-----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, UmP5sUQRgt8fBBTBF211eyzBAkmCQGocHCnM7eDWtml78m6y2F1hKFzEwJ8U+evg aJgInvmXOMnA2MNCz1AYrw== 0000908737-98-000212.txt : 19980302 0000908737-98-000212.hdr.sgml : 19980302 ACCESSION NUMBER: 0000908737-98-000212 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980227 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19980227 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: 8-K SEC ACT: SEC FILE NUMBER: 001-09317 FILM NUMBER: 98552482 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 8-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): February 27, 1998 HEALTH AND RETIREMENT PROPERTIES TRUST (Exact name of registrant as specified in its charter) Maryland 1-9317 04-6558834 (State or other (Commission (IRS Employer jurisdiction of File Number) Identification No.) incorporation) 400 Centre Street, Newton, MA 02158 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 617-332-3990 THIS CURRENT REPORT CONTAINS FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED OR PROJECTED. INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE REGISTRANT UNDERTAKES NO OBLIGATION TO PUBLISH REVISED FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. Item 5. Other Events Management's Discussion and Analysis of Financial Condition and Results of Operations The following information is provided in connection with the financial statements filed as Item 7 to this Current Report and should be read in conjunction with the financial statements and notes thereto included elsewhere herein. Results of Operations Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Total revenues for the year ended December 31, 1997 increased to $208.9 million from $120.2 million for the year ended December 31, 1996. Rental income increased by $90.0 million and interest and other income decreased by $1.3 million. Rental income increased because of new real estate investments in 1997, and partly as a result of the Company's increased investments in "gross leased" real estate assets as compared to "net leased" 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 primarily as a result of prepayments and repayments of mortgage investments, which was offset, in part, by an increase in earnings on the Company's short-term investments in the 1997 period compared to the 1996 period. Total expenses for the year ended December 31, 1997 increased to $114.5 million from $55.5 million for the year ended December 31, 1996. Operating expenses increased by $23.0 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 $14.2 million due to higher borrowings during the 1997 period. Depreciation and amortization, and general and administrative expenses increased by $17.2 million and $4.6 million, respectively, primarily as a result of new real estate investments in 1997 and 1996. Net income increased to $114.0 million, or $1.24 per basic share for the 1997 period, from $73.3 million, or $1.11 per basic share for the 1996 period. Net income increased primarily as a result of new investments in 1997 and 1996. In addition, net income increased as a result of a $2.9 million gain on sale of properties, the recognition of a $9.3 million gain on equity transaction of the Company's formerly wholly owned subsidiary Hospitality Properties Trust ("HPT") during the 1997 period compared to a $3.6 million gain in the 1996 period, and by an extraordinary loss of $1.1 million during the 1997 period compared to a $3.9 million extraordinary loss during the 1996 period, both resulting from the early extinguishment of debt. HPT is a real estate investment trust investing principally in income producing hotel real estate. The Company's investment in HPT is accounted for using the equity method. The Company's business goal is to maximize funds from operations ("FFO") rather than net income. The Company's Board of Trustees considers FFO, among other factors, when determining dividends to be paid to shareholders. The Company has adopted the National Association of Real Estate Investment Trust's ("NAREIT") definition of FFO as income before equity in earnings of HPT, gain (loss) on HPT's equity transaction, gain (loss) on sale of real estate and extraordinary items, plus depreciation, other non-cash items and the Company's proportionate share of HPT's FFO. Funds from operations for the year ended December 31, 1997, were $146.3 million, or $1.59 per basic share, versus $99.1 million, or $1.50 per basic share, in 1996. Funds from operations for 1997 increased $47.2 million, or 47.6%, over the prior year. The increase is the result of new investments in 1997 and 1996. Dividends declared for the years ended December 31, 1997 and 1996 were $144.3 million, or $1.46 per basic share, and $94.3 million, or $1.42 per basic share, respectively. Dividends in excess of net income constitute a return of capital. For 1997, the return of capital portion reported was 17.4% of dividends and the long-term capital gain portion was 1.7% of dividends. Cash flow provided by operating activities and cash available for distribution 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. 1 HEALTH AND RETIREMENT PROPERTIES TRUST Management's Discussion and Analysis of Financial Condition and Results of Operations Cash flows provided by (used for) operating, investing and financing activities were $185.7 million, ($815.2) million and $630.0 million, respectively, for the year ended December 31, 1997 and $98.3 million, ($235.3) million and $140.2 million, respectively, for the year ended December 31, 1996. The increases in all three categories are primarily the result of new real estate investments in 1997. Year Ended December 31, 1996 Compared to Year Ended December 31, 1995 Total revenues for the year ended December 31, 1996 were $120.2 million, an increase of $6.9 million over the year ended December 31, 1995. Rental income increased to $98.0 million from $90.2 million and interest and other income decreased to $22.1 million from $23.1 million. Rental income increased as a net result of new real estate investments during 1996, offset by the exclusion of rental revenue from HPT. During 1995, HPT completed its initial public offering and the Company's investment in HPT is accounted for using the equity method and the 1996 period does not include revenue and expenses of HPT. Interest and other income decreased as a net result of the scheduled and early repayment of mortgage loans acquired from the Resolution Trust Company in 1992 and 1993. The Company anticipates that such prepayments will continue and consequently interest income will decline in the future. This interest income decline was partially offset in 1996 by short-term investment income on excess cash which resulted from the Company's issuance of convertible debentures during the fourth quarter of 1996. Total expenses for 1996 increased to $55.5 million from $54.7 million in 1995. The increase of $0.8 million is the net result of higher operating, general and administrative expenses during the 1996 period. Interest expense declined due to lower borrowings and lower interest rates during 1996 as compared to 1995. Depreciation expense was essentially unchanged as the net result of new real estate investments during 1996 which was offset by the HPT transaction described above. Amortization expense declined due to the write-off of deferred finance fees in March 1996 and October 1996. Net income for 1996 increased to $73.3 million, or $1.11 per basic share, from $64.2 million, or $1.08 per basic share, in 1995. These increases are primarily the result of net new real estate investments and the recognition of the gain on the equity transaction of HPT. Cash flows provided by (used for) operating, investing and financing activities were $98.3 million, ($235.3) million and $140.2 million, respectively for the year ended December 31, 1996 and $82.3 million, ($190.3) million and $68.8 million, respectively, for the year ended December 31, 1995. Liquidity and Capital Resources Total assets of the Company increased to $2.1 billion at December 31, 1997 from $1.2 billion as of December 31, 1996. The increase is primarily attributable to the Company's new real estate investments during 1997. During 1997, the Company acquired three nursing properties, one retirement community, 22 medical and other office buildings and 20 medical clinics for an aggregated amount of $554.8 million and provided debt financing and improvement funding totaling $4.8 million to its existing properties. These transactions were funded by borrowing on the Company's revolving credit facility and available cash. In addition, the Company sold 14 nursing properties for $33.5 million, which resulted in a gain of $2.9 million. During 1997, the Company received regularly scheduled principal payments and prepayment on real estate mortgages of approximately $49.5 million. In February 1997, the Company agreed to acquire 30 office buildings (the "Government Properties") leased to various agencies of the United States Government. As of December 31, 1997, the Company had completed the purchase of 29 of the Government Properties for $439.5 million and elected not to acquire one of the Government Properties under development. 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 4,019,429 common shares of the Company in a private placement and the assumption of $27.6 million of debt. Subsequently, in January 1998, the Company sold one of the Government Properties for $5.7 million; no gain or loss was recognized on the sale of this property. 2 HEALTH AND RETIREMENT PROPERTIES TRUST Management's Discussion and Analysis of Financial Condition and Results of Operations At December 31, 1997, the Company owned 4.0 million, or 10.3%, of the common shares of beneficial interest of HPT with a carrying value of $111.1 million and a market value of $131.5 million. During December 1997, HPT completed a public stock offering of 12.0 million common shares of beneficial interest at a per share price of $33.0625 for total consideration of approximately $396.8 million. As a result of this transaction, the Company's ownership percentage in HPT was reduced from 14.9% to 10.3% and the Company realized a gain of $9.3 million. Although the Company did not sell any shares, pursuant to the Company's accounting policy, gains and losses on the issuance of common shares of beneficial interest by HPT are recognized in the Company's income statement. These amounts are not included in the Company's calculation of FFO. In March 1997, the Company issued 27,025,000 common shares and received net proceeds of $483.2 million. The proceeds were used to acquire the Government Properties. In March 1997, the Company extended and modified its $250.0 million unsecured revolving bank credit facility. Subsequently, in July 1997, the Company expanded the credit facility to $450.0 million. The revolving bank credit facility matures in 2001 and bears interest at LIBOR plus a premium. During July 1997, the Company issued senior unsecured Remarketed Reset Notes (the "Notes") totaling $200.0 million. The Notes are due in 2007 and the initial interest rate is LIBOR plus a premium, reset quarterly. In July 1998, these Notes may be prepaid without a premium, or the interest rate and interest period on these Notes may be fixed for the balance of the term or a lesser period at the Company's option and the Notes will be remarketed. Proceeds from the issuance of the Notes were used to prepay $125.0 million of the Company's Floating Rate Senior Notes, Series B, due 1999 and $75.0 million outstanding under the Company's revolving bank credit facility. In connection with this refinancing, the Company recognized an extraordinary loss of $1.1 million from the write-off of unamortized deferred financing costs. In December 1997, the Company issued unsecured Senior Notes totaling $150.0 million. The notes bear interest at 6.75% and mature in 2002. Net proceeds from the notes were used for general business purposes and to repay $140.0 million then outstanding under the Company's revolving bank credit facility. At December 31, 1997, the Company had $22.4 million of cash and cash equivalents and had drawn $200.0 million of the $450.0 million revolving bank credit facility. In addition, in May 1997, the Company filed a $1.0 billion Shelf Registration Statement (the "Shelf") that has been declared effective by the Securities and Exchange Commission. At December 31, 1997, $800.0 million was available to be drawn on the Shelf. As of December 31, 1997, the Company had commitments to provide improvement financing to existing properties and to purchase ten medical and other office buildings totaling approximately $92.1 million. The Company intends to fund these commitments with a combination of cash on hand, amounts available under its existing credit facility, proceeds of mortgage prepayments, if any, and/or proceeds of other financings such as the possible issuance of additional securities. In January and February 1998, the Company acquired ten medical and other office buildings for $81.6 million with available cash and by borrowing on the Company's revolving bank credit facility. During February 1998, the Company issued 5,495,776 common shares, issued additional Notes totaling $50.0 million and issued 6.7% unsecured Senior Notes due 2005 totaling $100.0 million. Net proceeds of $253.3 million were used to repay amounts outstanding under the Company's revolving credit facility and for general business purposes. The Company continues to seek new investments to expand and diversify its portfolio of real estate. The Company believes that the transactions described above will improve the security of its future funds from operations, cash available for distribution, and dividends. As of December 31, 1997, the Company's debt as a percentage of total book capitalization was approximately 38%. There can be no assurances that debt or equity financing will be available to fund the Company's existing commitments or its future growth, but the Company expects such financing will be available. 3 HEALTH AND RETIREMENT PROPERTIES TRUST Management's Discussion and Analysis of Financial Condition and Results of Operations Impact of Inflation Management believes that the Company may not be adversely affected by modest 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 fixed rent terms. In the health care and hotel industries, inflation usually increases the lessees' revenues, thereby increasing the Company's additional rent or interest. 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 expectation 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" and the ability to access capital markets depends upon various factors over which the Company and/or the Company's lessees 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 in federal, state and local legislation and other factors. The Company cannot 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 its estimates and assumptions are reasonable and prudent at this time. The Company's Year 2000 initiative is being managed by the Company to minimize any adverse effect on the Company's business operations and is scheduled to be completed in 1999. While the Company believes its planning efforts are adequate to address its Year 2000 concerns, there can be no guarantee that the systems of other companies on which the Company's systems and operations rely will be converted on a timely basis and will not have a material effect on the Company. The cost of the Year 2000 initiatives is not expected to be material to the Company's results of operations or financial position. 4 HEALTH AND RETIREMENT PROPERTIES TRUST
Item 7. Financial Statements and Exhibits (a) Financial Statements Report of Ernst & Young LLP, Independent Auditors...............................................F-1 Report of Arthur Andersen LLP, Independent Public Accountants...................................F-2 Consolidated Balance Sheets for the years ended December 31, 1997 and 1996......................F-3 Consolidated Statements of Income for each of the three years in the period ended December 31, 1997..............................................................F-4 Consolidated Statements of Shareholders_ Equity for each of the three years in the period ended December 31, 1997..............................................................F-5 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1997.....................................................................F-6 Notes to Consolidated Financial Statements......................................................F-8
(c) Exhibits 10.1 Master Management Agreement by and between Health and Retirement Properties Trust and REIT Management and Research, Inc., dated as of January 1, 1998 10.2 Parking Operation Management Agreement by and between HUB Properties Trust, a subsidiary of Health and Retirement Properties Trust, and REIT Management and Research, Inc., dated as of January 1, 1998 23. Consent of Ernst & Young LLP 27. Financial Data Schedule 5 REPORT OF INDEPENDENT AUDITORS To the Trustees and Shareholders of Health and Retirement Properties Trust We have audited the accompanying consolidated balance sheets of Health and Retirement Properties Trust as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements of Hospitality Properties Trust (a real estate investment trust in which the Company has a 10.3% and 14.9% interest as of December 31, 1997 and 1996, respectively) have been audited by other auditors whose report has been furnished to us; insofar as our opinion on the consolidated financial statements relates to data included for Hospitality Properties Trust, it is based solely on their report. 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 significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Health and Retirement Properties Trust at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP ERNST & YOUNG LLP Boston, Massachusetts February 9, 1998 F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Trustees and Shareholders of Hospitality Properties Trust We have audited the consolidated balance sheet of Hospitality Properties Trust (the "Company") as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows (not separately presented herein) for the years ended December 31, 1997, 1996 and the period from February 7, 1995 (inception) to December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hospitality Properties Trust as of December 31, 1997 and 1996 and the results of its operations and its cash flows for the years ended December 31, 1997 and 1996, and for the period from February 7, 1995 (inception) to December 31, 1995, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Washington, D.C. January 16, 1998 F-2
HEALTH AND RETIREMENT PROPERTIES TRUST CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) December 31, ------------------------------------- 1997 1996 ------------------------------------- ASSETS Real estate properties, at cost (including properties leased to affiliates with a cost of $112,075 and $109,843, respectively): Land $ 256,582 $ 93,522 Buildings and improvements 1,712,441 912,217 ----------- ----------- 1,969,023 1,005,739 Less accumulated depreciation 111,669 76,921 ----------- ----------- 1,857,354 928,818 Real estate mortgages and notes, net (including note from an affiliate of $2,365) 104,288 150,205 Investment in Hospitality Properties Trust 111,134 103,062 Cash and cash equivalents 22,355 21,853 Interest and rents receivable 20,455 11,612 Deferred interest and finance costs, net, and other assets 20,377 13,972 ----------- ----------- $ 2,135,963 $ 1,229,522 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Bank notes payable $ 200,000 $ 140,000 Senior notes payable, net 349,900 124,385 Mortgage notes payable 26,329 -- Convertible subordinated debentures 211,650 227,790 Accounts payable and accrued expenses 27,865 10,711 Deferred rents 30,089 7,608 Security deposits 18,767 8,387 Due to affiliates 5,103 2,593 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: 125,000,000 shares and 100,000,000 shares authorized, respectively, 98,853,170 shares and 66,888,917 shares issued and outstanding, respectively 988 669 Additional paidin capital 1,371,236 795,263 Cumulative net income 420,298 306,298 Dividends (526,262) (394,182) ----------- ----------- Total shareholders' equity 1,266,260 708,048 ----------- ----------- $ 2,135,963 $ 1,229,522 =========== ===========
See accompanying notes F-3
HEALTH AND RETIREMENT PROPERTIES TRUST CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Year Ended December 31, ----------------------------------- 1997 1996 1995 --------- ---------- --------- Revenues: Rental income $ 188,000 $ 98,039 $ 90,246 Interest and other income 20,863 22,144 23,076 --------- --------- --------- Total revenues 208,863 120,183 113,322 --------- --------- --------- Expenses: Operating expenses 26,765 3,776 644 Interest 36,766 22,545 24,274 Depreciation and amortization 39,330 22,106 22,849 General and administrative 11,670 7,055 6,914 --------- --------- --------- Total expenses 114,531 55,482 54,681 --------- --------- --------- Income before equity in earnings of Hospitality Properties Trust, gain on sale of properties and extraordinary items 94,332 64,701 58,641 Equity in earnings of Hospitality Properties Trust 8,590 8,860 3,119 Gain on equity transaction of Hospitality Properties Trust 9,282 3,603 -- --------- --------- --------- Income before gain on sale of properties and extraordinary items 112,204 77,164 61,760 Gain on sale of properties, net 2,898 -- 2,476 --------- --------- --------- Income before extraordinary items 115,102 77,164 64,236 Extraordinary items - early extinguishment of debt (1,102) (3,910) -- --------- --------- --------- Net income $ 114,000 $ 73,254 $ 64,236 ========= ========= ========= Weighted average shares outstanding 92,168 66,255 59,227 ========= ========= ========= Basic and diluted earnings per common share: Income before gain on sale of properties and extraordinary items $1.22 $1.16 $1.04 ===== ===== ===== Income before extraordinary items $1.25 $1.16 $1.08 ===== ===== ===== Net income $1.24 $1.11 $1.08 ===== ===== =====
See accompanying notes F-4
HEALTH AND RETIREMENT PROPERTIES TRUST CONSOLIDATED 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, 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 Issuance of shares 475,000 5 6,985 -- -- 6,990 Conversion of convertible subordinated debentures 679,441 7 11,860 -- -- 11,867 Stock grants 44,310 -- 730 -- -- 730 Net income -- -- -- 73,254 -- 73,254 Dividends -- -- -- -- (70,385) (70,385) ----------- ----------- ----------- ----------- ----------- ----------- Balance at December 31, 1996 66,888,917 669 795,263 306,298 (394,182) 708,048 Issuance of shares to acquire real estate 3,985,028 40 76,521 -- -- 76,561 Issuance of shares 27,025,000 270 482,883 -- -- 483,153 Conversion of convertible subordinated debentures 910,379 9 15,756 -- -- 15,765 Stock grants 43,846 -- 813 -- -- 813 Net income -- -- -- 114,000 -- 114,000 Dividends -- -- -- -- (132,080) (132,080) ----------- ----------- ----------- ----------- ----------- ----------- Balance at December 31, 1997 98,853,170 $ 988 $ 1,371,236 $ 420,298 $ (526,262) $ 1,266,260 =========== =========== =========== =========== =========== ===========
See accompanying notes F-5
HEALTH AND RETIREMENT PROPERTIES TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) Year Ended December 31, ----------------------------------- 1997 1996 1995 ----------------------------------- Cash flows from operating activities: Net income $ 114,000 $ 73,254 $ 64,236 Adjustments to reconcile net income to cash provided by operating activities: Gain on sale of properties (2,898) -- (2,476) Equity in earnings of Hospitality Properties Trust (8,590) (8,860) (3,119) Gain on equity transaction of Hospitality Properties Trust (9,282) (3,603) -- Dividends from Hospitality Properties Trust 9,800 9,360 960 Extraordinary items 1,102 3,910 -- Depreciation 37,619 21,265 21,048 Amortization 1,711 841 1,801 Amortization of deferred interest costs 699 1,444 1,529 Change in assets and liabilities: Increase in interest and rents receivable and other assets (5,273) (7,839) (1,639) Increase (decrease) in accounts payable and accrued expenses 10,832 6,033 (11,427) Increase in deferred rents 22,481 689 6,919 Increase in security deposits 10,380 1,001 3,586 Increase in due to affiliates 3,119 823 843 --------- --------- --------- Cash provided by operating activities 185,700 98,318 82,261 --------- --------- --------- Cash flows from investing activities: Real estate acquisitions and improvements (548,465) (225,428) (267,470) Acquisition of business, less cash acquired (337,400) -- -- Investments in mortgage loans (520) (17,191) (24,375) Proceeds from repayment of notes and mortgage loans, net of discounts 48,245 8,091 38,107 Proceeds from sale of real estate 22,898 -- 5,000 Proceeds from Hospitality Properties Trust initial public offering -- -- 60,000 Loans to affiliate -- (800) (1,565) --------- --------- --------- Cash used for investing activities (815,242) (235,328) (190,303) --------- --------- --------- Cash flows from financing activities: Proceeds from issuance of common shares 483,153 6,990 97,944 Proceeds from borrowings 784,900 481,000 219,000 Payments on borrowings (501,261) (247,070) (166,000) Deferred finance costs incurred (4,668) (7,320) (1,666) Dividends paid (132,080) (93,377) (80,473) --------- --------- --------- Cash provided by financing activities 630,044 140,223 68,805 --------- --------- --------- Increase (decrease) in cash and cash equivalents 502 3,213 (39,237) Cash and cash equivalents at beginning of period 21,853 18,640 57,877 --------- --------- --------- Cash and cash equivalents at end of period $ 22,355 $ 21,853 $ 18,640 ========= ========= ========= Supplemental cash flow information: Interest paid $ 34,425 $ 19,662 $ 22,783 ========= ========= =========
See accompanying notes F-6
HEALTH AND RETIREMENT PROPERTIES TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) Year Ended December 31, ---------------------------------------------------- 1997 1996 1995 ---------------------------------------------------- Non-cash investing activities: Real estate acquisitions $ (11,616) $ -- $ (24,444) Exchange of real estate 11,616 -- -- Acquisition of business, less cash acquired: Real estate acquisitions $ 439,498 $ -- $ -- Working capital, other than cash 2,051 -- -- Liabilities assumed (27,588) -- -- Net cash used to acquire business (337,400) -- -- ---------------------------------------------------- Issuance of shares $ 76,561 $ -- $ -- ==================================================== Sale of real estate -- -- 19,500 Investment in real estate mortgages -- -- (19,500) Investment in Hospitality Properties Trust -- -- (100,000) Non-cash financing activities: Issuance of common shares $ 16,578 $ 12,597 $ 24,838 Conversion of convertible subordinated debentures, net (15,765) (11,867) --
See accompanying notes F-7 HEALTH AND RETIREMENT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Organization Health and Retirement Properties Trust, a Maryland real estate investment trust (the "Company"), was organized on October 9, 1986. As of December 31, 1997, the Company had investments in 217 properties located in 33 states and the District of Columbia. The properties include 92 long-term care facilities, 58 medical office and other office buildings and clinics, 29 government office buildings, 26 retirement and assisted living communities and 12 nursing homes with subacute services. In addition, at December 31, 1997, the Company had a 10.3% equity investment in Hospitality Properties Trust ("HPT"). At December 31, 1997, HPT owned 119 hotels in 30 states. Note 2. Summary of Significant Accounting Policies Basis of Presentation. The consolidated financial statements include the Company's investment in 100% owned subsidiaries. The Company's investment in 50% or less owned companies is accounted for using the equity method. All inter-company transactions have been eliminated. The Company uses the income statement method to account for issuance of common shares of beneficial interest by HPT. Under this method, gains and losses reflecting changes in the value of the Company's ownership stake on issuance of stock by HPT are recognized in the Company's income statement. Real Estate Property and Mortgage Investments. Real estate properties and mortgages are recorded at cost. Depreciation on real estate investments is provided for on a straight-line basis over the estimated useful lives ranging up to 40 years. Impairment losses on investments are recognized where indicators of impairment are present and the undiscounted cash flow (net realizable value) estimated to be generated by the Company's investments are less than the carrying amount of such investments. The determination of net realizable value includes consideration of many factors including income to be earned from the investment, holding costs (exclusive of interest), estimated selling prices, and prevailing economic and market conditions. 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 the respective loans. Accumulated amortization at December 31, 1997 and 1996 was $1.8 million and $1.2 million, respectively. 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. Earnings Per Common Share. Basic earnings per common share is computed using the weighted average number of shares outstanding during the period. At December 31, 1997 and 1996, $211.7 million and $227.8 million of convertible securities were convertible into 11.8 million and 12.7 million shares of the Company, respectively. Basic earnings per share equals diluted earnings per share as the effect of these convertible securities is anti-dilutive to diluted earnings per share. Supplemental income per share for the years ended December 31, 1997, and 1995 was $1.25 and $1.11, respectively, based on the assumption that the issuance of shares in the Company's public offerings during 1997 and 1995, and the related repayment of outstanding bank borrowings, took place at the beginning of each year. 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 provided it distributes its 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. F-8 HEALTH AND RETIREMENT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS New Accounting Pronouncements. 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 "Disclosures About Segments of an Enterprise and Related Information" ("FAS 131"). FAS 128 and FAS 129 were adopted for the Company's 1997 financial statements. The adoption of each of these statements had no impact on the Company's financial statements. FAS 130 and FAS 131 must be adopted for the Company's 1998 financial statements. The Company anticipates that FAS 130 and FAS 131 will have no impact on the Company's financial condition or results of operations. Note 3. Real Estate Properties In February 1997, the Company agreed to acquire 30 office buildings (the "Government Properties") leased to various agencies of the United States Government through the acquisition of Government Properties Investors, Inc. ("GPI"). The acquisition was accounted for as a purchase and the net assets and results of operations have been included in the consolidated financial statements since the date of acquisition. As of December 31, 1997, the Company completed the purchase of 29 of the Government Properties for approximately $439.5 million and elected not to acquire one of the Government Properties. 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 4,019,429 common shares of the Company in a private placement and the assumption of $27.6 million of debt. In September 1997, the Company sold 14 nursing properties for $33.5 million and purchased three nursing properties which were mortgage financed by the Company for $15.7 million. In connection with the sale of the nursing properties, the company recognized a gain of $2.9 million. Also during the year ended December 31, 1997, the Company acquired one retirement community, 22 medical and other office buildings and 20 medical clinics for an aggregate amount of approximately $539.1 million in 13 separate transactions. In addition, the Company funded improvements to its existing properties of approximately $4.3 million. In January and February 1998, the Company acquired seven medical and other office buildings for $71.6 million. In addition, the Company sold one of the Government Properties for $5.7 million. No gain or loss was recognized on the sale of this property. The Company's real estate properties are leased on a gross lease, modified gross lease or triple net lease basis, pursuant to noncancellable, fixed term operating leases expiring from 1998 to 2022. Generally, the Company's triple net leases to a single tenant are cross-collateralized, cross-defaulted and cross-guaranteed and generally provide for renewal terms at existing rates followed by several market rate renewal terms. The triple net leases generally require the lessee to provide all property management services. The Company's gross leases and modified gross leases require the Company to provide certain property management services. The Government Properties and certain medical and other office properties owned by the Company are managed by M&P Partners Limited Partnership ("M&P"), an affiliate of the Company. The future minimum lease payments to be received by the Company during the current terms of the leases as of December 31, 1997, are approximately $223.6 million in 1998, $216.5 million in 1999, $208.8 million in 2000, $199.1 million in 2001, $185.4 million in 2002 and $1.4 billion thereafter. Note 4. Investment in Hospitality Properties Trust At December 31, 1997, the Company owned 4,000,000 common shares of beneficial interest of HPT with a carrying value of $111.1 million and a market value, based on quoted market prices, of $131.5 million. HPT is a real estate investment trust which invests principally in income producing hotel real estate. The Company's percentage of ownership of HPT as of December 31, 1997 was 10.3%. During December 1997, HPT completed a public stock offering of common F-9 HEALTH AND RETIREMENT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS shares. As a result of this transaction, the Company's ownership percentage in HPT was reduced from 14.9% to 10.3% in 1997 and the Company realized a gain of $9.3 million. Although the Company did not sell any shares, pursuant to the Company's accounting policy, gains and losses on the issuance of common shares of beneficial interest by HPT are recognized in the Company's income statement. Summarized financial data of HPT is as follow (dollars in thousands, except per share amounts):
February 7, 1995 (inception) to December 31, Year Ended December 31, December 31, ----------------------------- -------------------------- 1997 1996 1997 1996 1995 ----------------------------- ------------------------------------------- Real estate properties, net $1,207,868 $816,469 Revenues $114,132 $ 82,629 $ 23,642 Other assets, net 105,388 55,134 Expenses 54,979 30,965 12,293 -------------------------- ---------------------------------------- $1,313,256 $871,603 Net income $ 59,153 $ 51,664 $ 11,349 ========================== ======================================== Security deposits $ 146,662 $ 81,360 Average shares 27,530 23,170 4,515 ======================================== Other liabilities 158,701 145,035 Net income per share $2.15 $2.23 $2.51 ======================================== Shareholders' equity 1,007,893 645,208 -------------------------- $1,313,256 $871,603 ==========================
Note 5. Real Estate Mortgages and Notes Receivable, Net
December 31, ---------------------------- 1997 1996 (dollars in thousands) ---------------------------- Mortgage notes receivable, net of discounts of $209 and $1,574, respectively, and net of reserves of $927 and $1,743, respectively, due February 1998 through December 2016 $ 40,301 $ 58,750 Mortgage notes receivable due December 2010 19,185 19,358 Mortgage notes receivable, repaid in 1997 -- 15,444 Mortgage notes receivable due December 2002 12,240 12,309 Mortgage notes receivable due January 2013 11,466 11,500 Mortgage notes receivable, repaid in January 1998 11,472 11,500 Mortgage note receivable, repaid in 1997 -- 10,000 Mortgage notes receivable due December 2016 7,063 8,634 Other collateralized notes receivable due January 1999 196 345 Loan to an affiliate due June 1998 2,365 2,365 -------- -------- $104,288 $150,205 ======== ========
During 1997, the Company received regularly scheduled principal payments of $1.2 million and prepayments of mortgages secured by 19 nursing facilities of $48.3 million. The Company also provided improvement financing for existing mortgaged properties of $0.5 million. At December 31, 1997, the interest rates on the mortgages and notes receivable ranged from 8.02% to 13.75% per annum. In January and February 1998, the Company received $20.1 million from the repayment of mortgage loans secured by three retirement facilities and two nursing facilities. F-10 HEALTH AND RETIREMENT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 6. Shareholders' Equity During 1997, the Company issued 27,025,000 common shares in a public offering, raising net proceeds of approximately $483.2 million, issued 3,985,028 common shares in a private placement for the purchase of real estate, issued 910,379 common shares in exchange for the conversion of $16.1 million 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 January 1998, the Company issued 34,401 common shares in connection with the purchase of real estate. In January 1998, the Company declared a dividend of $.37 to be distributed on February 20, 1998. Dividends per share paid by the Company for 1997, 1996 and 1995 were $1.45, $1.41 and $1.37, respectively. The Company adopted a Shareholders Rights Plan ("Rights"). Each Right entitles the holder to purchase or to receive securities or other assets of the Company, upon the occurrence of certain events. The Rights expire on October 17, 2004 and are redeemable at the Company's option at any time. The Company has reserved 1,000,000 shares of the Company's common shares under the terms of the 1992 Incentive Share Award Plan (the "Award Plan"). During 1997, 1996 and 1995, 9,500, 7,250 and 8,500 shares, respectively, were granted to officers of the Company and certain employees of the Advisor. In addition, 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, 1997, 856,944 shares of the Company's common shares remain reserved for issuance under the Award Plan. Note 7. Commitments and Contingencies At December 31, 1997, the Company had total commitments aggregating $92.1 million to fund or finance improvements to certain properties leased or mortgaged by the Company and to purchase ten medical and other office buildings. The medical and other office buildings were purchased for $71.6 million in January and February 1998. The Company is involved in litigation with a former tenant. The amounts claimed against the Company are material. The Company intends to defend itself and to pursue its claims and rights against the former tenant. The outcome of this pending litigation cannot be predicted. Lessee's and mortgagors' of the Company's long-term care facilities and nursing facilities are dependent upon 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 8. Transactions with Affiliates As of January 1, 1998, the Company entered into an agreement with REIT Management and Research, Inc. ("RMR"), an affiliate of the Company, and the Advisor. RMR provides investment, management, property management services for some of the recently acquired Government Properties and medical and other office buildings and administrative services to the Company. During the three years ended December 31, 1997, such services were provided by the Advisor and M&P on similar terms. RMR is owned by Gerard M. Martin and Barry M. Portnoy, who also serve as Managing Trustees of the Company. RMR is compensated at an annual rate equal to .7% of the Company's real estate investments up to $250.0 million and .5% of such investments thereafter plus property management fees equal to three percent of gross rents from the managed properties. RMR is also entitled to an incentive fee comprised of restricted shares of the Company's common stock based on a formula. Incentive fees paid to the Advisor for the years ended December 31, 1997, 1996 and 1995 were $1.0 million, $0.6 million and $0.6 million, which represent approximately 52,316, 32,846 and 35,560 common shares, respectively. At December 31, 1997, the Advisor owned 1,082,056 common shares. F-11 HEALTH AND RETIREMENT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Messrs. Martin and Portnoy are principal shareholders of Connecticut Subacute Corporation ("CSC"), Connecticut Subacute Corporation II, New Hampshire Subacute Corporation and Vermont Subacute Corporation (collectively the "Subacute Entities"). The Subacute Entities are lessees of the Company. The Company has extended a $4.0 million line of credit to CSC. At December 31, 1997 and 1996, there was $2.4 million outstanding under this agreement. The lease and mortgage transactions with the Subacute Entities 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. 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, ------------------------------- 1997 1996 1995 (dollars in thousands) ------------------------------- Investment advisory fees earned by the Advisor $ 8,620 $ 5,349 $ 5,763 Dividends paid to the Advisor 1,557 1,467 1,383 Rent and interest income from Subacute Entities 13,616 12,981 12,015 Management fees earned by M&P 2,382 371 56 Note 9. Indebtedness
December 31, --------------------------- 1997 1996 (dollars in thousands) --------------------------- $450,000 unsecured revolving bank credit facility, due March 2001, at LIBOR plus a premium $200,000 $140,000 Senior Notes, Series B, repaid in 1997 -- 125,000 Senior Notes, due 2002 at 6.75% 150,000 -- Remarketed Reset Notes, due 2007 at LIBOR plus 0.45% 200,000 -- Mortgage Notes Payable, due 2008 at 8.00% 13,958 -- Mortgage Notes Payable, due 2009 at 7.66% 12,371 -- Convertible Subordinated Debentures, due 2003 at 7.50% 171,650 187,790 Convertible Subordinated Debentures, due 2001 at 7.25% 40,000 40,000 --------------------------- 787,979 492,790 Less unamortized discounts (100) (615) --------------------------- $787,879 $492,175 ===========================
In March 1997, the Company extended and modified its $250.0 million unsecured revolving bank credit facility. Subsequently, in July 1997, the Company expanded the credit facility to $450.0 million. The credit facility matures in 2001 and bears interest at LIBOR plus a premium. The rate was 6.8% at December 31, 1997. During July 1997, the Company issued senior unsecured Remarketed Reset Notes totaling $200.0 million. The notes are due in 2007 and the initial interest rate is LIBOR plus a premium. The rate was 6.2% at December 31, 1997. Proceeds from F-12 HEALTH AND RETIREMENT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS the issuance of the notes were used to prepay $125.0 million of the Company's Floating Rate Senior Notes, Series B, due 1999 and approximately $75.0 million outstanding under the Company's bank credit facility. In connection with this refinancing, the Company recognized an extraordinary loss of $1.1 million from the early extinguishment of debt as a result of the write-off of unamortized issuance costs associated with the prepaid debt. In December 1997, the Company issued unsecured Senior Notes totaling $150.0 million, at a discount (.067%). The notes bear interest at 6.75% and mature in 2002. Net proceeds from the notes were used to repay $140.0 million then outstanding under the Company's bank credit facility and for general business purposes. During 1997, approximately $16.1 million of the Convertible Subordinated Debentures (the "Debentures") due 2003 had been converted into 910,379 common shares of the Company. The Debentures are callable in October 1999 and are convertible at any time into common shares of the Company at $18 per share. During January 1998, approximately $.8 million of the Debentures due 2003 were converted into 31,387 common shares of the Company. At December 31, 1997, three properties with an aggregate net book value of $41.5 million were secured by mortgages due in 2008 and 2009. The required principal payments due during the next five years are $1.5 million in 1998, $1.7 million in 1999, $1.8 million in 2000, $241.9 million in 2001, $152.1 million in 2002 and $389.0 million thereafter. 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, senior notes, mortgage notes payable, convertible debentures, accounts payable and other accrued expenses, letter of credit and security deposits. Except as follows, the fair values of the financial instruments were not materially different from their carrying values at December 31, 1997: Carrying Amount Fair Value (dollars in thousands) -------------------------------- Real estate mortgages and notes $104,288 $110,140 Investment in HPT 111,134 131,500 Senior notes, mortgage notes payable and convertible debentures 587,879 591,190 Commitments -- 92,096 Letter of credit -- 1,653 The fair values of the real estate mortgages, senior notes, mortgage notes payable and convertible debentures 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 quoted per share price of $32.875 at December 31, 1997. The fair value of the commitments and letter of credit represents the actual amounts committed. F-13 HEALTH AND RETIREMENT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 11. Concentration of Credit Risk The Company's assets are primarily invested in income producing real estate located throughout the United States. The Company's significant lessees, mortgagees and equity investment are as follows:
Equity Investment, Notes, Mortgages and Real Estate Equity Earnings, Rent and Properties, Net Mortgage Interest Revenue ----------------------------- ----------------------------- December 31, 1997 Year Ended December 31, 1997 (dollars in thousands) (dollars in thousands) ----------------------------- ----------------------------- Amount % of Total Amount % of Total ----------------------------- ----------------------------- United States Government $ 433,223 21% $ 43,388 20% Marriott International, Inc. 299,893 15 30,365 14 Integrated Health Services, Inc. 172,834 8 27,041 13 Other 1,166,826 56 112,281 53 ----------------------------- ----------------------------- $2,072,776 100% $213,075 100% ============================= ============================= Equity Investment, Notes, Mortgages and Real Estate Equity Earnings, Rent and Properties, Net Mortgage Interest Revenue ----------------------------- ----------------------------- December 31, 1997 Year Ended December 31, 1997 (dollars in thousands) (dollars in thousands) ----------------------------- ----------------------------- Amount % of Total Amount % of Total ----------------------------- ----------------------------- Marriott International, Inc. $ 307,219 26% $ 30,524 24% Horizon/CMS Healthcare Corporation 114,008 10 16,180 13 GranCare, Inc. 87,184 7 15,491 13 Other 673,674 57 63,047 50 ----------------------------- ----------------------------- $1,182,085 100% $125,242 100% ============================= =============================
F-14 HEALTH AND RETIREMENT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 12. Selected Quarterly Financial Data (Unaudited) The following is a summary of the unaudited quarterly results of operations of the Company for 1997 and 1996. The amounts are in thousands except for per share amounts.
1997 ----------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------------------------------------------------------ Revenues $ 35,884 $ 52,507 $ 57,304 $ 63,168 Income before equity in earnings of HPT, gain on equity transaction of HPT, gain on sale of properties and extraordinary items 17,143 25,669 26,186 25,334 Equity in earnings and gain on equity transaction of HPT 2,256 2,189 2,238 11,189 Income before gain on sale of properties and extraordinary items 19,399 27,858 28,424 36,523 Gain on sale of properties -- -- 2,898 -- Income before extraordinary items 19,399 27,858 31,322 36,523 Extraordinary items - early extinguishment of debt -- -- (1,102) -- Net income 19,399 27,858 30,220 36,523 Per share data: Income before equity in earnings of HPT, gain on equity transaction of HPT, gain on sale of properties and extraordinary items .24 .26 .26 .26 Income before gain on sale of properties and extraordinary items .27 .28 .29 .37 Income before extraordinary items .27 .28 .32 .37 Net income .27 .28 .31 .37 1996 ----------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------------------------------------------------------ Revenues $ 28,480 $ 29,624 $ 29,917 $ 32,162 Income before equity in earnings of HPT and gain on equity transaction of HPT 16,120 16,623 16,157 15,801 Equity in earnings and gain on equity transaction of HPT 2,092 5,839 2,301 2,231 Income before extraordinary items 18,212 22,462 18,458 18,032 Extraordinary items - early extinguishment of debt (2,443) -- -- (1,467) Net income 15,769 22,462 18,458 16,565 Per share data: Income before equity in earnings of HPT and gain on equity transaction of HPT .24 .25 .24 .24 Income before extraordinary items .28 .34 .28 .27 Net income .24 .34 .28 .25
F-15 HEALTH AND RETIREMENT PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 13. Pro Forma Information (Unaudited) The following unaudited condensed Pro Forma Statements of Income assumes the acquisition of GPI described in Note 3 had occurred on January 1, 1996. These pro forma statements are not necessarily indicative of the expected results of operations 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, ------------------------------------------------ 1997 1996 ---- ---- (dollars in thousands, except per share amounts) ------------------------------------------------ Total revenues $221,051 $176,125 Income before extraordinary items $119,988 $102,711 Net income $118,886 $ 98,801 Income before extraordinary items per basic share $1.29 $1.46 Net income per basic share $1.28 $1.41
F-16 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/ Ajay Saini Ajay Saini, Treasurer and Chief Financial Officer Date: February 27, 1998 EX-10.1 2 EXHIBIT 10.1 MASTER MANAGEMENT AGREEMENT THIS MASTER MANAGEMENT AGREEMENT (this "Agreement") is made and entered into as of the 1st day of January, 1998 and effective as of the Effective Date (as defined below), by and among REIT Management and Research, Inc., a Delaware corporation ("Managing Agent"), and the parties identified on the signature page of this Agreement as Owners (each, an "Owner" and, "collectively, "Owners"). W I T N E S S E T H : WHEREAS, Owners are the owners of those premises described on Exhibit A, attached hereto and made a part hereof (collectively, the "Managed Premises"); and WHEREAS, Owners desire 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, Owners and Managing Agent hereby agree as follows: 1. Engagement. Subject to the terms and conditions hereinafter set forth, Owners hereby employ Managing Agent with respect to the Managed Premises. 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. Managing Agent may, with Owners' consent, subcontract out some or all of its obligations hereunder to third party managers; provided, however, that, in any such event, Managing Agent shall be and remain primarily liable to Owners for performance hereunder. Notwithstanding anything to the contrary set forth in this Agreement, the services to be provided by Manager hereunder shall exclude all services (including, without limitation, any garage management or cafeteria management services) whose performance by an advisor to any Owner could give rise to an Owner's receipt of "impermissible tenant service income" as defined in ss.856(d)(7) of the Internal Revenue Code (as amended or superseded hereafter) or could in any other way jeopardize an Owner's federal or state tax classification as a real estate investment trust. Manager shall not perform any such service and if, in any event, Manager shall inadvertently perform any such service, no compensation therefor shall be paid or payable hereunder. 2. General Parameters. 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 -2- 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. Wages, benefits and other related costs of centralized accounting personnel and employees employed by Managing Agent and assigned to work exclusively or partly at the Managed Premises shall be fairly apportioned and reimbursed, pro rata, by Owners in addition to the Fee and Construction Supervision Fee (as defined in Section 5). 3. Duties. Without limitation, Managing Agent agrees to perform the following specific duties: (a) To seek tenants for the Managed Premises in accordance with the rental schedule established by the applicable Owner and to negotiate leases including renewals thereof and to lease in the applicable Owner's name space on a lease form approved by such Owner, only to tenants, at rentals, and for periods of occupancy all as are approved in each case by the applicable 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 the applicable Owner. The legal expenses of negotiating such leases and leasing such space shall be approved and paid by the applicable Owner. (b) To collect all rents and other income from the Managed Premises and to give receipts therefor, both on behalf of Owners, and deposit such funds in such banks and such accounts as are named, from time to time, by Owners, in agency accounts for and under the name of Owners. Managing Agent shall be empowered to sign disbursement checks on these accounts. (c) 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 the applicable Owner. (d) For Owners' account and at its expense, to hire, supervise and discharge employees as required for the efficient operation and maintenance of the Managed Premises. (e) To obtain, at Owners' expense, appropriate insurance for the Managed Premises protecting Owners and Managing Agent while acting on behalf of Owners against all normally insurable risks relating to the Managed Premises and complying with the requirements of Owners' 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. (f) To promptly notify the applicable Owner and its insurance carriers, as required by the applicable policies, of any casualty or injury to person or property at the -3- Managed Premises, and complete customary reports in connection therewith. (g) To procure seasonably all supplies and other materials necessary for the proper operation of the Managed Premises, at Owners' expense. (h) To pay promptly from rental receipts, other income derived from the Managed Premises, or other monies made available by Owners for such purpose, all costs incurred in the operation of the Managed Premises which are expenses of Owners hereunder, including wages or other payments for services rendered, invoices for supplies or other items furnished in relation to the Managed Premises, and pay over forthwith the balance of such rental receipts, income and monies to Owners or as Owners 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, Owners shall pay promptly the amount of the deficiency thereof to Managing Agent upon receipt of statements therefor.) (i) To advise Owners promptly of any material developments in the operation of the Managed Premises that might affect the profitable operation of the Managed Premises. (j) To establish, in Owners' name and with Owners' approval, reasonable rules and regulations for tenants of the Managed Premises. (k) At the direction of the applicable Owner and with counsel selected by such Owner, to institute or defend, as the case may be, any and all legal actions or proceedings (in the name of such Owner if necessary) relating to operation of the Managed Premises. (l) To maintain the books and records of Owners reflecting the management and operation of the Managed Premises, making available for reasonable inspection and examination by Owners or its representatives, all books, records and other financial data relating to the Managed Premises. (m) 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. (n) To aid, assist and cooperate with Owners in matters relating to taxes and assessments and insurance loss adjustments, notify the Owners of any tax increase or special assessments relating to the Managed Premises and, with Owners' approval, to enter into contracts for tax abatements services. -4- (o) To provide such emergency services as may be required for the efficient management and operation of the Managed Premises on a 24-hour basis. (p) To enter into contracts for utilities (including, without limitation, water, fuel, electricity and telephone) and for building services (including, without limitation, cleaning of windows, 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. (q) To seek the lowest competitive price commensurate with desired quality for all items purchased or services contracted by it under this Agreement. (r) To take such action generally consistent with the provisions of this Agreement, as Owners might with respect to the Managed Premises if personally present. 4. Authority. Owners give to Managing Agent the authority and powers to perform the foregoing duties on behalf of Owners subject, however, to Owners' approval as specified. Owners further authorize Managing Agent to incur such reasonable expenses, specifically contemplated in Section 2, on behalf of Owners as are necessary in the performance of those duties. 5. 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 Owners' prior approval in each case: (a) Terminate tenancies and sign and serve in the name of Owners such notices therefor as may be required for the proper management of the Managed Premises. (b) With counsel selected by Owners, and at Owners' 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. 6. Compensation. (a) In consideration of the services to be rendered by the Managing Agent hereunder, Owners agree to pay and the Managing Agent agrees to accept as its sole compensation (i) a management fee (the "Fee") equal to three percent (3%) of the gross collected rents actually received by Owners 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 Owners in connection with occupancy of the Managed Premises, but excluding any amounts collected from tenants to reimburse Owners for the cost of capital improvements or for expenses incurred in curing any tenant default or in enforcing any -5- remedy against any tenant; and (ii) a construction supervision fee (the "Construction Fee") in connection with all interior and exterior construction renovation or repair activities at the Managed Premises, including, without limitation, all tenant and capital improvements in, on or about the Managed Premises, undertaken during the term of this Agreement, other than ordinary maintenance and repair, equal to five percent (5%) of the cost of such construction which shall include the costs of all related professional services and the cost of general conditions. (b) The Fee shall be due and payable monthly, in arrears based on a reasonable annual estimate or budget with an annual reconciliation within thirty (30) days after the end of each calendar year. The Construction Fee shall be due and payable periodically, as agreed by Managing Agent and Owners, based on actual costs incurred to date. (c) Notwithstanding anything herein to the contrary, Owners 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; provided, however, that, reasonable travel expenses shall not include expenses incurred for travel to and from the Managed Premises by personnel assigned to work exclusively at the Premises. (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 Owners 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 Owners of legal fees, accounting fees, salaries, wages, fees and charges of parties hired by the Managing Agent on behalf of Owners 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 Owners, 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 Owners' prior written consent, which consent shall not be unreasonably withheld. In addition, Managing Agent shall, at its expense, assume Owners' obligations under the contracts and agreements listed as Exhibit B, attached hereto and made a part hereof. 7. Contracts. Managing Agent shall not, without the prior consent of Owners, enter into any contracts on behalf of Owners which extend beyond the then current term of this Agreement. -6- 8. 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 Owners or Managing Agent to the other. This Agreement may be terminated with respect to less than all of the properties comprising the Managed Premises. 9. Termination or Expiration. Upon termination or expiration of this Agreement with respect to any of the Managed Premises for any reason whatsoever, Managing Agent shall promptly turn over to Owners all books, papers, funds, records, keys and other items relating to the management and operation of such Managed Premises, including, without limitation, all leases in the possession of the Managing Agent and shall render to Owners a final accounting with respect thereto through the date of termination. 10. Assignment of Rights and Obligations. (a) Without Owners' 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 Owners. (b) Owners, without Managing Agent's consent, may assign its rights and obligations hereunder to any mortgagee with respect to, or successor Owners of, the Managed Premises, but not otherwise. (c) Consistent with the foregoing paragraphs (a) and (b), the terms "Owners" and "Managing Agent" as used in this Agreement shall mean the original parties hereto and their respective mortgagees, successors, assigns, heirs and legal representatives. 11. Fidelity Bond. Owners, at Owners' expense, may require that employees of Managing Agent who handle or are responsible for Owners' money to be bonded by a fidelity bond in an amount sufficient in Owners' 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. 12. Indemnification and Insurance. (a) Owners agree 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, -7- 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) Owners agrees that required insurance shall include, at Owners' 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 Owners. (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. 13. 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. 14. Limitation of Liability. (a) No partner of Owners or Managing Agent shall be personally liable hereunder, all such liability being limited in the case of Owners to the interest of Owners in the Managed Premises and in the case of Managing Agent, to its interest hereunder. (b) The Declarations of Trust establishing some Owners, a copy of which, together with all amendments thereto (the "Declarations"), is duly filed with the Department of Assessments and Taxation of the State of Maryland, provides that the names of such Owners refers to the trustees under such Declarations collectively as trustees, but not individually or personally, and that no trustee, officer, shareholder, employee or agent of such Owners shall be held to any personal liability, jointly or severally, for any obligation of, or claim against, such Owners. All persons dealing with such Owners, in any way, shall look only to the respective assets of such Owners for -8- the payment of any sum or the performance of any obligation of such Owners. In any event, all liability of such Owners hereunder is limited to the interest of such Owners in the Managed Premises and, in the case of Managing Agent, to its interest hereunder. (c) It is the intention of the parties hereto that each Owner be liable hereunder only with respect to the Managed Premises owned by such Owner and that each Owner be solely responsible for liabilities incurred with respect only to its properties and receive all income therefrom. 15. 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. Additional properties may be added to the scope of this Agreement by substituting for Exhibit A to this Agreement a revised Exhibit A including such property or properties, provided that such replacement Exhibit A shall be initialed by Owners and Managing Agent. 16. Independent Contractor. This Agreement is not one of general agency by Managing Agent for Owners, 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 Owners and Managing Agent for any purposes whatsoever. 17. Law Governing. This Agreement shall be governed by and in accordance with the laws of The Commonwealth of Massachusetts. 18. Effective Date. The "Effective Date" of this Agreement shall be, with respect to any property listed on Exhibit A, the later to occur of January 1, 1998 and the date on which such property shall be added to Exhibit A. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as a sealed instrument as of the date above first written. MANAGING AGENT: REIT MANAGEMENT AND RESEARCH, INC. By: /s/ David M. Lepore Its (Vice) President OWNERS: TRUSTEES OF HARVARD STREET REALTY TRUST By: /s/ David J. Hegarty As Trustee and not individually -9- HUB PROPERTIES TRUST By: /s/ David J. Hegarty Its President HRPT MEDICAL BUILDING REALTY TRUST By: /s/ David J. Hegarty As Trustee and not individually CAUSEWAY HOLDINGS, INC. By: /s/ David J. Hegarty Its President HUB LA LIMITED PARTNERSHIP By: HUB LA Properties Trust, its general partner By: /s/ David J. Hegarty Its President 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 -10- HUB REALTY III, INC. By: /s/ David J. Hegarty Its President 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 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 -11- HUB RI PROPERTIES TRUST By: /s/ David J. Hegarty Its President HUB WOODMONT LIMITED LIABILITY COMPANY By: HUB Woodmont Properties Trust, managing member By: /s/ David J. Hegarty Its President
EXHIBIT A Managed Premises Owner (abbreviated) Hub Prop. Trust Sorrento Valley, 5555, San Diego, CA 5601, 5626 Hub Prop. Trust Torrey Pines, 3030-50 San Diego, CA Science Park Hub Prop. Trust Fair Oaks Fairfax, VA Hub Prop. Trust 145 University Avenue Westwood, MA Hub Prop. Trust 1145 19th Street Washington, DC Hub Prop. Trust 443 Gulph Road King of Prussia, PA Hub Prop. Trust 515 Penn Avenue Ft. Washington, PA Hub Prop. Trust 525 Virginia Avenue Ft. Washington, PA Hub Prop. Trust 1035 Virginia Avenue Ft. Washington, PA Hub Prop. Trust 723 Drescher Road Horsham, PA Hub Prop. Trust 7 W. 34th Street New York, NY Hub Prop. Trust One Franklin Plaza Philadelphia, PA Hub Prop. Trust 100 South Charles St., Baltimore, MD Tower II Hub Prop. Trust 710N/230S. Euclid & Anaheim, CA 1085 N. Harbor Hub Prop. Trust 6300 Bridgepoint Pkwy Austin, TX Hub Prop. Trust 2141 K Street, N.W. Washington, DC Hub Prop. Trust 3043 Walton Road Plym. Meeting, PA Hub Prop. Trust 475 Virginia Drive Ft. Washington, PA Hub Prop. Trust 6937 N. IH Austin, TX Hub Prop. Trust 4 Maguire Road Lexington, MA Hub Prop. Trust 210 Mall Blvd. King of Prussia, PA Hub Prop. Trust 216 Mall Blvd. King of Prussia, PA Hub Woodmont 1401 Rockville Pike Rockville, MD HR Fndg Inc. 15 Twelfth Street Petersburg, AK HR Fndg Inc. 8900 Lakes at 610 Houston, TX Business Park HR Fndg Inc. 711 14th Avenue Safford, AZ HR Fndg Inc. 220 E. Bryan Street Savannah, GA HR Fndg Inc. 435 Montano Boulevard Albuquerque, NM HR Fndg Inc. 9797 Aero Drive San Diego, CA HR Fndg Inc. 5353 North Yellowstone Cheyenne, WY Drive HR Fndg Inc. 1474 Rodeo Road Santa Fe, NM HR Fndg Inc. 820 West Diamond Ave. Gaithersburg, MD HR Fndg Inc. 20400 Century Blvd. Germantown, MD HR Fndg Inc. 6710 Oxon Hill Drive Oxon Hill, MD HR Buffalo Inc. 138 Delaware Avenue Buffalo, NY H.Grpp LLC 4181 Ruffin Road San Diego, CA Hub LA LP Cedar Sinai I Los Angeles, CA Hub LA LP Cedar Sinai II Los Angeles, CA HR Richland Inc. 2420 & 2430 Stevens Richland, WA Center Place HRPT Med. Bldg. RT 1295 Boylston Street Boston, MA HRPT Med. Bldg RT 109 Brookline Avenue Boston, MA Causeway Hldgs Inc. 251 Causeway Street Boston, MA -2- Owner (abbreviated) 47 Hvd. St. Rlty Tr. 47 Harvard Street Westwood, MA HR IV, Inc. 2029 Stonewall Jackson Falling Waters, WV Road HR III, Inc. 55 North Robinson Oklahoma City, OK HR Collg Pk I LLC 4700 River Road Riverdale, MD Hub Realty KC, Inc. 4241 N.E. 34th Street Kansas City, MO HR S. Diego I Inc. 4560 Viewridge Drive San Diego, CA HR Fndg. Inc. 5600 Columbia Pike Falls Church, VA HR Fndg. Inc. 20 Massachusetts Ave. Washington, DC HR Fndg. Inc. 625 Indiana Avenue Washington, DC HR Fndg. Inc. 400 State Avenue Kansas City, KS HR Fndg. Inc. 201 Indianola Avenue Phoenix, AZ HR Fndg. Inc. 3285 E. Hemisphere Loop Tucson, AZ HR Fndg. Inc. 5051 Rodeo Road Los Angeles, CA HR Fndg. Inc. 701 Clay Avenue Waco, TX HR Fndg. Inc. 16194 West 45th Street Golden, CO Hub Prop. Trust 830 E. Potomac Circle Aurora, CO Hub RI Prop. Trust 701 George Washington Highway Lincoln, RI
Initials: Owners: /s/ DJH Managing Agent: /s/ DML 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-10.2 3 EXHIBIT 10.2 PARKING OPERATION MANAGEMENT AGREEMENT THIS PARKING OPERATION MANAGEMENT AGREEMENT (this "Agreement") is entered into as of the 1st day of January 1998, by and between the persons identified as "Owner" on the signature page to this Agreement ("Owner"), and GARAGE MANAGEMENT, INC., a Delaware corporation ("Contractor"). In consideration of the covenants herein contained, Owner and Contractor hereby agree as follows: 1. Scope of Engagement. Owner hereby engages Contractor to provide professional parking management of the parking garages and/or areas at the premises described on Exhibit A to this Agreement (the "Managed Premises"). 2. Term. 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 Contractor to the other. This Agreement may be terminated with respect to less than all of the properties comprising the Managed Premises. 3. Independent Contractor. Contractor shall perform all of the services as an independent contractor and not as an agent of Owner. Owner shall reserve the right to instruct Contractor in writing through Contractor's agent or supervisor regarding the extent of the services and the results to be accomplished thereby; provided, however, Contractor shall have sole control, supervision, direction, and responsibility over its employees and the manner of providing the services. Except as set forth in this Agreement, Contractor shall have no authority to take any action on behalf of Owner without the express written consent of Owner. 4. Operation of the Managed Premises. For its operation of the Managed Premises, Contractor agrees to the following: (a) The Managed Premises are primarily for the convenient use and benefit of tenants and guests of the adjacent building(s) and will at all times be available to building tenants and guests (during the hours of operation) subject to Owner's right to designate special usage from time to time. (b) The Managed Premises will be operated in a manner consistent with that of first-class garages and/or areas in the area in which the Managed Premises are located. Accordingly, Contractor will staff the operation with good, experienced, professional -2- management. Contractor will operate the Managed Premises efficiently and properly through proper utilization of space, manpower and direction. (c) The Managed Premises will be open for parking as directed by Owner. (d) The Managed Premises will be maintained in a neat and clean condition, and will comply with all city, state and federal laws, rules or regulations, including, without limitation, any regulations or guidelines adopted for operation of the Managed Premises by Owner. (e) Contractor will issue permits to only those tenants designated by Owner and collect parking fees from those tenants in a manner directed by and acceptable to Owner. (f) Contractor will make recommendations, subject to Owner's approval, for operation of the Managed Premises including a system of tags, tickets or other methods best designed to indicate the number of vehicles using the Managed Premises and recommend parking rates for the Managed Premises. (g) All rates will be subject to the prior approval of Owner. (h) No signs will be erected in or about the Managed Premises without prior approval of Owner. (i) Contractor shall purchase on behalf of Owner all federal, state, and local licenses required by law to be obtained for the operation of the Managed Premises. (j) Contractor shall supervise the proper and efficient parking in the Managed Premises of the cars of members of the general public; collect parking fees from such transient parkers in accordance with rates and policies as established by Owner; issue, collect and keep safe all parking tickets received from such transient parkers; and prepare and maintain accurate reports and records on a daily basis of all such transient parking operations. In this connection, Contractor acknowledges that the primary intent for use of the Managed Premises is to serve employees, patrons, and visitors of the buildings. (k) Contractor shall supervise and control continuous daily policing of the Managed Premises and equipment; establish controls to prevent vandalism, theft, arson, damage to parked cars, and to the Managed Premises and equipment; maintain the Managed Premises as required to prevent unreasonable accumulation of debris, dust, oil, dirt, slicks, and loss of security. -3- (l) Prior to September 1st of each year, Contractor will provide Owner a budget for the ensuing year in a form reasonably satisfactory to Owner. (m) Contractor shall comply with all applicable city, county, state, and federal laws and regulations and obtain all necessary licenses, bonds and permits applicable for the Managed Premises. 5. Costs Reimbursement. (a) Owner shall pay Contractor an amount equal to the actual costs reasonably incurred and actually paid by Contractor in furnishing services under this Agreement. Costs incurred in furnishing services may include the following: (i) On-The-Job Payroll Costs. All wages and salaries for on-site personnel employed by Contractor to fulfill its obligations under this Agreement. (ii) Payroll Taxes and Other Direct Costs. All payroll taxes, whether federal, state, or local. (iii) Cost of Materials, Supplies and Equipment. The actual cost of materials, supplies, and equipment used by Contractor in the performance of duties hereunder; provided, however, that, any materials and supplies or equipment so purchased shall be mutually agreed upon by Owner and Contractor prior to such purchase. (iv) Other Items. Contractor shall contract for and purchase on authorization of Owner and at Owner's expense any other services and commodities necessary in the operation and maintenance of the Managed Premises, as well as for the making of all repairs, alterations, and decorations with respect thereto, including, without limitation, sweeping of the Managed Premises and gutters of the adjacent streets weekly; provided, however, that Contractor shall not contract for any repair or alteration, without the prior approval of Owner. (b) Payments to Contractor. As full and complete payment for services provided by Contractor under this Agreement, Owner will pay Contractor a monthly management fee of three percent (3%) of gross parking receipts for such month. (c) Payments. Payments of the charges of all items listed in this Section 5, and all disbursements which are -4- required under this Agreement, including the compensation of Contractor herein set forth, shall be made by Owner to Contractor within fifteen (15) days after the end of the month or upon receipt or the bill of expense as submitted by Contractor, whichever is later. 6. Parking Revenues. (a) All parking revenues shall belong to Owner subject to the following: (i) Contractor will keep books of accounts and records in accordance with generally accepted accounting principles to properly reflect all parking revenues with disbursements received and made in connection with the operation of the Managed Premises. Such books of accounts and records shall, at all times, during regular business hours, be open to the inspection of Owner or any of its duly appointed agents at such place as Contractor customarily maintains the same. (ii) On or before the 10th day of each month, Contractor will submit to Owner a monthly operating statement for the previous month. All operating statements will be certified as true and correct by an officer of Contractor. Such statements shall show the status of collections and expenditures and shall be supported by vouchers, canceled parking tickets, validation book slips, checks, duplicate invoices, and similar documentation shall be kept at the Managed Premises or at Contractor's principal place of business, and shall at all times during the regular business hours be open to Owner for inspection or any of its duly appointed agents. Canceled parking tickets shall be retained by Contractor for a period of thirty (30) days following the end of the month in which they are used. Contractor shall be permitted to destroy the tickets at that time, unless Owner shall have made written request for the retention of specific tickets prior to the expiration of said thirty (30) days. (b) Contractor will, at the direction of Owner: (i) give Owner a check daily in the amount of the receipts collected the previous day; or (ii) deposit daily all revenues from the Managed Premises to an account in the name of Owner at a bank designated by Owner, which revenues will be -5- the property of and for the exclusive use of Owner. Contractor will make all necessary disbursements required for the operation of the Managed Premises including, but not limited to, wages, payroll taxes and benefits, supplies, uniforms, operating repairs, cleaning, telephone, bookkeeping and accounting, accidents and other claims and expenses and other normal and usual operating costs. At the end of each month, Contractor will be paid within fifteen (15) days of receipt of the bill. (c) Contractor will reimburse Owner for Contractor theft, embezzlement or other loss of gross parking receipts by Contractor's employees or agents. (d) In order to control insurance costs, damage to parked vehicles not parked by Contractor employees, when such damage is under, Three Hundred Fifty Dollars ($350), may be paid from parking revenues. Contractor will coordinate claims relating to loss or damage to vehicles. Damage caused to cars by Contractor's employees will be the sole responsibility of Contractor. 7. Insurance. At all times during the term of this Agreement, Contractor shall carry insurance coverage naming Owner as an additional insured for the term of this Agreement and shall provide proof of such coverage upon the execution of this Agreement and at such times as Owner shall request. This insurance shall be maintained with an insurance company or companies satisfactory to Owner and qualified to do business in the jurisdiction in which the Managed Premises are located. Such insurance coverage shall include the following: (a) Worker's Compensation Insurance covering all employees subject to statutory benefits and including employer's liability coverage with a limit of at least $100,000. (b) Comprehensive general liability insurance with limits of not less than $1,000,000 covering the Managed Premises and operations, blanket contractual, garage liability and personal injury. (c) Garagekeeper's legal liability insurance covering exposure from fire and explosion, theft of an entire car, riot and civil commotion, malicious mischief and vandalism. (d) Fidelity bond of $25,000 for Contractor's employees to cover reimbursement to Owner for Contractor's employee theft, embezzlement or other loss of gross parking receipts by Contractor's employees. -6- All such insurance will be for the protection of Owner, and Owner will be named as an additional insured. Policies or certificates evidencing all insurance shall be furnished to Owner and the certificates or policies shall contain an endorsement requiring the insurance carrier to provide not less than thirty (30) days' written notice to the additional insured in the event of cancellation or material change. All of the foregoing insurance policies shall be considered as primary and any policies held or obtained by Owner shall be considered as excess and noncontributory. It is understood and agreed that Owner is responsible for providing and maintaining appropriate insurance coverage on the Managed Premises structures. 8. Indemnification. Contractor shall defend, indemnify and hold harmless Owner and its contractors, licensees, agents, servants, employees, guests, invitees, or visitors, from any and all actions, costs, claims, demands, losses and expenses, damages and liabilities of every kind and nature whatsoever whether direct, indirect or consequential (including, but not limited, to attorney's and consultant's fees and other expenses of litigation or arbitration) arising from or by reason of third party claims based, in whole or part, on any breach or alleged breach of any Contractor's obligations, a negligent act or omission or alleged negligent act or omission of Contractor arising under this Agreement, including, but not limited to, property damage, personal injury, death or contractual liabilities; provided, however, that the foregoing provision shall not be construed to make Contractor liable for any actions, costs, claims, demands, losses, expenses, damages or liabilities resulting from injuries to third parties caused by the negligence of Owner, or any of its officers, licensees, agents, servants, employees or visitors. 9. Waiver of Subrogation. Each of the parties releases the other and waives any claim for recovery for loss or damage to persons or to the property on or about the Managed Premises, arising out of or incident to fire, lightning or other perils included in the standard fire insurance extended endorsement coverage. Each party hereby agrees to obtain the appropriate consent of their respective insurers, if necessary, with respect to this waiver of subrogation; provided, however, that this paragraph shall not be construed as to in any way affect the rights of either party to recover under insurance policies insuring any matters covered by this waiver. 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 Contractor obtain a fiduciary policy of insurance. 11. Employees. (a) Contractor will employ, discharge and supervise all persons necessary for operation of the Managed Premises -7- including, without limitation, managers, attendants, cashiers or other personnel necessary for the efficient operation of the Managed Premises. (b) All personnel will be employees of Contractor and not Owner. (c) Contractor shall give notice to Owner prior to any changes in personnel or duty assignment except when such changes are made in response to an emergency situation in which case Contractor shall give notice of such changes immediately thereafter. (d) All personnel will comply with Owner's dress and appearance code which Owner will establish and may at Owner's discretion change with ninety (90) days' notice. (e) Owner shall at all times have the right to accept or reject individual Contractor personnel. Contractor will not remove personnel acceptable to Owner without Owner's express approval. Such approval will not unreasonably be withheld. 12. Uniforms and Badges. Contractor shall outfit all employees with uniforms satisfactory to Owner. The cost of such uniforms and cleaning thereof shall be at Owner's expense. 13. Right to Audit Books and Records. Upon Owner's request, either Owner's accountants or an independent accounting firm shall have the right to audit and inspect those portions of Contractor's books and records that pertain to the costs incurred in furnishing services under this Agreement. 14. 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. 15. Termination or Expiration. Upon termination or expiration of this Agreement with respect to any of the Managed Premises for any reason whatsoever, Contractor shall promptly turn over to Owner all books, papers, funds, records, keys and other items relating to the management and operation of such Managed Premises and shall render to Owner a final accounting with respect thereto through the date of termination. 16. Limitation of Liability. (a) No officer, director, trustee or partner of Owner shall be personally liable hereunder, all such liability being limited in the case of Owner to the interest of -8- Owner in the Managed Premises and in the case of Contractor, to its interest hereunder. (b) The Declarations of Trust establishing some of Owner, a copy of which, together with all amendments thereto (the "Declarations"), is duly filed with the Department of Assessments and Taxation of the State of Maryland, provides that the names of such Owner refers to the trustees under such Declarations collectively as trustees, but not individually or personally, and that no trustee, officer, shareholder, employee or agent of such Owner shall be held to any personal liability, jointly or severally, for any obligation of, or claim against, such Owner. All persons dealing with such Owner, in any way, shall look only to the respective assets of such Owner for the payment of any sum or the performance of any obligation of such Owner. In any event, all liability of such Owner hereunder is limited to the interest of such Owner in the Managed Premises. (c) It is the intention of the parties hereto that each Owner be liable hereunder only with respect to the Managed Premises owned by such Owner and that each Owner be solely responsible for liabilities incurred with respect only to its properties and receive all income therefrom. 17. 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. Additional properties may be added to the scope of this Agreement by substituting for Exhibit A to this Agreement a revised Exhibit A including such property or properties, provided that such replacement Exhibit A shall be initialed by Owner and Contractor. 18. Law Governing. This Agreement shall be governed by and in accordance with the laws of The Commonwealth of Massachusetts. 19. Effective Date. The "Effective Date" of this Agreement shall be, with respect to any property listed on Exhibit A, the later to occur of January 1, 1998 and the date on which such property shall be added to Exhibit A. -9- IN WITNESS WHEREOF, the parties hereto have executed this Agreement under seal as of the date above first written. OWNERS: HUB PROPERTIES TRUST: By: /s/ David J. Hegarty David J. Hegarty, its President MANAGER: GARAGE MANAGEMENT, INC. By: /s/ David Lepore David Lepore, its President Exhibit A Managed Premises Owner Property Address ----- ---------------- Hub Properties Trust 1145 19th Street Washington, DC EX-23 4 EXHIBIT 23 Consent Of Independent Auditors We consent to the incorporation by reference in Post-Effective Amendment No. 1 to the Registration Statement (Form S-3 No. 33-62135) of Health and Retirement Properties Trust and in the related Prospectus; in the Registration Statement (Form S-3 No. 333- 26887) of Health and Retirement Properties Trust and in the related Prospectus; and in the Registration Statement (Form S-3 No. 333-34823) of Health and Retirement Properties Trust and in the related Prospectus of our report dated February 9, 1998, with respect to the consolidated financial statements of Health and Retirement Properties Trust dated February 27, 1998, filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP ERNST & YOUNG LLP Boston, Massachusetts February 26, 1998 EX-27 5
5 1,000 Year DEC-31-1997 JAN-01-1997 DEC-31-1997 22,355 0 104,288 0 0 0 1,969,023 111,669 2,135,963 0 787,879 0 0 988 1,265,272 2,135,963 0 208,863 0 114,531 0 0 36,766 114,000 0 114,000 0 (1,102) 0 114,000 1.24 1.24
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