-----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, GmmVQG+JhAiIAzAKORB332/qRPNZnF341kt29fYFh51tZrXLu0Hf3UiPfUmSTt76 qYPXgJh6sE8jKvWSkhaRVA== 0000950135-96-004072.txt : 19960925 0000950135-96-004072.hdr.sgml : 19960925 ACCESSION NUMBER: 0000950135-96-004072 CONFORMED SUBMISSION TYPE: 424B5 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19960924 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: 424B5 SEC ACT: 1933 Act SEC FILE NUMBER: 333-02863 FILM NUMBER: 96633872 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 424B5 1 HEALTH AND RETIREMENT PROPERTIES TRUST 1 PRELIMINARY PROSPECTUS SUPPLEMENT SUBJECT TO COMPLETION, (TO PROSPECTUS DATED JUNE 25, 1996) DATED SEPTEMBER 20, 1996 $ HEALTH AND RETIREMENT PROPERTIES TRUST % CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003, SERIES A ------------------------ Health and Retirement Properties Trust (the "Company" or "HRP") is hereby offering (the "Offering") $ aggregate principal amount of its % Convertible Subordinated Debentures Due 2003, Series A (the "Debentures"). The Company is a health care real estate investment trust ("REIT") which invests principally in retirement communities, assisted living centers, nursing homes and other income producing health care related real estate. The Debentures will rank equally with other unsecured debt of the Company but will be subordinated in right of payment to Senior Indebtedness (as defined) and certain other debt. Upon completion of the Offerings (as defined) and the application of the net proceeds therefrom, the Company will have outstanding approximately $125,000,000 of indebtedness that will rank senior to the Debentures. There is no limitation on the amount of Senior Indebtedness which the Company may incur in the future. The Debentures will be convertible at any time prior to redemption or maturity into the Company's common shares of beneficial interest (the "Common Shares") at a conversion price of $ per share, subject to adjustment under certain circumstances (the "Conversion Shares"). Prior to October 1, 1999, the Debentures will not be redeemable by the Company except for certain reasons intended to protect the Company's status as a REIT. Thereafter, the Debentures will be redeemable at the option of the Company at any time upon 30 days' notice, in whole or in part, at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest thereon. Interest on the Debentures will be payable semi-annually on April 1 and October 1 each year, commencing on April 1, 1997. Concurrent with this Offering, the Company is also offering outside of the United States under Regulation S promulgated under the Securities Act of 1933, as amended (the "Regulation S Offering" and together with this Offering the "Offerings") $ aggregate principal amount of the Company's % Convertible Subordinated Debentures Due 2003, Series B (the "Regulation S Debentures"), which will be pari passu in all respects with the Debentures. See "Description of the Debentures". Prior to the Offering, there has been no public market for the Debentures. Application will be made to have the Debentures and the Conversion Shares listed on the New York Stock Exchange ("NYSE"). The Company's Common Shares are listed on the NYSE under the symbol HRP and on September 18, 1996, the reported last sale price on the NYSE of the Common Shares was $17.50 per share. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE MERIT OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL ============================================================================================== UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC(1) COMMISSIONS(2) COMPANY(3) - ---------------------------------------------------------------------------------------------- Per Debenture................................ 100% % - ---------------------------------------------------------------------------------------------- Total Debentures(4).......................... $ $ $ ============================================================================================== (1) Plus accrued interest, if any, on the Debentures from date of issuance to date of delivery. (2) For information regarding indemnification of the Underwriters, see "Underwriting". (3) Before deducting estimated expenses of $ payable by the Company. (4) The Company has granted the Underwriters a 30-day option to purchase up to $ in additional aggregate principal amount of Debentures solely to cover overallotments, if any. See "Underwriting". If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commission and Proceeds to Company will be $ , $ and $ , respectively.
------------------------ The Debentures are being offered by the several Underwriters named herein, subject to prior sale, when, as and if accepted by them and subject to certain conditions. It is expected that certificates for the Debentures will be made available for delivery on or about October , 1996, in New York, New York. NATWEST SECURITIES LIMITED MERRILL LYNCH & CO. THE DATE OF THIS PROSPECTUS SUPPLEMENT IS OCTOBER , 1996 2 INCORPORATION OF CERTAIN INFORMATION BY REFERENCE In addition to the documents incorporated by reference or deemed incorporated by reference into the prospectus dated June 25, 1996 (the "Prospectus"), which Prospectus is supplemented by this Prospectus Supplement, the following documents, which have been filed with the Securities and Exchange Commission (the "Commission") pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), are hereby incorporated in this Prospectus Supplement and specifically made a part hereof by reference: the consolidated financial statements of Marriott International, Inc. ("Marriott International"), Commission File No. 1-12188, at and for the fiscal quarters ended March 22, 1996 and June 14, 1996 incorporated herein by reference from Marriott International's Reports on Form 10-Q for such quarters. All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus Supplement and prior to the termination of the offering of the Debentures offered by the Company shall be deemed to be incorporated by reference into this Prospectus Supplement and to be a part hereof from the respective dates of filing of such documents. Any statement contained herein or in a document incorporated or deemed to be incorporated herein by reference shall be deemed to be modified or superseded for purposes of this Prospectus Supplement to the extent that a statement contained herein, or in any other subsequently filed document that also is or is deemed to be incorporated herein by reference, modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus Supplement. The Company will provide without charge to each person to whom this Prospectus Supplement is delivered, upon the written or oral request of such person, a copy of any and all of the information that has been incorporated by reference in this Prospectus Supplement (excluding exhibits unless such exhibits are specifically incorporated by reference into the information that this Prospectus Supplement incorporates). Requests for such copies should be made to the Company at its principal executive offices, 400 Centre Street, Newton, Massachusetts 02158, Attention: Investor Relations, telephone (617) 332-3990. ------------------------ FOR THE UNITED KINGDOM PURCHASERS: THE DEBENTURES MAY NOT BE OFFERED OR SOLD TO PERSONS IN THE UNITED KINGDOM EXCEPT TO PERSONS WHOSE ORDINARY ACTIVITIES INVOLVE THEM IN ACQUIRING, HOLDING, MANAGING OR DISPOSING OF INVESTMENTS (AS PRINCIPAL OR AGENT) FOR THE PURPOSES OF THEIR BUSINESS, OR OTHERWISE IN CIRCUMSTANCES WHICH WILL NOT RESULT IN AN OFFER TO THE PUBLIC IN THE UNITED KINGDOM WITHIN THE MEANING OF THE PUBLIC OFFERS OF SECURITIES REGULATIONS 1995, AND THIS PROSPECTUS SUPPLEMENT MAY NOT BE PASSED ON TO ANY PERSON IN THE UNITED KINGDOM WHO DOES NOT FALL WITHIN ARTICLE 11(3) OF THE FINANCIAL SERVICES ACT 1986 (INVESTMENT ADVERTISEMENTS) (EXEMPTIONS) ORDER 1995 OR WHO IS NOT A PERSON TO WHOM THE PROSPECTUS SUPPLEMENT MAY OTHERWISE LAWFULLY BE ISSUED OR PASSED ON. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE DEBENTURES OR COMMON SHARES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NYSE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. ii 3 - -------------------------------------------------------------------------------- SUMMARY The following summary is qualified in its entirety by the detailed information and financial statements appearing elsewhere or incorporated by reference in the accompanying Prospectus or this Prospectus Supplement. Unless otherwise noted, the information contained in this Prospectus Supplement assumes (i) that the Underwriters' over-allotment option is not exercised and (ii) completion of the Offerings and the application of the proceeds as described in "Use of Proceeds". THE COMPANY The Company is one of the largest publicly traded REITs in the United States with over 66 million Common Shares outstanding and had an equity market capitalization on September 16, 1996 of approximately $1.2 billion. The Company has investments in 163 health care related properties, located in 28 states, which are leased to or operated by over 30 separate companies. The Company's unsecured senior debt is rated "investment grade" by Standard & Poor's Ratings Services, Moody's Investors Service, Inc. and Fitch Investors Service, L.P. Approximately 84% of the Company's investments, at cost, are leased to or operated by public companies or private companies with investment grade ratings. The Company's largest tenant is Marriott International. PORTFOLIO BY OPERATOR [The pie chart shows the Company's properties by operator as of September 16, 1996 in the following percentages: Other Public Healthcare Companies (Community Care of America, GranCare, Vencor, Horizon/CMS, Integrated Health Services, Multicare, Sun Healthcare, ARV Assisted Living, Inc.)-38.990; Medical Office/Clinic Buildings (U.S. Dept. of Veterans' Affairs, Boston Children's Medical Center, Boston's Beth Israel Hospital, Harvard Community Health Plan, Dana Farber Cancer Institute, Unilab, Health Insurance Plan of Greater New York)-10.390; Marriott International-10.990; Hospitality Properties Trust-9.190; 22 Private Companies-12.090.] Approximately 81% of the Company's investments, at cost, are in nursing homes, retirement centers, specialty health and assisted living facilities. In addition to its health care property investments, the Company holds an equity investment of $100 million in Hospitality Properties Trust ("HPT"), a NYSE listed hotel REIT which was founded by the Company. PORTFOLIO BY TYPE OF PROPERTY (DOLLARS IN MILLIONS) [This pie chart describes the various uses of the Company's properties and shows the following dollar values (in millions) attributable thereto at September 16, 1996: Long Term Care - $360.4; Retirement/Assisted Living - $351.1 Medical Office/Clinic Buildings - $112.4 Specialty Health Services - $170.6 Equity Investment in HPT - $100.0] - -------------------------------------------------------------------------------- S-1 4 - -------------------------------------------------------------------------------- During the past ten years, the Company has paid 38 consecutive quarterly dividends and has increased its dividend rate 11 times. The current quarterly dividend rate is $.36/share or $1.44/share on an annualized basis. DIVIDEND GROWTH CHART [This bar chart shows the Company's dividend growth since 1987 and contains the following information: 1987-$1.06; 1988-$1.12; 1989-1.14; 1990-$1.17; 1991-$1.23; 1992-$1.26; 1993-$1.30; 1994-$1.33; 1995-$1.38; and for the quarter ending September 30, 1996 (annualized)-$1.44.] Since the Company's initial public offering in December 1986, an investment in the Common Shares has provided shareholders an average total return, assuming reinvestment of dividends and including share price appreciation, of approximately 18% per annum. The following table shows how $100 invested in Common Shares at December 17, 1986 would have grown to $499 as of September 16, 1996, as compared with the return an investor would have realized from a $100 investment in the equity securities represented by the Standard & Poor's 500 Index or the National Association of Real Estate Investments Trusts ("NAREIT") Index.
VALUE AT SEPTEMBER 16, 1996 AVERAGE ANNUAL OF A $100 INVESTMENT RETURN ON DECEMBER 17, 1986 -------------- --------------------------- HRP............................................ 18% $499 S&P Index...................................... 14 357 NAREIT Index................................... 7 193
During the 12 months ended August 31, 1996, the average trading volume of the Common Shares as reported by the NYSE was 652,994 shares/week. For the past three years, the high and low closing prices for the Company's Common Shares, on a quarterly basis, as reported by the NYSE were as follows:
HIGH LOW ------ ------ 1993 Third Quarter................. $15.13 $12.50 Fourth Quarter................ 16.75 14.00 1994 First Quarter................. 16.38 14.38 Second Quarter................ 15.38 14.00 Third Quarter................. 15.75 14.25 Fourth Quarter................ 14.88 13.00 HIGH LOW ------ ------ 1995 First Quarter................. $15.25 $13.25 Second Quarter................ 15.38 14.63 Third Quarter................. 16.38 14.88 Fourth Quarter................ 16.88 15.50 1996 First Quarter................. 17.38 16.00 Second Quarter................ 17.88 16.38 Third Quarter to September 16.......................... 18.13 16.75
- -------------------------------------------------------------------------------- S-2 5 - -------------------------------------------------------------------------------- THE DEBENTURES The following summary of certain terms of the Debentures is not complete and is qualified by all of the terms contained in the Debentures and in the Supplemental Indenture and the Indenture (as defined). Copies of such documents will be furnished to investors upon request. See "Description of the Debentures". ISSUE............................ $ of % Convertible Subordinated Debentures due 2003, Series A. MATURITY......................... October 1, 2003 (7 years). COUPON........................... % per annum, payable semi-annually on April 1 and October 1, commencing April 1, 1997. CONVERSION RIGHTS................ The Debentures are convertible at any time prior to redemption or maturity, at the holder's option, into the Company's Common Shares at a price of $ per share (the "Conversion Price"). The Conversion Price is subject to adjustment under certain conditions. USE OF PROCEEDS.................. Repayment of (i) the Series A Floating Rate Notes (as defined) and (ii) indebtedness under the Company's bank credit facility and for general business purposes. OPTIONAL REDEMPTION.............. The Debentures will not be redeemable prior to October 1, 1999 except in the event of certain tax-related events or to the extent necessary to preserve and protect the Company's status as a REIT. Thereafter, the Debentures will be redeemable at the option of the Company, in whole or in part, on 30 days' notice, at a redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest thereon. MANDATORY REDEMPTION............. The Company is not required to make any mandatory redemption or annual sinking fund payments prior to maturity of the Debentures. RESTRICTIONS ON CONSOLIDATION, MERGER OR SALE OF ALL ASSETS... The Company may not consolidate with, merge into or transfer all or substantially all of its assets to another person unless (i) such person assumes all the obligations of the Company under the Debentures and the Supplemental Indenture and the Indenture, (ii) no Default or Event of Default (each as defined) shall have occurred and be continuing and (iii) certain other conditions are met. RANKING.......................... The Debentures will be expressly subordinated to, and subject in right of payment to, the prior payment in full of the principal of, premium, if any, and interest on Senior Indebtedness. LISTING.......................... Application will be made to list the Debentures and the Conversion Shares on the NYSE. - -------------------------------------------------------------------------------- S-3 6 - -------------------------------------------------------------------------------- SELECTED FINANCIAL DATA Set forth below are selected financial data for the Company for the periods and dates indicated which have been derived from audited and unaudited financial statements. This data should be read in conjunction with, and is qualified in its entirety by reference to, the financial statements and accompanying notes incorporated by reference in this Prospectus Supplement and the Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 and its Quarterly Report on Form 10-Q/A for the fiscal quarter ended June 30, 1996 incorporated by reference in the accompanying Prospectus or this Prospectus Supplement. Amounts are in thousands, except per share information.
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, -------------------------------------------------------- ------------------------- 1991 1992 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- -------- -------- OPERATING DATA: Revenue: Rental income........ $36,806 $43,029 $46,069 $63,856 $ 89,602 $44,796 $46,277 Interest income...... 7,029 5,706 10,416 22,827 23,076 11,694 10,286 ------- ------- ------- ------- -------- ------- ------- Total revenues......... 43,835 48,735 56,485 86,683 112,678 56,490 56,563 Income before extraordinary item and gain (loss) on sale of properties... 22,079 27,243 37,738 57,878 61,760 31,500 40,674 Net income............. 22,079 27,243 33,417(1) 49,919(2) 64,236(3) 33,976 38,231 Dividends(4)........... 27,179 33,079 44,869 76,317 83,954 40,246 46,328 PER SHARE: Income before extraordinary item and gain (loss) on sale of properties... $ 1.01 $ 1.02 $ 1.10 $ 1.10 $ 1.04 $ .54 $ .61 Net income............. 1.01 1.02 .97(1) .95(2) 1.08(3) .58 .58 Dividends(4)........... 1.23 1.26 1.30 1.33 1.38 .68 .70 Average shares outstanding.......... 21,834 26,760 34,407 52,738 59,227 58,869 66,177 OTHER DATA: Funds From Operations(5)........ $30,059 $36,853 $47,578 $73,846 $ 87,967 $41,497 $49,000 AT JUNE 30, 1996 AT DECEMBER 31, ---------------------------- -------------------------------------------------------- AS 1991 1992 1993 1994 1995 ACTUAL ADJUSTED(6) -------- -------- -------- -------- -------- ---------- -------------- BALANCE SHEET DATA: Real estate properties, net...... $262,557 $310,882 $349,842 $633,513 $722,356 $ 750,766 $ 750,766 Real estate mortgages, net.................. 31,760 47,173 157,281 133,477 141,307 150,113 150,113 Total assets........... 340,718 374,468 527,662 840,206 999,677 1,043,304 1,101,304 Total borrowings....... 103,000 138,500 73,000 216,513 269,759 316,262 374,262 Total shareholders' equity............... 234,427 228,301 441,135 602,039 685,592 708,062 708,062 - --------------- (1) Includes, as an extraordinary charge, the write-off of $4.3 million in deferred finance charges (approximately $.13 per share) resulting from early extinguishment of debt. (2) Includes a gain on sale of property of $4.0 million (approximately $.08 per share), a provision for loss on sale of properties of $10.0 million (approximately $.19 per share) and, as an extraordinary charge, the write-off of deferred finance charges of $2.0 million (approximately $.04 per share) resulting from the early extinguishment of debt. (3) Includes a gain on sale of property of $2.5 million (approximately $.04 per share). (4) Amounts represent dividends declared with respect to the periods shown. (5) The Company's "Funds From Operations" represents net income (computed in accordance with GAAP), before real estate depreciation and amortization (including deferred finance charges) and includes its pro rata share of Hospitality Properties Trust's Funds From Operations. Management considers Funds From Operations to be a measure of the financial performance of an equity REIT that provides a relevant basis for comparison among REITs, and Funds From Operations is presented to assist in analyzing the performance of the Company. Funds From Operations does not represent cash flows from operating activities (as determined in accordance with GAAP) and should not be considered as an alternative to net income as an indicator of the Company's financial performance or to cash flows as a measure of liquidity. (6) Adjusted to give effect to the consummation of the Offerings and the application of the net proceeds therefrom.
- ------------------------------------------------------------------------------- S-4 7 RECENT DEVELOPMENTS Concurrent Offering of Regulation S Debentures. Concurrent with this Offering, the Company is also offering outside the United States under Regulation S promulgated under the Securities Act of 1933, as amended, $ aggregate principal amount of the Company's % Convertible Subordinated Debentures due 2003, Series B, which will be pari passu in all respects with the Debentures. NatWest Securities Limited and Merrill Lynch International are acting as managers in connection with the offering of the Regulation S Debentures. See "Underwriting" and "Use of Proceeds". From January 1, 1996 through September 16, 1996, the Company engaged in the following activities: Repayment of Secured Indebtedness. At January 1, 1996, the only outstanding secured indebtedness of the Company was a $17.6 million mortgage on one retirement living center in Arlington Heights, Illinois. The mortgage was in effect at the time the Company acquired this property. In April 1996, the Company retired this debt and the mortgage was released. Today, none of the assets of the Company or its subsidiaries are encumbered by secured indebtedness. Revolving Bank Credit Facility. The Company maintains a $250 million unsecured revolving credit facility with a syndicate of banks. This facility is used for interim acquisition funding until equity or long term debt is raised, and for working capital and general business purposes. At January 1, 1996, this facility was scheduled to mature in 1998 and drawings bore interest at LIBOR plus 125 basis points. During March 1996, this revolving bank credit facility was amended to extend the maturity until 2000 and to lower the spread for LIBOR-based borrowings to 87.5 basis points. Aggregate borrowings under the revolving bank credit facility at September 16, 1996 were $147.0 million. Some of the proceeds of the Offerings will be used to repay indebtedness outstanding under this credit facility. See "Use of Proceeds". Investments in Clinics Leased to Health Insurance Plan of Greater New York. In February and June 1996, the Company made investments totaling $19.9 million in two health clinics leased to and operated by Health Insurance Plan of Greater New York, a not-for-profit health maintenance organization which had annual revenues of approximately $1.8 billion and net worth of $155.6 million at December 31, 1995. One of these properties is located in Brooklyn, New York and contains 71,500 square feet of medical office and clinic space plus a structured parking garage. The second property is located in White Plains, New York and contains 50,000 square feet of medical office and clinic space plus a structured parking garage. The Company is actively seeking additional investments in this property sector. Initial Investment with ARV Assisted Living, Inc. In February 1996, the Company made a $5.0 million mortgage loan to ARV Assisted Living, Inc. ("ARV"). This loan is secured by a 248 unit independent living and assisted living property located in Jacksonville, Florida. ARV completed its initial public offering of common stock in 1995, and it has been rapidly expanding its assisted living business since that time. The Company has previously made significant financial investments in independent and assisted living properties, the majority of which are properties leased to Marriott International. The Company anticipates that it will make additional investments in this property sector. Increasing Investments in Medical Office Buildings. In September 1996, the Company purchased a 188,000 square foot medical office building located in Washington, DC for $24.9 million. This property, which is managed by an affiliate of HRPT Advisors, Inc. ("Advisors"), the investment advisor to the Company, is leased to approximately 60 tenants and includes underground parking. The Company made its initial investments in multi-tenant medical office buildings in September 1995 when it purchased two such properties with 387,000 square feet located in Boston, Massachusetts for $48.3 million. These Boston properties are leased principally to Harvard Medical School-affiliated teaching hospitals and their affiliates. The Company anticipates that it will make additional investments in this property sector. Improvement Financings. In the ordinary course of its business the Company occasionally provides financing for improvements to properties owned or mortgaged by the Company. When such improvement funding is provided, the rent or interest payable to the Company is correspondingly increased. From January 1, 1996 to September 16, 1996, such improvement funding totaled $6.1 million. At September 16, 1996, the S-5 8 Company had outstanding commitments to provide such improvement funding in the future totaling $18.6 million. Mortgage Repayments and Prepayments. In the ordinary course of business the Company receives regular payments and occasional prepayments of principal which reduce the outstanding balances of its owned mortgage portfolio. From January 1, 1996 though September 16, 1996, these repayments and prepayments totaled approximately $8.7 million. Discussions with Horizon/CMS Healthcare Corporation. During 1995 Horizon/CMS Healthcare Corporation ("Horizon") announced its intention to discontinue operations at certain properties, including eight properties owned by the Company. The Company has invested $117.8 million, at cost, in these eight properties. During 1996 Horizon and others have initiated occasional discussions with the Company concerning the possibility of another healthcare operating company assuming financial responsibility for the rents due for these eight properties, but no agreements have yet been achieved. Horizon is contractually responsible for the rents for three of these properties, representing a $35.8 million investment, through 1999 and for the remaining five properties through 2006. The Company has the right to approve any new tenants for all eight of these properties. Based upon information provided to it, the Company believes the operating cash flow of these properties is currently not sufficient to cover the rent due the Company. However, these eight properties are subject to cross default provisions with five additional properties leased by Horizon from the Company, and Horizon has guaranteed these rental obligations. According to Horizon's Form 10-K for the fiscal year ended May 31, 1996, Horizon had a net worth of $651.3 million and net cash provided by operating activities during such fiscal year was $32.6 million. The Company believes that Horizon will continue to meet its obligations with respect to these properties. Transactions with Community Care of America, Inc. The Company has invested $107.5 million, at cost, in nursing homes and other properties operated by Community Care of America, Inc. ("CCA"), of which $25.8 million has occurred in 1996. In July 1996, CCA announced that it was taking a pre-tax charge of $17.2 million to write down its investments in certain properties and other assets. CCA has stated to the Company that none of these write downs arose in connection with any property leased from or mortgage financed by the Company. In August 1996, CCA advised the Company that it was considering several financing alternatives and requested that the Company agree to defer lease and interest payments due from CCA on or about September 1 and October 1, 1996 until November 1996. The Company agreed to that request. The Company currently holds a cash security deposit of over $6 million to secure CCA's obligations and, based upon information provided to it, the Company believes that its owned and mortgaged properties operated by CCA produced operating cash flow in excess of 1.5 times the rents and mortgage payments due to the Company for the twelve months ended June 30, 1996. Discussions with GranCare, Inc. The Company has invested approximately $98.0 million, at cost, in properties leased to or mortgaged by GranCare, Inc. ("GranCare"). GranCare is a NYSE-listed company. In September 1996, GranCare announced that it had entered into an agreement to spin off to its shareholders all of its nursing home operations and to merge its pharmacy operations with another public company. GranCare has advised the Company that the Company's approval will be required for GranCare to effect the proposed spin off and merger transaction. Because discussions with GranCare have only recently begun, the Company is unable to state whether or on what terms the Company may consent to the proposed GranCare transaction. Based upon information provided to it, the Company believes that its owned and mortgaged properties operated by GranCare produced operating cash flow in excess of 1.7 times the rents and mortgage payments due to the Company for the twelve months ended June 30, 1996. Other Transactions. In the ordinary course of its business, the Company regularly evaluates investment opportunities and enters into contracts to purchase and lease or mortgage finance real estate. Several such possible investments are currently under consideration and at various stages of the contractual process. Similarly, the Company is regularly engaged in discussions concerning lease and loan extensions and other modifications of the terms of existing leases and mortgages. The Company does not believe the consummation of any one or all of such various pending transactions would have a material impact upon its financial condition or operations. S-6 9 THE COMPANY The Company invests principally in retirement communities, assisted living centers, nursing homes and other income producing health care related real estate. At September 16, 1996, the Company had investments in 163 health care related properties in 28 states throughout the United States, which are leased to or operated by over 30 separate companies. LOCATION OF COMPANY PROPERTIES [The map of the United States set forth below shows the states in which the Company owns properties shaded in gray as noted in the location table on S-7]
TOTAL NUMBER OF INVESTMENT STATE PROPERTIES (IN THOUSANDS) - ----- ---------- -------------- Arizona................ 5 $ 28,062 California............. 15 77,263 Colorado............... 11 37,067 Connecticut............ 9 89,401 District of Columbia... 1 25,001 Florida................ 7 147,923 Georgia................ 6 17,625 Illinois............... 2 39,453 Iowa................... 13 21,558 Kansas................. 8 11,088 Louisiana.............. 1 19,398 Maryland............... 1 33,080 Massachusetts.......... 8 145,637 Michigan............... 2 9,361 Missouri............... 3 5,612 Nebraska............... 16 16,170 New Hampshire.......... 1 3,689 New Jersey............. 1 13,007 New York............... 2 19,893 North Carolina......... 9 23,191 Ohio................... 6 22,983 Pennsylvania........... 2 18,482 South Dakota........... 3 7,589 Texas.................. 6 16,893 Vermont................ 8 29,763 Virginia............... 3 57,666 Washington............. 1 5,193 Wisconsin.............. 9 44,063 Wyoming................ 4 8,406 --- ---------- Total Health Care Related Properties... 163 $ 994,517 HPT Investment......... 100,000 ---------- Total Investments...... $1,094,517
S-7 10 DISTRIBUTIONS The Company has paid 38 consecutive quarterly dividends since its initial public offering in December 1986. The regular quarterly dividend of $.36 per share for the period ending September 30, 1996 will be paid on or about November 22, 1996 to shareholders of record on October 17, 1996. The Company intends to continue to declare and pay future dividends in cash on a quarterly basis, but may, from time to time, declare and pay special dividends. There can be no assurance that the Company will be able to increase its quarterly dividend or maintain it at the current level. Payment of dividends by the Company is subject to continued compliance with certain restrictions contained in the Company's loan agreements. In the past, the Company's dividends have been based upon Funds From Operations, which has exceeded earnings. 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. Management expects that the Company will continue to pay dividends based upon Funds From Operations and that such dividends may exceed earnings. Accordingly, the Company expects a portion of the Company's dividends on Common Shares to be considered a return of capital which may not be subject to income tax until the shares are sold. Information about dividends on a quarterly basis is summarized in the following table: DECLARED DIVIDENDS PER SHARE(1)
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 ------ ----- ----- ----- ----- ----- ----- ----- ----- ---- First Quarter......... $ .275(2) $ .28 $ .28 $ .29 $ .30 $ .31 $ .32 $ .33 $ .34 $.35 Second Quarter........ .26 .28 .28 .29 .31 .31 .32 .33 .34 .35 Third Quarter......... .27 .28 .29 .29 .31 .32 .33 .33 .35 .36 Fourth Quarter........ .28 .28 .29 .30 .31 .32 .33 .34 .35 ------ ----- ----- ----- ----- ----- ----- ----- ----- Total................. $1.085 $1.12 $1.14 $1.17 $1.23 $1.26 $1.30 $1.33 $1.38 - --------------- (1) Dividends are generally paid in the quarter following declaration. With respect to dividends paid in 1987, 1988, 1989, 1990, 1991, 1992, 1993, 1994, 1995 and the first three quarters of 1996, $.289, $.065, $.332, $.267, $.104, $.218, $.335, $.081, $.161 and $.105 (estimated), respectively, represent a return of capital. (2) Includes $.025 for the period from December 23, 1986 (commencement of the Company's operations) through December 31, 1986.
S-8 11 CAPITALIZATION The capitalization of the Company as of June 30, 1996 and as adjusted to give effect to the completion of the Offerings and the application of the net proceeds therefrom is as follows (see "Use of Proceeds"):
JUNE 30, 1996 ----------------------------------------- 100% ACTUAL AS ADJUSTED CONVERSION ---------- ----------- ---------- (DOLLARS IN THOUSANDS) % Convertible Subordinated Debentures due 2003...... $ -- $ 250,000 $ -- Bank notes payable..................................... 117,000 -- -- Notes and bonds payable, net........................... 199,262 124,262 124,262 Shareholders' equity: Preferred Shares of Beneficial Interest, par value $.01 per share; 50,000,000 authorized, none issued............................................ -- -- -- Common Shares of Beneficial Interest, par value $.01 per share; 100,000,000 shares authorized; 66,209,476 shares issued and outstanding and as adjusted; shares as converted........... 662 662 Additional paid-in capital........................... 783,258 783,258 Cumulative net income................................ 271,275 271,275 271,275 Dividends............................................ (347,133) (347,133) (347,133) ---------- ---------- ---------- Total shareholders' equity................... 708,062 708,062 951,812 ---------- ---------- ---------- Total capitalization......................... $1,024,324 $1,082,324 $1,076,074 ========== ========== ==========
RATIO OF EARNINGS TO FIXED CHARGES Set forth below are the ratios of earnings to fixed charges for the Company for the periods indicated:
SIX MONTHS ENDED JUNE 30, ---------------------------------- YEAR ENDED DECEMBER 31, 1996 ---------------------------------------- ---------------------- 1991 1992 1993 1994 1995 1995 ACTUAL AS ADJUSTED ---- ---- ---- ---- ---- ---- ------ ----------- Ratio of Earnings to Fixed Charges.................. 2.8x 3.6x 6.8x 6.7x 3.4x 3.6x 4.6x
For the purpose of calculating the ratio of earnings to fixed charges, income before gain (loss) on sale of properties and extraordinary items has been added to fixed charges, and that sum has been divided by such fixed charges. Fixed charges consist of interest expense and amortization of deferred financing costs. USE OF PROCEEDS The net proceeds to the Company from the Offerings are expected to be approximately $ million ($ million if the overallotment option is exercised in full). Net proceeds from the Offerings will be used to redeem the Company's Series A Floating Rate Senior Notes, Due 1999 in the aggregate original principal amounts of $75,000,000 (the "Series A Floating Rate Notes"), plus accrued and unpaid interest thereon, on or about January 13, 1997, although the Company may choose to redeem the Series A Floating Rate Notes at a later quarterly interest payment date. At September 16, 1996, the interest rate applicable to the Series A Floating Rate Notes was 6.74% per annum. Net proceeds will also be used to reduce amounts outstanding under the Company's credit facilities and for working capital and other general business purposes. At September 16, 1996, $147 million was outstanding under the Company's revolving credit facility. Under the terms of the revolving credit facility, the Company may draw up to $250 million. Outstanding amounts bear interest, at the Company's option, at prime or a spread over LIBOR, and the revolving credit line expires in 2000. At September 16, 1996, the weighted average interest rate applicable to borrowings under the revolving credit facility was 6.33% per annum. S-9 12 INVESTMENT AND FINANCING POLICY The population of the United States is aging. According to information from the U.S. Census Bureau, the segment of the U.S. population age 65 and over is increasing and is expected to increase sharply through the year 2020. The Company believes that the demand for services provided at retirement communities, assisted living centers and nursing homes should increase as the population ages. Currently proposed federal legislation seeks to limit the amount of growth in government expenditures for Medicare and Medicaid. These limitations, if enacted, may adversely affect the profitability of health care operating companies and might, in certain circumstances, affect their ability to pay rent or service debt. These government funding limitations will likely also make it less profitable to construct new health care facilities and thus may increase the value of existing facilities. The Company believes that the net effect of both these demographics and legislative changes will be to make it less profitable to provide services and facilities for government funded patients and more profitable to provide services and facilities for non-government supported patients. The Company intends to respond to these changes in three ways: (i) by focusing new investments in properties that are not directly dependent upon a high percentage of Medicaid or Medicare revenues, including retirement housing, assisted living facilities, medical office buildings and nursing homes with a high percentage of private pay revenues; (ii) by encouraging and making funding available to the operators of the Company's existing properties to improve these properties in order to attract a greater amount of non-government revenues; and (iii) whenever possible, by making new investments in properties leased to well capitalized operators. The Company considers equity offerings when, in the Company's judgment, doing so will improve the Company's capital structure, while not materially adversely affecting the market value of its Common Shares or impeding the Company's ability to increase regularly its per share dividend rate. In addition to the use of equity, the Company utilizes short term and long term borrowings to finance investments and to pay operating expenses. The Company's unsecured senior indebtedness has been rated "investment grade" by Standard & Poor's Ratings Services (BBB-), Moody's Investors Service, Inc. (Baa3) and Fitch Investors Service, L.P. (BBB+). When variable rate debt is utilized, the Company regularly purchases interest rate futures contracts to hedge against changes in interest rates. As of June 30, 1996, the Company had outstanding borrowings totaling $316.3 million, which amount increased to $346.3 million as of September 16, 1996. After the Offerings, and assuming the use of proceeds as described under "Use of Proceeds", the Company's total debt outstanding as of June 30, 1996 will be approximately $374.3 million. The Company's borrowing guidelines established in its revolving credit facility and by its Board of Trustees prohibit the Company from maintaining a debt to equity ratio of greater than 1 to 1, except in certain limited circumstances. As of June 30, 1996, the Company's debt to equity ratio was .45 to 1. After the Offerings, and assuming the use of proceeds as described under "Use of Proceeds", the Company's debt to equity ratio as of June 30, 1996 will be approximately .53 to 1. The Company may in the future choose to modify its debt to equity guidelines. There can be no assurance that equity or debt capital will be available in the future on reasonable terms to fund the Company's operations or growth. S-10 13 LEASE EXPIRATION AND MORTGAGE MATURITY SCHEDULES The following table sets forth the expiration and maturity dates of the Company's leases and mortgages for the years from 1996 to 2005, together with the percentage of the Company's current revenues at September 16, 1996 derived from base rent and interest payments under leases and mortgages expiring or maturing in each year shown:
PERCENT OF NO. OF NO. OF COMPANY'S LEASES MORTGAGES CURRENT YEAR EXPIRING MATURING REVENUES ---- -------- --------- --------- 1996................................................. -- 4 .79% 1997................................................. 1 3 1.69 1998................................................. 4 3 5.24 1999................................................. -- 10 1.83 2000................................................. -- 2 1.06 2001................................................. 4 1 4.75 2002................................................. -- 4 1.45 2003................................................. -- -- -- 2004................................................. -- -- -- 2005 and thereafter(1)............................... 101 26 83.19 -- --- ------ Total...................................... 110 53 100.00% === == ====== - --------------- (1) The Company has a $100 million investment in HPT which currently owns 82 hotels, all of which have leases expiring after 2008. The Company's investment represents an approximately 15% ownership interest in HPT. The Company is entitled to receive dividends on its shares in HPT. The Company's financial statements include its share of HPT's operating results under the equity method of accounting.
THE LESSEES AND MORTGAGORS The Company's financial condition depends in large part upon the financial condition of the operators of the Company's properties. Approximately 84% of the Company's investments are in properties leased to or operated by public companies or private companies with investment grade ratings. Certain information about the three largest operators of the Company's properties contained in their filings with the Commission or other public sources, or provided by these companies, is set forth in the chart below. OPERATOR DATA (DOLLARS IN THOUSANDS)
COMPANY PROPERTIES --------------------------------------- TOTAL TOTAL SHARE- INVESTMENT OPERATOR FACILITIES ANNUAL HOLDERS' NET INCOME FACILITIES (% OF TOTAL (STOCK SYMBOL) (UNITS)(1) REVENUES(1) EQUITY(1) (LOSS)(1) (UNITS)(2) OCCUPANCY(1) INVESTMENT)(2) - ----------------------- ---------- ----------- ---------- ---------- ---------- ------------ --------------- Marriott International........ 974 $8,961,000 $1,054,000 $247,000 14 96% $325,520 (NYSE:MAR) (200,028) (3,932) (29.7%) Horizon/CMS Healthcare........... 578 1,753,084 651,348 (24,776) 15 91% 171,533 (NYSE:Horizon) (34,841) (2,323) (15.6%) GranCare............... 136 816,462 172,599 20,564 27 90% 97,983 (NYSE:GranCare) (17,161) (3,750) (8.9%) - --------------- (1) As of the operator's most recent fiscal year end. (2) As of September 16, 1996.
Additional Security. In addition to fee ownership of the leased properties and mortgage liens on the mortgaged properties, certain of the Company's leases and mortgages contain additional security features. Generally, with respect to investments originated by the Company, each obligation of an operator to the Company is subject to cross default provisions with respect to all other obligations of that operator to the Company and any collateral pledged by an operator to the Company constitutes collateral for all obligations of that operator. Certain operators have pledged additional collateral or provided corporate guarantees, security deposits, and, in some cases, personal guarantees. S-11 14 EQUITY INVESTMENT IN HPT The Company owns four million shares of HPT, which constitutes approximately 15% of the total HPT shares outstanding. HPT is a REIT in the business of owning hotels and leasing them to independent hotel operating companies. HPT currently owns 53 Courtyard by Marriott(R) Hotels, 11 Wyndham Garden(R) Hotels, and 18 Residence Inn by Marriott(R) Hotels. The hotels are located in 26 states and contain 11,728 rooms. The Company receives dividends on its HPT shares at the current quarterly rate of $.58/share or $2.32/share on an annualized basis. The Company's financial reports include its share of HPT's operating results under the equity method of accounting. HPT shares are listed on the NYSE and, on September 16, 1996, the last reported sale price for such shares was $26.63. MANAGEMENT The Trustees and executive officers of the Company are as follows: NAME AGE POSITION - ---- --- -------- Barry M. Portnoy................. 51 Managing Trustee Gerard M. Martin................. 61 Managing Trustee Bruce M. Gans, M.D............... 49 Trustee Rev. Justinian Manning, C.P...... 70 Trustee Ralph J. Watts................... 49 Trustee David J. Hegarty................. 39 President, Chief Operating Officer and Secretary Ajay Saini....................... 36 Treasurer and Chief Financial Officer Adam D. Portnoy.................. 26 Vice President Barry M. Portnoy has been a partner in the law firm of Sullivan & Worcester LLP, since 1978. Mr. Portnoy was a founder and has been a Trustee of the Company since its organization in 1986. From 1985 until the merger of Greenery Rehabilitation Group, Inc. ("Greenery") into Horizon in February 1994 (the "Greenery/Horizon Merger"), Mr. Portnoy served as a Director of Greenery. Following the Greenery/ Horizon Merger, Mr. Portnoy was a Director of Horizon until July 1996 and currently serves as a Managing Trustee of HPT. Gerard M. Martin is a private investor in real estate. Mr. Martin was a founder and has been a Trustee of the Company since its organization in 1986. From 1985 until the Greenery/Horizon Merger, Mr. Martin served as the Chief Executive Officer and Chairman of the Board of Directors of Greenery. Following the Greenery/Horizon Merger, Mr. Martin was a Director of Horizon until July 1996 and also serves as a Managing Trustee of HPT. Bruce M. Gans, M.D. is President of the Rehabilitation Institute of Michigan, a specialty hospital affiliated with Wayne State University School of Medicine. Dr. Gans is also a Professor and Chairman of the Department of Physical Medicine and Rehabilitation at Wayne State University School of Medicine and a Senior Vice President of the Detroit Medical Center. Prior to assuming his current position in 1989, Dr. Gans was Chairman of the Department of Rehabilitation Medicine at New England Medical Center and a Professor and Chairman of Rehabilitation Medicine at the Tufts University School of Medicine in Boston, Massachusetts. Dr. Gans is a graduate of the University of Pennsylvania School of Medicine and is active in a number of medical professional organizations including serving as the current Chairman of the Injury Prevention Grant Review Committee for the Centers for Disease Control and Prevention in Atlanta, Georgia. S-12 15 The Reverend Justinian Manning C.P. has been, since September 1993, the pastor of St. Gabriel's parish in Brighton, Massachusetts. From 1984 until September 1990, he was the Treasurer of the Provincial Council of Passionist Provincialate. He is also on the Board of Directors of Charlesview, a low and moderate income housing program, and St. Elizabeth's Hospital Foundation. He is a past Treasurer and a former Director of St. Paul's Benevolent, Educational and Missionary Institute, a New Jersey corporation, which oversees foundations in Massachusetts, Connecticut, New York, Pennsylvania, Maryland, Florida and the Institute's Overseas Missions. He was formerly on the Board of Directors of St. Paul's Monastery Manor in Pittsburgh, Pennsylvania, a congregate housing facility. He belongs to the Provincial Council of the Passionist Provincialate. Ralph J. Watts is President and Chief Executive Officer of Cardiovascular Ventures, Inc., a privately held company which develops, owns and operates outpatient cardiac catheterization laboratories and is engaged in physician practice management. Mr. Watts has held this position since 1992. From 1988 to 1992, Mr. Watts was President and CEO of Ramsay Health Care, Inc., a public company which owned and operated 18 hospitals in 13 states and had approximately 2,000 employees. David J. Hegarty is the President, Chief Operating Officer and Secretary of the Company. He has been employed by the Company in various capacities since 1987, prior to which he was an audit manager with Ernst & Young LLP. Mr. Hegarty is a certified public accountant. Ajay Saini is the Treasurer and Chief Financial Officer of the Company. Mr. Saini has been employed by the Company in various capacities since June 1990, prior to which he was a senior accountant with Ernst & Young LLP. Mr. Saini is a certified public accountant. Adam D. Portnoy is a Vice President of the Company. Mr. Portnoy has been employed by Advisors since October 1995 and is currently a Vice President. He has been a Vice President of HPT since March 1996. Prior to his employment by Advisors, Mr. Portnoy was employed as Manager of Strategic Planning for Phase Metrics, Inc. a privately held manufacturer of computer testing equipment, and as a merchant banking analyst at Donaldson, Lufkin and Jenrette Securities Corporation. Adam Portnoy is the son of Barry Portnoy. Dr. Gans, Mr. Watts and Fr. Manning are the Company's Independent Trustees, that is Trustees who are not affiliated with any of the Company's lessees or mortgagors or with Advisors. Under the Company's Declaration of Trust, a majority of the Company's Trustees will at all times consist of Independent Trustees. All investment and policy decisions affecting the Company are made by its Board of Trustees. All day to day operations of the Company are conducted by Advisors pursuant to an investment advisory contract. Advisors is owned by Messrs. Martin and Portnoy. Messrs. Hegarty and Saini, as well as all other personnel involved in the Company's operations, are employees of Advisors. Advisors is paid an annual advisory fee calculated on the basis of total assets under management (0.7% of the first $250 million, plus 0.5% of additional assets) and an annual incentive fee calculated on the basis of increases in operating cash flow per share (as defined) above threshold amounts (15% of cash flow above the threshold amount of $1.47/share in 1996, which threshold increases by $.05/share annually thereafter), but no more than $.01/share. Advisors currently owns 1,049,210 Common Shares. All incentive fees which may be earned by Advisors will be paid in Common Shares. The Company believes that its total administrative costs, measured as a percentage of assets under management or as a percentage of revenues, are below the industry average. DESCRIPTION OF THE DEBENTURES The Debentures will be issued under an Indenture to be dated as of September 20, 1996, as supplemented by the First Supplement thereto (the "Indenture"), between the Company and Fleet National Bank, as trustee (the "Trustee"). The terms of the Debentures and the Indenture include those stated in the Debentures and the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). A copy of the form of the Indenture is filed as an exhibit to the Registration Statement relating to this Prospectus Supplement and incorporated herein by reference. The following is a summary of certain provisions of the Indenture and does not purport to be complete and is qualified in its entirety by reference to the detailed provisions of the Indenture, including the definition of S-13 16 certain terms therein which reference is hereby made, for a complete statement of such provisions. Wherever particular articles or sections of the Indenture or terms defined therein are referred to herein, such provisions or definitions are incorporated herein by reference. General. The Debentures are unsecured general obligations of the Company, subject to the rights of holders of Senior Indebtedness of the Company, and will mature on October 1, 2003. The Debentures will be limited to $ million aggregate principal amount and will bear interest semiannually on April 1 and October 1 of each year commencing April 1, 1997 at the rate per annum shown on the cover page of this Prospectus Supplement. The first payment will be for the period from the date of issuance to April 1, 1997. The Company will pay interest on the Debentures to the persons who are registered holders of Debentures ("Debentureholders") at the close of business on the March 15 or September 15 preceding the interest payment date. The Company may pay principal and interest by check and may mail an interest check to a holder's registered address; provided, however, that payments to The Depository Trust Company, New York, New York (the "Debt Depositary") will be made by wire transfer of immediately available funds to the account of the Debt Depositary or its nominee. Holders must surrender Debentures to a Paying Agent to collect final principal payments. The Debentures will be in registered form, without coupons, in denominations of $1,000 and integral multiples of $1,000. A holder may transfer or exchange Debentures in accordance with the Indenture. No service charge will be made for any registration of transfer, exchange or conversion of Debentures, except for any tax or other governmental charges that may be imposed in connection therewith. The Registrar need not transfer or exchange any Debentures selected for redemption. Also, in the event of a partial redemption, it need not transfer or exchange any Debentures for a period of 15 days before selecting the Debentures to be redeemed. The registered holder of a Debenture may be treated as its owner for all purposes. The Indenture does not contain any financial covenants or restrictions on the incurrence of Senior Indebtedness or, in the absence of an Event of Default, restrictions on the payment of dividends or the issuance or repurchase of securities of the Company, except to the extent described under "--Subordination of Debentures" or "-- Dividends, Distributions and Acquisitions of Common Shares." In addition, the Indenture does not contain any provision requiring the Company to repurchase the Debentures at the option of the holders thereof in the event of a leveraged buyout, recapitalization or similar restructuring of the Company, even though the Company's creditworthiness and the market value of the Debentures may decline significantly as a result of such transaction. The Indenture does not protect holders of the Debentures against any decline in credit quality, whether resulting from any such transaction or from any other cause. Initially, Fleet National Bank will act as Paying Agent, Registrar and Conversion Agent. The Company may change any Paying Agent, Registrar, Conversion Agent or co-registrar without notice and may act in any such capacity itself. Conversion. The holders of the Debentures will be entitled at any time prior to maturity, subject to prior redemption, to convert the Debentures or portions thereof (which are $1,000 or integral multiples thereof) into Common Shares at the conversion price set forth on the cover page of this Prospectus Supplement (subject to adjustments as described below). No payment or adjustment will be made for accrued interest on a converted Debenture. If any Debenture not called for redemption is converted between a record date for the payment of interest and the next succeeding interest payment date, such Debenture must be accompanied by funds equal to the interest payable to the registered holder on such interest payment date on the principal amount so converted. The Company will not issue fractional Common Shares upon conversion of Debentures and, instead, will deliver a check for the fractional Common Shares based upon the market value of the Common Shares on the last trading day prior to the conversion date. If the Debentures are called for redemption, conversion rights will expire at the close of business on the redemption date, unless the Company defaults in payment due upon such redemption. To protect the Company's status as a REIT, a holder may not own any Debenture if as a result of such ownership any Person would then be deemed to beneficially own, directly or indirectly, 8.5% or more of the Company's Common Shares. For purposes of determining a Person's beneficial ownership of Common Shares, the Debentures beneficially owned by such Person will be deemed converted and added to the Common S-14 17 Shares beneficially owned by such Person for purposes of determining whether such Person beneficially owns in excess of 8.5% of the Common Shares. The conversion price is subject to adjustment, as set forth in the Indenture, in certain events, including the payment of dividends or distributions on the Company's shares of beneficial interest in Common Shares or other securities issued by the Company; the issuance to all holders of Common Shares of rights, options or warrants entitling them to subscribe for Common Shares (or securities convertible into Common Shares), subdivisions or combinations of the Common Shares into a greater or smaller number of shares, and reclassification of Common Shares resulting in an issuance of any of the Company's shares of beneficial interest. No adjustment is provided in the case of distributions to holders of Common Shares of assets (including securities, other than those rights, options, warrants, dividends and distributions referred to above). No adjustment in the conversion price need be made unless such adjustment would require a change of at least 1% in the conversion price; however, any adjustment that would otherwise be required to be made shall be carried forward and taken into account in any subsequent adjustment. A conversion price adjustment made according to the provisions of the Debentures (or the absence of provision for such an adjustment) might result in a constructive distribution to the holders of Debentures or holders of Common Shares that would be subject to taxation as a dividend. The Company may, at its option, make such reduction in the conversion price, in addition to those set forth above, as the Board of Trustees of the Company deems advisable to avoid or diminish any income tax to holders of Common Shares resulting from any dividend or distribution of equity securities (or rights to acquire equity securities) or from any event treated as such for income tax purposes or for any other reason. The Board of Trustees will also have the power to resolve any ambiguity or correct any error in the provisions relating to the adjustment of the conversion price of the Debentures and its actions in so doing shall be final and conclusive. If the Company combines or merges with, or sells or transfers substantially all of its assets to, another corporation or trust, the holders of the Debentures then outstanding will be entitled thereafter to convert such Debentures into the kind and amount of shares of capital stock, other securities, cash or other assets which they would have owned immediately after such event had such Debentures been converted before the effective date of the transaction. Subordination of Debentures. The indebtedness evidenced by the Debentures will be subordinated and junior in right of payment to the extent set forth in the Indenture to the prior payment in full of amounts then due on all Senior Indebtedness (as defined). No payment shall be made by the Company on account of principal of or interest on the Debentures or on account of the purchase or other acquisition of Debentures, if there shall have occurred and be continuing a default with respect to any Senior Indebtedness permitting the holders to accelerate the maturity thereof or with respect to the payment of any Senior Indebtedness, and such default shall be the subject of a judicial proceeding or the Company shall have received notice of such default from any holder of Senior Indebtedness, unless and until such default or event of default shall have been cured or waived or shall have ceased to exist. By reason of these provisions, in the event of default on any Senior Indebtedness, whether now outstanding or hereafter issued, payments of principal of and interest on the Debentures may not be permitted to be made until such Senior Indebtedness is paid in full, or the event of default on such Senior Indebtedness is cured or waived. Upon any acceleration of the principal of the Debentures or any distribution of assets of the Company upon any receivership, dissolution, winding-up, liquidation, reorganization, or similar proceedings of the Company, whether voluntary or involuntary, or in bankruptcy or insolvency, all amounts due or to become due upon all Senior Indebtedness must be paid in full before the holders of the Debentures or the Trustee are entitled to receive or retain any assets so distributed in respect of the Debentures. By reason of this provision, in the event of insolvency, holders of the Debentures may recover less, ratably, than holders of Senior Indebtedness. "Senior Indebtedness" is defined to mean the principal, premium, if any, unpaid interest (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Company whether or not a claim for post-filing interest is allowed in such proceeding), fees, charges, expenses, reimbursements and indemnification obligations, and all other amounts payable under or in respect S-15 18 of Indebtedness of the Company (excluding the Debentures and the Regulation S Debentures and indebtedness by its terms expressly ranking subordinate in right of payment to or pari passu with the Debentures), whether any such Indebtedness exists as of the date of this Prospectus Supplement or is hereafter created, incurred, assumed or guaranteed. "Indebtedness" with respect to the Company or another Person (as defined) is defined to mean: (i) any debt (a) for money borrowed, or (b) evidenced by a bond, note, debenture, or similar instrument (including purchase money obligations) given in connection with the acquisition of any business, property or assets, whether by purchase, merger, consolidation or otherwise, but shall not include any account payable or other obligation created or assumed by a Person in the ordinary course of business in connection with the obtaining of materials or services, or (c) which is a direct or indirect obligation which arises as a result of banker's acceptances or letters of credit issued to secure Indebtedness or other obligations of such Person, or to secure the payment of revenue bonds issued for the benefit of such Person, whether contingent or otherwise; (ii) any debt of others described in the preceding clause (i) which such Person has guaranteed or for which it is otherwise liable; (iii) the obligation of such Person as lessee under any lease of property which is or is required to be reflected on such Person's balance sheet as a capitalized lease; and (iv) any deferral, amendment, renewal, extension, supplement or refunding of any liability of the kind described in any of the preceding clauses (i), (ii) and (iii). Optional Redemption. The Debentures will be subject to redemption, in whole or in part, at any time or from time to time commencing October 1, 1999, at the option of the Company on at least 30 days' prior notice by mail at a redemption price equal to 100% of the principal amount thereof, plus interest accrued to the date of redemption. The Debentures will not be redeemable prior to October 1, 1999; provided, however, the Debentures will be subject to redemption, in whole or in part, at any time for certain reasons intended to protect the Company's status as a REIT, at the option of the Company on at least 30 days' prior notice by mail at a redemption price equal to 100% of the principal amount, plus interest accrued to the date of redemption. The Company may redeem Debentures solely with respect to the Debentures of a holder or holders who pose a threat to the Company's REIT status and only to the extent deemed necessary by the Company's Board of Trustees to preserve such status. The Company may at any time buy Debentures on the open market at prices which may be greater or less than the optional redemption price listed above. Dividends, Distributions, and Acquisitions of Common Shares. The Indenture provides that the Company will not (i) declare or pay any dividend or make any distribution on its shares of Common Shares or to holders of Common Shares (other than dividends or distributions payable in Common Shares or other than as the Company determines in good faith is necessary to maintain its status as a REIT) or (ii) purchase, redeem or otherwise acquire or retire for value any of its Common Shares, if at the time of such action an Event of Default has occurred and is continuing or would exist immediately after such action. The foregoing, however, will not prevent (i) the payment of any dividend within 60 days after the date of declaration when the payment would have complied with the foregoing provision on the date of declaration, or (ii) the Company's retirement of any of its Common Shares by exchange for, or out of the proceeds of the substantially concurrent sale of, other Common Shares. Consolidation, Merger or Sale. The Indenture provides that the Company may consolidate with, or sell, lease or convey all or substantially all of its assets to, or merge with or into, any other entity, provided that (i) either the Company shall be the continuing entity or the successor entity (if other than the Company) formed by or resulting from any such consolidation or merger or which shall have received the transfer of such assets shall expressly assume payment of the principal of and interest on all of the Debentures and the due and punctual performance and observance of all of the covenants and conditions contained in the Indenture; (ii) immediately after giving effect to such transaction and treating any indebtedness which becomes an obligation of the Company or any subsidiary as a result thereof as having been incurred by the Company or such subsidiary at the time of such transaction, no Event of Default under the Indenture, and no event which, S-16 19 after notice or the lapse of time, or both, would become such an Event of Default (a "Default"), shall have occurred and be continuing; and (iii) an officer's certificate and legal opinion more fully described in the Indenture shall be delivered to the Trustee. Events of Default. The Indenture will provide that the following events are "Events of Default" with respect to the Debentures: (a) default for 30 days in the payment of any installment interest thereon or on the Regulation S Debentures; (b) default in the payment of the principal of the Debentures or the Regulation S Debentures at their maturity; (c) default in the performance of any other covenant of the Company contained in the Indenture (other than a covenant added to the Indenture solely for the benefit of a series of Senior Indebtedness issued thereunder), such default having continued for 60 days after written notice as provided in the Indenture; (d) default in the payment of an aggregate principal amount exceeding $25 million of any Indebtedness of the Company or any mortgage, indenture or other instrument under which such Indebtedness is issued or by which such Indebtedness is secured, such default having occurred after the expiration of any applicable grace period and having resulted in the acceleration of the maturity of such Indebtedness, but only if such Indebtedness is not discharged or such acceleration is not rescinded or annulled; or (e) certain events of bankruptcy, insolvency or reorganization, or court appointment of a receiver, liquidator or trustee of the Company. If an Event of Default (other than an Event of Default described in clause (e) above) under the Indenture with respect to Debentures occurs and is continuing, then in every such case (i) the Trustee or the holders of not less than a majority in principal amount of the outstanding Debentures may declare the principal amount of all of the Debentures to be due and payable immediately by written notice thereof to the Company (and to the Trustee if given by the holders) and (ii) the Trustee or the holders of not less than a majority in principal amount of the outstanding Regulation S Debentures may declare the principal amount of all of the Regulation S Debentures to be due and payable immediately by written notice thereof to the Company (and to the Trustee if given by the holders). If an Event of Default described in clause (e) above shall occur, the principal amount of the Debentures and the Regulation S Debentures will automatically, and without any action by the Trustee or any holder, become immediately due and payable. However, at any time after such a declaration of acceleration with respect to Debentures or of the Regulation S Debentures, (or of all Debentures and Regulation S Debentures as the case may be), has been made, but before a judgment or decree for payment of the money due has been obtained by the Trustee, the holders of not less than a majority in principal amount of outstanding Debentures (in the case of a declaration of acceleration with respect to the Debentures) or the holders of not less than a majority in principal amount of outstanding Regulation S Debentures (in the case of a declaration of acceleration with respect to the Regulation S Debentures), or the holder of all of the Debentures and the Regulation S Debentures, as the case may be, may rescind such declaration and its consequences if (i) the Company shall have deposited with the Trustee all required payments of the principal of and interest on the Debentures or the Regulation S Debentures, or of all the Debentures and the Regulation S Debentures, as the case may be, plus certain fees, expenses, disbursements and advances of the Trustee, and (ii) all Events of Default, other than the non-payment of accelerated principal (or specified portion thereof) or interest on the Debentures or the Regulation S Debentures or of all the Debentures and the Regulation S Debentures, as the case may be, have been cured or waived as provided in the Indenture. The Indenture will also provide that the holders of not less than a majority in principal amount of the outstanding Debentures or Regulation S Debentures, as the case may be, may waive any past default with respect to such series and its consequences, except a default (i) in the payment of the principal of or interest on any Debentures or Regulation S Debentures, as the case may be, or (ii) in respect of a covenant or provision contained in the Indenture that cannot be modified or amended without the consent of the holder of each outstanding Debenture or Regulation S Debenture, as the case may be. Summaries of certain additional information relating to Defaults or Events of Default, the exercise of remedies by the Trustee or holders of Debentures and limitations thereon and related notices and waivers is set forth in the accompanying Prospectus under "Description of Debt Securities -- Events of Default, Notice and Waiver". S-17 20 Book Entry: Delivery and Form. The Debentures may be evidenced by one or more global debentures (each, a "Global Debenture") which will be deposited with, or on behalf of, the Debt Depositary and registered in the name of Cede & Co. ("Cede") as the Debt Depositary's nominee. So long as Cede, as the nominee of the Debt Depositary, is the registered owner of a Global Debenture, Cede for all purposes will be considered the sole holder of such Global Debenture. Except as otherwise provided in the Indenture, owners of beneficial interests in a Global Debenture will not be entitled to have certificates registered in their names, will not receive or be entitled to receive physical delivery of certificates in definitive form, and will not be considered the holders thereof. Neither the Company nor the Trustee (or any registrar, paying agent or conversion agent under the Indenture) will have any responsibility for the performance of the Debt Depositary or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations. The Debt Depositary has advised the Company that it will take any action permitted to be taken by a holder of Debentures (including, without limitation, the presentation of Debentures for exchange as described below) only at the direction of one or more participants to whose account with the Debt Depositary interests in a Global Debenture are credited, and only in respect of the principal amount of the Debentures represented by a Global Debenture as to which such participant or participants has or have given such direction. The Debt Depositary has advised the Company as follows: the Debt Depositary is a limited purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the Uniform Commercial Code and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Debt Depositary was created to hold securities for its participants and to facilitate the clearance and settlement of securities transactions between participants through electronic book-entry changes to accounts of its participants, thereby eliminating the need for physical movement of certificates. Participants include securities brokers and dealers, banks, trust companies and clearing corporations and may include certain other organizations. Certain of such participants (or their representatives), together with other entities, own the Debt Depositary. Indirect access to the Debt Depositary's systems is available to others such as banks, brokers, dealers and trust companies that clear through, or maintain a custodial relationship, with a participant, either directly or indirectly. Ownership of beneficial interests in any Global Debenture will be limited to persons that have accounts with the Debt Depositary ("participants") or persons that may hold interests through participants. Upon the issuance of a Global Debenture, the Debt Depositary will credit, on its book-entry registration and transfer system, the participants' accounts with the respective principal amounts of the Debenture represented by such Global Debenture beneficially owned by such participants. The accounts to be credited will be designated by any dealers, underwriters or agents participating in the distribution of such Debentures. Ownership of beneficial interests in such Global Debenture will be shown on, and the transfer of such ownership interests will be effected only through, records maintained by the Debt Depositary (with respect to interests of participants) and on the records of participants (with respect to interests of persons holding through participants). The laws of some states may require that certain purchasers of securities take physical delivery of such securities in definitive form. Such limits and such laws may impair the ability to own, transfer or pledge beneficial interests in a Global Debenture. Each person owning a beneficial interest in a Global Debenture must rely on the procedures of the Debt Depositary and, if such person is not a participant, on the procedures of the participant through which such person owns its interest, to exercise any rights of a holder under the Indenture. The Company understands that under existing industry practices, if it requests any action of holders or if an owner of a beneficial interest in a Global Debenture desires to give or take any action which a holder is entitled to give or take under the Indenture, the Debt Depositary would authorize the participants holding the relevant beneficial interests to give or take such action, and such participants would authorize beneficial owners owning through such participants to give or take such action or would otherwise act upon the instructions of beneficial owners holding through them. S-18 21 Principal and interest payments on Debentures represented by a Global Debenture registered in the name of the Debt Depositary or its nominee will be made to the Debt Depositary or its nominee, as the case may be, as the registered owner of such Global Debenture. None of the Company, the Trustee or any other agent of the Company or agent of the Trustee will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in such Global Debenture or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. The Company expects that the Debt Depositary for any Debentures represented by a Global Debenture upon receipt of any payment of principal, premium or interest in respect of such Global Debenture will immediately credit participants' accounts with payments in amounts proportionate to their respective beneficial interests in such Global Debenture as shown on the records of Debt Depositary. The Company also expects that payments by participants to owners to beneficial interests in a Global Debenture held through such participants will be governed by standing customer instructions and customary practices, as is now the case with the securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such participants. If the Debt Depositary for any Debenture represented by a Global Debenture is at any time unwilling or unable to continue as Debt Depositary or ceases to be a clearing agency under the Exchange Act, and a successor Debt Depositary registered as a clearing agency under the Exchange Act is not appointed by the Company within 90 days, the Company will issue such Debentures in definitive form in exchange for such Global Debenture. In addition, the Company may at any time and in its sole discretion determine not to have any of the Debentures represented by a Global Debenture and, in such event, will issue Debentures in definitive form in exchange for the Global Debenture representing such Debentures. Any Debentures issued in definitive form in exchange for a Global Debenture will be registered in such name or names as the Debt Depositary shall instruct the Trustee. It is expected that such instructions will be based upon directions received by the Debt Depositary from participants with respect to ownership of beneficial interests in the Global Debenture. CERTAIN OTHER PROVISIONS. The accompanying Prospectus contains summaries of certain addition provisions of the Indenture with respect to, among other things, modifications of the Indenture with or without the consent of holders of the Debentures and discharge, defeasance and covenant defeasance. See "Description of Debt Securities -- Modification of the Indenture" and "-- Discharge, Defeasance and Covenant Defeasance". REGULATION S DEBENTURES Concurrently with the Offering, the Company is offering $ of Regulation S Debentures, titled % Convertible Subordinated Debentures Due 2003, Series B, outside of the United States pursuant to the provisions of Regulation S under the Securities Act. The Regulation S Debentures will be issued under a separate Supplemental Indenture under the Indenture and will be pari passu with the Debentures in all respects. See "Recent Developments". The terms and conditions of the Regulation S Debentures, including interest rate, maturity date and redemption and conversion provisions, are substantially the same as those of the Debentures, except that (i) the Regulation S Debentures are not convertible until following a 40-day period beginning on the closing date for the issuance thereof, (ii) the Regulation S Debentures may be issued in bearer or registered form and, subject to certain limitations, may be exchanged from one form to another, and (iii) the holders thereof may be entitled to receive certain additional payments in respect of the imposition of certain tax withholding or, in lieu thereof, the Company may redeem the Regulation S Debentures (on a date which may be prior to October 1, 1999) at a redemption price equal to 100% of the principal amount, plus interest accrued to the date of redemption, as a result of changes in certain laws, regulations or rulings relating to taxation. Application will be made for the Regulation S Debentures to be listed on the Luxembourg Stock Exchange. S-19 22 FEDERAL INCOME TAX CONSIDERATIONS THE FOLLOWING IS A SUMMARY OF CERTAIN MATERIAL FEDERAL INCOME TAX CONSIDERATIONS REGARDING THE DEBENTURES, AND IS BASED ON CURRENT LAW, IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. THIS DISCUSSION DOES NOT PURPORT TO DEAL WITH ALL ASPECTS OF TAXATION THAT MAY BE RELEVANT TO PARTICULAR HOLDERS OF DEBENTURES IN LIGHT OF THEIR PERSONAL INVESTMENT OR TAX CIRCUMSTANCES, OR TO CERTAIN TYPES OF HOLDERS OF DEBENTURES, INCLUDING INSURANCE COMPANIES, TAX-EXEMPT ORGANIZATIONS FINANCIAL INSTITUTIONS OR BROKER-DEALERS. EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP, CONVERSION AND SALE OF THE DEBENTURES INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX AND ERISA CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, CONVERSION AND SALE AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS. TAXATION OF HOLDERS OF DEBENTURES Stated Interest Holders of Debentures will be required to include stated interest on the Debentures in gross income for federal income tax purposes as ordinary income in accordance with their methods of accounting for tax purposes. The Debenture will not be issued with original issue discount. Market Discount Purchasers of Debentures should be aware that the holding and disposition of Debentures may be affected by the market discount provisions of the Internal Revenue Code of 1986, as amended (the "Code"). These rules generally provide that, subject to a statutorily-defined de minimis exception, if a holder of a debt instrument purchases it at a market discount and thereafter recognizes gain on a disposition of the debt instrument (including a gift or payment on maturity), the lesser of such gain (or appreciation, in the case of a gift) or the portion of the market discount that accrued while the debt instrument was held by such holder will be treated as ordinary interest income at the time of the disposition. For this purpose, a purchase at a market discount includes a purchase after original issuance at a price below the debt instrument's stated principal amount. The market discount rules also provide that a holder who acquires a debt instrument at a market discount (and who does not elect, as described below, to include such market discount in income on a current basis) may be required to defer a portion of any interest expense that may otherwise be deductible on any indebtedness incurred or maintained to purchase or carry such debt instrument until the holder disposes of the debt instrument in a taxable transaction. The Debentures provide that they may be redeemed, in whole or in part, before maturity only for certain tax reasons relating to the Company's status as a REIT under Sections 856 through 860 of the Code. If some or all of the Debentures are redeemed in part, each holder of a Debenture acquired at a market discount would be required to treat the principal payment as ordinary interest income to the extent of any accrued market discount on such Debenture. A holder of a debt instrument acquired at a market discount may elect to include the market discount in income as the discount thereon accrues, either on a straight line basis or, if elected, on a constant interest rate basis. The current inclusion election, once made, applies to all market discount obligations acquired by such holder on or after the first day of the first taxable year to which the election applies, and may not be revoked without the consent of the Internal Revenue Service ("IRS"). If a holder of a Debenture elects to include market discount in income in accordance with the preceding sentence, the foregoing rules with respect to the recognition of ordinary income on a sale or certain other dispositions of such Debenture and the deferral of interest deductions on indebtedness related to such Debenture would not apply. S-20 23 Amortizable Bond Premium Generally, if the tax basis of an obligation held as a capital asset exceeds the amount payable at maturity of the obligation, such excess may constitute amortizable bond premium that the holder may elect to amortize under the constant interest rate method and deduct over the period from his acquisition date to the obligation's maturity date. The amortization election, once made, applies to all bonds yielding taxable interest held by such holder on the first day of the first taxable year to which such election applies and to all bonds yielding taxable interest thereafter acquired by such holder, and such election may not be revoked without the consent of the IRS. A holder who elects to amortize bond premium must reduce his tax basis in the related obligation by the amount of the aggregate deductions allowable for amortizable bond premium. The amortizable bond premium deduction is treated as an offset to interest income on the related security for federal income tax purposes. Each prospective purchaser is urged to consult his tax advisor as to the consequences of the treatment of such premium as an offset to interest income for federal income tax purposes. Disposition In general, a holder of a Debenture will recognize gain or loss upon the sale, exchange, redemption, payment upon maturity or other taxable disposition of the Debenture measured by the difference between (i) the amount of cash and the fair market value of property received (except to the extent that such cash or other property is attributable to the payment of accrued interest not previously included in income, which amount will be taxable as ordinary income) and (ii) the holder's tax basis in the Debenture (as increased by any market discount previously included in income by the holder and decreased by any amortizable bond premium deducted over the term of the Debenture). Subject to the market discount and amortizable bond premium rules above, any such gain or loss will generally be long-term capital gain or loss, provided the Debenture was a capital asset in the hands of the holder and had been held for more than one year. Conversion A holder of a Debenture should not recognize gain or loss on the conversion of a Debenture solely into Common Shares except with respect to cash in lieu of fractional shares and except to the extent that the Common Shares issued upon conversion are treated as attributable to accrued interest on the Debentures. To the extent the Debentures converted are subject to accrued market discount, the amount of the accrued market discount will carry over to the Common Shares on conversion and will be treated as ordinary income on disposition of the Common Shares. If Common Shares are received by a holder of a Debenture without recognition of gain or loss, the holding period of the Common Shares received upon conversion of the Debenture will include the period during which the Debenture was held (provided the Debenture was a capital asset in the hands of the holder prior to the conversion), and the holder's aggregate basis in the Common Shares received upon conversion of the Debenture will be equal to the holder's aggregate basis in the Debenture exchanged therefor (less a portion thereof allocable to any fractional share exchanged for cash). A holder of a Debenture will recognize taxable gain or loss on cash received in lieu of fractional Common Shares in an amount equal to the difference between the amount of cash received and the holder's basis in such fractional share. Such gain or loss should be capital gain or loss if the fractional share is a capital asset in the hands of the holder, and should be long-term capital gain or loss if the fractional share has been deemed held for the then requisite holding period. The fair market value of Common Shares received which is attributable to accrued interest will be taxable as ordinary interest income. Adjustments in the conversion price of the Debentures made pursuant to the anti-dilution provisions thereof to reflect distributions to holders of Common Shares may result in constructive distributions to holders of Debentures that could be taxable to them as dividends pursuant to Section 305 of the Code. S-21 24 Non-U.S. Debentureholders The rules governing United States federal income taxation of the ownership and disposition of Debentures by holders that are, for purposes of such taxation, nonresident alien individuals, foreign corporations, foreign partnerships or foreign estates or trusts (collectively, "Non-U.S. Debentureholders") are complex, and no attempt is made herein to provide more than a brief summary of such rules. Accordingly, the discussion does not address all aspects of United States federal income tax and does not address state, local or foreign tax consequences that may be relevant to a Non-U.S. Debentureholder in light of its particular circumstances. In addition, this discussion is based on current law, which is subject to change. Prospective Non-U.S. Debentureholders should consult with their own tax advisors to determine the impact of federal, state, local and foreign income tax laws with regard to the purchase of Debentures, including any reporting requirements. The United States generally will impose a withholding tax at a 30% rate (subject to reduction or elimination in the case of Non-U.S. Debentureholders eligible for a lower treaty rate) on payments of interest received from sources within the United States by a Non-U.S. Debentureholder, unless such income is effectively connected with his conduct of a United States trade or business. This tax does not apply to payments of "portfolio interest." Payments of interest on the Debentures will qualify as portfolio interest, provided that (i) the Non-U.S. Debentureholder does not own 10% or more (directly or constructively) of the total combined voting power of all classes of stock of the Company entitled to vote; (ii) the Non-U.S. Debentureholder is not a "controlled foreign corporation" (generally, a foreign corporation controlled by United States stockholders related to the Company); (iii) the Non-U.S. Debentureholder is not a bank receiving the interest on an extension of credit made pursuant to a loan agreement entered into in the ordinary course of its trade or business; (iv) the interest is not "contingent interest" within the meaning of Section 871(h)(4) of the Code; and (v) requires the beneficial owner of the Debentures and, if relevant, a financial institution on the beneficial owner's behalf, complies with certain certification requirements regarding the beneficial owner's status as a foreign person. The certification requirement referred to in (v) requires the beneficial owner of the Debentures to provide to the Company (or, if appropriate, to the relevant financial institution which financial institution then provides to the Company) a statement under penalties of perjury on IRS Form W-8 (or a substantially similar substitute form) as to its status as a foreign person. Interest paid on Debentures should not constitute contingent interest within the meaning of Section 871(h)(4) of the Code. Thus, as long as the Non-U.S. Debentureholder satisfies requirement (v) above and the Company has no reason to believe that requirements (i), (ii) or (iii) above are not satisfied or that such interest is effectively connected with the conduct of a United States trade or business, the Company will treat the interest paid on the Debentures as "portfolio interest" and will not withhold tax from such interest paid to such Non-U.S. Debentureholder. In addition, if the interest paid on the Debentures to a foreign holder is effectively connected with the conduct of a United States trade or business and the Non-U.S. Debentureholder provides the requisite statement to such effect, then the Company will not withhold tax from such interest (and the Non-U.S. Debentureholder will be subject to United States federal income tax as described below). A Non-U.S. Debentureholder will not be subject to United States federal income tax or withholding tax on gain realized on the sale, exchange or redemption of a Debenture (including the conversion of such Debenture for Common Shares and the receipt of cash in lieu of fractional Common Shares on such a conversion, but excluding gain attributable to accrued and unpaid interest which will generally be treated as interest), provided that (i) such gain is not effectively connected with the conduct of a trade or business in the United States by such Non-U.S. Debentureholder, (ii) such Non-U.S. Debentureholder is not an individual who is present in the United States for 183 or more days during the taxable year in which such gain is realized and (iii) the certification requirements referred to in clause (v) of the second preceding paragraph are met with respect to such Non-U.S. Debentureholder. This paragraph assumes that the Company is a "domestically controlled REIT," which is defined generally as a REIT in which at all times during a specified testing period less than 50% in value of the stock was held directly or indirectly by foreign persons. It is currently anticipated that the Company will be a domestically controlled REIT. S-22 25 In general, a Non-U.S. Debentureholder will be subject to (i) United States federal income tax on interest or gain on a Debenture that is effectively connected with its conduct of a United States trade or business and (ii) a United States branch profits tax equal to 30% of its "effectively connected earnings and profits" (as adjusted) for the taxable year if the Non-U.S. Debentureholder is a corporation, unless it qualifies for exemption from the branch profits tax or a lower rate of such tax under an applicable treaty. Alternatively, an individual Non-U.S. Debentureholder who is present in the United States for 183 days or more in a taxable year and has a "tax home" in the United States will generally be taxed at a rate of 30% on any United States source capital gain (net of any United States source capital losses) recognized during such year on the Debentures that is not effectively connected with its conduct of a United States trade or business. Adjustments in the conversion price of the Debentures made pursuant to the anti-dilution provisions thereof to reflect distribution to holders of Common Shares may result in constructive dividends to Non-U.S. Debentureholders. Such deemed dividends would be taxable to a Non-U.S. Debentureholder in the same manner as dividends paid on the Common Shares. Where such deemed dividends would otherwise be subject to withholding taxes, such tax may be collected through subsequent payments on the Debentures. Backup Withholding Domestic Holders of Debentures Under the backup withholding rules, a domestic holder of Debentures may be subject to backup withholding at the rate of 31% with respect to interest or dividends paid on, and gross proceeds from the sale of, the Debentures unless such holder (a) is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact or (b) provides a correct taxpayer identification number, certifies as to no loss of exemption from backup withholding and otherwise complies with applicable requirements of the backup withholding rules. A holder of Debentures who does not provide the Company with his current taxpayer identification number may be subject to penalties imposed by the IRS. Any money paid as backup withholding will be creditable against the holder's federal income tax liability. The Company will report to holders of Debentures and the IRS the amount of any "reportable payments" (including any interest or dividends paid) and any amount withheld with respect to the Debentures during the calendar year. Non-U.S. Debentureholder Backup withholding tax and information reporting will generally not apply to payments of principal and interest made to Non-U.S. Debentureholders if the certification requirements referred to above are satisfied (see "--Non-U.S. Debentureholders"). As a general matter, backup withholding and information reporting will not apply to a payment of the proceeds of a sale of Debentures by or through a foreign office of a foreign broker. Information reporting (but not backup withholding) will apply, however, to a payment of the proceeds of a sale of Debentures by a foreign office of a broker that (a) is a United States person, (b) derives 50% or more of its gross income for certain periods from the conduct of a trade or business in the United States or (c) is a controlled foreign corporation for United States federal income tax purposes, unless the payee is an exempt recipient or the broker has documentary evidence in its records that the payee is a Non-U.S. Debentureholder and certain other conditions are met. Payment to or through a United States office of a broker of the proceeds of a sale of Debentures is subject to both backup withholdings and information reporting unless the payee certifies under penalties of perjury that it is a Non-U.S. Debentureholder and certain other requirements are met, or the payee otherwise establishes an exemption. A Non-U.S. Debentureholder may obtain a refund of any amounts withheld under the backup withholding rules by the appropriate claim for refund with the IRS. The backup withholding and information reporting rules are under review by the United States Treasury, and their applications to the Debentures could be changed prospectively by future Treasury regulations. On April 15, 1996, the IRS issued proposed regulations that would change in certain respects the certification requirements in respect of claims for exemptions from information reporting and backup withholding in respect of payments made after December 31, 1997 on, or in respect of proceeds from the S-23 26 disposition of Debentures. It is not currently possible to predict whether, or in what form, any such regulations ultimately will be adopted. OTHER INCOME TAXATION MATTERS AND ERISA CONSIDERATIONS The following description of certain Federal income tax matters and Employee Retirement Income Security Act of 1974, as amended ("ERISA"), considerations relating to the Company is qualified in its entirety by reference to the more detailed description thereof contained in the Company's Annual Report on Form 10-K, which is incorporated herein by reference. The Company is and intends to remain qualified as a REIT under the Code. As a REIT, the Company's net income which is distributed as dividends to shareholders will be exempt from Federal taxation. Distributions to the Company's shareholders generally will be includable in their income; however, dividends distributed which are in excess of current or accumulated earnings will be treated for tax purposes as a return of capital to the extent of a shareholder's basis, and will reduce the basis of shareholders' Common Shares. The Company intends to conduct its affairs so that the assets of the Company will not be deemed to be "plan assets" of any individual retirement account, employee benefit plan subject to Title I of ERISA , or other qualified retirement plan subject to Section 4975 of the Code which acquires its Common Shares. The Company believes that, under present law, its distributions do not create "unrelated business taxable income" to tax-exempt entities such as pension trusts, subject, however, to certain new rules which apply to pension trusts holding more than 10% of the Common Shares. Under Section 279 of the Code, deductions otherwise allowable to a corporation for interest expense may be reduced or eliminated in the case of "corporate acquisition indebtedness," which is defined generally to include certain subordinated convertible debt which was issued to provide consideration for the acquisition of stock or a substantial portion of the assets of another corporation, where the issuer does not meet certain debt/equity and earnings coverage tests. It is possible that this disallowance would apply to an issuance of subordinated convertible debt used to refinance other debt if the issuance of the subordinated convertible debt was contemplated when the refinanced debt was incurred for the purpose of the corporate acquisition. The Company expects that its interest expense with respect to the Debentures will not be materially reduced under Section 279 of the Code. UNDERWRITING The underwriters below (the "Underwriters") have severally agreed, subject to the terms and conditions of the Underwriting Agreement, to purchase from the Company the aggregate principal amount of Debentures set forth opposite their respective names: PRINCIPAL AMOUNT OF NAME DEBENTURES ---- ---------- NatWest Securites Limited............................. Merrill Lynch & Co. Incorporated...................... Total....................................... $ The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the Debentures are subject to approval of certain legal matters by counsel and to certain other conditions. The Underwriters are obligated to take and pay for all Debentures offered hereby (other than those covered by the over-allotment option described below) if any such Debentures are taken. The initial public offering price, concession and discount to dealers may be changed by the Underwriters after the date of this Prospectus Supplement. The Underwriters have informed the Company that they do not intend to confirm sales to any account over which they exercise discretionary authority. The Underwriters, for whom NatWest Securities Limited ("NatWest") and Merrill Lynch & Co. are acting as Representatives, propose to offer part of the Debentures directly to the public at the public offering price set forth on the cover page of this Prospectus Supplement and part of the Debentures to certain dealers at a price which represents a concession not in excess of % per Debenture under the public offering price. S-24 27 The Underwriters may allow, and such dealers may reallow, a concession not in excess of % per Debenture to certain other dealers. The Company has granted to the Underwriters an option, exercisable for thirty days from the date of this Prospectus Supplement, to purchase up to $ additional aggregate principal amount of Debentures at the price to the public set forth on the cover page of this Prospectus Supplement minus the underwriting discounts and commissions. The Underwriters may exercise such option solely for the purpose of covering over-allotments, if any, in connection with the Offering. To the extent such option is exercised, each Underwriter will be obligated, subject to certain conditions, to purchase approximately the same percentage of such additional principal amount of Debentures as the principal amount of Debentures set forth opposite each Underwriter's name in the preceding table bears to the total number of Debentures listed in such table. NatWest and Merrill Lynch International are also acting as the managers of the Regulation S Offering. NatWest, a United Kingdom broker-dealer and a member of the Securities and Futures Authority Limited, has agreed that, as part of the distribution of the Debentures offered hereby and subject to certain exceptions, it will not offer or sell any Debentures within the United States, its territories or possessions or to persons who are citizens thereof or residents therein. The Underwriting Agreement does not limit the sale of the Debentures outside of the United States. NatWest has further represented and agreed that (a) it has not offered or sold and will not offer or sell in the United Kingdom by means of any document, any Debentures except to persons whose ordinary activities involve them in acquiring, holding, managing, or disposing of investments (as principal or agent) for the purposes of their business or otherwise in circumstances which will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995; (b) it has complied and will comply with all applicable provisions of the Financial Services Act 1986 with respect to anything done by it in relation to the Debentures in, from or otherwise involving the United Kingdom; and (c) it has only issued or passed on and will only issue or pass on in the United Kingdom any document received by it in connection with the issues of the Debentures to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995 or is a person to whom such document may otherwise lawfully be issued or passed on. The Company and the Underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act of 1933, as amended. LEGAL MATTERS Certain legal matters with respect to the Debentures offered by the Company have been passed upon for the Company by Sullivan & Worcester LLP, Boston, Massachusetts and will be passed upon for the Underwriters by Stroock & Stroock & Lavan, New York, New York. Sullivan & Worcester LLP has relied, and Stroock & Stroock & Lavan will rely, as to all matters of Maryland law, upon the opinion of Piper & Marbury, L.L.P., Baltimore, Maryland. Sullivan & Worcester LLP has also given its opinion as to certain Federal income tax matters and certain ERISA considerations relating to the Company. See "Federal Income Tax and ERISA Considerations". Barry M. Portnoy, a partner in the firm of Sullivan & Worcester LLP, is a Managing Trustee of the Company and of HPT, a director and 50% shareholder of Advisors, and a director and/or significant shareholder of certain lessees and mortgagors of the Company, including Horizon. Sullivan & Worcester LLP represents Advisors, certain of such lessees and mortgagors and certain affiliates of each of the foregoing on various matters. S-25 28 THE AMENDED AND RESTATED DECLARATION OF TRUST ESTABLISHING THE COMPANY, DATED JULY 1, 1994, A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS THERETO (THE "DECLARATION"), IS DULY FILED IN THE OFFICE OF THE DEPARTMENT OF ASSESSMENTS AND TAXATION OF THE STATE OF MARYLAND, PROVIDES THAT THE NAME "HEALTH AND RETIREMENT PROPERTIES TRUST" REFERS TO THE TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF THE COMPANY SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, THE COMPANY. ALL PERSONS DEALING WITH THE COMPANY, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF THE COMPANY FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION. S-26 29 PROSPECTUS - ---------- $750,000,000 HEALTH AND RETIREMENT PROPERTIES TRUST DEBT SECURITIES, PREFERRED SHARES OF BENEFICIAL INTEREST, DEPOSITARY SHARES, COMMON SHARES OF BENEFICIAL INTEREST AND WARRANTS ------------------------ Health and Retirement Properties Trust (the "Company" or "HRP") may from time to time offer in one or more series (i) its unsecured debt securities (the "Debt Securities"), (ii) its preferred shares of beneficial interest, par value $.01 per share (the "Preferred Shares"), (iii) fractional shares of the Preferred Shares (the "Depositary Shares"), (iv) its common shares of beneficial interest, par value $.01 per share (the "Common Shares"), or (v) warrants to purchase any of the above securities (the "Warrants"), with an aggregate public offering price of up to $750,000,000 on terms to be determined at the time of offering. The Debt Securities, Preferred Shares, Depositary Shares, Common Shares and Warrants (collectively, the "Offered Securities") may be offered, separately or together, in separate series in amounts, at prices and on terms to be set forth in a supplement to this Prospectus (a "Prospectus Supplement"). The specific terms of the Offered Securities in respect of which this Prospectus is being delivered will be set forth in the applicable Prospectus Supplement and will include, where applicable: (i) in the case of Debt Securities, the specific title, aggregate principal amount, currency, form (which may be registered or bearer, or certificated or global), authorized denominations, maturity, rate (or manner of calculation thereof) and time of payment of interest, terms for redemption at the option of the Company or repayment at the option of the holder, terms for sinking fund payments, terms for conversion into Preferred Shares, Depositary Shares or Common Shares, terms for subordination to other indebtedness of the Company, and any initial public offering price; (ii) in the case of Preferred Shares, the specific title and stated value, any dividend, liquidation, redemption, conversion, voting and other rights, and any initial public offering price; (iii) in the case of Depositary Shares, the fractional shares of Preferred Shares represented by each Depositary Share, (iv) in the case of Common Shares, any offering price; and (v) in the case of Warrants, the securities to which they relate, duration, offering price, exercise price and detachability. In addition, such specific terms may include limitations on direct or beneficial ownership and restrictions on transfer of the Offered Securities, in each case as may be appropriate to preserve the status of the Company as a real estate investment trust ("REIT") for federal income tax purposes. The applicable Prospectus Supplement will also contain information, where applicable, about certain United States federal income tax considerations relating to, and any listing on a securities exchange of, the Offered Securities covered by such Prospectus Supplement. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. ------------------------ The Offered Securities may be offered directly, through agents designated from time to time by the Company or to or through underwriters or dealers. If any agents or underwriters are involved in the sale of any of the Offered Securities, their names, and any applicable purchase price, fee, commission or discount arrangement between or among them, will be set forth, or will be calculable from the information set forth, in an accompanying Prospectus Supplement. See "Plan of Distribution". No Offered Securities may be sold without delivery of a Prospectus Supplement describing the method and terms of the offering of such Offered Securities. ------------------------ The date of this Prospectus is June 25, 1996. 30 No person has been authorized to give any information or to make any representations other than those contained or incorporated by reference in this Prospectus in connection with the offer contained in this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Company or any underwriters, agents or dealers. This Prospectus does not constitute an offer to sell or solicitation of an offer to buy securities in any jurisdiction to any person to whom it is unlawful to make such offer or solicitation. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create an implication that there has been no change in the affairs of the Company and its subsidiaries since the date hereof or the information contained or incorporated by reference herein is correct at any time subsequent to the date hereof. AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") in Washington, D.C., a registration statement on Form S-3 (together with all exhibits, schedules and amendments thereto, the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the Offered Securities. This Prospectus, which is a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement. Statements in this Prospectus as to the contents of any contract or other document are not necessarily complete, and in each instance reference is made to the copy of such contract or other documents filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference and the exhibits and schedules thereto. For further information concerning the Company and the Offered Securities, reference is made to the Registration Statement. Copies of the Registration Statement may be obtained from the Commission at its principal office in Washington, D.C. upon payment of the prescribed fee. The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, files reports and other information with the Commission. The Registration Statement, the exhibits and schedules forming a part thereof and the reports, proxy statements and other information filed by the Company with the Commission can be inspected and copies obtained at the public reference facilities maintained by the Commission at Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following regional offices of the Commission: Chicago Regional Office, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661-2511; and New York Regional Office, Seven World Trade Center, New York, New York 10048. Copies of such material can be obtained at prescribed rates from the Public Reference Section of the Commission at its principal office at 450 Fifth Street, N.W., Washington, D.C. 20549. The Company's Common Shares are traded on the New York Stock Exchange ("NYSE") under the symbol "HRP," and similar information concerning the Company may be inspected at the office of the NYSE at 20 Broad Street, New York, New York 10005. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents, which have been filed with the Commission pursuant to the Exchange Act, are hereby incorporated in this Prospectus and specifically made a part hereof by reference: (i) the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995; (ii) the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1996, (iii) the consolidated financial statements of Marriott International, Inc. ("MII"), Commission File No. 1-12188, at and for the fiscal year ended December 29, 1995 incorporated herein by reference from MII's Report on Form 10-K for the year ended December 29, 1995 and at and for the fiscal quarter ended March 22, 1996 incorporated herein by reference from MII's Report Form 10-Q for the quarter ended March 22, 1996 and (iv) the Company's Registration Statement on Form 8-A dated November 8, 1986, relating to the Common Shares as amended by Form 8 dated July 30, 1991. All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the termination of the offering of the Offered Securities shall be deemed to be incorporated by reference into this Prospectus and to be a part hereof from the respective dates of filing of such documents. ii 31 Any statement contained herein or in a document incorporated or deemed to be incorporated herein by reference shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein (or in the applicable Prospectus Supplement), or in any subsequently filed document that also is or is deemed to be incorporated herein by reference, modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company hereby undertakes to provide without charge to each person to whom this Prospectus is delivered, upon the written or oral request of such person, a copy of any and all of the information that has been incorporated by reference in this Prospectus (excluding exhibits unless such exhibits are specifically incorporated by reference into the information that this Prospectus incorporates). Requests for such copies should be made to the Company at its principal executive offices, 400 Centre Street, Newton, Massachusetts 02158, Attention: Investor Relations, telephone (617) 332-3990. iii 32 THE COMPANY The Company is a real estate investment trust ("REIT") which invests primarily in retirement communities, assisted living centers, nursing homes and other income producing healthcare related real estate. At March 31, 1996, the Company (including its wholly owned subsidiaries) had direct real estate investments, at cost, totaling over $948 million in 161 properties, located in 29 states and operated or tenanted by over 30 separate companies, and an investment, at cost, of $100 million in approximately 32% of the issued and outstanding common shares of beneficial interest of Hospitality Properties Trust ("HPT"), New York Stock Exchange-traded real estate investment trust which invests primarily in hotel properties. (As a result of a public offering by HPT of additional common shares of beneficial interest in early April, the Company's percentage ownership of HPT as of April 11, 1996 was 15%.) At March 31, 1996, HPT owned and leased or had agreements to acquire and lease an aggregate of 82 hotels located in 26 states. Excluding its investment in HPT, approximately 70% of the Company's total investments as of such date were in properties leased to or operated by 10 public companies, and approximately 90% of the Company's total investments were in retirement communities, assisted living centers, long term care facilities and other income producing healthcare related properties. USE OF PROCEEDS Unless otherwise described in the applicable Prospectus Supplement, the Company intends to use the net proceeds from the sale of the Offered Securities for general trust purposes, which may include the acquisition of, or other investments in, retirement communities, assisted living centers, nursing home or other long term care facilities or other healthcare related properties, and the repayment of indebtedness outstanding at such time or to reduce amounts outstanding under the Company's credit facility. Pending utilization as set forth above, the proceeds from the sale of the Offered Securities will be invested in short term investments, including repurchase agreements. Such investments may not be investment grade. RATIO OF EARNINGS TO FIXED CHARGES The following table sets forth the Company's consolidated ratios of earnings to fixed charges for the periods indicated:
FOR THE FOR THE YEAR ENDED DECEMBER 31, QUARTER ENDED -------------------------------- MARCH 31, 1996 1995 1994 1993 1992 1991 -------------- ---- ---- ---- ---- ---- Ratio of earnings to fixed charges.................. 4.6x 3.4x 6.7x 6.8x 3.6x 2.8x
The ratios of earnings to fixed charges presented above were computed by dividing the Company's earnings by fixed charges. For this purpose, earnings have been calculated by adding fixed charges (excluding capitalized interest) to income before income taxes, extraordinary items and gain or loss on the disposition of real property. Fixed charges consist of interest costs, whether expensed or capitalized, the interest component of rental income, if any, amortization of debt discounts and deferred financing costs, whether expensed or capitalized. To date, the Company has not issued any Preferred Shares; therefore, the ratio of earnings to combined fixed charges and Preferred Shares distributions are the same as the ratios of earnings to fixed charges presented above. DESCRIPTION OF DEBT SECURITIES The Debt Securities will be issued under one or more indentures (an "Indenture") between the Company and a trustee (an "Indenture Trustee"). Any Indenture will be subject to, and governed by, the Trust Indenture Act of 1939, as amended (the "TIA"). The statements made hereunder relating to any Indentures and the Debt Securities to be issued thereunder are summaries of certain anticipated provisions thereof and do not purport to be complete and are subject to, and are qualified in their entirety by reference to, all provisions of the Indentures and such Debt Securities. 1 33 GENERAL The Debt Securities will be direct, unsecured obligations of the Company and will rank equally with all other unsecured and unsubordinated indebtedness of the Company (the "Senior Securities"), or, if so provided in the applicable Prospectus Supplement, will be subordinated in right of payment to the prior payment in full of other Debt Securities or other indebtedness of the Company ("Subordinated Securities"). See "-- Subordination". The Debt Securities may be issued without limit as to aggregate principal amount, in one or more series, in each case as established from time to time in or pursuant to authority granted by a resolution of the Board of Trustees of the Company (the "Trustees") or as established in one or more indentures supplemental to any Indenture. All Debt Securities of one series need not be issued at the same time and, unless otherwise provided, a series may be reopened, without the consent of the holders of the Debt Securities of such series, for issuances of additional Debt Securities of such series. It is anticipated that any Indenture will provide that the Company may, but need not, designate more than one Indenture Trustee thereunder, each with respect to one or more series of Debt Securities. Any Indenture Trustee under any Indenture may resign or be removed with respect to one or more series of Debt Securities, and a successor Indenture Trustee may be appointed to act with respect to such series. In the event that two or more persons are acting as Indenture Trustee with respect to different series of Debt Securities, each such Indenture Trustee shall be a trustee of a trust under the applicable Indenture separate and apart from the trust administered by any other Indenture Trustee, and, except as otherwise indicated herein, any action described herein to be taken by the Indenture Trustee may be taken by each such Indenture Trustee with respect to, and only with respect to, the one or more series of Debt Securities for which it is Indenture Trustee under the applicable Indenture. Reference is made to the Prospectus Supplement relating to the series of Debt Securities being offered for the specific terms thereof, including, where applicable, the following: (1) the title of such Debt Securities and whether such Debt Securities are Senior Securities or Subordinated Securities; (2) the aggregate principal amount of such Debt Securities and any limit on such aggregate principal amount; (3) the percentage of the principal amount at which such Debt Securities will be issued and, if other than the principal amount thereof, the portion of the principal amount thereof payable upon declaration of acceleration of the maturity thereof, or (if applicable) the portion of the principal amount of such Debt Securities which is convertible, or the method by which any such portion shall be determined; (4) if convertible, the terms on which such Debt Securities are convertible, including the initial conversion price or rate and the conversion period and, in connection with the preservation of the Company's status as a REIT, any applicable limitations on the ownership or transferability of the securities into which such Debt Securities are convertible; (5) the date or dates, or the method for determining such date or dates, on which the principal of such Debt Securities will be payable; (6) the rate or rates (which may be fixed or variable), or the method by which such rate or rates shall be determined, at which such Debt Securities will bear interest, if any; (7) the date or dates, or the method for determining such date or dates, from which any interest will accrue, the dates on which any such interest will be payable, the record dates for such interest payment dates, or the method by which any such date shall be determined, the person to whom such interest shall be payable, and the basis upon which interest shall be calculated if other than that of a 360-day year of 12 months consisting of 30 days each; (8) the place or places where the principal of, any premium and interest on, and any additional amounts payable in respect of such Debt Securities will be payable, such Debt Securities may be 2 34 surrendered for conversion or registration of transfer or exchange and notices or demands to or upon the Company in respect of such Debt Securities and the applicable Indenture may be served; (9) the period or periods within which, the price or prices at which and the terms and conditions upon which such Debt Securities may be redeemed, as a whole or in part, at the option of the Company, if the Company is to have such an option; (10) the obligation, if any, of the Company to redeem, repay or purchase such Debt Securities pursuant to any sinking fund or analogous provision or at the option of a holder thereof, and the period or periods within which, the price or prices at which and the terms and conditions upon which such Debt Securities will be redeemed, repaid or purchased, as a whole or in part, pursuant to such obligation; (11) if other than U.S. dollars, the currency or currencies in which such Debt Securities are denominated and payable, which may be a foreign currency or units of two or more foreign currencies or a composite currency or currencies, and the terms and conditions relating thereto; (12) if the principal of or premium, if any, or interest on such Debt Securities is to be payable, at the election of the Company or a holder thereof, in one or more currencies or currency units other than that or those in which such Debt Securities are stated to be payable, the currency, currencies or currency units in which payment of the principal of and premium, if any, and interest on Debt Securities of such series as to which such election is made shall be payable, and the periods within which and the terms and conditions upon which such election is to be made; (13) whether the amount of payments of principal of (and premium, if any) or interest, if any, on such Debt Securities may be determined with reference to an index, formula or other method (which index, formula or method may, but need not, be based on a currency, currencies, currency unit or units or composite currency or currencies) and the manner in which such amounts shall be determined; (14) the events of default or covenants of such Debt Securities, to the extent different from or in addition to those described herein, and any provisions granting special rights to the holders of such Debt Securities upon the occurrence of events specified in such Prospectus Supplement; (15) whether such Debt Securities will be issued in certificated and/or book-entry form; (16) whether such Debt Securities will be in registered or bearer form and, if in registered form, the denominations thereof if other than $1,000 and any integral multiple thereof and, if in bearer form, the denominations thereof and terms and conditions relating thereto; (17) whether any of such Debt Securities are to be issuable in permanent global form (a "Global Security") and, if so, the terms and conditions, if any, upon which interests in such Debt Securities in global form may be exchanged, in whole or in part, for the individual Debt Securities represented thereby; (18) the applicability, if any, of the defeasance and covenant defeasance provisions described herein or any modification thereof; (19) if such Debt Securities are to be issued upon the exercise of debt warrants, the time, manner and place for such Debt Securities to be authenticated and delivered; (20) whether and under what circumstances the Company will pay additional amounts on such Debt Securities in respect of any tax, assessment or governmental charge and, if so, whether the Company will have the option to redeem such Debt Securities in lieu of making such payment; and (21) any other terms of such Debt Securities. The Debt Securities may provide for less than the entire principal amount thereof to be payable upon declaration of acceleration of the maturity thereof ("Original Issue Discount Securities"). If material or applicable, special U.S. federal income tax, accounting and other considerations applicable to Original Issue Discount Securities will be described in the applicable Prospectus Supplement. 3 35 Except as described under "-- Merger, Consolidation or Sale" or as may be set forth in any Prospectus Supplement, an Indenture will not contain any other provisions that would limit the ability of the Company to incur indebtedness or that would afford holders of the Debt Securities protection in the event of a highly leveraged or similar transaction involving the Company. However, restrictions on ownership and transfers of the Company's capital stock, designed to preserve its status as a REIT, may act to prevent or hinder a change of control. Reference is made to the applicable Prospectus Supplement for information with respect to any deletions from, modifications of or additions to the events of default or covenants that are described below, including any addition of a covenant or other provisions providing event risk or similar protection. DENOMINATIONS, INTEREST, REGISTRATION AND TRANSFER Unless otherwise described in the applicable Prospectus Supplement, the Debt Securities of any series which are registered securities, other than registered securities issued in global form (which may be of any denomination), shall be issuable in denominations of $1,000 and any integral multiple thereof. Unless otherwise specified in the applicable Prospectus Supplement, the principal of (and premium, if any) and interest on any series of Debt Securities will be payable at the corporate trust office of the Indenture Trustee, initially at the address which will be set forth in the applicable Prospectus Supplement, PROVIDED that, at the option of the Company, payment of interest may be made by check mailed to the address of the person entitled thereto as it appears in the applicable register or by wire transfer of funds to such person at an account maintained within the United States. Any interest not punctually paid or duly provided for on any interest payment date with respect to a Debt Security ("Defaulted Interest") will forthwith cease to be payable to the holder on the applicable regular record date and may either be paid to the person in whose name such Debt Security is registered at the close of business on a special record date (the "Special Record Date") for the payment of such Defaulted Interest to be fixed by the applicable Indenture Trustee, notice whereof shall be given to the holder of such Debt Security not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner, all as more completely described in the applicable Indenture. Subject to certain limitations imposed upon Debt Securities issued in book-entry form, the Debt Securities of any series will be exchangeable for other Debt Securities of the same series and of a like aggregate principal amount and tenor of different authorized denominations upon surrender of such Debt Securities at the corporate trust office of the applicable Indenture Trustee. In addition, subject to certain limitations imposed upon Debt Securities issued in book-entry form, the Debt Securities of any series may be surrendered for conversion or registration of transfer thereof at the corporate trust office of the applicable Indenture Trustee. Every Debt Security surrendered for conversion, registration of transfer or exchange shall be duly endorsed or accompanied by a written instrument of transfer. No service charge will be made for any registration of transfer or exchange of any Debt Securities, but the Indenture Trustee or the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. If the applicable Prospectus Supplement refers to any transfer agent (in addition to the Indenture Trustee) initially designated by the Company with respect to any series of Debt Securities, the Company may at any time rescind the designation of any such transfer agent or approve a change in the location through which any such transfer agent acts, except that the Company will be required to maintain a transfer agent in each place of payment for such series. The Company may at any time designate additional transfer agents with respect to any series of Debt Securities. Neither the Company nor any Indenture Trustee shall be required to (i) issue, register the transfer of or exchange Debt Securities of any series during a period beginning at the opening of business 15 days before any selection of Debt Securities of that series to be redeemed and ending at the close of business on (a) if such Debt Securities are issuable only as registered securities, the day of the mailing of the relevant notice of redemption and (b) if such Debt Securities are issuable as bearer securities, the day of the first publication of the relevant notice of redemption or, if such Debt Securities are also issuable as registered securities and there is no publication, the mailing of the relevant notice of redemption, or (ii) to register the transfer of or exchange any registered security so selected for redemption in whole or in part, except, in the case of any 4 36 registered security to be redeemed in part, the portion thereof not to be redeemed, or (iii) to exchange any bearer security so selected for redemption except that such a bearer security may be exchanged for a registered security of that series and like tenor, PROVIDED that such registered security shall be simultaneously surrendered for redemption, or (iv) to issue, register the transfer of or exchange any Debt Security which has been surrendered for repayment at the option of the holder, except the portion, if any, of such Debt Security not to be so repaid. MERGER, CONSOLIDATION OR SALE The Company may consolidate with, or sell, lease or convey all or substantially all of its assets to, or merge with or into, any other entity, PROVIDED that (i) either the Company shall be the continuing entity or the successor entity (if other than the Company) formed by or resulting from any such consolidation or merger or which shall have received the transfer of such assets shall expressly assume payment of the principal of (and premium, if any) and interest on all of the Debt Securities and the due and punctual performance and observance of all of the covenants and conditions contained in any Indenture; (ii) immediately after giving effect to such transaction and treating any indebtedness which becomes an obligation of the Company or any subsidiary as a result thereof as having been incurred by the Company or such subsidiary at the time of such transaction, no event of default under any Indenture, and no event which, after notice or the lapse of time, or both, would become such an event of default, shall have occurred and be continuing; and (iii) an officer's certificate and legal opinion covering such conditions shall be delivered to the Indenture Trustee. CERTAIN COVENANTS Existence. Except as permitted under "-- Merger, Consolidation or Sale," the Company will be required to do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, rights (charter and statutory) and franchises; PROVIDED, HOWEVER, that the Company shall not be required to preserve any right or franchise if it determines that the preservation thereof is no longer desirable in the conduct of its business. Provision of Financial Information. Whether or not the Company is subject to Section 13 or 15(d) of the Exchange Act, the Company will, to the extent permitted under the Exchange Act, file with the Commission the annual reports, quarterly reports and other documents which the Company would have been required to file with the Commission pursuant to such Section 13 or 15(d) (the "Financial Statements") if the Company were so subject, such documents to be filed with the Commission on or prior to the respective dates (the "Required Filing Dates") by which the Company would have been required so to file such documents if the Company were so subject. The Company will also in any event (i) within 15 days of each Required Filing Date (a) transmit by mail to all holders of Debt Securities, as their names and addresses appear in the Company's security register, without cost to such holders, copies of the annual reports and quarterly reports which the Company would have been required to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act if the Company were subject to such Sections, and (b) file with the applicable Indenture Trustee copies of the annual reports, quarterly reports and other documents which the Company would have been required to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act if the Company were subject to such Sections, and (ii) if filing such documents by the Company with the Commission is not permitted under the Exchange Act, promptly upon written request and payment of the reasonable cost of duplication and delivery, supply copies of such documents to any prospective holder of Debt Securities. Additional Covenants. Any additional or different covenants of the Company with respect to any series of Debt Securities will be set forth in the Prospectus Supplement relating thereto. EVENTS OF DEFAULT, NOTICE AND WAIVER Each Indenture will provide that the following events are "Events of Default" with respect to any series of Debt Securities issued thereunder; (a) default for 30 days in the payment of any installment on any Debt Security of such series; (b) default in the payment of the principal of (or premium, if any, on) any Debt 5 37 Security of such series at its maturity; (c) default in making any sinking fund payments as required for any Debt Security of such series; (d) default in the performance of any other covenant of the Company contained in the applicable Indenture (other than a covenant added to such Indenture solely for the benefit of a series of Debt Securities issued thereunder other than such series), such default having continued for 60 days after written notice as provided in such Indenture; (e) default in the payment of an aggregate principal amount exceeding a specified dollar amount of any evidence of indebtedness of the Company or any mortgage, indenture or other instrument under which such indebtedness is issued or by which such indebtedness is secured, such default having occurred after the expiration of any applicable grace period and having resulted in the acceleration of the maturity of such indebtedness, but only if such indebtedness is not discharged or such acceleration is not rescinded or annulled; (f) certain events of bankruptcy, insolvency or reorganization, or court appointment of a receiver, liquidator or trustee of the Company or any Significant Subsidiary (as hereinafter defined) or any of their respective property; and (g) any other event of default provided with respect to a particular series of Debt Securities. The term "Significant Subsidiary" means each significant subsidiary (as defined in Regulation S-X promulgated under the Securities Act) of the Company. If an Event of Default (other than an Event of Default described in clause (f) above) under any Indenture with respect to Debt Securities of any series at the time outstanding occurs and is continuing, then in every such case the applicable Indenture Trustee or the holders of not less than a majority in principal amount of the outstanding Debt Securities of that series may declare the principal amount (or, if the Debt Securities of that series are Original Issue Discount Securities or indexed securities, such portion of the principal amount as may be specified in the terms thereof) of all of the Debt Securities of that series to be due and payable immediately by written notice thereof to the Company (and to the applicable Indenture Trustee if given by the holders). If an Event of Default described in clause (f) above with respect to the Debt Securities of any series at the time outstanding shall occur, the principal amount of all the Debt Securities of that series (or, in the case of any such Original Issue Discount Security or other Debt Security, such specified amount) will automatically, and without any action by the Indenture Trustee or any holder of such series of Debt Securities, become immediately due and payable. However, at any time after such a declaration of acceleration with respect to Debt Securities of such series (or of all Debt Securities then outstanding under the applicable Indenture, as the case may be) has been made, but before a judgment or decree for payment of the money due has been obtained by the applicable Indenture Trustee, the holders of not less than a majority in principal amount of outstanding Debt Securities of such series (or of all Debt Securities then outstanding under the applicable Indenture, as the case may be) may rescind and annul such declaration and its consequences if (i) the Company shall have deposited with the applicable Indenture Trustee all required payments of the principal of (and premium, if any) and interest on the Debt Securities of such series (or of all Debt Securities then outstanding under the applicable Indenture, as the case may be), plus certain fees, expenses, disbursements and advances of the applicable Indenture Trustee, and (ii) all Events of Default, other than the non-payment of accelerated principal (or specified portion thereof), or premium (if any) or interest on the Debt Securities of such series (or of all Debt Securities then outstanding under the applicable Indenture, as the case may be) have been cured or waived as provided in the applicable Indenture. Each of the Indentures will also provide that the holders of not less than a majority in principal amount of the outstanding Debt Securities of any series (or of all Debt Securities then outstanding under the applicable Indenture, as the case may be) may waive any past default with respect to such series and its consequences, except a default (i) in the payment of the principal of (or premium, if any) or interest on any Debt Security of such series or (ii) in respect of a covenant or provision contained in the applicable Indenture that cannot be modified or amended without the consent of the holder of each outstanding Debt Security affected thereby. The Indenture Trustee will be required to give notice to the holders of Debt Securities within 90 days of a default under the applicable Indenture unless such default has been cured or waived; provided, however, that such Indenture Trustee may withhold notice to the holders of any series of Debt Securities of any default with respect to such series (except a default in the payment of the principal of (or premium, if any) or interest on any Debt Security of such series or in the payment of any sinking fund installment in respect of any Debt Security of such series) if specified responsible officers of such Indenture Trustee consider such withholding to be in the interest of such holders. 6 38 Each Indenture will provide that no holders of Debt Securities of any series may institute any proceedings, judicial or otherwise, with respect to the Indenture or for any remedy thereunder, except in the case of failure of the Indenture Trustee, for 60 days, to act after it has received a written request to institute proceedings in respect of an event of default from the holders of not less than a majority in principal amount of the outstanding Debt Securities of such series, as well as an offer of reasonable indemnity. This provision will not prevent, however, any holder of Debt Securities from instituting suit for the enforcement of payment of the principal of (and premium, if any) and interest on such Debt Securities at the respective due dates thereof. Subject to provisions in the applicable Indenture relating to its duties in case of default, no Indenture Trustee will be under any obligation to exercise any of its rights or powers under such Indenture at the request or direction of any holders of any series of Debt Securities then outstanding under such Indenture, unless such holders shall have offered to the Indenture Trustee reasonable security or indemnity. The holders of not less than a majority in principal amount of the outstanding Debt Securities of any series (or of all Debt Securities then outstanding under the applicable Indenture, as the case may be) shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the applicable Indenture Trustee, or of exercising any trust or power conferred upon such Indenture Trustee. However, a Indenture Trustee may refuse to follow any direction which is in conflict with any law or the Indenture, which may involve such Indenture Trustee in personal liability or which may be unduly prejudicial to the holders of Debt Securities of such series not joining therein. The Company will be required to deliver to each Indenture Trustee annually a certificate, signed by one of several specified officers of the Company, stating whether or not such officer has knowledge of any default under the applicable Indenture and, if so, specifying each such default and the nature and status thereof. MODIFICATION OF THE INDENTURE Modifications and amendments of an Indenture will be permitted to be made only with the consent of the holders of not less than a majority in principal amount of all outstanding Debt Securities or series of outstanding Debt Securities which are affected by such modification or amendment; provided, however, that no such modification or amendment may, without the consent of the holder of each such Debt Security affected thereby, (i) change the stated maturity of the principal of, or any installment of interest (or premium, if any) on any such Debt Security; (ii) reduce the principal amount of, or the rate or amount of interest on, or any premium payable on redemption of, any such Debt Security, or reduce the amount of principal of an Original Issue Discount Security that would be due and payable upon declaration of acceleration of the maturity thereof or would be provable in bankruptcy, or adversely affect any right of repayment of the holder of any such Debt Security; (iii) change the place of payment, or the coin or currency, for payment of principal of, premium, if any, or interest on any such Debt Security; (iv) impair the right to institute suit for the enforcement of any payment on or with respect to any such Debt Security; (v) reduce the above-stated percentage of outstanding Debt Securities of any series necessary to modify or amend the Indenture, to waive compliance with certain provisions thereof or certain defaults and consequences thereunder or to reduce the quorum or voting requirements set forth in such Indenture; or (vi) modify any of the foregoing provisions or any of the provisions relating to the waiver of certain past defaults or certain covenants, except to increase the required percentage to effect such action or to provide that certain other provisions may not be modified or waived without the consent of the holder of such Debt Security. Each Indenture will provide that the holders of not less than a majority in principal amount of a series of outstanding Debt Securities have the right to waive compliance by the Company with certain covenants relating to such series of Debt Securities in such Indenture. Modifications and amendments of an Indenture will be permitted to be made by the Company and the applicable Indenture Trustee thereunder without the consent of any holder of Debt Securities for any of the following purposes: (i) to evidence the succession of another person to the Company as obligor under such Indenture; (ii) to add to the covenants of the Company for the benefit of the holders of all or any series of Debt Securities or to surrender any right or power conferred upon the Company in such Indenture; (iii) to add events of default for the benefit of the holders of all or any series of Debt Securities; (iv) to add or change any 7 39 provisions of the Indenture to facilitate the issuance of, or to liberalize certain terms of, Debt Securities in bearer form, or to permit or facilitate the issuance of Debt Securities in uncertificated form, PROVIDED that such action shall not adversely affect the interests of the holders of the Debt Securities in any material respect; (v) to change or eliminate any provisions of the Indenture, PROVIDED that any such change or elimination shall become effective only when there are no Debt Securities outstanding of any series created prior thereto which are entitled to the benefit of such provision; (vi) to secure the Debt Securities; (vii) to establish the form or terms of Debt Securities of any series, including the provisions and procedures, if applicable, for the conversion of such Debt Securities into Common Shares or Preferred Shares; (viii) to provide for the acceptance of appointment by a successor Indenture Trustee or facilitate the administration of the trusts under an Indenture by more than one Indenture Trustee; (ix) to cure any ambiguity, defect or inconsistency in an Indenture, PROVIDED that such action shall not adversely affect the interests of holders of Debt Securities of any series in any material respect; or (x) to supplement any of the provisions of an Indenture to the extent necessary to permit or facilitate defeasance and discharge of any series of such Debt Securities, PROVIDED that such action shall not adversely affect the interests of the holders of the Debt Securities of any series in any material respect. Each Indenture will provide that in determining whether the holders of the requisite principal amount of outstanding Debt Securities of a series have given any request, demand, authorization, direction, notice, consent or waiver thereunder or whether a quorum is present at a meeting of holders of Debt Securities, (i) the principal amount of an Original Issue Discount Security that shall be deemed to be outstanding shall be the amount of the principal thereof that would be due and payable as of the date of such determination upon declaration of acceleration of the maturity thereof, (ii) the principal amount of a Debt Security denominated in a foreign currency that shall be deemed outstanding shall be the U.S. dollar equivalent, determined on the issue date for such Debt Security, of the principal amount (or, in the case of an Original Issue Discount Security, the U.S. dollar equivalent on the issue date of such Debt Security of the amount determined as provided in (i) above), (iii) the principal amount of an indexed security that shall be deemed outstanding shall be the principal face amount of such indexed security at original issuance, unless otherwise provided with respect to such indexed security in the applicable Indenture, and (iv) Debt Securities owned by the Company or any other obligor upon the Debt Securities or any affiliate of the Company or of such other obligor shall be disregarded. Each Indentures will contain provisions for convening meetings of the holders of Debt Securities of a series. A meeting may be called at any time by an Indenture Trustee, and also, upon request, by the Company or the holders of at least 25% in principal amount of the outstanding Debt Securities of such series, in any such case, upon notice given as provided in such Indenture. Except for any consent that must be given by the holder of each Debt Security affected by certain modifications and amendments of an Indenture, any resolution presented at a meeting or adjourned meeting duly reconvened at which a quorum is present may be adopted by the affirmative vote of the holders of a majority in principal amount of the outstanding Debt Securities of that series; PROVIDED, HOWEVER, that, except as referred to above, any resolution with respect to any request, demand, authorization, direction, notice, consent, waiver or other action that may be made, given or taken by the holders of a specified percentage, which is less than a majority, in principal amount of the outstanding Debt Securities of a series may be adopted at a meeting or adjourned meeting duly reconvened at which a quorum is present by the affirmative vote of the holders of such specified percentage in principal amount of the outstanding Debt Securities for that series. Any resolution passed or decision taken at any meeting of holders of Debt Securities of any series duly held in accordance with the applicable Indenture will be binding on all holders of Debt Securities of that series. The quorum at any meeting called to adopt a resolution, and at any reconvened meeting, will be persons holding or representing a majority in principal amount of the outstanding Debt Securities of a series; PROVIDED, HOWEVER, that if any action is to be taken at such meeting with respect to a consent or waiver which may be given by the holders of not less than a specified percentage in principal amount of the outstanding Debt Securities of a series, the persons holding or representing such specified percentage in principal amount of the outstanding Debt Securities of such series will constitute a quorum. Notwithstanding the foregoing provisions, each Indenture will provide that if any action is to be taken at a meeting of holders of Debt Securities of any series with respect to any request, demand, authorization, 8 40 direction, notice, consent, waiver or other action that such Indenture expressly provides may be made, given or taken by the holders of such series and one or more additional series: (i) there shall be no minimum quorum requirement for such meeting and (ii) the principal amount of the outstanding Debt Securities of such series that vote in favor of such request, demand, authorization, direction, notice, consent, waiver or other action shall be taken into account in determining whether such request, demand, authorization, direction, notice, consent, waiver or other action has been made, given or taken under such Indenture. DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE The Company may discharge certain obligations to holders of any series of Debt Securities that have not already been delivered to the applicable Indenture Trustee for cancellation and that either have become due and payable or will become due and payable within one year (or scheduled for redemption within one year) by irrevocably depositing with such Indenture Trustee, in trust, funds in such currency or currencies, currency unit or units or composite currency or currencies in which such Debt Securities are payable in an amount sufficient to pay the entire indebtedness on such Debt Securities in respect of principal (and premium, if any) and interest to the date of such deposit (if such Debt Securities have become due and payable) or to the stated maturity or redemption date, as the case may be. An Indenture may provide that, if certain provisions thereof are made applicable to the Debt Securities of or within a series pursuant to the Indenture, the Company may elect either (i) to defease and be discharged from any and all obligations with respect to such Debt Securities (except for the obligation to pay additional amounts, if any, upon the occurrence of certain events of tax, assessment or governmental charge with respect to payments on such Debt Securities and the obligations to register the transfer or exchange of such Debt Securities, to replace temporary or mutilated, destroyed, lost or stolen Debt Securities, to maintain an office or agency in respect of such Debt Securities and to hold moneys for payment in trust) ("defeasance") or (ii) to be released from its obligations with respect to such Debt Securities under certain sections of such Indenture (including the restrictions described under "-- Certain Covenants") and, if provided pursuant to such Indenture, its obligations with respect to any other covenant, and any omission to comply with such obligations shall not constitute a default or an event of default with respect to such Debt Securities ("covenant defeasance"), in either case upon the irrevocable deposit by the Company with the applicable Indenture Trustee, in trust, of an amount, in such currency or currencies, currency unit or units of composite currency or currencies in which such Debt Securities are payable at stated maturity, or Government Obligations (as defined below), or both, applicable to such Debt Securities which through the scheduled payment of principal and interest, in accordance with their terms will provide money in an amount sufficient to pay the principal of (and premium, if any) and interest on such Debt Securities, and any mandatory sinking fund or analogous payments thereon, on the scheduled dates therefor. Such a trust may be established only if, among other things, the Company has delivered to the applicable Indenture Trustee an opinion of counsel (as specified in the applicable Indenture) to the effect that the holders of such Debt Securities will not recognize income, gain or loss for U.S. federal income tax purposes as a result of such defeasance or covenant defeasance and will be subject to U.S. federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance or covenant defeasance had not occurred. "Government Obligations" means securities which are (i) direct obligations of the United States of America or the government which issued the foreign currency in which the Debt Securities of a particular series are payable, for the payment of which its full faith and credit is pledged or (ii) obligations of a person controlled or supervised by and acting as an agency or instrumentality of the United States of America or such government which issued the foreign currency in which the Debt Securities of a particular series are payable, the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America or such other government, which, in either case, are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank or trust company as custodian with respect to any such Government Obligation or a specific payment of interest on or principal of any such Government Obligation held by such custodian for the account of the holder of a depository receipt, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount 9 41 payable to the holder of such depository receipt from any amount received by the custodian in respect of the Government Obligations or the specific payment of interest on or principal of the Government Obligations evidenced by such depository receipt. Unless otherwise provided in the applicable Prospectus Supplement, if after the Company has deposited funds and/or Government Obligations to effect defeasance or covenant defeasance with respect to Debt Securities of any series, (i) the holder of a Debt Security of such series is entitled to, and does, elect pursuant to the applicable Indenture or the terms of such Debt Security to receive payment in a currency, currency unit or composite currency other than that in which such deposit has been made in respect of such Debt Security, or (ii) a Conversion Event (as defined below) occurs in respect of the currency, currency unit or composite currency in which such deposit has been made, the indebtedness represented by such Debt Security shall be deemed to have been, and will be, fully discharged and satisfied through the payment of the principal of (and premium, if any) and interest on such Debt Security as they become due out of the proceeds yielded by converting the amount so deposited in respect of such Debt Security into the currency, currency unit or composite currency in which such Debt Security becomes payable as a result of such election or such cessation of usage based on the applicable market exchange rate. "Conversion Event" means the cessation of use of (i) a currency, currency unit or composite currency both by the government of the country which issued such currency and for the settlement of transactions by a central bank or other public institutions of or within the international banking community, (ii) the ECU both within the European Monetary System and for the settlement of transactions by public institutions of or within the European Communities or (iii) any currency unit or composite currency other than the ECU for the purposes for which it was established. Unless otherwise provided in the applicable Prospectus Supplement, all payments of principal of (and premium, if any) and interest on any Debt Security that is payable in a foreign currency that ceases to be used by its government of issuance shall be made in U.S. dollars. In the event the Company effects covenant defeasance with respect to any Debt Securities and such Debt Securities are declared due and payable because of the occurrence of any event of default other than the event of default described in clause (d) under "-- Events of Default, Notice and Waiver" with respect to certain sections of the applicable Indenture (which sections would no longer be applicable to such Debt Securities) or described in clause (g) under "-- Events of Default, Notice and Waiver" with respect to any other covenant as to which there has been covenant defeasance, the amount in such currency, currency unit or composite currency in which such Debt Securities are payable, and Government Obligations on deposit with the Trustee, will be sufficient to pay amounts due on such Debt Securities at the time of their stated maturity but may not be sufficient to pay amounts due on such Debt Securities at the time of the acceleration resulting from such event of default. However, the Company would remain liable to make payment of such amounts due at the time of acceleration. Notwithstanding the description set forth under "-- Subordination" below, in the event that the Company deposits money or Government Obligations in compliance with the applicable Indenture in order to defease all or certain of its obligations with respect to any Subordinated Securities, the moneys or Government Obligations so deposited will not be subject to the subordination provisions of such Indenture and the indebtedness evidenced by such Subordinated Securities will not be subordinated in right of payment to the holders of senior indebtedness to the extent of the moneys or Government Obligations so deposited. The applicable Prospectus Supplement may further describe the provisions, if any, permitting such defeasance or covenant defeasance, including any modifications to the provisions described above, with respect to the Debt Securities of or within a particular series. CONVERSION RIGHTS The terms and conditions, if any, upon which the Debt Securities are convertible into Common or Preferred Shares will be set forth in the Prospectus Supplement relating thereto. Such terms will include whether such Debt Securities are convertible into Common or Preferred Shares, the conversion price (or manner of calculation thereof), the conversion period, provisions as to whether conversion will be at the option of the holders of the Company, the events requiring an adjustment of the conversion price and provisions 10 42 affecting conversion in the event of the redemption of such Debt Securities and any restrictions on conversion, including restrictions directed at maintaining the Company's REIT status. SUBORDINATION The terms and conditions, if any, upon which Subordinated Securities of a series are subordinated to Debt Securities of other series or to other indebtedness of the Company will be set forth in the applicable Prospectus Supplement relating thereto. Such terms will include a description of the indebtedness ranking senior to such Subordinated Securities, the restrictions on payments to the holders of such Subordinated Securities while a default with respect to such senior indebtedness in continuing, the restrictions, if any, on payments to the holders of such Subordinated Securities following an Event of Default, and provisions requiring holders of such Subordinated Securities to remit certain payments to holders of senior indebtedness. GLOBAL SECURITIES If so set forth in the applicable Prospectus Supplement, the Debt Securities of a series may be issued in whole or in part in the form of one or more Global Securities that will be deposited with, or on behalf of, a depositary identified in the applicable Prospectus Supplement relating to such series. Global Securities may be issued in either registered or bearer form and in either temporary or permanent form. The specific terms of the depositary arrangement with respect to any such series of Debt Securities will be described in the related Prospectus Supplement. 11 43 DESCRIPTION OF SHARES The Declaration of Trust ("Declaration") authorizes the Company to issue an aggregate of 150,000,000 shares of beneficial interest ("Shares") in the Company, including (i) 100,000,000 Common Shares, par value $.01 per share, and (ii) 50,000,000 Preferred Shares, par value $.01 per share. As of March 31, 1996 there were 66,165,166 Shares outstanding, all of which are Common Shares. At their March, 1996 meeting, the Trustees approved and recommended for approval by the Company's shareholders an amendment to the Declaration which would allow the Board of Trustees to amend the Declaration to increase or decrease the authorized Shares of the Company without the requirement of shareholder approval. A vote of shareholders on such approval is on the agenda for the adjourned session of the Company's annual meeting of shareholders, scheduled to be held on June 28, 1996, and no assurance can be given that such amendment will be approved. The following descriptions do not purport to be complete and are subject to, and qualified in their entirety by reference to, the more complete descriptions thereof set forth in the Declaration. Capitalized terms not defined herein are as defined in the Declaration. The Declaration authorizes the Trustees to cause the issuance, without shareholder approval, of other classes or series of Preferred Shares from time to time and to set (or change, if the class or series has been previously established) the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications or terms and conditions of redemption of such Preferred Shares as are not prohibited by the Declaration or applicable law. As of April 1, 1996, the Trustees had created an authorized but unissued class of 1,000,000 Preferred Shares (the "Junior Participating Preferred Shares"), described more fully below under "Description of Preferred Shares," and no other such class or series of Preferred Shares. Except as otherwise determined by the Trustees with respect to any class or series of Preferred Shares, all Shares: (i) will participate equally in dividends payable to shareholders when, as and if declared by the Trustees and ratably in net assets available for distribution to shareholders on liquidation or dissolution; (ii) will have one vote per share on all matters submitted to a vote of the shareholders, (iii) will not have cumulative voting rights in the election of Trustees; and (iv) will have no preference, conversion, exchange, sinking fund, redemption rights or preemptive or similar rights. Upon issuance in accordance with the Declaration, applicable law and the terms and conditions described in the related Prospectus Supplement, the Shares will be fully paid and nonassessable. The holders of Shares do not have preemptive rights with respect to the issuance of additional Shares or other securities of the Company. The authorized but unissued Shares will be available for issuance from time to time by the Company at the sole discretion of its Board of Trustees for any proper trust purpose, which could include raising capital, providing compensation or benefits to employees and others, paying stock dividends or acquiring companies, businesses or properties. The issuance of such unissued Shares could have the effect of diluting the earnings per share and book value per share of currently outstanding Shares. For certain other information with respect to the Shares, see "Limitation of Liabilities; Shareholder Liability" and "Redemption; Business Combinations and Control Share Acquisitions" below. DESCRIPTION OF PREFERRED SHARES The Declaration authorizes the Board of Trustees to cause the issuance, without shareholder approval, of classes or series of Preferred Shares from time to time and to set (or change, if the class or series has been previously established) the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications or terms and conditions of redemption of such Preferred Shares that are not prohibited by the Declaration or applicable law. The Trustees have provided for the Junior Participating Preferred Shares as an authorized but unissued class of 1,000,000 Preferred Shares. The rights of the Junior Participating Preferred Shares, when and if issued, are as follows. The holder of each Junior Participating Preferred Share is entitled to quarterly dividends 12 44 in the greater amount of $5.00 or 100 times the quarterly per share dividend, whether cash or otherwise, declared upon the Common Shares. Dividends on the Junior Participating Preferred Shares are cumulative, and upon failure of the Company to pay such dividends for six quarters, the holders of the Junior Participating Preferred Shares shall be entitled to elect two Trustees. The holder of each Junior Participating Preferred Share is entitled to 100 votes on all matters submitted to a vote of the shareholders. The Junior Participating Preferred Shares have a preference of $100.00 per share upon liquidation, dissolution or winding up of the Company. The rights of the Junior Participating Preferred Shares are subject to the superior rights of any senior series or class of Preferred Shares which the Board of Trustees shall, from time to time, authorize and issue. See "Redemption; Business Combinations and Control Share Acquisitions" below. The following description of the Preferred Shares sets forth certain general terms and provisions of the Preferred Shares to which any Prospectus Supplement may relate. The statements below describing the Preferred Shares are in all respects subject to and qualified in their entirety by reference to the applicable provisions of the Declaration (including any applicable articles supplementary) and By-Laws. GENERAL Subject to limitations prescribed by Maryland law and the Declaration, the Trustees are authorized to fix the number of shares constituting each series of Preferred Shares and the designations and powers, preferences and relative, participating, optional or other specific rights and qualifications, limitations or restrictions thereof, including such provisions as may be desired concerning voting, redemption, dividends, dissolution or the distribution of assets, conversion or exchange, and such other subjects or matters as may be fixed by resolutions of the Trustees. Reference is made to the Prospectus Supplement relating to the Preferred Shares offered thereby for specific terms, including: (1) the title of such Preferred Shares; (2) the number of shares of such Preferred Shares offered, the liquidation preference per share and the offering price of such Preferred Shares; (3) the dividend rate(s), period(s) and/or payment date(s) or method(s) of calculation thereof applicable to such Preferred Shares; (4) the date from which dividends on such Preferred Shares shall accumulate, if applicable; (5) the procedures for any auction and remarketing, if any, for such Preferred Shares; (6) the provision for a sinking fund, if any, for such Preferred Shares; (7) the provision for redemption, if applicable, of such Preferred Shares; (8) any listing of such Preferred Shares on any securities exchange; (9) the terms and conditions, if applicable, upon which such Preferred Shares will be convertible into Common Shares of the Company or another series of Offered Securities, including the conversion price (or manner of calculation thereof); (10) whether interests in such Preferred Shares will be represented by Depositary Shares as more fully described below under "Description of Depositary Shares"; (11) any other specific terms, preferences, rights, limitations or restrictions of such Preferred Shares; (12) a discussion of federal income tax considerations applicable to such Preferred Shares; (13) the relative ranking and preferences of such Preferred Shares as to dividend rights and rights upon liquidation, dissolution or winding up of the affairs of the Company; 13 45 (14) any limitations on issuance of any series of Preferred Shares ranking senior to or on a parity with such series of Preferred Shares as to dividend rights and rights upon liquidation, dissolution or winding up of the affairs of the Company; and (15) any limitations on direct or beneficial ownership and restrictions on transfer, in each case as may be appropriate to preserve the status of the Company as a REIT. As described under "Description of Depositary Shares," the Company may, at its option, elect to offer Depositary Shares evidenced by depositary receipts ("Depositary Receipts"), each representing a fractional interest (to be specified in the Prospectus Supplement relating to the particular series of the Preferred Shares) in a share of the particular series of the Preferred Shares issued and deposited with a Depositary (as defined below). RANK Unless otherwise determined by the Trustees and specified in the applicable Prospectus Supplement, it is expected that the Preferred Shares will, with respect to dividend rights and rights upon liquidation, dissolution or winding up of the Company, rank (i) senior to all Common Shares, and to all equity securities ranking junior to such Preferred Shares; (ii) on a parity with all equity securities issued by the Company the terms of which specifically provide that such equity securities rank on a parity with the Preferred Shares; and (iii) junior to all equity securities issued by the Company the terms of which specifically provide that such equity securities rank senior to the Preferred Shares. DIVIDENDS Holders of Preferred Shares of each series shall be entitled to receive, when, as and if declared by the Trustees, out of assets of the Company legally available for payment, cash dividends at such rates and on such dates as will be set forth in the applicable Prospectus Supplement. Each such dividend shall be payable to holders of record as they appear on the stock transfer books of the Company (or, if applicable, on the records of the Depositary referred to below under "Description of Depositary Shares") on such record dates as shall be fixed by the Trustees. Dividends on any series of the Preferred Shares may be cumulative or noncumulative, as provided in the applicable Prospectus Supplement. Dividends, if cumulative, will be cumulative from and after the date set forth in the applicable Prospectus Supplement. If the Trustees fail to declare a dividend payable on a dividend payment date on any series of the Preferred Shares for which dividends are noncumulative, then the holders of such series of the Preferred Shares will have no right to receive a dividend in respect of the dividend period ending on such dividend payment date, and the Company will have no obligation to pay the dividend accrued for such period, whether or not dividends on such series are declared payable on any future dividend payment date. If Preferred Shares of any series are outstanding, no full dividends shall be declared or paid or set apart for payment on the Preferred Shares of the Company of any other series ranking, as to dividends, on a parity with or junior to the Preferred Shares of such series for any period unless (i) if such series of Preferred Shares has a cumulative dividend, full cumulative dividends have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for such payment on the Preferred Shares of such series for all past dividend periods and the then current dividend period or (ii) if such series of Preferred Shares does not have a cumulative dividend, full dividends for the then current dividend period have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for such payment on the Preferred Shares of such series. When dividends are not paid in full (or a sum sufficient for such full payment is not so set apart) upon the Preferred Shares of any series and the shares of any other series of Preferred Shares ranking on a parity as to dividends with the Preferred Shares of such series, all dividends declared upon Preferred Shares of such series and any other series of Preferred Shares shall in all cases bear to each other the same ratio that accrued dividends per share on the Preferred Shares of such series (which shall not include any accumulation in respect of unpaid dividends for prior dividend periods if such Preferred Shares do not have a cumulative dividend) and such other series of Preferred Shares bear to 14 46 each other. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on Preferred Shares of such series which may be in arrears. Except as provided in the immediately preceding paragraph, unless (i) if such series of Preferred Shares has a cumulative dividend, full cumulative dividends on the Preferred Shares of such series have been or contemporaneously are declared and paid or declared and a sum sufficient for the repayment thereof set apart for payment for all past dividend periods and the then current dividend period, and (ii) if such series of Preferred Shares does not have a cumulative dividend, full dividends on the Preferred Shares of such series have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for the then current dividend period, no dividends (other than in Common Shares or other capital stock ranking junior to the Preferred Shares of such series as to dividends and upon liquidation) shall be declared or paid or set aside for payment or other distribution shall be declared or made upon the Common Shares or any other capital stock of the Company ranking junior to or on a parity with the Preferred Shares of such series as to dividends or upon liquidation, nor shall any Common Shares or any other capital stock of the Company ranking junior to or on a parity with the Preferred Shares of such series as to dividends or upon liquidation be redeemed, purchased or otherwise acquired for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any shares of any such stock) by the Company (except by conversion into or exchange for other capital stock of the Company ranking junior to the Preferred Shares of such series as to dividends and upon liquidation and except pursuant to certain pro rata offers to purchase or a concurrent redemption of all, or a pro rata portion of, the outstanding shares of the Preferred Shares of such series and any other series of Preferred Shares ranking on a parity with such series as to dividends and liquidation). Any dividend payment made on shares of a series of Preferred Shares shall first be credited against the earliest accrued but unpaid dividend due with respect to shares of such series which remains payable. REDEMPTION If so provided in the applicable Prospectus Supplement, the Preferred Shares will be subject to mandatory redemption or redemption at the option of the Company, as a whole or in part, in each case upon the terms, at the times and at the redemption prices set forth in such Prospectus Supplement. The Prospectus Supplement relating to a series of Preferred Shares that is subject to mandatory redemption will specify the number of such Preferred Shares that shall be redeemed by the Company in each year commencing after a date to be specified, at a redemption price per share to be specified, together with an amount equal to all accrued and unpaid dividends thereon (which shall not, if such Preferred Shares does not have a cumulative dividend, include any accumulation in respect of unpaid dividends for prior dividend periods) to the date of redemption. The redemption price may be payable in cash or other property, as specified in the applicable Prospectus Supplement. If the redemption price for Preferred Shares of any series is payable only from the net proceeds of the issuance of capital stock of the Company, the terms of such Preferred Shares may provide that, if no such capital stock shall have been issued or to the extent the net proceeds from any issuance are insufficient to pay in full the aggregate redemption price then due, such Preferred Shares shall automatically and mandatorily be converted into shares of the applicable capital stock of the Company pursuant to conversion provisions specified in the applicable Prospectus Supplement. Notwithstanding the foregoing, unless (i) if such series of Preferred Shares has a cumulative dividend, full cumulative dividends on all shares of any series of Preferred Shares shall have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for all past dividend periods and the then current dividend period, and (ii) if such series of Preferred Shares does not have a cumulative dividend, full dividends on the Preferred Shares of any series have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for the then current dividend period, no shares of any series of Preferred Shares shall be redeemed unless all outstanding Preferred Shares of such series are simultaneously redeemed; PROVIDED, HOWEVER, that the foregoing shall not prevent the purchase or acquisition of Preferred Shares of such series pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding Preferred Shares of such 15 47 series, and, unless (i) if such series of Preferred Shares has a cumulative dividend, full cumulative dividends on all outstanding shares of any series of Preferred Shares have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for all past dividend periods and the then current dividend period, and (ii) if such series of Preferred Shares does not have a cumulative dividend, full dividends on the Preferred Shares of any series have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for the then current dividend period, the Company shall not purchase or otherwise acquire directly or indirectly any Preferred Shares of such series (except by conversion into or exchange for capital stock of the Company ranking junior to the Preferred Shares of such series as to dividends and upon liquidation). If fewer than all of the outstanding Preferred Shares of any series are to be redeemed, the number of Preferred Shares to be redeemed will be determined by the Company and such shares may be redeemed pro rata from the holders of record of such shares in proportion to the number of such shares held by such holders (with adjustments to avoid redemption of fractional shares) or by lot in manner determined by the Company. Notice of redemption will be mailed at least 30 days but not more than 60 days before the redemption date to each holder of record of Preferred Shares of any series to be redeemed at the address shown on the stock transfer books of the Company. Each notice shall state: (i) the redemption date; (ii) the number of shares and series of the Preferred Shares to be redeemed; (iii) the redemption price; (iv) the place or places where certificates for such Preferred Shares are to be surrendered for payment of the redemption price; (v) that dividends on the shares to be redeemed will cease to accrue on such redemption date; and (vi) the date upon which the holder's conversion rights, if any, as to such shares shall terminate. If fewer than all the Preferred Shares of any series are to be redeemed, the notice mailed to each such holder thereof shall also specify the number of Preferred Shares to be redeemed from each such holder. If notice of redemption of any Preferred Shares has been given and if the funds necessary for such redemption have been set aside by the Company in trust for the benefit of the holders of any of the Preferred Shares so called for redemption, then from and after the redemption date dividends will cease to accrue on such Preferred Shares, and any and all rights of the holders of such shares will terminate, except the right to receive the redemption price. LIQUIDATION PREFERENCE Upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, then, before any distribution or payment shall be made to the holders of any Common Shares or any other class or series of capital stock of the Company ranking junior to the Preferred Shares in the distribution of assets upon any liquidation, dissolution or winding up of the Company, the holders of each series of Preferred Shares shall be entitled to receive out of assets of the Company legally available for distribution to shareholders liquidating distributions in the amount of the liquidation preference per share (set forth in the applicable Prospectus Supplement), plus an amount equal to all dividends accrued and unpaid thereon (which shall not include any accumulation in respect of unpaid dividends for prior dividend periods if such Preferred Shares do not have a cumulative dividend). After payment of the full amount of the liquidating distributions to which they are entitled, the holders of Preferred Shares will have no right or claim to any of the remaining assets of the Company. In the event that upon any such voluntary or involuntary liquidation, dissolution or winding up, the available assets of the Company are insufficient to pay the amount of the liquidating distributions on all outstanding Preferred Shares and the corresponding amounts payable on all shares of other classes or series of capital stock of the Company ranking on a parity with the Preferred Shares in the distribution of assets, then the holders of the Preferred Shares and all other such classes or series of capital stock shall share ratably in any such distribution of assets in proportion to the full liquidating distributions to which they would otherwise be respectively entitled. If liquidating distributions shall have been made in full to all holders of Preferred Shares, the remaining assets of the Company shall be distributed among the holders of any other classes or series of capital stock ranking junior to the Preferred Shares upon liquidation, dissolution or winding up, according to their respective rights and preferences and in each case according to their respective number of shares. For such purposes, the consolidation or merger of the Company with or into any other trust or corporation, or the sale, lease or 16 48 conveyance of all or substantially all of the property or business of the Company, shall not be deemed to constitute a liquidation, dissolution or winding up of the Company. VOTING RIGHTS Holders of the Preferred Shares will not have any voting rights, except as set forth below or as otherwise from time to time required by law or as indicated in the applicable Prospectus Supplement. Unless otherwise specified in the related Prospectus Statement, at any time dividends on any Preferred Shares shall be in arrears for six consecutive quarterly periods, the holders of such Preferred Shares (voting separately as a class with all other series of preferred shares upon which like voting rights have been conferred and are exercisable) will be entitled to vote for the election of two additional trustees of the Company at the next annual meeting of shareholders and at each subsequent meeting until (i) if such series of Preferred Shares has a cumulative dividend, all dividends accumulated on such Preferred Shares for the past dividend periods and the then current dividend period shall have been fully paid or declared and a sum sufficient for the payment thereof set aside for payment or (ii) if such series of Preferred Shares does not have a cumulative dividend, four consecutive quarterly dividends shall have been fully paid or declared and a sum sufficient for the payment thereof set aside for payment. In such case, the entire Board of Trustees of the Company will be increased by two trustees. Unless provided otherwise for any series of Preferred Shares, so long as any Preferred Shares remain outstanding, the Company shall not, without the affirmative vote or consent of the holders of a majority of the shares of each series of Preferred Shares outstanding at the time, given in person or by proxy, either in writing or at a meeting (such series voting separately as a class), (i) authorize or create, or increase the authorized or issued amount of, any class or series of capital stock ranking prior to such series of Preferred Shares with respect to payment of dividends or the distribution of assets upon liquidation, dissolution or winding up, or reclassify any authorized capital stock of the Company into any such shares, or create, authorize or issue any obligation or security convertible into or evidencing the right to purchase any such shares; or (ii) amend, alter or repeal the provisions of the Declaration or the certificate of designations for such series of Preferred Shares, whether by merger, consolidation or otherwise, so as to materially and adversely affect any right, preference, privilege or voting power of such series of Preferred Shares or the holders thereof; PROVIDED, HOWEVER, that any increase in the amount of the authorized Preferred Shares or the creation or issuance of any other series of Preferred Shares, or any increase in the amount of authorized shares of such series or any other series of Preferred Shares, in each case ranking on a parity with or junior to the Preferred Shares of such series with respect to payment of dividends or the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers. The foregoing voting provisions will not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required shall be effected, all outstanding shares of such series of Preferred Shares shall have been redeemed or called for redemption and sufficient funds shall have been deposited in trust to effect such redemption. As more fully described under "Description of Depositary Shares" below, if the Company elects to issue Depositary Shares, each representing a fraction of share of a series of the Preferred Shares, each such Depositary will, in effect be entitled to such fraction of a vote per Depositary Share. CONVERSION RIGHTS The terms and conditions, if any, upon which shares of any series of Preferred Shares may be converted into or exchanged for Common Shares or another series of Preferred Shares or other series of Offered Securities will be set forth in the Prospectus Supplement relating thereto. Such terms will include the number of Common Shares or other securities into which the Preferred Share is convertible or exchangeable, conversion or exchange price (or manner of calculation thereof), the conversion or exchange period, provisions as to whether conversion or exchange will be at the option of the holders of the Preferred Shares or the Company, the events requiring an adjustment of the conversion or exchange price and provisions affecting conversion or exchange in the event of the redemption of such Preferred Shares. 17 49 DESCRIPTION OF DEPOSITARY SHARES GENERAL The description set forth below and in any applicable Prospectus Supplement of certain provisions of any Deposit Agreement (as defined below) and of the Depositary Shares and Depositary Receipts does not purport to be complete and is subject to and qualified in its entirety by reference to the forms of Deposit Agreement and Depositary Receipts relating to each series of the Preferred Shares which have been or will be filed with the Commission at or prior to the time of the offering of such series of the Preferred Shares. The Company may, at its option, elect to offer fractional interests in shares of Preferred Shares, rather than shares of Preferred Shares. In the event such option is exercised, the Company will provide for the issuance by a Depositary (as defined below) to the public of receipts for Depositary Shares, each of which will represent a fractional interest to be set forth in the Prospectus Supplement relating to a particular series of the Preferred Shares which will be filed with the Commission at or prior to the time of the offering of such series of the Preferred Shares as described below. Preferred Shares of each series represented by Depositary Shares will be deposited under a separate deposit agreement (each, a "Deposit Agreement") among the Company and the depositary named therein (a "Depositary"). The Prospectus Supplement relating to a series of Depositary Shares will set forth the name and address of the Depositary. Subject to the terms of the applicable Deposit Agreement, each owner of a Depositary Share will be entitled, in proportion to the fractional interest of a share of a particular series of Preferred Shares represented by such Depositary Share to all the rights and preferences of the Preferred Shares represented by such Depositary Shares (including dividend, voting, conversion, redemption and liquidation rights). The Depositary Shares will be evidenced by Depositary Receipts issued pursuant to the applicable Deposit Agreement. Upon surrender of Depositary Receipts at the office of the Depositary and upon payment of the charges provided in the Deposit Agreement and subject to the terms thereof, a holder of Depositary Shares is entitled to have the Depositary deliver to such holder the whole shares of Preferred Shares underlying the Depositary Shares evidenced by the surrendered Depositary Receipts. DIVIDENDS AND OTHER DISTRIBUTIONS A Depositary will be required to distribute all cash dividends or other cash distributions received in respect of the applicable Preferred Shares to the record holders of Depositary Receipts evidencing the related Depositary Shares in proportion to the number of such Depositary Receipts owned by such holders, subject to certain obligations of holders to file proofs, certificates and other information and to pay certain charges and expenses to such Depositary. Fractions will be rounded down to the market whole cent. In the event of a distribution other than in cash, a Depositary will be required to distribute property received by it to the record holders of Depositary Receipts entitled thereto, subject to certain obligations of holders to file proofs, certificates and other information and to pay certain charges and expenses to such Depositary, unless such Depositary determines that it is not feasible to make such distribution, in which case such Depositary may, with the approval of the Company, sell such property and distribute the net proceeds from such sale to such holders. No distributions will be made in respect of any Depositary Share to the extent that it represents any Preferred Shares which have been converted or exchanged. The Deposit Agreement will also contain provisions relating to the manner in which any subscription or similar rights offered by the Company to holders of the Preferred Shares shall be made available to holders of Depositary Shares. REDEMPTION OF DEPOSITARY SHARES If a series of the Preferred Shares underlying the Depositary Shares is subject to redemption, the Depositary Shares will be redeemed from the proceeds received by the Depositary resulting from the redemption, in whole or in part, of such series of the Preferred Shares held by the Depositary. The Depositary shall mail notice of redemption not less than 30 and not more than 60 days prior to the date fixed for 18 50 redemption to the record holders of the Depositary Receipts evidencing the Depositary Shares to be so redeemed at their respective addresses appearing in the Depositary's books. The redemption price per Depositary Share will be equal to the applicable fraction of the redemption price per share payable with respect to such series of the Preferred Shares. Whenever the Company redeems shares of Preferred Shares held by the Depositary, the Depositary will redeem as of the same redemption date the number of Depositary Shares relating to shares of Preferred Shares so redeemed. If less than all of the Depositary Shares are to be redeemed, the Depositary Shares to be redeemed will be selected by lot or pro rata as may be determined by the Depositary. After the date fixed for redemption, the Depositary Shares so called for redemption will no longer be deemed to be outstanding and all rights of the holders of the Depositary Shares and the related Depositary Receipts will cease, except the right to receive the moneys payable upon such redemption and any money or other property to which the holders of such Depositary Shares were entitled upon such redemption upon surrender to the Depositary of the Depositary Receipts evidencing such Depositary Shares. VOTING OF THE PREFERRED SHARES Upon receipt of notice of any meeting at which the holders of the applicable Preferred Shares are entitled to vote, a Depositary will be required to mail the information contained in such notice of meeting to the record holders of the Depositary Receipts evidencing the Depositary Shares which represent such Preferred Shares. Each record holder of Depositary Receipts evidencing Depositary Shares on the record date (which will be the same date as the record date for the Preferred Shares) will be entitled to instruct such Depositary as to the exercise of the voting rights pertaining to the amount of Preferred Shares represented by such holder's Depositary Shares. Such Depositary will endeavor, insofar as practical, to vote the amount of Preferred Shares represented by such Depositary Shares in accordance with such instructions, and the Company will agree to take all reasonable action which may be deemed necessary by such Depositary in order to enable such Depositary to do so. Such Depositary will be required to abstain from voting the amount of Preferred Shares represented by such Depositary Shares to the extent it does not receive specific instructions from the holders of Depositary Receipts evidencing such Depositary Shares. The Depositary will not be responsible for any failure to carry out any instruction to vote, or for the manner or effect of any such vote made, as long as such action or non-action is in good faith and does not result from gross negligence or willful misconduct of such Depositary. LIQUIDATION PREFERENCE In the event of the liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the holders of each Depositary Share will be entitled to the fraction of the liquidation preference accorded each Preferred Share represented by such Depositary Share, as set forth in the applicable Prospectus Supplement. CONVERSION OF PREFERRED SHARES The Depositary Shares, as such, will not be convertible into or exchangeable for Common Shares, Preferred Shares or any other securities or property of the Company. Nevertheless, if so specified in the applicable Prospectus Supplement relating to an offering of Depositary Shares, the Depositary Receipts may be surrendered by holders thereof to the applicable Depositary with written instructions to such Depositary to instruct the company to cause conversion or exchange of the Preferred Shares represented by the Depositary Share evidenced by such Depositary Receipts into Common Shares, other shares of Preferred Shares of the Company or such other securities as shall be provided therein, and the Company will agree that upon receipt of such instruction and any amounts payable in respect thereof, it will cause the conversion or exchange thereof utilizing the same procedures as those provided for delivery of Preferred Shares to effect such conversion or exchange. If the Depositary Shares evidenced by a Depositary Receipt are to be converted in part only, a new Depositary Receipt or Depositary Receipts will be issued for any Depositary Shares not to be converted. 19 51 AMENDMENT AND TERMINATION OF A DEPOSIT AGREEMENT Any form of Depositary Receipt evidencing Depositary Shares and any provision of a Deposit Agreement will be permitted at any time to be amended by agreement between the Company and the applicable Depositary. However, any amendment that materially and adversely alters the rights of the holders of Depositary Shares will not be effective unless such amendment has been approved by the existing holders of at least a majority of the applicable Depositary Shares then outstanding. Every holder of an outstanding Depositary Receipt at the time any such amendment becomes effective shall be deemed, by continuing to hold such Depositary Receipt, to consent and agree to such amendment and to be bound by the applicable Deposit Agreement as amended thereby. Any Deposit Agreement may be terminated by the Company upon not less than 30 days prior written notice to the applicable Depositary if (i) such termination is necessary to preserve the Company's status as a REIT or (ii) a majority of each series of Preferred Shares affected by such termination consents to such termination, whereupon such Depositary will be required to deliver or make available to each holder of Depositary Receipts, upon surrender of the Depositary Receipts held by such holder, such number of whole or fractional Preferred Shares as are represented by the Depositary Shares evidenced by such Depositary Receipts together with any other property held by such Depositary with receipts to such Depositary Receipts. The Company will agree in each Depositary Agreement that if such Deposit Agreement is terminated to preserve the Company's status as a REIT, then the Company will use its best efforts to list the Preferred Shares issued upon surrender of the related Depositary Shares on a national securities exchange. In addition, a Deposit Agreement will automatically terminate if (i) all outstanding Depositary Shares thereunder shall have been redeemed; (ii) there shall have been a final distribution in respect of the related Preferred Shares in connection with any liquidation, dissolution or winding up of the Company and such distribution shall have been distributed to the holders of Depositary Receipts evidencing the Depositary Shares underlying such Preferred Shares; or (iii) each of the related Preferred Shares shall have been converted or exchanged into securities not so represented by Depositary Shares. CHARGES OF A DEPOSITARY The Company will pay all transfer and other taxes and governmental charges arising solely from the existence of a Deposit Agreement. In addition, the Company will pay the fees and expenses of a Depositary in connection with the initial deposit of the Preferred Shares and any redemption of Preferred Shares. However, holders of Depositary Receipts will pay any transfer or other governmental charges and the fees and expenses of a Depositary for any duties requested by such holders to be performed which are outside of those expressly provided for in the applicable Deposit Agreement. RESIGNATION AND REMOVAL OF DEPOSITARY A Depositary may resign at any time by delivering to the Company notice of its election to do so, and the Company may at any time remove a Depositary, any such resignation or removal to take effect upon the appointment of a successor Depositary. A successor Depositary will be required to be appointed within 60 days after delivery of the notice of resignation or removal and will be required to be a bank or trust company having its principal office in the United States and having a combined capital and surplus of at least $50 million. MISCELLANEOUS A Depositary will be required to forward to holders of Depositary Receipts any reports and communications from the Company which are received by such Depositary with respect to the related Preferred Shares. Neither Depositary nor the Company will be liable if it is prevented from or delayed in, by law or any circumstances beyond its control, performing its obligations under a Deposit Agreement. The obligations of the Company and a Depositary under a Deposit Agreement will be limited to performing their duties thereunder in good faith and without gross negligence or willful misconduct, and neither the Company nor any applicable Depositary will be obligated to prosecute or defend any legal proceeding in respect of any Depositary Receipts, Depositary Shares or Preferred Shares represented thereby unless satisfactory indemnity 20 52 is furnished. The Company and any Depositary will be permitted to rely on written advice of counsel or accountants, or information provided by persons presenting Preferred Shares represented thereby for deposit, holders of Depositary Receipts or other persons believed in good faith to be competent to give such information, and on documents believed in good faith to be genuine and signed by a proper party. In the event a Depositary shall receive conflicting claims, requests or instructions from any holders of Depositary Receipts, on the one hand, and the Company, on the other hand, such Depositary shall be entitled to act on such claims, requests or instructions received from the Company. DESCRIPTION OF WARRANTS The Company may issue, together with any other series of Offered Securities or separately, Warrants entitling the holder to purchase from or sell to the Company, or to receive from the Company the cash value of the right to purchase or sell, Debt Securities, Preferred Shares, Depositary Shares or Common Shares. The Warrants are to be issued under Warrant Agreements (each a "Warrant Agreement") to be entered into between the Company and a warrant agent (the "Warrant Agent"), all as set forth in the applicable Prospectus Supplement relating to the particular issue of Warrants. In the case of each series of Warrants, the applicable Prospectus Supplement will describe the terms of the Warrants being offered thereby, including the following, if applicable: (i) the offering price; (ii) the currencies in which such Warrants are being offered; (iii) the number of Warrants offered; (iv) the securities underlying the Warrants; (v) the exercise price, the procedures for exercise of the Warrants and the circumstances, if any, that will cause the Warrants to be deemed to be automatically exercised; (vi) the date on which the right shall expire; (vii) U.S. federal income tax consequences; and (viii) other terms of the Warrants. Warrants may be exercised at the appropriate office of the Warrant Agent or any other office indicated in the applicable Prospectus Supplement. Prior to the exercise of Warrants entitling the holder to purchase any securities, holders of such Warrants will not have any of the rights of holders of the securities purchasable upon such exercise and will not be entitled to payments made to holders of such securities. The Warrant Agreements may be amended or supplemented without the consent of the holders of the Warrants issued thereunder to effect changes that are not inconsistent with the provisions of the Warrants and that do not adversely affect the interests of the holders of the Warrants. LIMITATION OF LIABILITY; SHAREHOLDER LIABILITY Maryland law permits a REIT to provide, and the Declaration provides, that no trustee, officer, shareholder, employee or agent of the Company shall be held to any personal liability, jointly or severally, for any obligation of or claim against the Company, and that, as far as practicable, each written agreement of the Company is to contain a provision to that effect. Despite these facts, counsel has advised the Company that in some jurisdictions the possibility exists that shareholders of a non-corporate entity such as the Company may be held liable for acts or obligations of the Company. Counsel has advised the Company that the State of Texas may not give effect to the limitation of shareholder liability afforded by Maryland law, but that Texas law would likely recognize contractual limitations of liability such as those discussed above. The Company intends to conduct its business in a manner designed to minimize potential shareholder liability by, among other things, inserting appropriate provisions in written agreements of the Company; however, no assurance can be given that shareholders can avoid liability in all instances in all jurisdictions. The Declaration provides that, upon payment by a shareholder of any such liability, the shareholder will be entitled to indemnification by the Company. There can be no assurance that, at the time any such liability arises, there will be assets of the Company sufficient to satisfy the Company's indemnification obligation. The Trustees intend to conduct the operations of the Company, with the advice of counsel, in such a way as to minimize or avoid, as far as practicable, the ultimate liability of the shareholders of the Company. The Trustees do not intend to provide insurance covering such risks to the shareholders. 21 53 REDEMPTION; BUSINESS COMBINATIONS AND CONTROL SHARE ACQUISITIONS REDEMPTION AND BUSINESS COMBINATIONS For the Company to qualify as a REIT under the Code, in any taxable year, not more than 50% in value of its outstanding Shares may be owned, directly or indirectly by five or fewer individuals during the last six months of such year, and the shares must be owned by 100 or more persons during at least 335 days of a taxable year or a proportionate part of a taxable year less than 12 months. In order to meet these and other requirements, the Trustees have the power to redeem or prohibit the transfer of a sufficient number of Shares to maintain or bring the ownership of the Shares into conformity with such requirements. In connection with the foregoing, if the Trustees shall, at any time and in good faith, be of the opinion that direct or indirect ownership of shares representing more than 8.5% in value of the total Shares outstanding (the "Excess Shares") has or may become concentrated in the hands of one beneficial owner, other than Excepted Persons, the Trustees shall have the power (i) to purchase from any shareholder of the Company such Excess Shares, and (ii) to refuse to transfer or issue Shares to any person whose acquisition of such Shares would, in the opinion of the Trustees, result in the direct or indirect beneficial ownership by any person of Shares representing more than 8.5% in value of the outstanding Shares. Any transfer of Shares, options, or other securities convertible into Shares that would create a beneficial owner (other than any of the Excepted Persons) of Shares representing more than 8.5% in value of the total Shares outstanding shall be deemed void AB INITIO, and the intended transferee shall be deemed never to have had an interest therein. Further the Declaration provides that transfers or purported acquisitions, directly, indirectly or by attribution, of Shares, or securities convertible into Shares, that could result in disqualification of the Company as a REIT are null and void and permits the Trustees to repurchase Shares or other securities to the extent necessary to maintain the Company's status as a REIT. The purchase price for any Shares so purchased shall be determined by the price of the Shares on the principal exchange on which they are then traded, or if no such price is available, then the purchase price shall be equal to the net asset value of such Shares as determined by the Trustees in accordance with applicable law. From and after the date fixed for purchase by the Trustees, and so long as payment of the purchase price for the Shares to be so redeemed shall have been made or duly provided for, the holder of any Excess Shares so called for purchase shall cease to be entitled to distributions, voting rights and any and all other benefits with respect to such Shares, except the right to payment of the purchase price for the Shares. The Declaration also requires that Business Combinations between the Company and a beneficial holder of 10% or more of the outstanding Shares (a "Related Person") be approved by the affirmative vote of the holders of at least 75% of the Shares unless (1) the Trustees by unanimous vote or written consent shall have expressly approved in advance the acquisition of the outstanding Shares that caused the Related Person to become a Related Person or shall have approved the Business Combination prior to the Related Person involved in the Business Combination having become a Related Person; or (2) the Business Combination is solely between the Company and a 100% owned affiliate of the Company. As permitted by law, the Company has elected to be governed by such provisions rather than the provisions of Subtitle 6 of Title 3 of the Corporations and Associations Article of the Annotated Code of Maryland regarding business combinations. Under the Declaration the number of trustees may be fixed from time to time by two-thirds of the Trustees or by an amendment of the Declaration by the shareholders of the Company, with a minimum of three and a maximum of 12 trustees, a majority of whom must be Independent Trustees. The Declaration fixes the current number of trustees of the Company at five and divides the Trustees into three groups. Trustees in each group are elected to three-year terms. As the trustees' terms expire, replacements are elected by a majority of the outstanding Shares. The classified nature of the Trustees may make it more difficult for the shareholders to remove the management of the Company than if all trustees were elected on an annual basis. Vacancies may be filled by a majority of the remaining trustees, except that a vacancy among the Independent Trustees must be filled by a majority of the remaining Independent Trustees or by majority vote of the Company's shareholders. Any trustee may be removed for cause by all the remaining trustees, or without cause by vote of two-thirds of the Shares then outstanding and entitled to vote thereon. 22 54 The provisions regarding business combinations and the classified nature of the Trustees and certain other matters may not be repealed or amended without the affirmative vote of at least 75% of the of the shareholders of the Company, PROVIDED that the Trustees, by two-thirds vote, may, without the approval or consent of the shareholders, adopt any amendment that they in good faith determine to be necessary to permit the Company to qualify as a REIT under the Code. The foregoing provisions may have the effect of discouraging unilateral tender offers or other takeover proposals which certain shareholders might deem in their interests or pursuant to which they might receive a substantial premium for their Shares. The provisions could also have the effect of insulating current management against the possibility of removal and could, by possibly reducing temporary fluctuations in market price caused by accumulations of Shares, deprive shareholders of opportunities to sell at a temporarily higher market price. However, the Trustees believe that inclusion of the business combination provisions in the Declaration may help assure fair treatment of shareholders and preserve the assets of the Company. CONTROL SHARE ACQUISITION Maryland law provides for a limitation of voting rights in a "control share acquisition". The Maryland statute defines a control share acquisition at the 20%, 33 1/3% and 50% acquisition levels, and requires a two-thirds vote (excluding shares owned by the acquiring person and certain members of management) to accord voting rights to shares acquired in a control share acquisition. The statute would require the target company to hold a special meeting at the request of an actual or proposed control share acquiror subject to compliance with certain conditions by such acquiror. In addition, unless the charter, declaration of trust or By-Laws provide otherwise, the statute gives the company, within certain time limitations, various redemption rights if there is a shareholder vote on the issue and the grant of voting rights is not approved, or if an "acquiring person statement" is not delivered to the target company within 10 days following a control share acquisition. Moreover, unless the charter, declaration of trust or By-Laws provide otherwise, the statute provides that if, before a control share acquisition occurs, voting rights for control shares are approved at a shareholders' meeting and the acquiror becomes entitled to vote a majority of the shares entitled to vote, then all other shareholders may exercise appraisal rights. The statute does not apply to shares acquired in a merger, consolidation or share exchange if the company is a party to the transaction. An acquisition of shares may be exempted from the control share statute provided that a charter, declaration of trust or By-Law provision is adopted for such purpose prior to the control share acquisition. There are no such provisions in the Declaration or By-Laws of the Company. RIGHTS PLAN In October 1994 the Board of Trustees adopted a shareholder rights plan (the "Rights Plan") under which one Junior Participating Preferred Share purchase right (a "Right") was distributed for each Common Share then outstanding. Each Right entitles the holder to buy 1/100th of a Junior Participating Preferred Share (or, in certain circumstances, to receive cash, property, Common Shares or other securities of the Company) at an exercise price of $50 per 1/100th of a Junior Participating Preferred Share. Initially, the Rights are attached to certificates representing then outstanding Common Shares. The Rights will separate from such Common Shares and a "Distribution Date" will occur upon the earlier of (1) 10 business days (or such later date as the Company's Board of Trustees may determine before a Distribution Date occurs) following a public announcement by the Company that a person or group of affiliated or associated persons, with certain exceptions (an "Acquiring Person"), has acquired, or has obtained the right to acquire, beneficial ownership of 10% or more of the outstanding Common Shares (the date of such announcement being a "Share Acquisition Date") or (ii) 10 business days (or such later date as the Company's Board of Trustees may determine before a Distribution Date occurs) following the commencement of a tender offer or exchange offer that would result in a person becoming an Acquiring Person. Until the Distribution Date, (i) the Rights will be evidenced by the certificates for Common Shares and will be transferred with and only with such Common Share certificates, (ii) Common Share certificates will contain a notation incorporating the rights agreement pursuant to which the Rights were issued (the "Rights 23 55 Agreement") by reference and (iii) the surrender for transfer of any certificates for Common Shares outstanding will also constitute the transfer of the Rights associated with the Common Shares represented by such certificates. The Rights are not exercisable until the Distribution Date and will expire at the close of business on October 17, 2004, unless earlier redeemed or exchanged by the Company as described below. Until a Right is exercised, the holder thereof, as such, has no rights as a shareholder of the Company, including, without limitation, the right to vote or to receive dividends. In the event (a "Flip-In Event") a Person becomes an Acquiring Person (except pursuant to a tender or exchange offer for all outstanding Common Shares at a price and on terms which a majority of the Company's Outside Trustees (as defined in the Rights Agreement) determines to be fair to and otherwise in the best interests of the Company and its shareholders (a "fair offer")), each holder of a Right will thereafter have the right to receive, upon exercise of such Right, Common Shares (or, in certain circumstances, cash, property or other securities of the Company) having a Current Market Price (as defined in the Rights Agreement) equal to two times the exercise price of the Right. Notwithstanding the foregoing, following the occurrence of any Flip-In Event, all Rights that are, or (under certain circumstances specified in the Rights Agreement) were, beneficially owned by any Acquiring Person (or by certain related parties) will be null and void in the circumstances set forth in the Rights Agreement. However, Rights will not be exercisable following the occurrence of any Flip-In Event until such time as the Rights are no longer redeemable by the Company as set forth below. In the event (a "Flip-Over Event") that, at any time on or after the Share Acquisition Date, (i) the Company shall take part in a merger or other business combination transaction (other than certain mergers that follow a fair offer) and the Company shall not be the surviving entity or (ii) the Company shall take part in a merger or other business combination transaction in which the Common Shares are changed or exchanged (other than certain mergers that follow a fair offer) or (iii) 50% or more of the Company's assets or earning power is sold or transferred, each holder of a Right (except Rights which previously have been voided, as set forth above) shall thereafter have the right to receive, upon exercise, a number of shares of common stock of the acquiring company having a Current Market Price equal to two times the exercise price of the Right. Flip-In Events and Flip-Over Events are collectively referred to as "Triggering Events." The Purchase Price payable and the number of Junior Participating Preferred Shares (or the amount of cash, property or other securities) issuable upon exercise of the Rights are subject to adjustment from time to time to prevent dilution (i) in the event of a share dividend on, or a subdivision, combination or reclassification of, the Junior Participating Preferred Shares, (ii) if holders of the Junior Participating Preferred Shares are granted certain rights or warrants to subscribe for Junior Participating Preferred Shares or convertible securities at less than the Current Market Price of the Junior Participating Preferred Shares or (iii) upon the distribution to holders of the Junior Participating Preferred Shares of evidences of indebtedness or assets (excluding regular quarterly cash dividends) or of subscription rights or warrants (other than those referred to above). With certain exceptions, no adjustment in the Purchase Price will be required until cumulative adjustments amount to at least 1% of the Purchase Price. The Company is not required to issue fractional Shares upon the exercise of any Right, and in lieu thereof, a cash payment will be made. At any time until 10 business days following the Share Acquisition Date, the Company may redeem the Rights in whole, but not in part, at a price of $.01 per Right, payable, at the option of the Company, in cash, Common Shares or other consideration as the Board of Trustees may determine. Immediately upon the effectiveness of the action of the Company's Board of Trustees ordering redemption of the Rights, the Rights will terminate and the only right of the holders of Rights will be to receive the $.01 per Right redemption price. The term of the Rights, other than key financial terms and the date on which the Rights expire, may be amended by the Board of Trustees of the Company prior to the Distribution Date. Thereafter, the provisions of the Rights Agreement may be amended by the Board of Trustees only in order to cure any ambiguity, defect or inconsistency, to make changes which do not adversely affect the interests of holders of Rights (excluding the interests of any Acquiring Person and certain other related parties) or to shorten or lengthen any time 24 56 period under the Rights Agreement; provided, however, that no amendment to lengthen the time period governing redemption is permitted to be made at such time as the Rights are not redeemable. PLAN OF DISTRIBUTION The Company may sell the Offered Securities to one or more underwriters for public offering and sale by them or may sell the Offered Securities to investors directly or through agents. Any such underwriter or agent involved in the offer and sale of the Offered Securities will be named in the applicable Prospectus Supplement. The distribution of Offered Securities may be effected from time to time in one or more transactions at a fixed price or prices, which may be changed, at market prices prevailing at the time of sale, at prices related to such market prices or at negotiated prices. In connection with the sale of Offered Securities, underwriters or agents may receive or be deemed to have received compensation from the Company or from purchasers in the form of underwriting discounts, concessions or commissions. Underwriters may sell Offered Securities to or through dealers, and such dealers may receive compensation in the form of discounts, concessions or commissions from the underwriters or from purchasers. Any underwriting compensation paid by the Company to underwriters or agents in connection with the offering of Offered Securities, and any discounts, concessions or commissions allowed by underwriters to participating dealers, will be set forth in the applicable Prospectus Supplement. Underwriters, dealers and agents participating in the distribution of the Offered Securities may be deemed to be underwriters, and any discounts, concessions and commissions received by them and any profit realized by them on resale of the Offered Securities may be deemed to be underwriting discounts and commissions, under the Securities Act. Underwriters, dealers and agents may be entitled, under agreements entered into with the Company, to indemnification against and contribution toward certain civil liabilities, including liabilities under the Securities Act. If so indicated in the applicable Prospectus Supplement, the Company will authorize underwriters or other persons acting as the Company's agents to solicit offers by certain institutions to purchase Offered Securities from the Company at the public offering price set forth in such Prospectus Supplement pursuant to contracts providing for payment and delivery on a future date or dates. Institutions with whom such contracts, when authorized, may be made include commercial and savings banks, insurance companies, pension funds, investment companies, educational and charitable institutions, and other institutions, but will in all cases be subject to the approval of the Company. Any such contracts will be subject to the condition that the purchase by an institution of the Offered Securities covered by its contracts shall not at the time of delivery be prohibited under the law of any jurisdiction in the United States to which such institution is subject and, if a portion of the Offered Securities is being sold to underwriters, may be subject to the condition that the Company shall have sold to such underwriters the Offered Securities not sold for delayed delivery. The underwriters and such other persons will not have any responsibility in respect of the validity or performance of such contracts. Unless otherwise specified in the related Prospectus Supplement, each series of Offered Securities will be a new issue with no established trading market, other than Common Shares which are listed on the New York Stock Exchange. Any Common Shares sold pursuant to a Prospectus Supplement will be listed on such Exchange. The Company may elect to list any other series of Offered Securities on an exchange, but is not obligated to do so. Any underwriters to whom Offered Securities are sold by the Company for public offering and sale may make a market in such Offered Securities, but such underwriters will not be obligated to do so and may discontinue any market making at any time without notice. No assurance can be given as to the liquidity of or the trading markets for any Offered Securities. Certain of the underwriters and their affiliates may be customers of, engage in transactions with and perform services for the Company and its subsidiaries in the ordinary course of business. The specific terms and manner of sale of the Offered Securities will be set forth or summarized in the applicable Prospectus Supplement. 25 57 LEGAL MATTERS Certain legal matters with respect to the Offered Securities offered by the Company will be passed upon for the Company by Sullivan & Worcester LLP, Boston, Massachusetts. Sullivan & Worcester LLP, will rely, as to all matters of Maryland law, upon one or more opinions of Piper & Marbury L.L.P., Baltimore, Maryland. Barry M. Portnoy, a partner in the firm of Sullivan & Worcester LLP, is a Managing Trustee of the Company and Hospitality Properties Trust, a director and 50% shareholder of the HRPT Advisors, Inc., the advisor to the Company ("Advisors"), and a director, trustee and/or significant shareholder of certain lessees and mortgagors of the Company, including Horizon/CMS Healthcare Corporation. Sullivan & Worcester LLP represents Advisors, certain of such lessees and mortgagors and certain affiliates of each of the foregoing on various matters. EXPERTS The financial statements of the Company appearing in the Company's Annual Report (Form 10-K) for the year ended December 31, 1995, have been audited by Ernst & Young LLP, independent auditors as set forth in their report thereon included therein and incorporated herein by reference. Such financial statements are incorporated herein by reference in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The consolidated financial statements of Marriott International, Inc. incorporated by reference in this Prospectus and elsewhere in the registration statement to the extent and for the periods indicated in their reports, have been audited by Arthur Andersen LLP, independent public accountants, and are included herein in reliance upon the authority of said firm as experts in giving said reports. ------------------------ THE AMENDED AND RESTATED DECLARATION OF TRUST OF THE COMPANY, DATED JULY 1, 1994, A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS THERETO (THE "DECLARATION"), IS DULY FILED IN THE OFFICE OF THE DEPARTMENT OF ASSESSMENTS AND TAXATION OF THE STATE OF MARYLAND, PROVIDES THAT THE NAME "HEALTH AND RETIREMENT PROPERTIES TRUST" REFERS TO THE TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF THE COMPANY SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, THE COMPANY. ALL PERSONS DEALING WITH THE COMPANY, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF THE COMPANY FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION. 26 58 ============================================================================== - ------------------------------------------------------------------------------ NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY THE DEBENTURES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------------ TABLE OF CONTENTS PAGE ---- PROSPECTUS SUPPLEMENT Incorporation of Certain Information by Reference............................. ii Summary.................................... S-1 Selected Financial Data.................... S-4 Recent Developments........................ S-5 The Company................................ S-7 Distributions.............................. S-8 Capitalization............................. S-9 Ratio of Earnings to Fixed Charges......... S-9 Use of Proceeds............................ S-9 Investment and Financing Policy............ S-10 Lease Expiration and Mortgage Maturity Schedules................................ S-11 The Lessees and Mortgagors................. S-11 Equity Investment in HPT................... S-12 Management................................. S-12 Description of the Debentures.............. S-13 Federal Income Tax Considerations.......... S-20 Underwriting............................... S-24 Legal Matters.............................. S-25 PROSPECTUS Available Information...................... ii Incorporation of Certain Documents by Reference................................ ii The Company................................ 1 Use of Proceeds............................ 1 Ratio of Earnings to Fixed Charges......... 1 Description of Debt Securities............. 1 Description of Shares...................... 12 Description of Preferred Shares............ 12 Description of Depository Shares........... 18 Description of Warrants.................... 21 Limitation of Liability; Shareholder Liability................................ 21 Redemption; Business Combinations and Control Share Acquisitions............... 22 Plan of Distribution....................... 25 Legal Matters.............................. 26 Experts.................................... 26 - ------------------------------------------------------------------------------ ============================================================================== ============================================================================== - ------------------------------------------------------------------------------ $ % CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003, SERIES A HEALTH AND RETIREMENT PROPERTIES TRUST ------------------------------ PROSPECTUS SUPPLEMENT OCTOBER , 1996 ------------------------------ NATWEST SECURITIES LIMITED MERRILL LYNCH & CO. - -------------------------------------------------------------------------------- ================================================================================ -----END PRIVACY-ENHANCED MESSAGE-----