospectus and in Posteffective Amendment No. 1 to the Registration Statement (Form S-3 No. 33-62135) of Health and Retirement Properties Trust and in the related Prospectus of our report dated February 9, 1996, with respect to the financial statements and schedules of Health and Retirement Properties Trust included in this Annual Report (Form 10-K) for the year ended December 31, 1995. /s/ Ernst & Young LLP ERNST & YOUNG LLP Boston, Massachusetts March 26, 1996 EX-24.1 5 Exhibit 24.1 POWER OF ATTORNEY The undersigned Officers and Trustees of Health and Retirement Properties Trust hereby severally constitute David J. Hegarty, Ajay Saini, Gerard M. Martin and Barry M. Portnoy, and each of them, to sign for us and in our names in the capacities indicated below, the Annual Report on Form 10-K herewith filed with the Securities and Exchange Commission, and any and all amendments thereto, hereby ratifying and confirming our signatures as they may be signed by our said attorneys to the Annual Report on Form 10-K and any and all amendments to the Annual Report on Form 10-K. Witness our hands and seals on the dates set forth below. Signature Title Date - --------- ----- ---- /s/David J. Hegarty President and Chief March 29, 1996 David J. Hegarty Operating Officer /s/Ajay Saini Treasurer and March 29, 1996 Ajay Saini Financial Officer /s/Bruce M. Gans, M.D. Trustee March 27, 1996 Bruce M. Gans, M.D. /s/Justinian Manning, C.P. Trustee March 27, 1996 Rev. Justinian Manning, C.P. Trustee March 29, 1996 Ralph J. Watts Trustee March 29, 1996 Gerard M. Martin /s/ Barry M. Portnoy Trustee March 29, 1996 Barry M. Portnoy EX-27.1 6
5 This schedule contains summary financial information extracted from the financial statements of Health and Retirement Properties Trust for the years ended December 31, 1995 and is qualified in its entirety by reference to such financial statements. 1,000 US DOLLARS YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 1 18,640 0 7,895 0 0 0 778,211 55,855 999,677 0 269,759 0 0 657 684,935 999,677 0 112,678 0 54,037 0 0 24,274 64,236 0 64,236 0 0 0 64,236 1.08 1.08
-----END PRIVACY-ENHANCED MESSAGE-----