-----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, E9EA/FgSbpwe+VDpx3hOuYsvA24B288+fQRftLnxNDxQy1hbScgCJm0PmWBNm7T0 XB8fkKkSYoxHisHNVtX7mQ== 0000908737-97-000512.txt : 19971117 0000908737-97-000512.hdr.sgml : 19971117 ACCESSION NUMBER: 0000908737-97-000512 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 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-Q SEC ACT: SEC FILE NUMBER: 001-09317 FILM NUMBER: 97720999 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-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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 of incorporation) No.) 400 Centre Street, Newton, Massachusetts 02158 (Address of principal executive offices) (Zip Code) 617-332-3990 (Registrant's telephone number, including area code) 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 [ ] ] Number of Common Shares outstanding at the latest practicable date November 13, 1997: 98,838,340 shares of beneficial interest, $.01 par value. HEALT AND RETIREMENT PROPERTIES TRUST FORM 10-Q SEPTEMBER 30, 1997 INDEX PART I Financial Information Page Item 1. Consolidated Financial Statements (Unaudited) Consolidated Balance Sheets - September 30, 1997 and December 31, 1996 1 Consolidated Statements of Income - Three and Nine Months Ended September 30, 1997 and 1996 2 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 1997 and 1996 3 Notes to Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II Other Information Item 2. Changes in Securities 11 Item 6. Exhibits and Reports on Form 8-K 11 Signatures 12
HEALTH AND RETIREMENT PROPERTIES TRUST CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share amounts) (unaudited) September 30, December 31, 1997 1996 ------------- ------------ ASSETS Real estate properties, at cost (including properties leased to affiliates with a cost of $110,885 and $109,843, respectively): Land $ 188,267 $ 93,522 Buildings and improvements 1,433,255 912,217 ----------- ----------- 1,621,522 1,005,739 Less accumulated depreciation 99,746 76,921 ----------- ----------- 1,521,776 928,818 Real estate mortgages and notes, net (including note from an affiliate of $2,365) 116,941 150,205 Investment in Hospitality Properties Trust 102,465 103,062 Cash and cash equivalents 71,765 21,853 Interest and rents receivable 19,722 11,612 Deferred interest and finance costs, net, and other assets 18,625 13,972 ----------- ----------- $ 1,851,294 $ 1,229,522 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Bank notes payable $ 100,000 $ 140,000 Senior notes and bonds payable, net 200,000 124,385 Mortgage notes payable 26,941 -- Convertible subordinated debentures 211,650 227,790 Accounts payable and accrued expenses 35,616 10,711 Prepaid rents 7,077 7,608 Security deposits 2,872 8,387 Due to affiliates 1,336 2,593 Dividends payable 36,571 -- Shareholders' equity: Preferred shares of beneficial interest, $.01 par value: 50,000,000 shares authorized, none issued -- -- Common shares of beneficial interest, $.01 par value: 125,000,000 shares and 100,000,000 shares authorized, respectively, and, 98,838,340 shares and 66,888,917 shares issued and outstanding, respectively 988 669 Additional paid-in capital 1,370,730 795,263 Cumulative net income 383,775 306,298 Dividends (526,262) (394,182) ----------- ----------- Total shareholders' equity 1,229,231 708,048 ----------- ----------- $ 1,851,294 $ 1,229,522 =========== ===========
See accompanying notes 1
HEALTH AND RETIREMENT PROPERTIES TRUST CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands, except per share amounts) (unaudited) Three Months Ended September 30, Nine Months Ended September 30, 1997 1996 1997 1996 ---------- ------------ ---------- ----------- Revenues: Rental income $ 52,226 $ 24,682 $ 129,518 $ 72,501 Interest and other income 5,078 5,235 16,177 15,521 --------- --------- --------- --------- Total revenues 57,304 29,917 145,695 88,022 --------- --------- --------- --------- Expenses: Operating 8,205 879 16,961 2,421 Interest 9,209 5,580 24,955 15,826 Depreciation and amortization 10,395 5,592 26,633 16,093 General and administrative 3,309 1,709 8,148 4,782 --------- --------- --------- --------- Total expenses 31,118 13,760 76,697 39,122 --------- --------- --------- --------- Income before equity in earnings of Hospitality Properties Trust, gain on sale of properties and extraordinary item 26,186 16,157 68,998 48,900 Equity in earnings of Hospitality Properties Trust 2,238 2,301 6,683 6,629 Gain on equity transaction of Hospitality Properties Trust -- -- -- 3,603 --------- --------- --------- --------- Income before gain on sale of properties and extraordinary item 28,424 18,458 75,681 59,132 Gain on sale of properties 2,898 -- 2,898 -- --------- --------- --------- --------- Income before extraordinary item 31,322 18,458 78,579 59,132 Extraordinary item - early extinguishment of debt (1,102) -- (1,102) (2,443) --------- --------- --------- --------- Net income $ 30,220 $ 18,458 $ 77,477 $ 56,689 ========= ========= ========= ========= Weighted average shares outstanding 98,829 66,209 89,918 66,188 ========= ========= ========= ========= Per share amounts: Income before gain on sale of properties and extraordinary item $0.29 $0.28 $0.84 $0.89 ========= ========= ========= ========= Income before extraordinary item $0.32 $0.28 $0.87 $0.89 ========= ========= ========= ========= Net income $0.31 $0.28 $0.86 $0.86 ========= ========= ========= =========
See accompanying notes 2
HEALTH AND RETIREMENT PROPERTIES TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) (unaudited) For the Nine Months Ended September 30, 1997 1996 --------- ---------- Cash flows from operating activities: Net income $ 77,477 $ 56,689 Adjustments to reconcile net income to cash provided by operating activities: Gain on sale of properties (2,898) -- Gain on equity transaction of Hospitality Properties Trust -- (3,603) Equity in earnings of Hospitality Properties Trust (6,683) (6,629) Dividends from Hospitality Properties Trust 7,280 6,960 Extraordinary item 1,102 2,443 Depreciation 25,422 15,618 Amortization 1,211 475 Amortization of deferred interest costs 699 1,283 Change in assets and liabilities: Increase in interest and rents receivable and other assets (4,068) (11,327) Increase (decrease) in accounts payable and accrued expenses 21,129 (354) (Decrease) increase in prepaid rents (531) 9 (Decrease) increase in security deposits (5,515) 849 Decrease in due to affiliates (648) (1,193) --------- --------- Cash provided by operating activities 113,977 61,220 --------- --------- Cash flows from investing activities: Real estate acquisitions (215,310) (66,585) Acquisition of business, less cash acquired (323,181) -- Investments in mortgage loans (576) (16,369) Proceeds from repayment of notes and mortgage loans, net of discounts 33,690 6,843 Proceeds from sale of real estate 22,898 -- Repayment and advance of loan to affiliate -- 200 --------- --------- Cash used for investing activities (482,479) (75,911) --------- --------- Cash flows from financing activities: Proceeds from issuance of common shares 483,153 6,990 Proceeds from borrowings 375,000 101,000 Payments on borrowings (340,649) (24,620) Deferred finance costs incurred (3,581) (719) Dividends paid (95,509) (69,502) --------- --------- Cash provided by financing activities 418,414 13,149 --------- --------- Increase (decrease) in cash and cash equivalents 49,912 (1,542) Cash and cash equivalents at beginning of period 21,853 18,640 --------- --------- Cash and cash equivalents at end of period $ 71,765 $ 17,098 ========= ========= Supplemental cash flow information: Interest paid $ 24,400 $ 15,709 ========= =========
See accompanying notes 3
HEALTH AND RETIREMENT PROPERTIES TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) (unaudited) For the Nine Months Ended September 30, 1997 1996 ---------- ---------- Non-cash financing activities: Issuance of shares $ 16,578 $ -- Conversion of convertible subordinated debentures, net (15,765) -- Non-cash investing activities: Real estate acquisitions $ (15,739) $ -- Exchange of real estate 10,616 -- --------- ---------- Net cash used to acquire real estate $ (5,123) $ -- ========= ========== Acquisition of business, less cash acquired: Real estate acquisitions $ 422,920 $ -- Working capital, other than cash 3,904 -- Liabilities assumed (27,588) -- Net cash used to acquire business (323,181) -- --------- ---------- Issuance of shares $ 76,055 $ -- ========= ==========
See accompanying notes 4 HEALTH AND RETIREMENT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) Note 1. Basis of Presentation The financial statements of Health and Retirement Properties Trust (the "Company") have been prepared in accordance with generally accepted accounting principals for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. Certain prior year amounts have been reclassified to conform to the current year's presentation. The Financial Accounting Standards Board has issued Financial Accounting Standards Board Statement No. 128 "Earnings Per Share" ("FAS 128"), Statement No. 129 "Disclosure of Information about Capital Structure" ("FAS 129"), Statement No. 130 "Reporting Comprehensive Income" ("FAS 130") and Statement No. 131 "Disclosure about Segments of an Enterprise and Related Information" ("FAS 131"). FAS 128 and FAS 129 must be adopted for the Company's 1997 annual financial statements. FAS 130 and FAS 131 must be adopted for the Company's 1998 financial statements. The Company estimates that the adoption of FAS 128, FAS 129, FAS 130 and FAS 131 would have no impact on reported results. Note 2. Shareholders' Equity During the nine months ended September 30, 1997, the Company issued 27,025,000 common shares in a public offering, raising net proceeds of approximately $483,153, issued 3,985,028 common shares in a private placement for the purchase of real estate, issued 895,549 common shares due to the conversion of $16,140 of its convertible subordinated debentures due 2003 and issued 32,846 common shares to HRPT Advisors, Inc., (the "Advisor") an affiliate, as the incentive fee earned for the year ended December 31, 1996. In July 1997, 9,500 shares were granted to officers of the Company and certain employees of the Advisor under the 1992 Incentive Share Award Plan. Additionally, in May 1997, the three independent Trustees were also granted 500 shares each under such plan as part of their annual fee. The shares granted to the officers of the Company and certain employees of the Advisor vest over a three-year period and the shares granted to the Trustees vest immediately. On September 15, 1997, the Trustees declared a dividend on the Company's common shares with respect to the quarter ended September 30, 1997 of $.37 per share, which will be distributed on or about November 20, 1997 to shareholders of record as of September 30, 1997. Note 3. Real Estate Properties During the nine months ended September 30, 1997, the Company purchased eight medical office buildings, one retirement community and 20 medical clinics for approximately $222,772. During the first quarter of 1997, the Company entered into an agreement to acquire 30 office buildings (the "Government Properties"), leased to various agencies of the United States Government. During the third quarter of 1997, the Company elected not to acquire one of the Government Properties currently under development with an aggregate value of approximately $12,000. At September 30, 1997, the Company had completed the purchase of 28 of the Government Properties for approximately $422,920. The acquisition of the Government Properties was funded, in part, with the proceeds from the issuance of the Company's common shares pursuant to a public offering, the issuance of 3,985,028 common shares of the Company in a private placement and the assumption of $27,588 of debt. At September 30, 1997, 17% of the Company's real estate properties, net, and mortgage receivables were in properties leased to Marriott International, Inc. ("Marriott"). The financial statements of Marriott have been filed as a part of Marriott's Quarterly Report on Form 10-Q, file number 1-12188, for the quarter ended September 12, 1997. During the nine months ended September 30, 1997, the Company funded $3,154 of improvements to existing tenants. At September 30,1997, the Company had total outstanding commitments aggregating approximately $170,363 to acquire properties or to provide financing. 5 HEALTH AND RETIREMENT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) Note 3. Real Estate Properties - continued The Company had invested approximately $112,000 in properties leased to or mortgaged by Community Care of America, Inc. ("CCAI"). During the third quarter of 1997, CCAI was acquired by Integrated Health Services, Inc. ("IHS"). In connection with IHS's acquisition of CCAI, the Company sold 14 nursing homes to IHS for $33,514 and purchased three nursing homes which were mortgage financed by the Company for $15,739. In addition, leases for 16 nursing homes operated by CCAI were assumed by IHS and these leases were modified to provide rent increases based upon the Consumer Price Index ("CPI") and these leases are guaranteed by IHS. In connection with this transaction, the Company was paid a lease modification fee of $3,737 and recognized a gain on sale of properties of $2,898. Subsequent to September 30, 1997, the Company purchased three medical office properties for approximately $204,500, paid for with cash on hand and by borrowing $110,000 on the Company's revolving credit facility. The Government Properties and medical office properties owned by the Company are managed by M&P Partners Limited Partnership, an affiliate of the Company. Note 4. Investment in Hospitality Properties Trust At September 30, 1997, the Company owned four million shares of the common stock of Hospitality Properties Trust ("HPT") with a carrying value of $102,465 and a market value of $141,500. The Company's percentage ownership of HPT is 14.9%. Note 5. Real Estate Mortgages and Notes Receivable, net During the nine months ended September 30, 1997, the Company funded improvements for existing properties totaling approximately $576. In addition, the Company received regularly scheduled principal payments and prepayments of mortgages secured by nine nursing facilities totaling $34,729, including amounts received from IHS. In connection with the acquisition of CCAI by IHS discussed in Note 3, the Company received $27,980 from IHS representing prepayments of mortgages secured by six nursing facilities owned by CCAI. Additionally, IHS assumed the mortgage indebtedness of CCAI secured by nine nursing homes. The terms of the mortgages have been modified to require interest increases based upon the CPI and these mortgages are guaranteed by IHS. Note 6. Indebtedness In March 1997, the Company extended and modified its $250,000 unsecured revolving bank credit facility. Subsequently, in July 1997, the Company expanded the credit facility to $450,000. The credit facility matures in 2001 and bears interest at LIBOR plus a premium. At September 30, 1997, $100,000 was outstanding under the credit facility. During July 1997, the Company issued Senior Unsecured Remarketed Reset Notes totaling $200,000. The notes are due in 2007 and the initial interest rate is LIBOR plus a premium, reset quarterly. Subsequent to the first year, the interest rate and interest period on the notes may be fixed for the balance of the term or a lesser period at the Company's option and the notes are subject to remarketing. Proceeds from the issuance of the notes were used to prepay $125,000 of the Company's Floating Rate Senior Notes, Series B, due 1999 and $75,000 outstanding under the Company's bank credit facility. In connection with this refinancing, the Company recognized an extraordinary loss from the write-off of deferred financing fees and bond discounts of $1,102. 6 HEALTH AND RETIREMENT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) Note 7. Pro Forma Information The following pro forma summary presents the results of operations of the Company as if the Government Properties transaction had occurred at the beginning of January 1996. These pro forma results are not necessarily indicative of the expected results of operation of the Company for any future period. Differences could result from, but are not limited to, additional property investments, changes in interest rates and changes in the capital structure of the Company. Nine Months ended September 30, ----------------------------- 1997 1996 -------- --------- Revenues $157,662 $129,978 Expenses 85,926 62,338 -------- -------- 71,736 67,640 Equity in earnings of HPT 6,683 6,629 -------- -------- Net income $ 78,419 $ 74,269 ======== ======== Average shares outstanding 98,838 97,076 ======== ======== Net income per share $ 0.79 $ 0.77 ======== ======== 7 HEALTH AND RETIREMENT PROPERTIES TRUST MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Quarter Ended September 30, 1997 Versus 1996 Total revenues for the quarter ended September 30, 1997, increased to $57.3 million, from $29.9 million for the quarter ended September 30, 1996. Rental income increased by $27.5 million and interest and other income decreased by $157,000. Rental income increased because of new real estate investments subsequent to September 30, 1996 and partly as a result of the Company's increased investments in "gross leased" real estate assets during the 1997 period as compared to the 1996 period. As the Company's investment in such "gross leased " assets increases, the Company anticipates rental income and the corresponding operating expenses from such leases to increase during subsequent periods. Interest and other income decreased slightly primarily as a result of a decrease in mortgage interest income, offset by an increase in earnings on the Company's short-term investments due to higher cash balances in the quarter ended September 30, 1997 compared to the quarter ended September 30, 1996. Total expenses for the quarter ended September 30, 1997, increased to $31.1 million from $13.8 million for the quarter ended September 30, 1996. Operating expenses increased by $7.3 million as a result of the Company's increased investment in "gross leased" real estate assets during the 1997 quarter as compared to the 1996 period. Interest expense increased by $3.6 million due to higher borrowings outstanding during the 1997 quarter and the Company's issuance of convertible debentures in October 1996. Depreciation and amortization, and general and administrative expense increased by $4.8 million and $1.6 million, respectively, primarily as a result of new real estate investments subsequent to September 30, 1996. Net income for the quarter ended September 30, 1997, increased to $30.2 million or $.31 per share, from $18.5 million or $.28 per share, for the same quarter in 1996. This increase is primarily a result of new investments since September 30, 1996, and a gain recognized on the sale of properties in 1997, offset by an extraordinary loss recognized as a result of the prepayment of the Company's Floating Rate Senior Notes, Series B in 1997. The Company bases its dividend primarily on Funds from Operations ("FFO"). The Company has adopted the National Association of Real Estate Investment Trust's definition of FFO, as income before equity in earnings of HPT, gain (loss) on sale of properties and extraordinary items, plus depreciation and other non-cash charges, plus the Company's proportionate share of HPT's FFO. FFO for the 1997 quarter was $40.1 million, or $.41 per share, as compared to $24.9 million, or $.38 per share, for the 1996 quarter. Cash available for distribution may not necessarily equal FFO as the cash flow of the Company is affected by other factors not included in the FFO calculation. The dividends declared which relate to these quarters were $36.6 million, or $.37 per share, in 1997 and $23.8 million, or $.36 per share, in 1996. Nine Months Ended September 30, 1997 Versus 1996 Total revenues for the nine months ended September 30, 1997 increased to $145.7 million from $88.0 million for the nine months ended September 30, 1996. Rental income increased by $57.0 million and interest and other income increased by $656,000. Rental income increased because of new real estate investments subsequent to September 30, 1996 and partly as a result of the Company's increased investments in "gross leased" real estate assets as compared to "net leased" assets subsequent to September 30, 1996. As the Company's investment in such "gross leased" assets increases, the Company anticipates rental income and the corresponding operating expenses from such leases to increase during subsequent periods. Interest and other income increased slightly as a result of earnings on the Company's short-term investments due to higher cash balances in the 1997 period compared to the 1996 period, which was offset, in part, by a decrease in mortgage interest income. Total expenses for the nine months ended September 30, 1997 increased to $76.7 million from $39.1 million for the nine months ended September 30, 1996. Operating expenses increased by $14.5 million as a result of the Company's increased investment in "gross leased" real estate assets during the 1997 period as compared to the 1996 period. Interest expense increased by $9.1 million due to higher borrowings outstanding during the 1997 period and the Company's issuance of convertible debentures in October 1996. Depreciation and amortization, and general and administrative expense increased by $10.5 million and $3.4 million, respectively, primarily as a result of new real estate investments subsequent to September 30, 1996. 8 HEALTH AND RETIREMENT PROPERTIES TRUST MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Nine Months Ended September 30, 1997 Versus 1996 - continued Net income increased to $77.5 million, or $.86 per share, for the 1997 period from $56.7 million, or $.86 per share, for the 1996 period. Net income increased primarily as a result of new investments since September 30, 1996, the recognition of a gain on sale of properties and a decrease in the extraordinary loss on early extinguishment of debt. Funds from operations for the nine months ended September 30, 1997, were $105.2 million, or $1.17 per share, and $73.9 million, or $1.12 per share, for the 1996 period. The dividends declared which relate to the nine months ended September 30, 1997 and 1996 were $107.7 million, or $1.09 per share, and $70.2 million, or $1.06 per share, respectively. LIQUIDITY AND CAPITAL RESOURCES Total assets of the Company increased to $1.9 billion at September 30, 1997, from $1.2 billion at December 31, 1996. The increase is primarily attributable to new real estate acquisitions since December 31, 1996. During the nine months ended September 30, 1997, the Company purchased eight medical office buildings, one retirement community and 20 medical clinics for approximately $222.8 million funded with cash on hand and by borrowing on the Company's revolving credit facility. In the first quarter of 1997, the Company entered into an agreement to acquire 30 office buildings leased to the United States Government. Through September 30, 1997, the Company had purchased 28 of the 30 Government Properties for approximately $423 million. These acquisitions were funded, in part, with the proceeds from the issuance of the Company's common shares pursuant to a public offering, the issuance of 3,985,028 common shares of the Company in a private placement and the assumption of $27.6 million of debt. During the third quarter of 1997, the Company elected not to acquire one of the Government Properties currently under development with an aggregate value of approximately $12 million. The acquisition of the remaining property is subject to various conditions customary in real estate transactions and is expected to be completed by March 31, 1998. The Company had invested approximately $112 million in properties leased to or mortgaged by CCAI. During the third quarter of 1997, CCAI was acquired by IHS. In connection with this transaction, the Company sold 14 nursing homes to IHS for approximately $33.5 million and purchased three nursing homes which were mortgage financed by the Company for approximately $15.7 million. In addition, leases for 16 nursing homes operated by CCAI were assumed by IHS. The leases were modified to provide rent increases based upon the CPI and these leases are now guaranteed by IHS. Also, the Company received approximately $28 million from IHS as prepayments of mortgages secured by six nursing facilities owned by CCAI. IHS also assumed the mortgage indebtedness of CCAI secured by nine nursing homes. These mortgages were modified to require interest increases based upon the CPI and these mortgages are guaranteed by IHS. In connection with this transaction, the Company was paid a lease modification fee of $3.7 million and recognized a gain on sale of properties of $2.9 million. Subsequent to September 30, 1997, the Company acquired three medical office properties for approximately $204.5 million, paid for with cash on hand and by borrowing $110 million on the Company's revolving credit facility. During the nine months ended September 30, 1997, the Company funded $3.7 million of improvements to existing facilities and received $34.7 million of principal payments on mortgages, including the repayment of nine mortgage loans secured by nine long-term care properties. In March 1997, the Company issued 27,025,000 common shares in a public offering yielding net proceeds of approximately $483.2 million. Proceeds of the offering were used to repay the then outstanding balance on the Company's revolving credit facility of $140 million and to fund the acquisition of real estate. During the nine months ended September 30, 1997, the Company issued 895,549 common shares due to the conversion of $16.1 million of its convertible subordinated debentures. 9 LIQUIDITY AND CAPITAL RESOURCES - continued At September 30, 1997, the Company had $71.8 million of cash and cash equivalents. In July 1997, the Company expanded the credit facility to $450 million. The credit facility matures in 2001 and bears interest at LIBOR plus a premium. At September 30, 1997, $100 million was outstanding and $350 million was available for borrowing under the credit facility. During July 1997, the Company issued Senior Unsecured Remarketed Reset Notes aggregating $200 million. The notes are due in 2007 and the initial interest rate is LIBOR plus a premium, reset quarterly. Subsequent to the first year, the interest rate and interest period on the notes may be fixed for the balance of the term or a lesser term at the Company's option and the notes are subject to remarketing. Proceeds from the issuance of the notes were used to prepay $125 million of the Company's Floating Rate Senior Notes, Series B, due 1999 and $75 million outstanding under the Company's revolving credit facility. In connection with this refinancing, the Company recognized a loss from the write-off of deferred financing fees and bond discounts of $1.1 million. At September 30, 1997, the Company had outstanding commitments to purchase properties or provide financing totaling approximately $170.4 million. The Company intends to fund these commitments with a combination of cash on hand, issuance of common shares of the Company, amounts available under its existing credit facilities and/or proceeds of mortgage prepayments, if any. The Company continues to seek new investments to expand and diversify its portfolio of leased and mortgaged real estate. The Company intends to balance the use of debt and equity in such a manner that the long term cost of funds used to acquire or mortgage finance facilities is appropriately matched, to the extent practicable, with the terms of the investments made with such funding. As of September 30, 1997, the Company's debt as a percentage of total market capitalization was approximately 22%. 10 HEALTH AND RETIREMENT PROPERTIES TRUST CERTAIN IMPORTANT FACTORS The Company's Quarterly Report on Form 10-Q contains statements which constitute forward looking statements within the meaning of the Securities Exchange Act of 1934, as amended. Those statements appear in a number of places in this Form 10-Q and include statements regarding the intent, belief or expectations of the Company, its Trustees or its officers with respect to the declaration or payment of dividends, the consummation of additional acquisitions, policies and plans of the Company regarding investments, financings or other matters, the Company's qualification and continued qualification as a real estate investment trust or trends affecting the Company's or any property's financial condition or results of operations. Readers are cautioned that any such forward looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contained in the forward looking statements as a result of various factors. Such factors include without limitation changes in financing terms, the Company's ability or inability to complete acquisitions and financing transactions, results of operations of the Company's properties and general changes in economic conditions not presently contemplated. The information contained in this Form 10-Q and the Company's Annual Report on Form 10-K for the year ended December 31, 1996, including the information under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations", identifies other important factors that could cause such differences. THE AMENDED AND RESTATED DECLARATION OF TRUST ESTABLISHING 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. Part II Other Information Item 2. Changes in Securities. On July 11, 1997, the Company issued an aggregate of 86,188 common shares of beneficial interest, par value $.01 per share ("Common Shares") in connection with the Company's previously disclosed acquisition of office properties leased to agencies of the United States Federal Government. The issuance of such Common Shares was made pursuant to the exemption from registration contained in Section 4(2) of the Securities Act of 1933, as amended. On July 2, 1997, pursuant to the Company's Incentive Share Award Plan, officers of the Company and certain employees of the Advisor received a grant of 9,500 Common Shares valued at $18.5625 per share, the closing price of the Common Shares on the New York Stock Exchange on July 2, 1997. The grants were made pursuant to the exemption from registration contained in Section 4(2) of the Securities Act of 1933, as amended. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 10.1 Agreement (for Property Management and Leasing Agent) between M&P Partners Limited Partnership and various subsidiaries of the Company, effective as of March 25, 1997, relating to properties leased to Agencies of the United States Government. 27. Financial Data Schedule (b) Reports on Form 8-K: 1. The Company filed a Current Report on Form 8-K, dated September 2, 1997, with respect to (a) a further acquisition of a government office property, (b) the Company's agreements with CCAI, relating to CCAI's acquisition by IHS, and (c) recent tax law developments. This Report also included pro forma financial and other data relating to the acquisition of such government office property. 11 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: November 14, 1997 By: /s/ Ajay Saini Ajay Saini Treasurer and Chief Financial Officer Dated: November 14, 1997 12 EX-10.1 2 EXHIBIT 10.1 MANAGEMENT AGREEMENT This Management Agreement (this "Agreement") is made and entered into as of the 25th day of March, 1997 between M&P Partners Limited Partnership, a Massachusetts limited partnership ("Managing Agent"), and the parties identified on the signature page of this Agreement as owner (collectively, "Owner"). WHEREAS, Owner is the owner of those premises described on Exhibit A, attached hereto and made a part hereof (collectively, the "Managed Premises"); and WHEREAS, Owner desires to retain Managing Agent, and Managing Agent is willing to serve, as managing agent with respect to the Managed Premises, all upon the terms and subject to the conditions hereinafter set forth; NOW, THEREFORE, in consideration of the premises and the agreements herein contained, Owner and Managing Agent hereby agree as follows: 1. Employment. Subject to the terms and conditions hereinafter set forth, Owner hereby employs Managing Agent with respect to the Managed Premises. 2. Duties. (a) Managing Agent hereby accepts such employment as managing agent and agrees to devote such time, attention and effort as may be appropriate to operate and manage the Managed Premises in a diligent, orderly and efficient manner. Any or all services may be performed or goods purchased by Managing Agent under arrangements jointly with or for other properties owned or managed by Managing Agent and the costs shall be reasonably apportioned. Managing Agent may employ personnel who are assigned to work exclusively at the Managed Premises or partly at the Managed Premises and other buildings owned and/or managed by Managing Agent. The properly apportioned costs of such personnel shall be reimbursed by Owner, in addition to the Fee, but only to the extent that such personnel shall be on-site employees. (b) Without limitation, Managing Agent agrees to perform the following specific duties: (i) To seek tenants for the Managed Premises in accordance with the rental schedule established by Owner and to negotiate leases including renewals thereof and to lease in Owner's name space on a lease form approved by the Owner, only to tenants, at -2- rentals, and for periods of occupancy all as are approved in each case by Owner. To employ appropriate means in order that the availability of rental space is made known to potential tenants; provided, however, that such means shall not include the employment of brokers unless otherwise agreed by Owner. The legal expenses of negotiating such leases and leasing such space shall be approved and paid by Owner. (ii) To collect all rents and other income from the Managed Premises and to give receipts therefor, both on behalf of Owner, and deposit such funds in such banks and such accounts as are named, from time to time, by Owner, in agency accounts for and under the name of Owner. Managing Agent shall be empowered to sign disbursement checks on these accounts. (iii) To make contracts for and to supervise any repairs and/or alterations to the Managed Premises, including tenant improvements and decoration of rental space, as may be approved by Owner. (iv) For Owner's account and, with respect to on-site employees only, at its expense, to hire, supervise and discharge employees as required for the efficient operation and maintenance of the Managed Premises. (v) To obtain, at Owner's expense, appropriate insurance for the Managed Premises protecting Owner and Managing Agent while acting on behalf of Owner against all normally insurable risks relating to the Managed Premises and complying with the requirements of Owner's mortgagee, if any, and, upon approval thereof, to cause the same to be provided and maintained by all tenants with respect to the Managed Premises to the extent required by the terms of such tenants' leases. (vi) To promptly notify Owner and Owner's insurance carriers, as required by the applicable policies, of any casualty or injury to person or property at the Managed Premises, and complete customary reports in connection therewith. (vii) To procure seasonably all supplies and other materials necessary for the proper operation of the Managed Premises, at Owner's expense. (viii) To pay promptly from rental receipts, other income derived from the Managed Premises, or other monies made available by Owner for such purpose, all costs incurred in the operation of the Managed Premises which are expenses of Owner hereunder, including wages or other payments for services rendered, invoices for supplies or other items -3- furnished in relation to the Managed Premises, and pay over forthwith the balance of such rental receipts, income and monies to Owner or as Owner shall from time to time direct. (In the event that the sum of the expenses to operate and the compensation due the Managing Agent exceed gross receipts in any month and no excess funds from prior months are available for payment of such excess, Owner shall pay promptly the amount of the deficiency thereof to Managing Agent upon receipt of statements therefor.) (ix) To advise Owner promptly of any material developments in the operation of the Managed Premises that might affect the profitable operation of the Managed Premises. (x) To establish, in Owner's name and with Owner's approval, reasonable rules and regulations for tenants of the Managed Premises. (xi) At the direction of Owner and with counsel selected by Owner, to institute or defend, as the case may be, any and all legal actions or proceedings (in the name of Owner if necessary) relating to operation of the Managed Premises. (xii) To maintain the books and records of Owner reflecting the management and operation of the Managed Premises, making available for reasonable inspection and examination by Owner or its representatives, all books, records and other financial data relating to the Managed Premises. (xiii) To prepare and deliver seasonably to tenants of the Managed Premises such statements of expenses or other information as shall be required on the landlord's part to be delivered to such tenants for computation of rent, additional rent, or any other reason. (xiv) To aid, assist and cooperate with Owner in matters relating to taxes and assessments and insurance loss adjustments and notify the Owner of any tax increase or special assessments relating to the Managed Premises. (xv) To provide such emergency services as may be required for the efficient management and operation of the Managed Premises on a 24-hour basis. (xvi) To enter into contracts for utilities (including, without limitation, water, fuel, electricity and telephone) and for building services (including, without limitation, cleaning of windows, -4- common areas and tenant space, ash, rubbish and garbage hauling, snow plowing, landscaping, carpet cleaning and vermin extermination), and for other services as are appropriate to first class office space. (xvii) To seek the lowest competitive price commensurate with desired quality for all items purchased or services contracted by it under this Agreement. (xviii) To take such action generally consistent with the provisions of this Agreement, as Owner might with respect to the Managed Premises if personally present. 3. Authority. Owner gives to Managing Agent the authority and powers to perform the foregoing duties on behalf of Owner subject, however, to Owner's approval as specified. Owner further authorizes Managing Agent to incur such reasonable expenses, specifically contemplated in Section 2, on behalf of Owner as are necessary in the performance of those duties. 4. Special Authority of Agent. In addition to, and not in limitation of, the duties and authority of Managing Agent contained herein, Managing Agent shall perform the following duties, but only with Owner's prior approval in each case: (a) Terminate tenancies and sign and serve in the name of Owner such notices therefor as may be required for the proper management of the Managed Premises. (b) With counsel selected by Owner, and at Owner's expense, institute and prosecute actions to evict tenants and recover possession of rental space, and recover rents and other sums due; and when expedient, settle, compromise and release such actions or suits or reinstate such tenancies. 5. Compensation. (a) In consideration of the services to be rendered by the Managing Agent hereunder, the Owner agrees to pay and the Managing Agent agrees to accept as its sole compensation a management fee (the "Fee") equal to three percent (3%) of the gross collected rents actually received by Owner from the Managed Premises, such gross rents to include all fixed rents, percentage rents, additional rents, operating expense and tax escalations, and any other charges paid to Owner in connection with occupancy of the Managed Premises, but excluding any amounts collected from tenants to reimburse Owner for the cost of capital improvements or for expenses incurred in curing any tenant default or in enforcing any remedy against any tenant. -5- (b) The Fee shall be due and payable monthly, in arrears. (c) Notwithstanding anything herein to the contrary, Owner shall reimburse Managing Agent for reasonable travel expenses incurred when traveling to and from the Managed Premises while performing its duties in accordance with this Agreement. (d) Managing Agent shall also receive the amount of any lump sum reimbursables paid by tenants of the Managed Premises to the extent amounts paid exceed costs incurred by Owner for work performed with respect thereto. (e) Managing Agent shall be entitled to no other additional compensation, whether in the form of commission, bonus or the like for its services under this Agreement. Except as otherwise specifically provided herein with respect to payment by Owner of legal fees, accounting fees, salaries, wages, fees and charges of parties hired by the Managing Agent on behalf of Owner to perform operating and maintenance functions in the Managed Premises, and the like, if Managing Agent hires third parties to perform services required to be performed hereunder by Managing Agent without additional charge to Owner, Managing Agent shall (except to the extent the same are reasonably attributable to an emergency at the Managed Premises) be responsible for the charges of such third parties. Managing Agent shall not, however, hire any third party without Owner's prior written consent, which consent shall not be unreasonably withheld. In addition, Managing Agent shall, at its expense, assume Owner's obligations under the contracts and agreements listed as Exhibit B, attached hereto and made a part hereof. 6. Contracts. Managing Agent shall not, without the prior consent of Owner, enter into any contracts on behalf of Owner which extend beyond the then current term of this Agreement. 7. Term of Agreement. The term of this Agreement shall begin on the date hereof and, unless sooner terminated as herein provided, shall end on that date which is thirty (30) days following written notice of termination given by either Owner or Managing Agent to the other. 8. Termination or Expiration. Upon termination or expiration of this Agreement for any reason whatsoever, Managing Agent shall promptly turn over to Owner all books, papers, funds, records, keys and other items relating to the management and operation of the Managed Premises, including, without limitation, all leases in the possession of the Managing Agent and shall render to Owner a final accounting through the date of termination. -6- 9. Assignment of Rights and Obligations. (a) Without Owner's prior written consent, Managing Agent shall not sell, transfer, assign or otherwise dispose of or mortgage, hypothecate or otherwise encumber or permit or suffer any encumbrance of all or any part of its rights and obligations hereunder, and any transfer, encumbrance or other disposition of an interest herein made or attempted in violation of this paragraph shall be void and ineffective, and shall not be binding upon Owner. (b) Owner, without Managing Agent's consent, may assign its rights and obligations hereunder to any mortgagee with respect to, or successor owner of, the Managed Premises, but not otherwise. (c) Consistent with the foregoing paragraphs (a) and (b), the terms "Owner" and "Managing Agent" as used in this Agreement shall mean the original parties hereto and their respective mortgagees, successors, assigns, heirs and legal representatives. 10. Fidelity Bond. Owner, at Owner's expense, may require that employees of Managing Agent who handle or are responsible for Owner's money to be bonded by a fidelity bond in an amount sufficient in Owner's determination to cover any loss which may occur in the management and operation of the Managed Premises or that Managing Agent obtain a fiduciary policy of insurance. 11. Indemnification. (a) Owner agrees to defend, indemnify and hold harmless Managing Agent from and against all costs, claims, expenses and liabilities (including reasonable attorneys' fees) arising out of Managing Agent's performance of its duties in accordance with this Agreement including, without limitation, injury or damage to persons or property occurring in, on or about the Managed Premises and violations or alleged violations of any law, ordinance, regulation or order of any governmental authority regarding the Managed Premises except any injury, damage or violation resulting from Managing Agent's default hereunder, or from Managing Agent's fraud, gross negligence or willful misconduct in the performance of its duties hereunder. (b) Owner agrees that required insurance shall include, at Owner's expense, public liability and workmen's compensation insurance upon the following terms and conditions: (i) policies shall be so written as to protect the Managing Agent in the manner and to the same extent as the Owner. -7- (ii) Workmen's compensation policies shall be written to comply with applicable legal requirements. (iii) The public liability insurance shall be written in limits of not less than One Million Dollars ($1,000,000) per occurrence for bodily injury and Five Hundred Thousand Dollars ($500,000) per occurrence for property damage. (iv) Such public liability insurance shall include the standard extensions of liability coverage as may be mutually agreed upon from time to time, and shall name both parties and their respective employees as additional insureds. 12. Notices. Whenever notice is to be sent pursuant to this Agreement to either party to this Agreement, it is expressly understood that same shall be sent postage prepaid, certified mail, return receipt requested to either party at 400 Centre Street, Newton, Massachusetts 02158, or to any such address that either party may hereinafter designate. 13. Limitation of Liability. No partner of Owner or Managing Agent shall be personally liable hereunder, all such liability being limited in the case of Owner to the interest of Owner in the Managed Premises and in the case of Managing Agent, to its interest hereunder. 14. Modification of Agreement. This Agreement may not be modified, altered or amended in manner except by an amendment in writing, duly executed by the parties hereto. 15. Independent Contractor. This Agreement is not one of general agency by Managing Agent for Owner, but one with Managing Agent engaged as an independent contractor. Nothing in this Agreement is intended to create a joint venture, partnership, tenancy-in-common or other similar relationship between Owner and Managing Agent for any purposes whatsoever. 16. Law Governing. This Agreement shall be governed by and in accordance with the laws of The Commonwealth of Massachusetts. -8- Executed as a sealed instrument as of the date above first written. MANAGING AGENT: M&P PARTNERS LIMITED PARTNERSHIP By: HRPT Advisors, Inc., its general partner By:/s/David J. Hegarty Its President OWNER: HUB REALTY FUNDING, INC. By:/s/David J. Hegarty Its President HUB REALTY RICHLAND, INC. By:/s/David J. Hegarty Its President HUB REALTY IV, INC. By:/s/David J. Hegarty Its President HUB REALTY III, INC. By:/s/David J. Hegarty Its President -9- HUB REALTY COLLEGE PARK, I, LLC By: HUB Management, Inc. By:/s/David J. Hegarty Its President HUB REALTY KANSAS CITY, INC. By:/s/David J. Hegarty Its President HUB REALTY BUFFALO, INC. By:/s/David J. Hegarty Its President HUB REALTY SAN DIEGO I, INC. By:/s/David J. Hegarty Its President EPA GOLDEN, L.P. By: Hub Realty Golden, Inc., general partner By:/s/David J. Hegarty Its President HUB ACQUISITION TRUST By:/s/David J. Hegarty Its President EXHIBIT A Managed Premises Attached to this Exhibit A in the original document are property descriptions for properties leased to the U.S. Government in the following locations: 1. Phoenix, AZ: Midtowne II and Bella Vista Place 2. Kearney Mesa, CA: Aero Drive 3. Houston, TX (Harris County) 4. Petersburg, AK 5. Safford, AZ 6. Sante Fe, NM 7. Buffalo, NY 8. Gauthersburg, MD 9. Albuquerque, NM 10. Savannah, GA 11. Cheyenne, WY 12. College Park, MD 13. Tucson, AZ 14. Washington, D.C. (625 Indiana Ave.) 15. Washington, D.C. (20 Mass. Ave.) 16. Golden, CO 17. Germantown, MD 18. Falls Church, VA 19. Oxon Hill, MD 20. San Diego, CA (DEA) 21. San Diego, CA (DFAS) 22. Oklahoma City, OK 23. Falling Waters, WY 24. Kansas City, MO 25. Kansas City, KS 26. Richland, WA 26. Los Angeles, CA (MEPS) EXHIBIT B Assumed Contracts Property Management Agreement, dated as of June 16, 1994, between GovProp Funding, L.P. and Rosecliff Realty Inc., as amended. Property Management Agreement, dated as of February 7, 1995, between Rosecliff Realty Richland Inc. and Rosecliff Realty Inc. (Richland, WA). Property Management Agreement, dated as of July 27, 1995, between Rosecliff Realty College Park I, LLC and Rosecliff Realty Inc. (College Park, MD). Property Management Agreement, dated as of October 13, 1995, between Rosecliff Realty Kansas City, Inc., and Rosecliff Realty Inc. (Kansas City, MO). Property Management Agreement, dated as of September 7, 1995, between Rosecliff Realty III, Inc. and Rosecliff Realty Inc. (Oklahoma City, OK). Property Management Agreement, dated as of September 7, 1995, between Rosecliff Realty IV, Inc. and Rosecliff Realty Inc. (Falling Waters, WV). Property Management Agreement, dated as of March 13, 1996, between Rosecliff Realty Buffalo, Inc. and Rosecliff Realty Inc. (Buffalo, NY). Property Management Agreement, dated as of December 23, 1995, between Roseview San Diego Limited Partnership and Rosecliff Realty Inc. (San Diego, CA (DEA)), as amended. Property Management Agreement, dated as of July 19, 1996 between Rose Group LLC and Rosecliff Realty Inc. (San Diego, CA (DFAS)). Development & Management Agreement, dated as of August 22, 1996, between Imperial Industrial Group and Rose Group LLC (San Diego, CA (DFAS)). EX-27 3
5 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 71,765 0 116,941 0 0 0 1,621,522 99,746 1,851,294 0 538,591 0 0 988 1,228,243 1,851,294 0 145,695 0 76,697 0 0 24,955 77,477 0 77,477 0 (1,102) 0 77,477 0.86 0.86
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