UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number 001-15319
SENIOR HOUSING PROPERTIES TRUST
(Exact name of registrant as specified in its charter)
Maryland 04-3445278
(State or other jurisdiction of incorporation) (IRS Employer Identification No.)
400 Centre Street, Newton, Massachusetts 02458
(Address of principal executive offices) (Zip Code)
617-796-8350
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Shares of Beneficial Interest New York Stock Exchange
Trust Preferred Securities of SNH Capital Trust I New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock of the registrant held by
non-affiliates was $633.9 million based on the $13.94 closing price per share
for such stock on the New York Stock Exchange on March 15, 2002. For purposes of
this calculation, 12,809,238 shares held by HRPT Properties Trust and an
aggregate of 136,406 shares held directly or by affiliates of the trustees and
executive officers of the registrant have been included in the number of shares
held by affiliates.
Number of the registrant's Common Shares of Beneficial Interest, $0.01 par
value, outstanding as of March 15, 2002: 58,422,200.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K is incorporated by
reference from our definitive Proxy Statement for the annual meeting of
shareholders currently scheduled to be held on May 7, 2002.
CERTAIN IMPORTANT FACTORS
This Annual Report on Form 10-K contains statements which constitute
forward looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 and the Securities Exchange Act of 1934, as
amended. These forward looking statements include references to the possible
expansion of our portfolio, the performance of our tenants and properties, our
ability to pay interest and principal and make distributions, our policies and
plans regarding investments, financings and other matters, our tax status as a
real estate investment trust, our ability to appropriately balance the use of
debt and equity and to access capital markets or other sources of funds and
other statements or implications arising from such statements. Also, whenever we
use words such as "believe", "expect", "anticipate", "intend", "plan",
"estimate" or similar expressions, we are making forward looking statements.
These forward looking statements are not guarantees of future performance and
involve risks and uncertainties. Actual results may differ materially from those
contained in or implied by the forward looking statements as a result of various
factors. Such factors include, without limitation, the impact of changes in the
economy and the capital markets (including prevailing interest rates) on us and
our tenants, compliance with and changes to regulations and payment policies
within the real estate, senior housing and healthcare industries, changes in
financing terms, competition within the real estate, senior housing and
healthcare industries, and changes in federal, state and local legislation. The
accompanying information contained in this Annual Report on Form 10-K, including
under the headings "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," identify other important factors
that could cause such differences. You should not rely upon forward looking
statements except as statements of our present intentions and of our present
expectations which may or may not occur.
THE ARTICLES OF AMENDMENT AND RESTATEMENT ESTABLISHING SENIOR HOUSING PROPERTIES
TRUST, DATED SEPTEMBER 20, 1999, A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS
THERETO, AS DULY FILED IN THE OFFICE OF THE STATE DEPARTMENT OF ASSESSMENTS AND
TAXATION OF MARYLAND, PROVIDES THAT THE NAME "SENIOR HOUSING PROPERTIES TRUST"
REFERS TO THE TRUSTEES UNDER THE DECLARATION OF TRUST AS TRUSTEES, BUT NOT
INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE
OR AGENT OF SENIOR HOUSING PROPERTIES TRUST SHALL BE HELD TO ANY PERSONAL
LIABILITY FOR ANY OBLIGATION OF, OR CLAIM AGAINST, SENIOR HOUSING PROPERTIES
TRUST. ALL PERSONS DEALING WITH SENIOR HOUSING PROPERTIES TRUST, IN ANY WAY,
SHALL LOOK ONLY TO THE ASSETS OF SENIOR HOUSING PROPERTIES TRUST FOR THE PAYMENT
OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.
SENIOR HOUSING PROPERTIES TRUST
2001 FORM 10-K ANNUAL REPORT
Table of Contents
Part I
Page
Item 1. Business................................................................................ 1
Item 2. Properties.............................................................................. 33
Item 3. Legal Proceedings....................................................................... 35
Item 4. Submission of Matters to a Vote of Security Holders..................................... 35
Part II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters.................... 36
Item 6. Selected Financial Data................................................................. 37
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.................................................................... 38
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............................. 46
Item 8. Financial Statements and Supplementary Data............................................. 47
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................................. 47
Part III
Item 10. Directors and Executive Officers of the Registrant...................................... *
Item 11. Executive Compensation.................................................................. *
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................... *
Item 13. Certain Relationships and Related Transactions.......................................... *
* Incorporated by reference from our Proxy Statement for
the Annual Meeting of Shareholders currently scheduled
to be held on May 7, 2002, to be filed pursuant to
Regulation 14A.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................... 48
References in this Annual Report on Form 10-K to the "Company", "Senior
Housing", "we", "us" or "our" include Senior Housing Properties Trust and its
consolidated subsidiaries, unless the context indicates otherwise.
PART I
Item 1. Business
The Company. Senior Housing Properties Trust is a Maryland real estate
investment trust ("REIT") which was organized on December 16, 1998 as a 100%
owned subsidiary of HRPT Properties Trust ("HRPT"). On October 12, 1999, HRPT
distributed 50.7% of its ownership in us to HRPT shareholders. We invest in
senior housing real estate, including apartment buildings for aged residents,
independent living properties, assisted living facilities and nursing homes. Our
principal executive offices are located at 400 Centre Street, Newton,
Massachusetts 02458, and our telephone number is (617) 796-8350.
As of December 31, 2001, we owned 83 properties located in 23 states.
On that date, our undepreciated carrying value of these properties, net of
impairment losses, was $593.2 million.
Number of Undepreciated
Location of Properties by State Properties Carrying Value
------------------------------- ----------- --------------
(in thousands)
Arizona 5 $28,137
California 7 49,322
Colorado 7 28,666
Connecticut 2 11,103
Florida 5 131,990
Georgia 4 12,564
Illinois 1 36,742
Iowa 7 12,037
Kansas 1 1,377
Maryland 1 33,080
Massachusetts 1 5 73,422
Michigan 2 9,166
Missouri 2 3,865
Nebraska 14 14,120
New Jersey 1 13,007
Ohio 1 3,445
Pennsylvania 1 15,598
South Dakota 3 7,589
Texas 1 12,410
Virginia 3 57,666
Washington 1 5,192
Wisconsin 7 25,294
Wyoming 2 7,407
---- --------
Total investments 83 $593,199
==== ========
--------
1 On January 2, 2002, the five nursing home properties in Massachusetts
were exchanged for two rehabilitation hospitals. The investment in the two new
hospitals is $43,308, the net book value of the five nursing home properties
given up at the time of the exchange.
1
We believe that the aging of the United States population will increase
the demand for existing senior apartments, independent living properties,
assisting living facilities and nursing homes and encourage development of new
properties. Our basic business plan is to profit from this increasing demand in
two ways. First, we intend to purchase additional properties and lease them at
initial rents that are greater than our costs of acquisition capital. Second, we
intend to structure leases that provide for periodic rental increases.
Our present business plan contemplates investments in properties which
offer four types of senior housing accommodations, including some properties
that combine more than one type in a single building or campus.
Senior Apartments. Senior apartments are marketed to residents who are
generally capable of caring for themselves. Residence is usually restricted on
the basis of age. Purpose built properties may have special function rooms,
concierge services, high levels of security and assistance call systems for
emergency use. Residents at these properties who need healthcare or assistance
with the activities of daily living are expected to contract independently for
these services with homemakers or home healthcare companies.
Independent Living Properties. Independent living properties, or
congregate communities, also provide high levels of privacy to residents and
require residents to be capable of relatively high degrees of independence.
Unlike a senior apartment property, an independent living property usually
bundles several services as part of a regular monthly charge--for example, one
or two meals per day in a central dining room, weekly maid service or a social
director may be offered. Additional services are generally available from staff
employees on a fee-for-service basis. In some independent living properties,
separate parts of the property are dedicated to assisted living or nursing
services.
Assisted Living Facilities. Assisted living facilities are typically
comprised of one bedroom suites which include private bathrooms and efficiency
kitchens. Services bundled within one charge usually include three meals per day
in a central dining room, daily housekeeping, laundry, medical reminders and 24
hour availability of assistance with the activities of daily living such as
dressing and bathing. Professional nursing and healthcare services are usually
available at the property on call or at regularly scheduled times. Since the
early 1990s, there has been significant growth in the number of purpose built
assisted living facilities.
Nursing Homes. Nursing homes generally provide extensive nursing and
healthcare services similar to those available in hospitals, without the high
costs associated with operating theaters, emergency rooms or intensive care
units. A typical purpose built nursing home includes mostly two-bed units with a
separate bathroom in each unit and shared dining and bathing facilities. Some
private rooms are often available for those residents who pay higher rates or
for patients whose medical conditions require segregation. Nursing homes are
generally staffed by licensed nursing professionals 24 hours per day.
During the past few years, nursing home owners and operators have faced
two significant business challenges. First, the rapid expansion of the assisted
living industry which started in the early 1990s has attracted a number of
residents away from nursing homes. This was especially significant because the
residents who chose assisted living facilities often previously had been the
most profitable residents in the nursing homes. These residents required a
lesser amount of care and were able to pay higher private rates rather than
government rates.
The second major challenge arose as a result of Medicare and Medicaid
cost containment laws, particularly 1997 federal legislation that required the
Medicare program to implement a prospective payment program for various subacute
services provided in nursing homes. Implementation of this Medicare prospective
payment program began on July 1, 1998. Prior to the prospective payment program,
Medicare generally paid nursing home operators based upon audited costs for
services provided. The prospective payment system sets Medicare rates based upon
government estimated costs of treating specified medical conditions. Although it
is possible that a nursing home may increase its profit if it is able to provide
quality services at below average costs, we believe that the effect of the new
Medicare rate setting methodology has been and will be to reduce the
profitability of Medicare services in nursing homes. This belief is based upon
our observation of the impact of similar Medicare changes that were implemented
for hospitals during the 1980s and the large number of bankruptcies which have
occurred in the nursing home industry since the implementation of the Medicare
prospective payment system began.
2
Recent Developments.
Spin-Off of Five Star Quality Care, Inc. On December 31, 2001, we
distributed substantially all of our equity ownership of Five Star Quality Care,
Inc. ("Five Star"), one of our wholly-owned subsidiaries, to our shareholders,
resulting in Five Star becoming a separately listed public company (the "Five
Star Spin-Off"). Five Star was created to conduct the operations of the 56
facilities that were repossessed or acquired from bankrupt former tenants in
July 2000 and operated for our account through December 31, 2001. Internal
Revenue Code of 1986, as amended ("IRC"), rules applicable to REITs restrict the
manner and period these operations may be conducted and make the profits from
these operations subject to income tax. In connection with the Five Star
Spin-Off, Five Star, which is not a REIT, leased 55 facilities from us and
directly assumed a third party lease for an additional property. By completing
the Five Star Spin-Off, we are permitted under the IRC to continue indefinitely
our ownership of these facilities, and the rent we will receive from Five Star
may generally be distributed to our shareholders without any federal income tax
being paid by us.
We completed the Five Star Spin-Off by distributing 4,342,170 shares of
Five Star common stock, or one share of Five Star common stock for every ten of
our common shares owned, to our shareholders. Following completion of the Five
Star Spin-Off, we continue to own 35,000 shares of Five Star common stock. We
also entered into a transaction agreement to govern the initial capitalization
of Five Star and other events related to the Five Star Spin-Off. Pursuant to the
transaction agreement, we provided initial capitalization of $50.0 million of
equity to Five Star which consisted of cash and working capital related to the
operations of the 56 facilities and two facilities with a net book value of $2.2
million.
We agreed to pay all costs relating to the Five Star Spin-Off. At
December 31, 2001, total costs incurred were $3.7 million, which included costs
of distributing Five Star shares to shareholders, legal and accounting fees,
Securities and Exchange Commission ("SEC") filing fees and Five Star's American
Stock Exchange listing fees.
Settlement with HEALTHSOUTH. During 2001, HEALTHSOUTH Corporation
("HEALTHSOUTH"), one of our tenants, had committed a non-monetary default by
closing one of our nursing homes which it leased. On January 2, 2002, this
default was settled by a property exchange. We delivered to HEALTHSOUTH title to
five nursing homes which it leased from us. In exchange, HEALTHSOUTH delivered
to us title to two rehabilitation hospitals and HEALTHSOUTH leased these
hospitals from us. As part of this settlement, HEALTHSOUTH's lease was extended
to December 31, 2011, from January 1, 2006, and the annual rent was reduced from
$10.3 million to $8.7 million.
Acquisition of 31 Marriott Senior Living Communities. On January 11,
2002, we acquired 31 senior living communities for approximately $600.0 million.
These communities are managed by a subsidiary of Marriott International, Inc.
and leased to Five Star under long-term agreements.
3
Tenants. Our financial condition depends, in part, on the financial
condition of our tenants and upon our properties' operations. The following
table presents our current tenants and property operators, the current rent we
receive from our tenants and the current lease terminations. The transactions
discussed in "Recent Developments" are reflected in this table (dollars in
thousands):
Percent of Current
Current Annual Current Lease
Tenant/Operator Rent Annual Rent Expiration
-----------------------------------------------------------------------------------------------------
Five Star/Marriott(1) $63,000 55% 12/31/17
Marriott 30,482 26% 12/31/13
HEALTHSOUTH(2) 8,700 8% 12/31/11
Five Star(3) 7,000 6% 12/31/18
Genesis Health 1,483 1% 12/31/05
Integrated Health 1,200 1% 12/31/10
Private companies (by location):
Huron & Sioux Falls, SD (3 properties) 1,074 1% 1/31/13
Fresno, CA 900 1% 9/30/15
Seattle, WA 803 1% 12/31/05
Grove City, OH 378 -% 12/31/03
St. Joseph, MO 307 -% Month to month
-------- ------
$115,327 100%
======== ======
1 This lease went into effect on January 11, 2002, upon the closing of our acquisition of 31
properties for $600.0 million.
2 On January 2, 2002, we completed a property exchange with HEALTHSOUTH and amended the lease to
reduce the annual rent and extend the lease term.
3 In connection with the Five Star Spin-Off, our lease with Five Star for 55 facilities
previously operated for our own account commenced on January 1, 2002.
Marriott. Marriott International, Inc. ("Marriott") is our most
important tenant and property operator. We own 14 independent living properties
and assisted living facilities located in seven states with 4,030 units that are
leased to a subsidiary of Marriott. Our historic investment in these properties
is $325.5 million. The current lease expires in 2013 and Marriott has four
all-or-none renewal options for five years each. This lease requires minimum
annual rent of $28.0 million, plus percentage rent equal to 4.5% of net patient
revenue increases at these properties after 1994. Marriott has guaranteed our
lease for these 14 properties.
Effective January 11, 2002, we leased an additional 31 properties to
Five Star which are managed by a subsidiary of Marriott. The minimum rent for
these 31 properties is $63.0 million per year plus 5% of net patient revenues
increases at these properties after 2002. In addition, a varying percentage of
gross revenues each year is required to be paid as additional rent to us and
escrowed for future capital expenditures at the leased facilities. Marriott has
not guaranteed Five Star's lease obligations. Marriott is a NYSE listed company
whose major businesses are developing, operating and managing hotels, senior
living properties and timeshare resorts. At December 28, 2001, Marriott reported
total assets of $9.1 billion and stockholders' equity of $3.5 billion and its
unsecured senior debt obligations are investment grade rated.
4
The following table presents summary financial information of Marriott
from its Annual Report on Form 10-K for the three fiscal years ended December
28, 2001.
Summary Financial Information of Marriott International, Inc.
(in millions)
As of or for the year ended
----------------------------------------------
December 28, December 29, December 31,
2001 2000 1999
------------- ------------ ------------
Sales.......................... $10,152 $10,080 $8,739
Net income..................... 236 479 400
Total assets................... 9,107 8,237 7,324
Debt........................... 2,815 2,016 1,676
Equity......................... 3,478 3,267 2,908
HEALTHSOUTH. On September 6, 2001, we were notified by HEALTHSOUTH that
it intended to close one of the five healthcare facilities which it leased from
us, but that it expected to continue paying rent to us for this facility through
the remainder of the lease term. We notified HEALTHSOUTH that its closure of
this facility was a default under its lease even if the rent were to be
continuously paid. On January 2, 2002, this default was settled by a property
exchange. We delivered to HEALTHSOUTH title to the five nursing homes which it
leased from us. In exchange, HEALTHSOUTH delivered to us title to two
rehabilitation hospitals with 364 beds and HEALTHSOUTH leases these hospitals
from us. As part of this settlement, HEALTHSOUTH's lease was extended to
December 31, 2011 from January 1, 2006 and HEALTHSOUTH has two all-or-none
renewal options for 10 years each. In addition, the annual rent was reduced from
$10.3 million to $8.7 million. Our historic investment in the five properties
prior to the exchange was $73.4 million (net book value of $43.3 million). Our
historic investment in the new properties is $43.3 million, which was the net
book value of the properties given up at the time of the exchange. HEALTHSOUTH
is a NYSE listed company whose principal businesses are in-hospital
rehabilitation services, outpatient rehabilitation services and outpatient
surgery services. At December 31, 2001, HEALTHSOUTH reported total assets of
$7.6 billion and stockholders' equity of $3.8 billion and its senior unsecured
long-term debt obligations are currently rated Ba1 by Moody's Investors Service
and BBB- by Standard & Poor's.
Five Star. In 2000, two of our tenants, Integrated Health Services,
Inc. ("Integrated") and Mariner Post-Acute Network, Inc. ("Mariner"), filed for
bankruptcy. Effective July 1, 2000, we entered settlements with these tenants.
Pursuant to the Integrated settlement, we assumed the financial responsibility
for 41 nursing homes, operations for five nursing homes formerly managed by
Integrated were assumed by the primary tenant, HEALTHSOUTH, and the lease for
one nursing home was amended as described below. Pursuant to the Mariner
settlement, we assumed financial responsibility for 17 nursing homes. Subsequent
to July 1, 2000, we closed operations at two of these nursing homes, and we
purchased an assisted living facility in the vicinity of a nursing home formerly
leased to Mariner. As a result of these activities, 56 healthcare properties,
including 54 nursing homes and two assisted living facilities, located in 12
states, with 5,166 beds were managed for our account from July 1, 2000 to
December 31, 2001. As previously discussed in "Recent Developments", we
completed a spin-off of substantially all of our equity ownership of Five Star
to our shareholders on December 31, 2001. Five Star began to lease 55 of these
healthcare properties as of the spin-off date and Five Star directly assumed a
third party lease for an additional property. The carrying value of our historic
investment in these properties, net of previously reported impairment losses, is
$144.6 million. The Five Star lease expires in 2018 and Five Star has one-all-or
none renewal option for 15 years. The annual rent payable to us is $7.0 million
plus increases beginning in 2004 equal to 3% of revenues at each property during
a year in excess of revenues at each property during 2003. We also lease 31
senior living communities operated by a subsidiary of Marriott to Five Star.
This lease expires in 2017 and the annual rent payable to us is $63.0 million
plus increases beginning in 2003 equal to 5% of revenues at each property during
a year in excess of revenues at each property during 2002. Five Star is a public
company listed on the American Stock Exchange; its book equity capitalization at
the time of the spin-off was $50.0 million and Five Star has no debt.
5
Integrated. We lease one nursing home with 140 beds to Integrated. Our
historic investment in this property is $15.6 million. This lease expires in
2010 and Integrated has three renewal options for 10 years each. The annual rent
payable to us is $1.2 million plus annual increases beginning in 2004 based upon
changes in the consumer price index. Integrated is a large, publicly owned,
nursing home and home health services company. Integrated filed for bankruptcy
in 2000, but the lease for this property was amended pursuant to an agreement of
the parties, and our lease payments have remained current since then.
Genesis. We lease one nursing home with 150 beds to a subsidiary of
Genesis Health Ventures, Inc. ("Genesis"). Our historic investment in this
property is $13.0 million. This lease expires in 2005 and Genesis has three
renewal options totaling an additional 25 years. The lease currently requires
annual rent of $1.5 million and increases annually by $13,000. Genesis is a
large, publicly owned, nursing home company. Genesis and its subsidiary filed
for bankruptcy in 2000. A plan of reorganization was confirmed and both Genesis
and its subsidiary emerged from bankruptcy on October 2, 2001.
In addition to the tenants described above, we currently lease seven
properties located in five states with an aggregate of 964 units to five
separate privately owned tenants. Our historic investment in these properties is
$21.1 million. These leases require total annual rent of $3.5 million. These
leases are currently being paid according to their contractual terms, except for
one lease of a facility in St. Joseph, Missouri which is presently not current
in its lease obligations to us.
Lease Terms. Our leases are so called "triple net" leases which require
the tenants to maintain our properties during the lease terms and to indemnify
us for liability which may arise by reason of our ownership of the properties.
Lease terms generally include the following:
Maintenance and Alterations. Our tenants are required to maintain, at
their expense, the leased properties in good order and repair, including
structural and nonstructural components. Except in the case of properties leased
to Marriott, alterations and additions to any leased property which exceed
threshold amounts may only be made with our prior consent. Any alterations or
improvements made to any leased property during the terms of the leases become
our property at the expiration of the lease, subject in some cases to our
obligation to pay to the tenants unamortized costs. At the end of the leases,
tenants are required to surrender the leased properties in substantially the
same condition as existed on the commencement dates of the leases, subject to
permitted alterations and subject to ordinary wear and tear.
Assignment and Subletting. Our consent is generally required for any
direct or indirect assignment or sublease of our properties. In the event of any
assignment or subletting, the initial tenant remains liable under the lease and
all guarantees and other security remain in place.
Environmental Matters. Our tenants are required, at their expense, to
remove and dispose of any hazardous substances at the leased properties in
compliance with all applicable environmental laws and regulations and to pay any
costs we incur in connection with removal and disposal. Each tenant has
indemnified us for any liability which may arise as a result of the presence of
hazardous substances at the leased property and from any violation or alleged
violation of any applicable environmental law or regulation.
Indemnification and Insurance. Each tenant is required to indemnify us
from all liabilities which may arise from our ownership or their use of our
properties. Each tenant is required to maintain insurance for our properties
covering:
o comprehensive general liability for damage to property or injury
arising out of the ownership, use, occupancy or maintenance of the
property;
o commercial property "all risk" liability for damage to improvements,
merchandise, trade fixtures, furnishings, equipment and personal
property;
o workers' compensation liability;
6
o business interruption loss;
o in some cases, medical malpractice;
o flood loss, if a property is located in whole or in part in a flood
plain; and
o other losses customarily insured by businesses similar to the business
conducted at our properties.
The leases require that we be named as an additional insured under these
policies.
Damage, Destruction or Condemnation. If any of our properties is
damaged by fire or other casualty, or is taken for a public use, we receive all
insurance or taking proceeds and our tenants are required to pay any difference
between the amount of proceeds and the historical investment by us in the
affected property. In the event of material destruction or condemnation, some
tenants have a right to purchase the affected property for amounts at least
equal to our historical investment in the property.
Events of Default. Events of default include:
o the failure of the tenant to pay rent or any other sum when due;
o the failure of the tenant to perform terms, covenants or conditions of
its lease and the continuance thereof for a specified period after
written notice;
o the occurrence of events of insolvency with respect to the tenant;
o the failure of the tenant to maintain required insurance coverages; or
o the revocation of any material license necessary for the tenant's
operation of our property.
Default Remedies. Upon the occurrence of any event of default, we may
(subject to applicable law):
o terminate the affected lease and accelerate the rent;
o terminate the tenant's rights to occupy and use the affected property,
relet the property and recover from the tenant the difference between
the amount of rent which would have been due under the lease and the
rent received under the reletting;
o make any payment or perform any act required to be performed by the
tenant under its lease;
o exercise our rights with respect to any collateral securing the lease;
and
o require the defaulting tenant to reimburse us for all payments made
and all costs and expenses incurred in connection with any exercise of
the foregoing remedies.
Ground Lease Terms. During 2001, the land underlying two of our
properties was leased. These ground leases terminate in 2079 and 2086. The
annual rents payable under these ground leases in 2001 totaled approximately
$140,000. If any ground lease terminates, the lease with respect to the property
on such ground-leased land will also terminate. Our leases require the tenants
to pay and perform all obligations arising under these ground leases. If our
tenants fail to pay the applicable ground rent or elect not to renew any ground
lease, we may have to do so in order to protect our investment in these
properties. Any pledge of our interests in a ground lease may also require the
consent of the applicable ground lessor and its lenders. We have no current
requirement to make any pledge of our ground lease interests.
7
Of the 31 properties acquired on January 11, 2002, there are three
ground leases, two of which terminate in 2016 and one which terminates in 2028.
The current annual rents payable under these ground leases total approximately
$1.6 million per year.
Investment Policies
Our investment policies are established by our Board of Trustees and
may be changed by our Board of Trustees at any time without shareholder
approval.
Acquisitions. Our present investment goals are to acquire additional
senior apartments, independent living properties, assisted living facilities and
nursing homes, primarily for income and secondarily for their appreciation
potential. In making acquisitions, we will consider a range of factors
including:
o the acquisition price of the proposed property;
o the estimated replacement cost of the proposed property;
o proposed lease terms;
o the financial strength and operating reputation of the proposed
tenant;
o historical and projected cash flows of the property to be acquired;
o the location and competitive market environment of the proposed
property;
o the physical condition of the proposed property and its potential for
redevelopment or expansion; and
o the price segment and payment sources in which the proposed property
is operated.
We intend to acquire properties which will enhance the diversity of our
portfolio with respect to tenants, types of services provided and locations.
However, we have no policies which specifically limit the percentage of our
assets which may be invested in any individual property, in any one type of
property, in properties leased to any one tenant or in properties leased to an
affiliated group of tenants.
Form of Investments. We prefer wholly-owned investments in fee
interests. However, circumstances may arise in which we may invest in
leaseholds, joint ventures, mortgages and other real estate interests. We may
invest in real estate joint ventures if we conclude that by doing so we may
benefit from the participation of co-venturers or that our opportunity to
participate in the investment is contingent on the use of a joint venture
structure. We may invest in participating, convertible or other types of
mortgages if we conclude that by doing so, we may benefit from the cash flow or
appreciation in the value of a property which is not available for purchase.
Other Types of Real Estate. During the past year we have on several
occasions considered investing in real estate different from senior housing
properties. We have focused upon purpose built specialized real estate which is
triple net leased for long terms. To date we have not made any such investments,
but we may continue to explore such alternative investments.
Completed Acquisitions. During 2001 we completed no new investments.
Disposition Policies
From time to time we consider the sale of one or more properties.
Disposition decisions are made based on a number of factors including the
following:
o the proposed sale price;
8
o the strategic fit of the property with the rest of our portfolio;
o potential opportunities to increase revenues by reinvesting sale
proceeds;
o the potential for, or the existence of, any environmental or
regulatory problems affecting a particular property;
o our capital needs; and
o the requirements for our continued qualification as a REIT under the
IRC.
We assumed nursing home operations as a result of lease terminations
and foreclosures arising from two tenant bankruptcies in 2000. Under applicable
IRC provisions governing REITs, we were required to dispose of these operations
within three years, subject to extension periods for up to an additional three
years. After these operations were stabilized we leased these properties on a
long term basis to Five Star.
Financing Policies
We have a $270.0 million revolving bank credit facility. The facility
requires payment of interest only at LIBOR plus a premium until maturity on
September 15, 2002. Outstanding borrowings under the facility were zero at
December 31, 2001. This revolving bank credit facility is secured by first
mortgages upon, and a collateral assignment of leases for, the 14 properties
leased to Marriott. This revolving bank credit facility has several covenants
typically found in revolving loan facilities including covenants to maintain a
minimum net worth and minimum collateral value, which prohibit us from incurring
debt in excess of 60% of our total capital.
We may use our revolving bank credit facility to fund acquisitions, for
working capital and for general business purposes. Periodically, we expect to
repay amounts drawn under the revolving bank credit facility with proceeds of
equity and long term debt offerings. Our organizational documents do not limit
the amount of indebtedness we may incur. At present we expect to maintain a
capital structure in which our debt will not exceed 60% of our total capital. We
will consider future equity offerings when, in our judgment, doing so will
improve our capital structure without materially adversely affecting the market
value of our shares. In the future, we may modify our current financing policies
in light of then current economic conditions, relative costs of debt and equity
capital, acquisition opportunities and other factors; and our intended ratio of
debt to total capital may change.
Policies with Respect to Other Activities
We operate in a manner that will not subject us to regulation under the
Investment Company Act of 1940. Except for the possible acquisition of other
REITs, we do not currently intend to invest in the securities of other companies
for the purpose of exercising control, to underwrite securities of other
companies or to trade actively in loans or other investments.
We may make investments other than as previously described. We have
authority to repurchase or otherwise reacquire our shares or other securities we
issue and may do so in the future. We may issue shares or other securities in
exchange for property. Also, although we have no current intention to do so, we
may make loans to third parties, including to our trustees and officers and to
joint ventures in which we participate.
Our Investment Manager and Other Operating Arrangements
We have no employees. Services which would be provided to us by
employees are provided by our investment manager, REIT Management & Research LLC
("RMR"). RMR is a Delaware limited liability company beneficially owned by
Gerard M. Martin and Barry M. Portnoy. RMR's principal executive offices are
located at 400 Centre Street, Newton, Massachusetts 02458, and its telephone
number is (617) 928-1300. The Directors of RMR are Gerard M. Martin, Barry M.
Portnoy and David J. Hegarty. The executive officers of RMR are David J.
Hegarty, President and Secretary, John G. Murray, Executive Vice President, John
C. Popeo,
9
Treasurer, and Evrett W. Benton, John A. Mannix, David M. Lepore, Thomas M.
O'Brien, Jennifer B. Clark, John R. Hoadley and Bruce J. Mackey Jr., all Vice
Presidents. Gerard M. Martin and Barry M. Portnoy are our Managing Trustees, and
David J. Hegarty and John R. Hoadley are our officers.
In accordance with applicable IRC provisions, we hired FSQ, Inc., an
independent third party manager, to manage the operations of the 56 facilities
conducted by Five Star. See "Federal Income Tax Considerations - REIT
Qualification Requirements." FSQ, Inc. was owned by Gerard M. Martin and Barry
M. Portnoy, our Managing Trustees. On January 2, 2002, in connection with the
Five Star Spin-Off, Five Star acquired FSQ, Inc. in order for Five Star to
acquire the personnel, systems and assets necessary to operate the 56
facilities. The consideration for this merger was 125,000 shares of Five Star
common stock payable to each of Messrs. Martin and Portnoy. In connection with
the merger, our Board of Trustees received an opinion from an internationally
recognized investment banking firm to the effect that, the consideration
provided for in the merger was fair, from a financial point of view, to Five
Star.
The title to certain nursing homes operated for our own account were
delivered to us in partial satisfaction of our claims against one of our former
bankrupt tenants. Because we did not own or mortgage these properties prior to
their delivery to us, these properties were not foreclosure properties as
defined in applicable IRC regulations. Accordingly, we created new subsidiaries
to take title to these properties and assume these operations, which
subsidiaries were 99% beneficially owned by us with no voting control and 0.5%
beneficially owned with 50% voting control by each of our Managing Trustees,
Gerard M. Martin and Barry M. Portnoy. Effective January 1, 2001, the IRC laws
concerning permissible REIT activities were changed and we acquired 100%
ownership interests of these entities from Messrs. Martin and Portnoy at their
cost.
Employees
As of March 15, 2002, we had no employees. RMR, which administers our
day-to-day operations, had about 250 full-time employees.
Regulation and Reimbursement
Our own and our tenants' operations of our properties must comply with
numerous federal, state and local statutes and regulations. The healthcare
industry depends significantly upon federal and federal/state programs for
revenues and, as a result, is vulnerable to the budgetary policies of both the
federal and state governments.
Government Regulation and Rate Setting
Senior Apartments. Generally, government programs do not pay for
housing in senior apartments. Rents are paid from the residents' private
resources. Accordingly, the government regulations that apply to these types of
properties are generally limited to zoning, building and fire codes, Americans
with Disabilities Act requirements and other life safety type regulations
applicable to residential real estate. Government rent subsidies and government
assisted development financing for low income senior housing are exceptions to
these general statements. The development and operation of subsidized senior
housing properties are subject to numerous governmental regulations. While it is
possible that we may lease some subsidized senior apartment facilities, we do
not expect these facilities to be a major part of our future business, and we do
not own senior apartments where rent subsidies are applicable.
Independent Living Apartments. Government benefits generally are not
available for services at independent living apartments and the resident charges
in these facilities are paid from private resources. However, a number of
Federal Supplemental Security Income program benefits pay housing costs for
elderly or disabled residents to live in these types of residential facilities.
The Social Security Act requires states to certify that they will establish and
enforce standards for any category of group living arrangement in which a
significant number of supplemental security income residents reside or are
likely to reside. Categories of living arrangements which may be subject to
these state standards include independent living apartments and assisted living
facilities. Because independent living apartments usually offer common dining
facilities, in many locations they are required to obtain licenses applicable to
food service establishments in addition to complying with land use and
10
life safety requirements. In many states, independent living apartments are
licensed by state health departments, social service agencies, or offices on
aging with jurisdiction over group residential facilities for seniors. To the
extent that independent living apartments include units in which assisted living
or nursing services are provided, these units are subject to applicable state
licensing regulations, and if the facilities receive Medicaid or Medicare funds,
to certification standards. In some states, insurance or consumer protection
agencies regulate independent living apartments in which residents pay entrance
fees or prepay other costs.
Assisted Living. According to the National Academy for State Health
Policy, approximately 39 states provide or are approved to provide Medicaid
payments for residents in some assisted living facilities under waivers granted
by the Federal Centers for Medicare and Medicaid Services, known as CMS, or
under Medicaid state plans, and eight other states are planning some Medicaid
funding by requesting waivers implementing assisted living pilot programs or
demonstration projects. Because rates paid to assisted living facility operators
are lower than rates paid to nursing home operators, some states use Medicaid
funding of assisted living as a means of lowering the cost of services for
residents who may not need the higher intensity of health-related services
provided in nursing homes. States that administer Medicaid programs for assisted
living facilities are responsible for monitoring the services at, and physical
conditions of, the participating facilities. Different states apply different
standards in these matters, but generally we believe these monitoring processes
are similar to the concerned states' inspection processes for nursing homes.
In light of the large number of states using Medicaid to purchase
services at assisted living facilities and the growth of assisted living in the
1990s, a majority of states have adopted licensing standards applicable to
assisted living facilities. According to the National Academy for State Health
Policy, 29 states have licensing statutes or standards specifically using the
term "assisted living". The majority of states have revised their licensing
regulations recently or are reviewing their policies or drafting or revising
their regulations. State regulatory models vary; there is no national consensus
on a definition of assisted living, and no uniform approach by the states to
regulating assisted living facilities. Most state licensing standards apply to
assisted living facilities whether or not they accept Medicaid funding. Also,
according to the National Academy for State Health Policy, seven states require
certificates of need from state health planning authorities before new assisted
living facilities may be developed and two states have exempted assisted living
facilities from certificate of need laws. Based on our analysis of current
economic and regulatory trends, we believe that assisted living facilities that
become dependent upon Medicaid payments for a majority of their revenues may
decline in value because Medicaid rates may fail to keep up with increasing
costs. We also believe that assisted living facilities located in states that
adopt certificate of need requirements or otherwise restrict the development of
new assisted living facilities may increase in value because these limitations
upon development may help ensure higher occupancy and higher non-governmental
rates.
Two federal government studies provide background information and make
recommendations regarding the regulation of, and the possibility of increased
governmental funding for, the assisted living industry. The first study, an
April 1999 report by the General Accounting Office to the Senate Special
Committee on Aging on assisted living facilities in four states, found a variety
of residential settings serving a wide range of resident health and care needs.
The General Accounting Office found that consumers often receive insufficient
information to determine whether a particular facility can meet their needs and
that state licensing and oversight approaches vary widely. The General
Accounting Office anticipates that as the states increase the use of Medicaid to
pay for assisted living, federal financing will likewise grow, and these trends
will focus more public attention on the place of assisted living in the
continuum of long-term care and upon state standards and compliance approaches.
The second study, a National Study of Assisted Living for the Frail Elderly, was
funded by the U.S. Department of Health and Human Services Assistant Secretary
for Planning and Evaluation and is expected to result in a report on the effects
of different service and privacy arrangements on resident satisfaction, aging in
place and affordability. In 2001, the Senate Special Committee on Aging held
hearings on assisted living and its role in the continuum of care and on
community-based alternatives to nursing homes. We cannot predict whether these
studies will result in governmental policy changes or new legislation, or what
impact any changes may have. Based upon our analysis of current economic and
regulatory trends, we do not believe that the federal government is likely to
have a material impact upon the current regulatory environment in which the
assisted living industry operates unless it also undertakes expanded funding
obligations, and we do not believe a materially increased financial commitment
from the federal government is presently likely. However, we do anticipate that
assisted
11
living facilities will increasingly be licensed and regulated by the various
states, and that in absence of federal standards, the states' policies will
continue to vary widely.
Nursing homes.
Reimbursement. About 58% of all nursing home revenues in the U.S. in
2000 came from government Medicare and Medicaid programs, including about 48%
from Medicaid programs. Nursing homes are among the most highly regulated
businesses in the country. The federal and state governments regularly monitor
the quality of care provided at nursing homes. State health departments conduct
surveys of resident care and inspect the physical condition of nursing home
properties. These periodic inspections and occasional changes in life safety and
physical plant requirements sometimes require nursing home operators to make
significant capital improvements. These mandated capital improvements have in
the past usually resulted in Medicare and Medicaid rate adjustments, albeit on
the basis of amortization of expenditures over expected useful lives of the
improvements. A new Medicare prospective payment system, often referred to as
PPS, began being phased in over three years beginning with cost reporting years
starting on or after July 1, 1998. Under this new Medicare payment system,
capital costs are part of the prospective rate and are not facility specific.
This new Medicare payment system and other recent legislative and regulatory
actions with respect to state Medicaid rates are limiting the reimbursement
levels for some nursing home and other eldercare services. At the same time
federal and state enforcement and oversight of nursing homes are increasing,
making licensing and certification of these facilities more rigorous. These
actions have adversely affected the revenues and increased the expenses of many
nursing home operators, including our tenants. The new Medicare payment system
was established by the Balanced Budget Act of 1997, and was intended to reduce
the rate of growth in Medicare payments for skilled nursing facilities. Before
the new Medicare payment system, Medicare rates were facility-specific and
cost-based. Under the new Medicare payment system, facilities receive a fixed
payment for each day of care provided to residents who are Medicare
beneficiaries. Each resident is assigned to one of 44 care groups depending on
that resident's medical characteristics and service needs. Per diem payment
rates are based on these care groups. Medicare payments cover substantially all
services provided to Medicare residents in skilled nursing facilities, including
ancillary services such as rehabilitation therapies. The new Medicare payment
system is intended to provide incentives to providers to furnish only necessary
services and to deliver those services efficiently. During the three year
phase-in period, Medicare rates for skilled nursing facilities have been based
on a blend of facility specific costs and rates established by the new Medicare
payment system. According to the General Accounting Office, between fiscal year
1998 and fiscal year 1999, the first full year of the new Medicare payment
system phase-in, the average Medicare payment per day declined by about nine
percent.
Since November 1999, Congress has provided some relief from the impact
of the Balanced Budget Act of 1997. Effective April 1, 2000, the Medicare,
Medicaid and SCHIP Balanced Budget Refinement Act of 1999 temporarily boosted
payments for certain skilled nursing cases by 20 percent and allowed nursing
facilities to transition more rapidly to the federal payment system. This Act
also increased the new Medicare payment rates by 4% for fiscal years 2001 and
2002 and imposed a two-year moratorium on some therapy limitations for skilled
nursing patients covered under Medicare Part B.
In December 2000, the Medicare, Medicaid and SCHIP Benefits Improvement
and Protection Act of 2000 was approved. Effective April 1, 2001 to October 1,
2002, this Act increases the nursing component of the payment rate for each care
group by 16.66%. This Act also increased annual inflation adjustments for fiscal
year 2001, increased rehabilitation care group rates by 6.7%, and maintained the
previously temporary 20% increase in the other care group rates established in
1999.
Effective October 1, 2002, the 4% across-the-board increase in Medicare
payment rates, the 16.66% increase in the nursing component of the rates, and
the 6.7% increase in rehabilitation care group rates, are scheduled to expire.
The 20% increase for the skilled nursing care groups will expire when the
current resource utilization groups are refined. The Bush administration's
fiscal year 2003 budget proposal assumes that the add-ons to the Medicare rates
will expire as scheduled and does not provide for additional Medicaid funding
for nursing homes. The Medicare Payment Advisory Commission has recommended that
Congress incorporate the 20% increases into the base rate for fiscal year 2003
and that the other add-ons expire as scheduled.
12
Survey And Enforcement. CMS has begun to implement an initiative to
increase the effectiveness of Medicare and Medicaid nursing facility survey and
enforcement activities. CMS' initiative follows a July 1998 General Accounting
Office investigation which found inadequate care in a significant proportion of
California nursing homes and the CMS' July 1998 report to Congress on the
effectiveness of the survey and enforcement system. In 1999, the U.S. Department
of Health and Human Services Office of Inspector General issued several reports
concerning quality of care in nursing homes, and the General Accounting Office
issued reports in 1999 and 2000 which recommended that CMS and the states
strengthen their compliance and enforcement practices to better ensure that
nursing homes provide adequate care. Since 1998, the Senate Special Committee on
Aging has been holding hearings on these issues. CMS is taking steps to focus
more survey and enforcement efforts on nursing homes with findings of
substandard care or repeat violations of Medicare and Medicaid standards and to
identify chain operated facilities with patterns of noncompliance. CMS is
increasing its oversight of state survey agencies and requiring state agencies
to use enforcement sanctions and remedies more promptly when substandard care or
repeat violations are identified, to investigate complaints more promptly, and
to survey facilities more consistently. In addition, CMS has adopted regulations
expanding federal and state authority to impose civil money penalties in
instances of noncompliance. Medicare survey results for each nursing home are
posted on the internet at http://www.medicare.gov. When deficiencies under state
licensing and Medicare and Medicaid standards are identified, sanctions and
remedies such as denials of payment for new Medicare and Medicaid admissions,
civil monetary penalties, state oversight and loss of Medicare and Medicaid
participation or licensure may be imposed. Our tenants and their managers
receive notices of potential sanctions and remedies from time to time, and such
sanctions have been imposed from time to time on facilities operated by them. If
they are unable to cure deficiencies which have been identified or which are
identified in the future, such sanctions may be imposed, and if imposed, may
adversely affect our tenants' abilities to pay their rents.
In 2000, CMS issued a report on its study linking nursing staffing
levels with quality of care, and CMS is assessing the impact that minimum
staffing requirements would have on facility costs and operations. In a report
to be presented to Congress in 2002, the Department of Health and Human Services
has found that 90% of nursing homes lack the nurse and nurse aide staffing
necessary to provide adequate care to residents. The Bush administration has
indicated that it does not intend to impose minimum staffing levels or to
increase Medicare or Medicaid rates to cover the costs of increased staff at
this time, but is considering publishing the staffing level at each nursing home
to increase market demand.
Federal efforts to target fraud and abuse and violations of
anti-kickback laws and physician referral laws by Medicare and Medicaid
providers have also increased. In March 2000, the U.S. Department of Health and
Human Services Office of Inspector General issued compliance guidelines for
nursing facilities, to assist them in developing voluntary compliance programs
to prevent fraud and abuse. Also, new rules governing the privacy, use and
disclosure of individually identified health information became final in 2001
and will require compliance by 2003, with civil and criminal sanctions for
noncompliance. An adverse determination concerning any of our tenants' licenses
or eligibility for Medicare or Medicaid reimbursement or compliance with
applicable federal or state regulations could negatively affect their ability to
pay rent to us.
Certificates Of Need. Most states also limit the number of nursing
homes by requiring developers to obtain certificates of need before new
facilities may be built. Even states such as California and Texas that have
eliminated certificate of need laws often have retained other means of limiting
new nursing home development, such as the use of moratoria, licensing laws or
limitations upon participation in the state Medicaid program. We believe that
these governmental limitations generally make nursing homes more valuable by
limiting competition.
A number of legislative proposals that would affect major reforms of
the healthcare system have been introduced in Congress, such as additional
Medicare and Medicaid reforms and cost containment measures. We cannot predict
whether any of these legislative proposals will be adopted or, if adopted, what
effect, if any, these proposals would have on our business.
13
Competition
We compete with other real estate investment trusts. We also compete
with banks, non-bank finance companies, leasing companies and insurance
companies which invest in real estate. Some of these competitors have resources
that are greater than ours and have lower costs of capital.
Environmental Matters
Under various laws, owners of real estate may be required to
investigate and clean up hazardous substances present at a property, and may be
held liable for property damage or personal injuries that result from such
contamination. These laws also expose us to the possibility that we become
liable to reimburse the government for damages and costs it incurs in connection
with the contamination. We review environmental surveys of the facilities we own
prior to their purchase. Based upon those surveys we do not believe that any of
our properties are subject to material environmental contamination. However, no
assurances can be given that environmental liabilities are not present in our
properties or that costs we incur to remediate contamination will not have a
material adverse effect on our business or financial condition.
Segment Information
For financial information about our segments see Note 11 to our
Consolidated Financial Statements.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of federal income tax consequences is based on
existing law, and is limited to investors who own our shares as investment
assets rather than as inventory or as property used in a trade or business. The
summary does not discuss the particular tax consequences that might be relevant
to you if you are subject to special rules under the federal income tax law, for
example if you are:
o a bank, life insurance company, regulated investment company, or other
financial institution,
o a broker or dealer in securities or foreign currency,
o a person who has a functional currency other than the U.S. dollar,
o a person who acquires our shares in connection with employment or
other performance of services,
o a person subject to alternative minimum tax,
o a person who owns our shares as part of a straddle, hedging
transaction, constructive sale transaction, or conversion transaction,
or
o except as specifically described in the following summary, a
tax-exempt entity or a foreign person.
The sections of the Internal Revenue Code that govern the federal
income tax qualification and treatment of a REIT and its shareholders are
complex. This presentation is a summary of applicable Internal Revenue Code
provisions, related rules and regulations and administrative and judicial
interpretations, all of which are subject to change, possibly with retroactive
effect. Future legislative, judicial, or administrative actions or decisions
could affect the accuracy of statements made in this summary. We have not
received a ruling from the IRS with respect to any matter described in this
summary, and we cannot assure you that the IRS or a court will agree with the
statements made in this summary. In addition, the following summary is not
exhaustive of all possible tax consequences, and does not discuss any estate,
gift, state, local, or foreign tax consequences. For all these reasons, we urge
you and any prospective acquirer of our shares to consult with a tax advisor
about the federal income tax and other tax consequences of the acquisition,
ownership and disposition of our shares.
14
Your federal income tax consequences may differ depending on whether or
not you are a "U.S. shareholder." For purposes of this summary, a "U.S.
shareholder" for federal income tax purposes is:
o a citizen or resident of the United States, including an alien
individual who is a lawful permanent resident of the United States or
meets the substantial presence residency test under the federal income
tax laws,
o a corporation, partnership or other entity treated as a corporation or
partnership for federal income tax purposes, that is created or
organized in or under the laws of the United States, any state thereof
or the District of Columbia, unless otherwise provided by Treasury
regulations,
o an estate the income of which is subject to federal income taxation
regardless of its source, or
o a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or
more United States persons have the authority to control all
substantial decisions of the trust, or electing trusts in existence on
August 20, 1996 to the extent provided in Treasury regulations,
whose status as a U.S. shareholder is not overridden by an applicable tax
treaty. Conversely, a "non-U.S. shareholder" is a beneficial owner of our shares
who is not a U.S. shareholder.
Taxation as a REIT
We have elected to be taxed as a REIT under Sections 856 through 860 of
the Internal Revenue Code, commencing with our taxable year ending December 31,
1999. Our REIT election, assuming continuing compliance with the qualification
tests summarized below, continues in effect for subsequent taxable years.
Although no assurance can be given, we believe that we are organized, have
operated, and will continue to operate in a manner that qualifies us to be taxed
under the Internal Revenue Code as a REIT.
As a REIT, we generally will not be subject to federal income tax on
our net income distributed as dividends to our shareholders. Distributions to
our shareholders generally will be includable in their income as dividends to
the extent of our current or accumulated earnings and profits. A portion of
these dividends may be treated as capital gain dividends, as explained below. No
portion of any dividends will be eligible for the dividends received deduction
for corporate shareholders. Distributions in excess of current or accumulated
earnings and profits generally will be treated for federal income tax purposes
as a return of capital to the extent of a recipient shareholder's basis in our
shares, and will reduce this basis. Our current or accumulated earnings and
profits will generally be allocated first to distributions made on our preferred
shares, if any, and thereafter to distributions made on our common shares.
Our counsel, Sullivan & Worcester LLP, has opined that we have been
organized and have qualified as a REIT under the Internal Revenue Code for our
1999 through 2001 taxable years, and that our current investments and plan of
operation will enable us to meet the requirements for qualification and taxation
as a REIT under the Internal Revenue Code. Our actual qualification and taxation
as a REIT will depend upon our ability to meet the various qualification tests
imposed under the Internal Revenue Code and summarized below. While we believe
that we will operate in a manner to satisfy the various REIT qualification
tests, our counsel has not reviewed and will not review compliance with these
tests on a continuing basis. If we fail to qualify as a REIT in any year, we
will be subject to federal income taxation as if we were a C corporation, and
our shareholders will be taxed like shareholders of C corporations. In this
event, we could be subject to significant tax liabilities, and the amount of
cash available for distribution to our shareholders may be reduced or
eliminated.
If we qualify as a REIT and meet the annual distribution tests
described below, we generally will not be subject to federal income taxes on the
amounts we distribute. However, even if we qualify as a REIT, we may be subject
to federal tax in the following circumstances:
15
o We will be taxed at regular corporate rates on any undistributed "real
estate investment trust taxable income," including our undistributed
net capital gains.
o If our alternative minimum taxable income exceeds our taxable income,
we may be subject to the corporate alternative minimum tax on our
items of tax preference.
o If we have net income from the sale or other disposition of
"foreclosure property" that is held primarily for sale to customers in
the ordinary course of business or other nonqualifying income from
foreclosure property, we will be subject to tax on this net income
from foreclosure property at the highest regular corporate rate, which
is currently 35%. We expect to have little or no net income from
foreclosure property in 2001 or 2002.
o If we have net income from prohibited transactions, including sales or
other dispositions of inventory or property held primarily for sale to
customers in the ordinary course of business other than foreclosure
property, we will be subject to tax on this income at a 100% rate.
o If we fail to satisfy the 75% gross income test or the 95% gross
income test discussed below, but nonetheless maintain our
qualification as a REIT, we will be subject to tax at a 100% rate on
the greater of the amount by which we fail the 75% or the 95% test,
multiplied by a fraction intended to reflect our profitability.
o If we fail to distribute for any calendar year at least the sum of 85%
of our REIT ordinary income for that year, 95% of our REIT capital
gain net income for that year, and any undistributed taxable income
from prior periods, we will be subject to a 4% excise tax on the
excess of the required distribution over the amounts actually
distributed.
o If we acquire an asset from a corporation in a transaction in which
our basis in the asset is determined by reference to the basis of the
asset in the hands of a present or former C corporation, and if we
subsequently recognize gain on the disposition of this asset during
the ten-year period beginning on the date on which the asset ceased to
be owned by the C corporation, then we will pay tax at the highest
regular corporate tax rate, which is currently 35%, on the lesser of
the excess of the fair market value of the asset over the C
corporation's basis in the asset on the date the asset ceased to be
owned by the C corporation, or the gain recognized in the disposition.
o If we have succeeded to undistributed earnings and profits from an
acquired C corporation, to preserve our status as a REIT we must
generally distribute all of these undistributed earnings and profits
not later than the end of the taxable year of the acquisition.
However, if we fail to do so, relief provisions would allow us to
maintain our status as a REIT provided we distribute any subsequently
discovered C corporation earnings and profits and pay an interest
charge in respect of the period of delayed distribution. As discussed
below, we acquired several C corporations on January 11, 2002 as part
of our acquisition of 31 senior living facilities. Some of these C
corporations had operated for several years as subsidiaries of
different parent companies. Our investigation of these C corporations
indicates that they do not have retained earnings and profits that
will jeopardize our status as a REIT. However, upon review or audit,
the IRS may disagree with our conclusion.
o As explained below, we are permitted within limits to own stock and
securities of a "taxable REIT subsidiary." A taxable REIT subsidiary
of ours will be separately taxed on its net income as a C corporation,
and will be subject to limitations on the deductibility of interest
expense paid to us. In addition, we will be subject to a 100% tax on
redetermined rents, redetermined deductions, and excess interest
expense, in order to ensure that transactions between and among us,
our tenants, and our taxable REIT subsidiaries are at arm's length.
16
If we invest in properties in foreign countries, our profits from those
investments will generally be subject to tax in the countries where those
properties are located. The nature and amount of this taxation will depend on
the laws of the countries where the properties are located. If we operate as we
currently intend, then we will distribute our taxable income to our shareholders
and we will generally not pay federal income tax, and thus we generally cannot
recover the cost of foreign taxes imposed on our foreign investments by claiming
foreign tax credits against our federal income tax liability. Also, we cannot
pass through to our shareholders any foreign tax credits.
If we fail to qualify or elect not to qualify as a REIT in any taxable
year, then we will be subject to federal income tax in the same manner as a C
corporation. Any distributions to our shareholders in a year in which we fail to
qualify as a REIT will not be deductible, nor will these distributions be
required under the Internal Revenue Code. In that event, to the extent of our
current and accumulated earnings and profits, any distributions to our
shareholders will be taxable as ordinary dividends and, subject to limitations
in the Internal Revenue Code, will be eligible for the dividends received
deduction for corporate recipients. Also, we will generally be disqualified from
federal income taxation as a REIT for the four taxable years following
disqualification. Failure to qualify for federal income taxation as a REIT for
even one year could result in reduction or elimination of distributions to our
shareholders, or in our incurring substantial indebtedness or liquidating
substantial investments in order to pay the resulting corporate-level taxes.
REIT Qualification Requirements
General Requirements. Section 856(a) of the Internal Revenue Code
defines a REIT as a corporation, trust or association:
(1) that is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable
shares or by transferable certificates of beneficial interest;
(3) that would be taxable, but for Sections 856 through 859 of the
Internal Revenue Code, as a C corporation;
(4) that is not a financial institution or an insurance company subject
to special provisions of the Internal Revenue Code;
(5) the beneficial ownership of which is held by 100 or more persons;
(6) that is not "closely held" as defined under the personal holding
company stock ownership test, as described below; and
(7) that meets other tests regarding income, assets and distributions,
all as described below.
Section 856(b) of the Internal Revenue Code provides that conditions
(1) to (4), inclusive, must be met during the entire taxable year and that
condition (5) must be met during at least 335 days of a taxable year of 12
months, or during a pro rata part of a taxable year of less than 12 months.
Section 856(h)(2) of the Internal Revenue Code provides that neither condition
(5) nor (6) need be met for our first taxable year as a REIT. We believe that we
have satisfied conditions (1) to (6), inclusive, during each of the requisite
periods ending on or before December 31, 2001, and that we will continue to
satisfy those conditions in future taxable years. There can, however, be no
assurance in this regard.
By reason of condition (6) above, we will fail to qualify as a REIT for
a taxable year if at any time during the last half of the year more than 50% in
value of our outstanding shares is owned directly or indirectly by five or fewer
individuals. To help comply with condition (6), our declaration of trust
restricts transfers of our shares. In addition, if we comply with applicable
Treasury regulations to ascertain the ownership of our shares and do not know,
or by exercising reasonable diligence would not have known, that we failed
condition (6), then we will be
17
treated as satisfying condition (6). However, our failure to comply with these
regulations for ascertaining ownership may result in a penalty of $25,000, or
$50,000 for intentional violations. Accordingly, we intend to comply with these
regulations, and to request annually from record holders of significant
percentages of our shares information regarding the ownership of our shares.
Under our declaration of trust, our shareholders are required to respond to
these requests for information.
For purposes of condition (6) above, REIT shares held by a pension
trust are treated as held directly by the pension trust's beneficiaries in
proportion to their actuarial interests in the pension trust. Consequently, five
or fewer pension trusts could own more than 50% of the interests in an entity
without jeopardizing that entity's federal income tax qualification as a REIT.
However, as discussed below, if a REIT is a "pension-held REIT," each pension
trust owning more than 10% of the REIT's shares by value generally may be taxed
on a portion of the dividends it receives from the REIT.
Our Wholly-Owned Subsidiaries and Our Investments through Partnerships.
Except in respect of taxable REIT subsidiaries as discussed below, Section
856(i) of the Internal Revenue Code provides that any corporation, 100% of whose
stock is held by a REIT, is a qualified REIT subsidiary and shall not be treated
as a separate corporation. The assets, liabilities and items of income,
deduction and credit of a qualified REIT subsidiary are treated as the REIT's.
We believe that each of our direct and indirect wholly-owned subsidiaries, other
than the taxable REIT subsidiaries discussed below, will either be a qualified
REIT subsidiary within the meaning of Section 856(i) of the Internal Revenue
Code, or a noncorporate entity that for federal income tax purposes is not
treated as separate from its owner under regulations issued under Section 7701
of the Internal Revenue Code. Thus, except for the taxable REIT subsidiaries
discussed below, in applying all the federal income tax REIT qualification
requirements described in this summary, all assets, liabilities and items of
income, deduction and credit of our direct and indirect wholly-owned
subsidiaries are treated as ours.
We may invest in real estate through one or more limited or general
partnerships or limited liability companies that are treated as partnerships for
federal income tax purposes. In the case of a REIT that is a partner in a
partnership, regulations under the Internal Revenue Code provide that, for
purposes of the REIT qualification requirements regarding income and assets
discussed below, the REIT is deemed to own its proportionate share of the assets
of the partnership corresponding to the REIT's proportionate capital interest in
the partnership and is deemed to be entitled to the income of the partnership
attributable to this proportionate share. In addition, for these purposes, the
character of the assets and gross income of the partnership generally retain the
same character in the hands of the REIT. Accordingly, our proportionate share of
the assets, liabilities, and items of income of each partnership in which we are
a partner is treated as ours for purposes of the income tests and asset tests
discussed below. In contrast, for purposes of the distribution requirement
discussed below, we must take into account as a partner our share of the
partnership's income as determined under the general federal income tax rules
governing partners and partnerships under Sections 701 through 777 of the
Internal Revenue Code.
Taxable REIT Subsidiaries. We are permitted to own any or all of the
securities of a "taxable REIT subsidiary" as defined in Section 856(l) of the
Internal Revenue Code, provided that no more than 20% of our assets, at the
close of each quarter of our taxable year, is comprised of our investments in
the stock or securities of our taxable REIT subsidiaries. Among other
requirements, a taxable REIT subsidiary must:
(1) be a non-REIT corporation for federal income tax purposes in which
we directly or indirectly own shares,
(2) join with us in making a taxable REIT subsidiary election,
(3) not directly or indirectly operate or manage a lodging facility or
a health care facility, and
(4) not directly or indirectly provide to any person, under a
franchise, license, or otherwise, rights to any brand name under which any
lodging facility or health care facility is operated, except that in limited
circumstances a subfranchise, sublicense or similar right can be granted to an
independent contractor to operate or manage a lodging facility.
18
In addition, a corporation other than a REIT in which a taxable REIT
subsidiary directly or indirectly owns more than 35% of the voting power or
value will automatically be treated as a taxable REIT subsidiary. Subject to the
discussion below, we believe that we and each of our taxable REIT subsidiaries
have complied with, and will continue to comply with, the requirements for
taxable REIT subsidiary status during all times each subsidiary's taxable REIT
subsidiary election remains in effect, and we believe that the same will be true
for any taxable REIT subsidiary that we later form or acquire.
Our ownership of stock and securities in taxable REIT subsidiaries is
exempt from the 10% and 5% REIT asset tests discussed below. Also, as discussed
below, taxable REIT subsidiaries can perform services for our tenants without
disqualifying the rents we receive from those tenants under the 75% or 95% gross
income tests discussed below. Moreover, because taxable REIT subsidiaries are
taxed as C corporations that are separate from us, their assets, liabilities and
items of income, deduction and credit are not imputed to us for purposes of the
REIT qualification requirements described in this summary. Therefore, taxable
REIT subsidiaries can generally undertake third-party management and development
activities and activities not related to real estate.
Restrictions are imposed on taxable REIT subsidiaries to ensure that
they will be subject to an appropriate level of federal income taxation. For
example, a taxable REIT subsidiary may not deduct interest paid in any year to
an affiliated REIT to the extent that the interest payments exceed, generally,
50% of the taxable REIT subsidiary's adjusted taxable income for that year.
However, the taxable REIT subsidiary may carry forward the disallowed interest
expense to a succeeding year, and deduct the interest in that later year subject
to that year's 50% adjusted taxable income limitation. In addition, if a taxable
REIT subsidiary pays interest, rent, or other amounts to its affiliated REIT in
an amount that exceeds what an unrelated third party would have paid in an arm's
length transaction, then the REIT generally will be subject to an excise tax
equal to 100% of the excessive portion of the payment. Finally, if in comparison
to an arm's length transaction, a tenant has overpaid rent to the REIT in
exchange for underpaying the taxable REIT subsidiary for services rendered, then
the REIT may be subject to an excise tax equal to 100% of the overpayment. There
can be no assurance that arrangements involving our taxable REIT subsidiaries
will not result in the imposition of one or more of these deduction limitations
or excise taxes, but we do not believe that we are or will be subject to these
impositions.
In our 2000 taxable year, we took title to several healthcare
facilities, valued in the aggregate at less than $9 million, through corporate
subsidiaries in which we owned 99% of the outstanding common stock, all of which
was nonvoting, and in which individual shareholders owned 1% of the outstanding
common stock, all of which was voting. We could not take direct title to these
particular facilities and operate them under the "foreclosure property" rules
discussed below, because the facilities were not leased by or mortgaged to us at
the time of our tenant-mortgagor's default with respect to other facilities, nor
could we lease these facilities on suitable terms because of market conditions
at that time. Accordingly, our 99% subsidiaries took title to these particular
facilities and retained an independent contractor to operate and manage the
facilities. Although there can be no assurance in this regard, we believe that
these 99% subsidiaries' ownership and operational structure during our 2000
taxable year satisfied the then applicable REIT asset tests discussed below,
because we did not own more than 10% of the voting securities of the 99%
subsidiaries. As of January 1, 2001, we acquired 100% ownership of the formerly
99% owned corporate subsidiaries, and filed a taxable REIT subsidiary election
with each of these subsidiaries effective January 1, 2001. These elections were
revoked early in taxable year 2002, in connection with the spin-off of Five Star
Quality Care, Inc. and our diminished ownership of these subsidiaries. We have
received an opinion of counsel that, although the matter is not free from doubt,
it is more likely than not that these subsidiaries were taxable REIT
subsidiaries from January 1, 2001 until the revocation of the taxable REIT
subsidiary elections. We had submitted a private letter ruling request to the
IRS to confirm that these subsidiaries complied with the requirement that
prohibits the direct or indirect operation or management of a healthcare
facility by a taxable REIT subsidiary, but withdrew this request before any IRS
ruling was issued. If it is determined that these subsidiaries were ineligible
for taxable REIT subsidiary status, we believe that the subsidiaries would
instead have been qualified REIT subsidiaries under Section 856(i) of the
Internal Revenue Code because we owned 100% of them and they were not properly
classified as taxable REIT subsidiaries. As our qualified REIT subsidiaries, the
gross income from the subsidiaries' healthcare facilities would be treated as
our own, and as a general matter would be nonqualifying income for purposes of
the 75% and 95% gross income tests discussed below. We expect to take steps to
qualify for the 75% and 95% gross income tests under the relief provision
described below, including for example attaching an applicable schedule of gross
income to our 2001
19
federal income tax return as required by Section 856(c)(6)(A) of the Internal
Revenue Code. Thus, even if the IRS or a court ultimately determines that these
subsidiaries failed to qualify as our taxable REIT subsidiaries, and that this
failure thereby implicated our compliance with the 75% and 95% gross income
tests discussed below, we expect we would qualify for the gross income tests'
relief provision and thereby preserve our qualification as a REIT. If this
relief provision were to apply to us, we would be subject to tax at a 100% rate
on the greater of the amount by which we failed the 75% or the 95% gross income
test, with adjustments, multiplied by a fraction intended to reflect our
profitability for the taxable year; however, we would expect to owe little or no
tax in these circumstances.
Income Tests. There are two gross income requirements for qualification
as a REIT under the Internal Revenue Code:
o At least 75% of our gross income, excluding gross income from sales or
other dispositions of property held primarily for sale, must be
derived from investments relating to real property, including "rents
from real property" as defined under Section 856 of the Internal
Revenue Code, mortgages on real property, or shares in other REITs.
When we receive new capital in exchange for our shares or in a public
offering of five-year or longer debt instruments, income attributable
to the temporary investment of this new capital in stock or a debt
instrument, if received or accrued within one year of our receipt of
the new capital, is generally also qualifying income under the 75%
test.
o At least 95% of our gross income, excluding gross income from sales or
other dispositions of property held primarily for sale, must be
derived from a combination of items of real property income that
satisfy the 75% test described above, dividends, interest, payments
under interest rate swap or cap agreements, options, futures
contracts, forward rate agreements, or similar financial instruments,
and gains from the sale or disposition of stock, securities, or real
property.
For purposes of these two requirements, income derived from a "shared
appreciation provision" in a mortgage loan is generally treated as gain
recognized on the sale of the property to which it relates. Although we will use
our best efforts to ensure that the income generated by our investments will be
of a type which satisfies both the 75% and 95% gross income tests, there can be
no assurance in this regard.
In order to qualify as "rents from real property" under Section 856 of
the Internal Revenue Code, several requirements must be met:
o The amount of rent received generally must not be based on the income
or profits of any person, but may be based on receipts or sales.
o Rents do not qualify if the REIT owns 10% or more by vote or value of
the tenant, whether directly or after application of attribution
rules. While we intend not to lease property to any party if rents
from that property would not qualify as rents from real property,
application of the 10% ownership rule is dependent upon complex
attribution rules and circumstances that may be beyond our control.
For example, an unaffiliated third party's ownership directly or by
attribution of 10% or more by value of our shares, or 10% or more by
value of HRPT Properties Trust's shares for so long as HRPT Properties
Trust owns 10% or more by value of us, as well as 10% or more by vote
or value of the stock of one of our tenants, would result in that
tenant's rents not qualifying as rents from real property. Our
declaration of trust disallows transfers or purported acquisitions,
directly or by attribution, of our shares that could result in
disqualification as a REIT under the Internal Revenue Code and permits
our trustees to repurchase the shares to the extent necessary to
maintain our status as a REIT under the Internal Revenue Code.
Nevertheless, there can be no assurance that these provisions in our
declaration of trust will be effective to prevent REIT status under
the Internal Revenue Code from being jeopardized under the 10%
affiliated tenant rule. Furthermore, there can be no assurance that we
will be able to monitor and enforce these restrictions, nor will our
shareholders necessarily be aware of ownership of shares attributed to
them under the Internal Revenue Code's attribution rules.
20
o For our 2001 taxable year and thereafter, there is a limited exception
to the above prohibition on earning "rents from real property" from a
10% affiliated tenant, if the tenant is a taxable REIT subsidiary. If
at least 90% of the leased space of a property is leased to tenants
other than taxable REIT subsidiaries and 10% affiliated tenants, and
if the taxable REIT subsidiary's rent for space at that property is
substantially comparable to the rents paid by nonaffiliated tenants
for comparable space at the property, then otherwise qualifying rents
paid by the taxable REIT subsidiary to the REIT will not be
disqualified on account of the rule prohibiting 10% affiliated
tenants.
o In order for rents to qualify, we generally must not manage the
property or furnish or render services to the tenants of the property,
except through an independent contractor from whom we derive no income
or, for our 2001 taxable year and thereafter, through one of our
taxable REIT subsidiaries. There is an exception to this rule
permitting a REIT to perform customary tenant services of the sort
which a tax-exempt organization could perform without being considered
in receipt of "unrelated business taxable income" as defined in
Section 512(b)(3) of the Internal Revenue Code. In addition, a de
minimis amount of noncustomary services will not disqualify income as
"rents from real property" so long as the value of the impermissible
services does not exceed 1% of the gross income from the property.
o If rent attributable to personal property leased in connection with a
lease of real property is 15% or less of the total rent received under
the lease, then the rent attributable to personal property will
qualify as "rents from real property", if this 15% threshold is
exceeded, the rent attributable to personal property will not so
qualify. For our taxable years through December 31, 2000, the portion
of rental income treated as attributable to personal property is
determined according to the ratio of the tax basis of the personal
property to the total tax basis of the real and personal property
which is rented. For our 2001 taxable year and thereafter, the ratio
will be determined by reference to fair market values rather than tax
bases.
We believe that all or substantially all our rents have qualified and
will qualify as rents from real property for purposes of Section 856 of the
Internal Revenue Code.
In order to qualify as mortgage interest on real property for purposes
of the 75% test, interest must derive from a mortgage loan secured by real
property with a fair market value, at the time the loan is made, at least equal
to the amount of the loan. If the amount of the loan exceeds the fair market
value of the real property, the interest will be treated as interest on a
mortgage loan in a ratio equal to the ratio of the fair market value of the real
property to the total amount of the mortgage loan.
In our 2000 taxable year, we reduced to possession several healthcare
facilities, including both the real property and the incidental personal
property at these facilities, in each case after a default or imminent default
on either a loan secured by the facility or a lease of the facility. As of and
subsequent to December 31, 2001, these facilities are leased to Five Star
Quality Care, Inc., and we believe the rents from these facilities qualify as
"rents from real property". For periods before we began leasing these facilities
to Five Star Quality Care, Inc., gross operating income from the facilities
would not have qualified under the 75% and 95% gross income tests in the absence
of "foreclosure property" treatment under Section 856(e) of the Internal Revenue
Code, and would likely have disqualified us from being a REIT. As foreclosure
property, however, gross operating income from our repossessed facilities
qualified under the 75% and 95% gross income tests. Further, any gain we
recognized on the sale of foreclosure property, plus any income we received from
foreclosure property that would not qualify under the 75% gross income test in
the absence of foreclosure property treatment, reduced by our expenses directly
connected with the production of those items of income, was subject to tax at
the maximum corporate rate of 35%.
We believe that we were eligible, pursuant to Section 856(e) of the
Internal Revenue Code, to treat our repossessed facilities as "foreclosure
property," and we made an election to that effect with our 2000 federal income
tax return. However, a repossessed facility's status as foreclosure property
would have ceased upon the earlier of:
21
o the date we began to lease the facility on terms that gave rise to
income that did not qualify under the 75% gross income test, or the
date we began to receive or accrue income pursuant to a lease,
directly or indirectly, that did not qualify under the 75% gross
income test,
o the first day after repossession on which construction took place,
other than completion of a building or other improvement where more
than 10% of the construction was completed before our tenant's or
debtor's default became imminent, or
o the first day more than 90 days after repossession that we did not
retain an independent contractor, from whom we did not derive or
receive any income, to operate the facility on our behalf.
We do not believe that foreclosure property status for the repossessed
facilities terminated at any point before our lease of these properties to Five
Star Quality Care, Inc. began. We retained an independent contractor from whom
we did not derive or receive any income to oversee the day-to-day operation of
our repossessed facilities, and although there can be no assurance in this
regard, we believe that our repossessed facilities qualified as foreclosure
property under Section 856(e) of the Internal Revenue Code. Accordingly, we
believe that gross operating income from these repossessed facilities qualified
under the 75% and 95% gross income tests.
Other than sales of foreclosure property, any gain we realize on the
sale of property held as inventory or other property held primarily for sale to
customers in the ordinary course of business will be treated as income from a
prohibited transaction that is subject to a penalty tax at a 100% rate. This
prohibited transaction income also may adversely affect our ability to satisfy
the 75% and 95% gross income tests for federal income tax qualification as a
REIT. We cannot provide assurances as to whether or not the IRS might
successfully assert that one or more of our dispositions is subject to the 100%
penalty tax. However, we believe that dispositions of assets that we might make
will not be subject to the 100% penalty tax, because we intend to:
o own our assets for investment with a view to long-term income
production and capital appreciation;
o engage in the business of developing, owning and operating our
existing properties and acquiring, developing, owning and operating
new properties; and
o make occasional dispositions of our assets consistent with our
long-term investment objectives.
If we fail to satisfy one or both of the 75% or 95% gross income tests
for any taxable year, we may nevertheless qualify as a REIT for that year if:
o our failure to meet the test was due to reasonable cause and not due
to willful neglect;
o we report the nature and amount of each item of our income included in
the 75% or 95% gross income tests for that taxable year on a schedule
attached to our tax return; and
o any incorrect information on the schedule was not due to fraud with
intent to evade tax.
It is impossible to state whether in all circumstances we would be
entitled to the benefit of this relief provision for the 75% and 95% gross
income tests. Even if this relief provision did apply, a special tax equal to
100% is imposed upon the greater of the amount by which we failed the 75% test
or the 95% test with certain adjustments, multiplied by a fraction intended to
reflect our profitability.
Asset Tests. At the close of each quarter of each taxable year, we must
also satisfy these asset percentage tests in order to qualify as a REIT for
federal income tax purposes:
o At least 75% of our total assets must consist of real estate assets,
cash and cash items, shares in other REITs, government securities, and
stock or debt instruments purchased with proceeds of a
22
stock offering or an offering of our debt with a term of at least five
years, but only for the one-year period commencing with our receipt of
the offering proceeds.
o Not more than 25% of our total assets may be represented by securities
other than those securities that count favorably toward the preceding
75% asset test.
o Of the investments included in the preceding 25% asset class, the
value of any one non-REIT issuer's securities that we own may not
exceed 5% of the value of our total assets, and we may not own more
than 10% of any one non-REIT issuer's outstanding voting securities.
For our 2001 taxable year and thereafter, we may not own more than 10%
of the vote or value of any one non-REIT issuer's outstanding
securities, unless that issuer is our taxable REIT subsidiary or the
securities are straight debt securities.
o For our 2001 taxable year and thereafter, our stock and securities in
a taxable REIT subsidiary are exempted from the preceding 10% and 5%
asset tests. However, no more than 20% of our total assets may be
represented by stock or securities of taxable REIT subsidiaries.
When a failure to satisfy the above asset tests results from an
acquisition of securities or other property during a quarter, the failure can be
cured by disposition of sufficient nonqualifying assets within 30 days after the
close of that quarter. We intend to maintain records of the value of our assets
to document our compliance with the above asset tests, and to take actions as
may be required to cure any failure to satisfy the tests within 30 days after
the close of any quarter.
Our Relationship with Five Star. In 2001, we and HRPT Properties Trust
spun off substantially all of our Five Star Quality Care, Inc. common shares. In
addition, our leases with Five Star, Five Star's charter and bylaws, and the
transaction agreement governing the spin-off collectively contain restrictions
upon the ownership of Five Star common shares and require Five Star to refrain
from taking any actions that may jeopardize our qualification as a REIT under
the Internal Revenue Code, including actions which would result in our or our
principal shareholder, HRPT Properties Trust, obtaining actual or constructive
ownership of 10% or more of the Five Star common shares. Accordingly, commencing
with our 2002 taxable year, we expect that the rental income we receive from
Five Star and its subsidiaries will be "rents from real property," and thus
qualifying income under the 75% and 95% gross income tests described above.
Annual Distribution Requirements. In order to qualify for taxation as a
REIT under the Internal Revenue Code, we are required to make annual
distributions other than capital gain dividends to our shareholders in an amount
at least equal to the excess of:
(A) the sum of 90% of our "real estate investment trust taxable
income," as defined in Section 857 of the Internal Revenue Code, computed by
excluding any net capital gain and before taking into account any dividends paid
deduction for which we are eligible, and 90% of our net income after tax, if
any, from property received in foreclosure, over
(B) the sum of our qualifying noncash income, e.g., imputed rental
income or income from transactions inadvertently failing to qualify as like-kind
exchanges.
Prior to our 2001 taxable year, the preceding 90% percentages were 95%.
The distributions must be paid in the taxable year to which they relate, or in
the following taxable year if declared before we timely file our tax return for
the earlier taxable year and if paid on or before the first regular distribution
payment after that declaration. If a dividend is declared in October, November,
or December to shareholders of record during one of those months, and if the
dividend is paid during the following January, then for federal income tax
purposes the dividend will be treated as having been both paid and received on
December 31 of the prior taxable year. A distribution which is not pro rata
within a class of our beneficial interests entitled to a distribution, or which
is not consistent with the rights to distributions among our classes of
beneficial interests, is a preferential distribution that is not taken into
consideration for purposes of the distribution requirements, and accordingly the
payment of a preferential distribution could affect our ability to meet the
distribution requirements. Taking into account our
23
distribution policies, including the dividend reinvestment plan we have adopted,
we expect that we will not make any preferential distributions. The distribution
requirements may be waived by the IRS if a REIT establishes that it failed to
meet them by reason of distributions previously made to meet the requirements of
the 4% excise tax discussed below. To the extent that we do not distribute all
of our net capital gain and all of our real estate investment trust taxable
income, as adjusted, we will be subject to tax on undistributed amounts.
In addition, we will be subject to a 4% excise tax to the extent we
fail within a calendar year to make required distributions to our shareholders
of 85% of our ordinary income and 95% of our capital gain net income plus the
excess, if any, of the "grossed up required distribution" for the preceding
calendar year over the amount treated as distributed for that preceding calendar
year. For this purpose, the term "grossed up required distribution" for any
calendar year is the sum of our taxable income for the calendar year without
regard to the deduction for dividends paid and all amounts from earlier years
that are not treated as having been distributed under the provision.
If we do not have enough cash or other liquid assets to meet the 90%
distribution requirements, we may find it necessary to arrange for new debt or
equity financing to provide funds for required distributions, or else our REIT
status for federal income tax purposes could be jeopardized. We can provide no
assurance that financing would be available for these purposes on favorable
terms.
If we fail to distribute sufficient dividends for any year, we may be
able to rectify this failure by paying "deficiency dividends" to shareholders in
a later year. These deficiency dividends may be included in our deduction for
dividends paid for the earlier year, but an interest charge would be imposed
upon us for the delay in distribution. Although we may be able to avoid being
taxed on amounts distributed as deficiency dividends, we will remain liable for
the 4% excise tax discussed above.
In addition to the other distribution requirements above, to preserve
our status as a REIT we are required to timely distribute earnings and profits
that we inherit from acquired C corporations, for example, the subsidiaries we
acquired on January 11, 2002. However, as explained below, our investigation
indicates that we did not inherit earnings and profits from these subsidiaries
that will jeopardize our status as a REIT.
The Acquisition of 31 Senior Living Communities
On January 11, 2002, we acquired all of the outstanding stock of a
subsidiary of a domestic C corporation. At the time of that acquisition, this
subsidiary directly or indirectly owned all of the outstanding equity interests
in lower tier, corporate and noncorporate subsidiaries. Upon our acquisition,
each of the acquired entities became either our qualified REIT subsidiary under
Section 856(i) of the Internal Revenue Code or a disregarded entity under
Treasury regulations issued under Section 7701 of the Internal Revenue Code.
Thus, after the acquisition, all assets, liabilities and items of income,
deduction and credit of wholly-owned subsidiaries have been treated as ours for
purposes of the various REIT qualification tests described above. In addition,
we generally are treated as the successor to the acquired subsidiaries' federal
income tax attributes, such as those entities' adjusted tax bases in their
assets and their depreciation schedules; we are also treated as the successor to
the acquired corporate subsidiaries' earnings and profits for federal income tax
purposes, if any.
Built-in Gains from C Corporations. As described above, notwithstanding
our qualification and taxation as a REIT, we may still be subject to corporate
taxation in particular circumstances. Specifically, if we acquire an asset from
a C corporation in a transaction in which our adjusted tax basis in the asset is
determined by reference to the adjusted tax basis of that asset in the hands of
the C corporation, and if we subsequently recognize gain on the disposition of
that asset during the ten year period following the acquisition, then we will
generally pay tax at the highest regular corporate tax rate, currently 35%, on
the lesser of (1) the excess at the time we acquired the asset, if any, of the
asset's fair market value over its then adjusted tax basis, or (2) our gain
recognized in the disposition. Accordingly, any taxable disposition of an asset
acquired in the January 11, 2002 transaction during the ten-year period
commencing on that date could be subject to tax under these rules. However,
except as described below, we have not disposed, and have no present plan or
intent to dispose, of any assets acquired in this transaction.
24
Also on January 11, 2002, we conveyed to Five Star and its subsidiaries
operating assets that were of a type that are typically owned by the tenant of a
senior living facility. In exchange, Five Star and its subsidiaries assumed
related operating liabilities. The aggregate adjusted tax basis in the
transferred operating assets was less than the related liabilities assumed, and
Five Star and its subsidiaries have received a cash payment from us in the
amount of the estimated difference. We believe that the fair market value of
these conveyed operating assets will equal their adjusted tax bases, and we and
Five Star agreed to do our respective tax return reporting to that effect.
Accordingly, although Sullivan & Worcester LLP is unable to render an opinion on
factual determinations such as assets' fair market value, we expect to report no
gain or loss, and therefore to owe no corporate level tax under the rules for
dispositions of former C corporation assets, in respect of this conveyance of
operating assets to Five Star.
Earnings and Profits. A REIT may not at the end of any taxable year
have any undistributed earnings and profits for federal income tax purposes that
are attributable to a C corporation. Upon the closing of the January 11, 2002
transaction, we succeeded to the undistributed earnings and profits, if any, of
the acquired corporate subsidiaries. Thus, we need to distribute all of these
earnings and profits no later than December 31, 2002. If we fail to do so, we
will not qualify as a REIT for 2002 and thereafter unless a relief provision
applies.
Although Sullivan & Worcester LLP is unable to render an opinion on
factual determinations such as the amount of undistributed earnings and profits,
we have made a preliminary investigation of the amount of undistributed earnings
and profits that we inherited in the January 11, 2002 transaction. At present,
we believe that we did not acquire any undistributed earnings and profits in
this transaction that will remain undistributed on December 31, 2002 after
taking into account our anticipated distributions for 2002. However, there can
be no assurance that the IRS would not, upon subsequent examination, propose
adjustments to the undistributed earnings and profits that we inherited as a
result of the January 11, 2002 transaction. In examining the calculation of
undistributed earnings and profits that we inherited, the IRS might consider all
taxable years of the acquired subsidiaries as open for review for purposes of
its proposed adjustments.
If we discover that we have inherited undistributed earnings and
profits in the January 11, 2002 transaction that would not be eliminated by
December 31, 2002 through our distributions made during 2002, we may choose to
preserve our qualification and taxation as a REIT by making a special
distribution for our 2002 taxable year. If, despite these best efforts during
our 2002 taxable year, it is subsequently determined that we had undistributed
earnings and profits from the January 11, 2002 transaction at December 31, 2002,
we may be eligible for a relief provision similar to the "deficiency dividends"
procedure described above. To utilize this relief provision, we would have to
pay an interest charge for the delay in distributing the undistributed earnings
and profits; in addition, we would be required to distribute to our
shareholders, in addition to our other REIT distribution requirements, the
amount of the undistributed earnings and profits less the interest charge paid.
Depreciation and Federal Income Tax Treatment of Leases
Our initial tax bases in our assets will generally be our acquisition
cost. We will generally depreciate our real property on a straight-line basis
over 40 years and our personal property over 12 years. These depreciation
schedules may vary for properties that we acquire through tax-free or carryover
basis acquisitions.
The initial tax bases and depreciation schedules for our assets we held
immediately after we were spun off from HRPT Properties Trust depends upon
whether the deemed exchange that resulted from that spin-off was an exchange
under Section 351(a) of the Internal Revenue Code. We believe that Section
351(a) treatment was appropriate. Therefore, we carried over HRPT Properties
Trust's tax basis and depreciation schedule in each of the assets, and to the
extent that HRPT Properties Trust recognized gain on an asset in the deemed
exchange, we obtained additional tax basis in that asset which we depreciate in
the same manner as we depreciate newly purchased assets. In contrast, if Section
351(a) treatment was not appropriate for the deemed exchange, then we will be
treated as though we acquired all our assets at the time of the spin-off in a
fully taxable acquisition, thereby acquiring aggregate tax bases in these assets
equal to the aggregate amount realized by HRPT Properties Trust in the deemed
exchange, and it would then be appropriate to depreciate these tax bases in the
same manner as we depreciate newly purchased assets. We believe, and Sullivan &
Worcester LLP has opined, that it is likely that the deemed exchange was an
exchange under Section 351(a) of the Internal Revenue Code, and we will perform
all our tax reporting accordingly. We may be required to amend these tax
reports, including those sent to
25
our shareholders, if the IRS successfully challenges our position that the
deemed exchange is an exchange under Section 351(a) of the Internal Revenue
Code. We intend to comply with the annual REIT distribution requirements
regardless of whether the deemed exchange was an exchange under Section 351(a)
of the Internal Revenue Code.
We will be entitled to depreciation deductions from our facilities only
if we are treated for federal income tax purposes as the owner of the
facilities. This means that the leases of the facilities must be classified for
federal income tax purposes as true leases, rather than as sales or financing
arrangements, and we believe this to be the case. In the case of sale-leaseback
arrangements, the IRS could assert that we realized prepaid rental income in the
year of purchase to the extent that the value of a leased property, at the time
of purchase, exceeded the purchase price for that property. While we believe
that the value of leased property at the time of purchase did not exceed
purchase prices, because of the lack of clear precedent we cannot provide
assurances as to whether the IRS might successfully assert the existence of
prepaid rental income in any of our sale-leaseback transactions.
Taxation of U.S. Shareholders
As long as we qualify as a REIT for federal income tax purposes, a
distribution to our U.S. shareholders that we do not designate as a capital gain
dividend will be treated as an ordinary income dividend to the extent that it is
made out of current or accumulated earnings and profits. Distributions made out
of our current or accumulated earnings and profits that we properly designate as
capital gain dividends will be taxed as long-term capital gains, as discussed
below, to the extent they do not exceed our actual net capital gain for the
taxable year. However, corporate shareholders may be required to treat up to 20%
of any capital gain dividend as ordinary income under Section 291 of the
Internal Revenue Code.
In addition, we may elect to retain net capital gain income and treat
it as constructively distributed. In that case:
(1) we will be taxed at regular corporate capital gains tax rates on
retained amounts,
(2) each U.S. shareholder will be taxed on its designated proportionate
share of our retained net capital gains as though that amount were distributed
and designated a capital gain dividend,
(3) each U.S. shareholder will receive a credit for its designated
proportionate share of the tax that we pay,
(4) each U.S. shareholder will increase its adjusted basis in our
shares by the excess of the amount of its proportionate share of these retained
net capital gains over its proportionate share of this tax that we pay, and
(5) both we and our corporate shareholders will make commensurate
adjustments in our respective earnings and profits for federal income tax
purposes.
If we elect to retain our net capital gains in this fashion, we will
notify our U.S. shareholders of the relevant tax information within 60 days
after the close of the affected taxable year.
For noncorporate U.S. shareholders, long-term capital gains are
generally taxed at maximum rates of 20% or 25%, depending upon the type of
property disposed of and the previously claimed depreciation with respect to
this property. If for any taxable year we designate as capital gain dividends
any portion of the dividends paid or made available for the year to our U.S.
shareholders, including our retained capital gains treated as capital gain
dividends, then the portion of the capital gain dividends so designated that
will be allocated to the holders of a particular class of shares will on a
percentage basis equal the ratio of the amount of the total dividends paid or
made available for the year to the holders of that class of shares to the total
dividends paid or made available for the year to holders of all classes of our
shares. We will similarly designate the portion of any capital gain dividend
that is to be taxed to noncorporate U.S. shareholders at the maximum rates of
20% or 25% so that the designations will be proportionate among all classes of
our shares.
26
Distributions in excess of current or accumulated earnings and profits
will not be taxable to a U.S. shareholder to the extent that they do not exceed
the shareholder's adjusted basis in the shareholder's shares, but will reduce
the shareholder's basis in those shares. To the extent that these excess
distributions exceed the adjusted basis of a U.S. shareholder's shares, they
will be included in income as capital gain, with long-term gain generally taxed
to noncorporate U.S. shareholders at a maximum rate of 20%. No U.S. shareholder
may include on his federal income tax return any of our net operating losses or
any of our capital losses.
Dividends that we declare in October, November or December of a taxable
year to U.S. shareholders of record on a date in those months will be deemed to
have been received by shareholders on December 31 of that taxable year, provided
we actually pay these dividends during the following January. Also, items that
are treated differently for regular and alternative minimum tax purposes are to
be allocated between a REIT and its shareholders under Treasury regulations
which are to be prescribed. It is possible that these Treasury regulations will
require tax preference items to be allocated to our shareholders with respect to
any accelerated depreciation or other tax preference items that we claim.
A U.S. shareholder's sale or exchange of our shares will result in
recognition of gain or loss in an amount equal to the difference between the
amount realized and the shareholder's adjusted basis in the shares sold or
exchanged. This gain or loss will be capital gain or loss, and will be long-term
capital gain or loss if the shareholder's holding period in the shares exceeds
one year. In addition, any loss upon a sale or exchange of our shares held for
six months or less will generally be treated as a long-term capital loss to the
extent of our long-term capital gain dividends during the holding period.
Noncorporate U.S. shareholders who borrow funds to finance their
acquisition of our shares could be limited in the amount of deductions allowed
for the interest paid on the indebtedness incurred. Under Section 163(d) of the
Internal Revenue Code, interest paid or accrued on indebtedness incurred or
continued to purchase or carry property held for investment is generally
deductible only to the extent of the investor's net investment income. A U.S.
shareholder's net investment income will include ordinary income dividend
distributions received from us and, if an appropriate election is made by the
shareholder, capital gain dividend distributions received from us; however,
distributions treated as a nontaxable return of the shareholder's basis will not
enter into the computation of net investment income.
Taxation of Tax-Exempt Shareholders
In Revenue Ruling 66-106, the IRS ruled that amounts distributed by a
REIT to a tax-exempt employees' pension trust did not constitute "unrelated
business taxable income," even though the REIT may have financed some its
activities with acquisition indebtedness. Although revenue rulings are
interpretive in nature and subject to revocation or modification by the IRS,
based upon the analysis and conclusion of Revenue Ruling 66-106, our
distributions made to shareholders that are tax-exempt pension plans, individual
retirement accounts, or other qualifying tax-exempt entities should not
constitute unrelated business taxable income, unless the shareholder has
financed its acquisition of our shares with "acquisition indebtedness" within
the meaning of the Internal Revenue Code.
Special rules apply to tax-exempt pension trusts, including so-called
401(k) plans but excluding individual retirement accounts or government pension
plans, that own more than 10% by value of a "pension-held REIT" at any time
during a taxable year. The pension trust may be required to treat a percentage
of all dividends received from the pension-held REIT during the year as
unrelated business taxable income. This percentage is equal to the ratio of:
(1) the pension-held REIT's gross income derived from the conduct of
unrelated trades or businesses, determined as if the pension-held REIT were a
tax-exempt pension fund, less direct expenses related to that income, to
(2) the pension-held REIT's gross income from all sources, less direct
expenses related to that income,
27
except that this percentage shall be deemed to be zero unless it would otherwise
equal or exceed 5%. A REIT is a pension-held REIT if:
o the REIT is "predominantly held" by tax-exempt pension trusts, and
o the REIT would otherwise fail to satisfy the "closely held" ownership
requirement discussed above if the stock or beneficial interests in
the REIT held by tax-exempt pension trusts were viewed as held by
tax-exempt pension trusts rather than by their respective
beneficiaries.
A REIT is predominantly held by tax-exempt pension trusts if at least
one tax-exempt pension trust owns more than 25% by value of the REIT's stock or
beneficial interests, or if one or more tax-exempt pension trusts, each owning
more than 10% by value of the REIT's stock or beneficial interests, own in the
aggregate more than 50% by value of the REIT's stock or beneficial interests.
Because of the restrictions in our declaration of trust regarding the ownership
concentration of our shares, we believe that we are not and will not be a
pension-held REIT. However, because our shares are publicly traded, we cannot
completely control whether or not we are or will become a pension-held REIT.
Taxation of Non-U.S. Shareholders
The rules governing the United States federal income taxation of
non-U.S. shareholders are complex, and the following discussion is intended only
as a summary of these rules. If you are a non-U.S. shareholder, we urge you to
consult with your own tax advisor to determine the impact of United States
federal, state, local, and foreign tax laws, including any tax return filing and
other reporting requirements, with respect to your investment in our shares.
In general, a non-U.S. shareholder will be subject to regular United
States federal income tax in the same manner as a U.S. shareholder with respect
to its investment in our shares if that investment is effectively connected with
the non-U.S. shareholder's conduct of a trade or business in the United States.
In addition, a corporate non-U.S. shareholder that receives income that is or is
deemed effectively connected with a trade or business in the United States may
also be subject to the 30% branch profits tax under Section 884 of the Internal
Revenue Code, which is payable in addition to regular United States federal
corporate income tax. The balance of this discussion of the United States
federal income taxation of non-U.S. shareholders addresses only those non-U.S.
shareholders whose investment in our shares is not effectively connected with
the conduct of a trade or business in the United States.
A distribution by us to a non-U.S. shareholder that is not attributable
to gain from the sale or exchange of a United States real property interest and
that is not designated as a capital gain dividend will be treated as an ordinary
income dividend to the extent that it is made out of current or accumulated
earnings and profits. A distribution of this type will generally be subject to
United States federal income tax and withholding at the rate of 30%, or the
lower rate that may be specified by a tax treaty if the non-U.S. shareholder has
in the manner prescribed by the IRS demonstrated its entitlement to benefits
under a tax treaty. Because we cannot determine our current and accumulated
earnings and profits until the end of the taxable year, withholding at the rate
of 30% or applicable lower treaty rate will generally be imposed on the gross
amount of any distribution to a non-U.S. shareholder that we make and do not
designate a capital gain dividend. Notwithstanding this withholding on
distributions in excess of our current and accumulated earnings and profits,
these distributions are a nontaxable return of capital to the extent that they
do not exceed the non-U.S. shareholder's adjusted basis in our shares, and the
nontaxable return of capital will reduce the adjusted basis in these shares. To
the extent that distributions in excess of current and accumulated earnings and
profits exceed the non-U.S. shareholder's adjusted basis in our shares, the
distributions will give rise to tax liability if the non-U.S. shareholder would
otherwise be subject to tax on any gain from the sale or exchange of these
shares, as discussed below. A non-U.S. shareholder may seek a refund from the
IRS of amounts withheld on distributions to him in excess of our current and
accumulated earnings and profits.
For any year in which we qualify as a REIT, distributions that are
attributable to gain from the sale or exchange of a United States real property
interest are taxed to a non-U.S. shareholder as if these distributions were
28
gains effectively connected with a trade or business in the United States
conducted by the non-U.S. shareholder. Accordingly, a non-U.S. shareholder will
be taxed on these amounts at the normal capital gain rates applicable to a U.S.
shareholder, subject to any applicable alternative minimum tax and to a special
alternative minimum tax in the case of nonresident alien individuals; the
non-U.S. shareholder will be required to file a United States federal income tax
return reporting these amounts, even if applicable withholding is imposed as
described below; and corporate non-U.S. shareholders may owe the 30% branch
profits tax under Section 884 of the Internal Revenue Code in respect of these
amounts. We will be required to withhold from distributions to non-U.S.
shareholders, and remit to the IRS, 35% of the maximum amount of any
distribution that could be designated as a capital gain dividend. In addition,
for purposes of this withholding rule, if we designate prior distributions as
capital gain dividends, then subsequent distributions up to the amount of the
designated prior distributions will be treated as capital gain dividends. The
amount of any tax withheld is creditable against the non-U.S. shareholder's
United States federal income tax liability, and any amount of tax withheld in
excess of that tax liability may be refunded if an appropriate claim for refund
is filed with the IRS. If for any taxable year we designate as capital gain
dividends any portion of the dividends paid or made available for the year to
our shareholders, including our retained capital gains treated as capital gain
dividends, then the portion of the capital gain dividends so designated that
will be allocated to the holders of a particular class of shares will on a
percentage basis equal the ratio of the amount of the total dividends paid or
made available for the year to the holders of that class of shares to the total
dividends paid or made available for the year to holders of all classes of our
shares.
Tax treaties may reduce the withholding obligations on our
distributions. Under some treaties, however, rates below 30% that are applicable
to ordinary income dividends from United States corporations may not apply to
ordinary income dividends from a REIT. You must generally use an applicable IRS
Form W-8, or substantially similar form, to claim tax treaty benefits. If the
amount of tax withheld by us with respect to a distribution to a non-U.S.
shareholder exceeds the shareholder's United States federal income tax liability
with respect to the distribution, the non-U.S. shareholder may file for a refund
of the excess from the IRS. In this regard, note that the 35% withholding tax
rate on capital gain dividends corresponds to the maximum income tax rate
applicable to corporate non-U.S. shareholders but is higher than the 20% and 25%
maximum rates on capital gains generally applicable to noncorporate non-U.S.
shareholders. Treasury regulations also provide special rules to determine
whether, for purposes of determining the applicability of a tax treaty, our
distributions to a non-U.S. shareholder that is an entity should be treated as
paid to the entity or to those owning an interest in that entity, and whether
the entity or its owners are entitled to benefits under the tax treaty. These
Treasury regulations require the use of the IRS Forms W-8 series.
If our shares are not "United States real property interests" within
the meaning of Section 897 of the Internal Revenue Code, a non-U.S.
shareholder's gain on sale of these shares generally will not be subject to
United States federal income taxation, except that a nonresident alien
individual who was present in the United States for 183 days or more during the
taxable year will be subject to a 30% tax on this gain. Our shares will not
constitute a United States real property interest if we are a "domestically
controlled REIT." A domestically controlled REIT is a REIT in which at all times
during the preceding five-year period less than 50% in value of its shares is
held directly or indirectly by foreign persons. We believe that we are and will
be a domestically controlled REIT and thus a non-U.S. shareholder's gain on sale
of our shares will not be subject to United States federal income taxation.
However, because our shares are publicly traded, we can provide no assurance
that we will be a domestically controlled REIT. If we are not a domestically
controlled REIT, a non-U.S. shareholder's gain on sale of our shares will not be
subject to United States federal income taxation as a sale of a United States
real property interest, if that class of shares is "regularly traded," as
defined by applicable Treasury regulations, on an established securities market
like the New York Stock Exchange, and the non-U.S. shareholder has at all times
during the preceding five years owned 5% or less by value of that class of
shares. If the gain on the sale of our shares were subject to United States
federal income taxation, the non-U.S. shareholder will generally be subject to
the same treatment as a U.S. shareholder with respect to its gain, will be
required to file a United States federal income tax return reporting that gain,
and in the case of corporate non-U.S. shareholders might owe branch profits tax
under Section 884 of the Internal Revenue Code. A purchaser of our shares from a
non-U.S. shareholder will not be required to withhold on the purchase price if
the purchased shares are regularly traded on an established securities market or
if we are a domestically controlled REIT. Otherwise, a purchaser of our shares
from a non-U.S. shareholder may be required to withhold 10% of the purchase
price paid to the non-U.S. shareholder and to remit the withheld amount to the
IRS.
29
Backup Withholding and Information Reporting
Information reporting and backup withholding may apply to distributions
or proceeds paid to our shareholders under the circumstances discussed below.
The backup withholding rate is currently 30%, but this rate will fall to 28%
over the next several years. Amounts withheld under backup withholding are
generally not an additional tax and may be refunded or credited against the REIT
shareholder's federal income tax liability.
A U.S. shareholder will be subject to backup withholding when it
receives distributions on our shares or proceeds upon the sale, exchange,
redemption, retirement or other disposition of our shares, unless the U.S.
shareholder properly executes under penalties of perjury an IRS Form W-9 or
substantially similar form that:
o provides the U.S. shareholder's correct taxpayer identification
number; and
o certifies that the U.S. shareholder is exempt from backup withholding
because it is a corporation or comes within another exempt category,
it has not been notified by the IRS that it is subject to backup
withholding, or it has been notified by the IRS that it is no longer
subject to backup withholding.
If the U.S. shareholder does not provide its correct taxpayer
identification number on the IRS Form W-9 or substantially similar form, it may
be subject to penalties imposed by the IRS and the REIT or other withholding
agent may have to withhold a portion of any capital gain distributions paid to
it. Unless the U.S. shareholder has established on a properly executed IRS Form
W-9 or substantially similar form that it is a corporation or comes within
another exempt category, distributions on our shares paid to it during the
calendar year, and the amount of tax withheld, if any, will be reported to it
and to the IRS.
Distributions on our shares to a non-U.S. shareholder during each
calendar year and the amount of tax withheld, if any, will generally be reported
to the non-U.S. shareholder and to the IRS. This information reporting
requirement applies regardless of whether the non-U.S. shareholder is subject to
withholding on distributions on our shares or whether the withholding was
reduced or eliminated by an applicable tax treaty. Also, distributions paid to a
non-U.S. shareholder on our shares may be subject to backup withholding, unless
the non-U.S. shareholder properly certifies its non-U.S. shareholder status on
an IRS Form W-8 or substantially similar form in the manner described above.
Similarly, information reporting and backup withholding will not apply to
proceeds a non-U.S. shareholder receives upon the sale, exchange, redemption,
retirement or other disposition of our shares, if the non-U.S. shareholder
properly certifies its non-U.S. shareholder status on an IRS Form W-8 or
substantially similar form. Even without having executed an IRS Form W-8 or
substantially similar form, however, in some cases information reporting and
backup withholding will not apply to proceeds that a non-U.S. shareholder
receives upon the sale, exchange, redemption, retirement or other disposition of
our shares if the non-U.S. shareholder receives those proceeds through a
broker's foreign office.
Other Tax Consequences
You should recognize that our and our shareholders' federal income tax
treatment may be modified by legislative, judicial, or administrative actions at
any time, which actions may be retroactive in effect. The rules dealing with
federal income taxation are constantly under review by the Congress, the IRS and
the Treasury Department, and statutory changes, new regulations, revisions to
existing regulations, and revised interpretations of established concepts are
issued frequently. No prediction can be made as to the likelihood of passage of
new tax legislation or other provisions either directly or indirectly affecting
us and our shareholders. Revisions in federal income tax laws and
interpretations of these laws could adversely affect the tax consequences of an
investment in our shares. We and our shareholders may also be subject to state
or local taxation in various state or local jurisdictions, including those in
which we or our shareholders transact business or reside. State and local tax
consequences may not be comparable to the federal income tax consequences
discussed above. For example, if a state has not updated its REIT taxation
provisions to permit taxable REIT subsidiaries, then our use of a taxable REIT
subsidiary may disqualify us from favorable taxation as a REIT in that state.
30
ERISA PLANS, KEOGH PLANS AND INDIVIDUAL RETIREMENT ACCOUNTS
General Fiduciary Obligations
Fiduciaries of a pension, profit-sharing or other employee benefit plan
subject to Title I of the Employee Retirement Income Security Act of 1974,
ERISA, must consider whether:
o their investment in our shares satisfies the diversification
requirements of ERISA;
o the investment is prudent in light of possible limitations on the
marketability of our shares;
o they have authority to acquire our shares under the applicable
governing instrument and Title I of ERISA; and
o the investment is otherwise consistent with their fiduciary
responsibilities.
Trustees and other fiduciaries of an ERISA plan may incur personal
liability for any loss suffered by the plan on account of a violation of their
fiduciary responsibilities. In addition, these fiduciaries may be subject to a
civil penalty of up to 20% of any amount recovered by the plan on account of a
violation. Fiduciaries of any IRA, Roth IRA, Keogh Plan or other qualified
retirement plan not subject to Title I of ERISA, referred to as "non-ERISA
plans," should consider that a plan may only make investments that are
authorized by the appropriate governing instrument. Fiduciary shareholders
should consult their own legal advisors if they have any concern as to whether
the investment is consistent with the foregoing criteria.
Prohibited Transactions
Fiduciaries of ERISA plans and persons making the investment decision
for an IRA or other non-ERISA plan should consider the application of the
prohibited transaction provisions of ERISA and the Internal Revenue Code in
making their investment decision. Sales and other transactions between an ERISA
or non-ERISA plan, and persons related to it, are prohibited transactions. The
particular facts concerning the sponsorship, operations and other investments of
an ERISA plan or non-ERISA plan may cause a wide range of other persons to be
treated as disqualified persons or parties in interest with respect to it. A
prohibited transaction, in addition to imposing potential personal liability
upon fiduciaries of ERISA plans, may also result in the imposition of an excise
tax under the Internal Revenue Code or a penalty under ERISA upon the
disqualified person or party in interest with respect to the plan. If the
disqualified person who engages in the transaction is the individual on behalf
of whom an IRA or Roth IRA is maintained or his beneficiary, the IRA or Roth IRA
may lose its tax-exempt status and its assets may be deemed to have been
distributed to the individual in a taxable distribution on account of the
prohibited transaction, but no excise tax will be imposed. Fiduciary
shareholders should consult their own legal advisors as to whether the ownership
of our shares involves a prohibited transaction.
Special Fiduciary and Prohibited Transactions Consequences
The Department of Labor, which has administrative responsibility over
ERISA plans as well as non-ERISA plans, has issued a regulation defining "plan
assets." The regulation generally provides that when an ERISA or non-ERISA plan
acquires a security that is an equity interest in an entity and that security is
neither a "publicly offered security" nor a security issued by an investment
company registered under the Investment Company Act of 1940, the ERISA plan's or
non-ERISA plan's assets include both the equity interest and an undivided
interest in each of the underlying assets of the entity, unless it is
established either that the entity is an operating company or that equity
participation in the entity by benefit plan investors is not significant.
Each class of our shares, that is, our common shares and any class of
preferred shares that we may issue, must be analyzed separately to ascertain
whether it is a publicly offered security. The regulation defines a publicly
offered security as a security that is "widely held," "freely transferable" and
either part of a class of securities registered under the Securities Exchange
Act of 1934, or sold under an effective registration statement under the
Securities Act of 1933, provided the securities are registered under the
Securities Exchange Act of 1934 within
31
120 days after the end of the fiscal year of the issuer during which the
offering occurred. All our outstanding shares have been registered under the
Securities Exchange Act of 1934.
The regulation provides that a security is "widely held" only if it is
part of a class of securities that is owned by 100 or more investors independent
of the issuer and of one another. However, a security will not fail to be
"widely held" because the number of independent investors falls below 100
subsequent to the initial public offering as a result of events beyond the
issuer's control. Our common shares have been widely held and we expect our
common shares to continue to be widely held. We expect the same to be true of
any class of preferred stock that we may issue, but we can give no assurance in
that regard.
The regulation provides that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The regulation further provides that, where a
security is part of an offering in which the minimum investment is $10,000 or
less, some restrictions on transfer ordinarily will not, alone or in
combination, affect a finding that these securities are freely transferable. The
restrictions on transfer enumerated in the regulation as not affecting that
finding include:
o any restriction on or prohibition against any transfer or assignment
which would result in a termination or reclassification for federal or
state tax purposes, or would otherwise violate any state or federal
law or court order;
o any requirement that advance notice of a transfer or assignment be
given to the issuer and any requirement that either the transferor or
transferee, or both, execute documentation setting forth
representations as to compliance with any restrictions on transfer
which are among those enumerated in the regulation as not affecting
free transferability, including those described in the preceding
clause of this sentence;
o any administrative procedure which establishes an effective date, or
an event prior to which a transfer or assignment will not be
effective; and
o any limitation or restriction on transfer or assignment which is not
imposed by the issuer or a person acting on behalf of the issuer.
We believe that the restrictions imposed under our declaration of trust
on the transfer of shares do not result in the failure of our shares to be
"freely transferable." Furthermore, we believe that at present there exist no
other facts or circumstances limiting the transferability of our shares which
are not included among those enumerated as not affecting their free
transferability under the regulation, and we do not expect or intend to impose
in the future, or to permit any person to impose on our behalf, any limitations
or restrictions on transfer which would not be among the enumerated permissible
limitations or restrictions.
Assuming that each class of our shares will be "widely held" and that
no other facts and circumstances exist which restrict transferability of these
shares, we have received an opinion of our counsel Sullivan & Worcester LLP that
our shares will not fail to be "freely transferable" for purposes of the
regulation due to the restrictions on transfer of the shares under our
declaration of trust and that under the regulation the shares are publicly
offered securities and our assets will not be deemed to be "plan assets" of any
ERISA plan or non-ERISA plan that invests in our shares.
32
Item 2. Properties
At December 31, 2001, we had real estate investments totaling $593.2
million, at cost and after impairment loss write-downs, in 83 properties that
were leased to tenants. At December 31, 2001, 14 properties with an aggregate
cost of $325.5 million were mortgaged to secure our revolving bank credit
facility and two properties with an aggregate cost of $9.2 were mortgaged for
$9.1 million.
The following table summarizes some information about our properties as
of December 31, 2001. All dollar amounts are in thousands. See "Item 1.
Business."
Built/ Invest-
Location Property Type Renovated(1) Units/Beds(2) ment(3)
------------------------------------------- ----------------------- ----------------- ----------------- -----------
Triple Net Leases:
Marriott International, Inc.
Scottsdale, AZ Assisted Living 1990 148 $9,877
Sun City, AZ Assisted Living 1990 149 11,916
Laguna Hills, CA Independent Living 1991 403 31,791
Boca Raton, FL Independent Living 1999 412 44,836
Deerfield Beach, FL Independent Living 1986 288 16,935
Fort Myers, FL Independent Living 1987 470 23,905
Palm Harbor, FL Independent Living 1992 319 33,863
Port St. Lucie, FL Assisted Living 1993 128 12,451
Arlington Heights, IL Independent Living 1986 363 36,742
Silver Spring, MD Independent Living 1992 354 33,080
Bellaire, TX Assisted Living 1991 145 12,410
Arlington, VA Independent Living 1992 421 18,889
Charlottesville, VA Independent Living 1991 316 29,829
Virginia Beach, VA Assisted Living 1990 114 8,948
----------------- --------------
4,030 325,472
Five Star Quality Care, Inc.
Phoenix, AZ Nursing Home 1984 125 3,223
Yuma, AZ Nursing Home 1984 119 2,386
Yuma, AZ Independent Living 1984 52 735
Arleta, CA Assisted Living 1976 85 2,468
Lancaster, CA Nursing Home 1994 99 3,531
Stockton, CA Nursing Home 1991 116 3,179
Thousand Oaks, CA Nursing Home 1970 124 3,498
Van Nuys, CA Nursing Home 1984 58 1,352
Canon City, CO Nursing Home/
Senior Apartments 1984 133 3,180
Colorado Springs, CO Nursing Home 1996 75 2,645
Delta, CO Nursing Home 1978 92 3,880
Grand Junction, CO Nursing Home 1986 95 4,467
Grand Junction, CO Nursing Home 1995 82 3,979
Lakewood, CO Nursing Home 1985 125 4,816
Littleton, CO Nursing Home 1965 198 5,699
New Haven, CT Nursing Home 1971 150 5,783
Waterbury, CT Nursing Home 1974 150 5,320
College Park, GA Nursing Home 1985 99 3,077
Dublin, GA Nursing Home 1968 130 4,610
Glenwood, GA Nursing Home 1972 61 1,788
Marietta, GA Nursing Home 1973 109 3,089
Clarinda, IA Nursing Home 1968 96 1,999
Council Bluffs, IA Nursing Home 1963 62 1,401
33
Built/ Invest-
Location Property Type Renovated(1) Units/Beds(2) ment(3)
------------------------------------------- ----------------------- ----------------- ----------------- -----------
Mediapolis, IA Nursing Home 1973 62 2,206
Des Moines, IA Nursing Home 1997 85 799
Glenwood, IA Nursing Home 1982 116 2,464
Pacific Junction, IA Nursing Home 1978 12 375
Winterset, IA Nursing Home/
Senior Apartments 1995 117 2,793
Ellinwood, KS Nursing Home 1972 59 1,377
Farmington, MI Nursing Home 1991 149 4,190
Howell, MI Nursing Home 1985 149 4,976
Tarkio, MO Nursing Home 1996 75 2,532
Ainsworth, NE Nursing Home 1995 48 470
Ashland, NE Nursing Home 1996 101 1,906
Blue Hill, NE Nursing Home 1996 63 1,158
Central City, NE Nursing Home 1999 65 996
Columbus, NE Nursing Home 1978 48 689
Edgar, NE Nursing Home 1995 52 179
Exeter, NE Nursing Home 1972 48 677
Grand Island, NE Nursing Home 1996 76 2,035
Gretna, NE Nursing Home 1995 61 991
Lyons, NE Nursing Home 1974 63 860
Milford, NE Nursing Home 1970 54 944
Sutherland, NE Nursing Home 1995 62 1,306
Utica, NE Nursing Home 1988 40 645
Waverly, NE Nursing Home 1995 50 1,264
Brookfield, WI Nursing Home 1995 224 6,223
Clintonville, WI Nursing Home 1965 61 1,831
Clintonville, WI Nursing Home 1969 103 1,789
Madison, WI Nursing Home 1987 63 1,922
Milwaukee, WI Nursing Home 1983 154 4,221
Pewaukee, WI Nursing Home 1969 175 3,494
Waukesha, WI Nursing Home 1995 105 5,814
Laramie, WY Nursing Home 1986 98 4,097
Worland, WY Nursing Home/
Senior Apartments 1996 93 3,310
----------------- --------------
5,166 144,638
HEALTHSOUTH Corporation (4)
Boston, MA Nursing Home 1985 201 24,978
Hyannis, MA Nursing Home 1982 142 8,292
Middleboro, MA Nursing Home 1987 124 17,523
North Andover, MA Nursing Home 1985 122 3,860
Worcester, MA Nursing Home 1990 173 18,769
----------------- --------------
762 73,422
Integrated Health Services, Inc.
Canonsburg, PA Nursing Home 1990 140 15,598
----------------- --------------
140 15,598
Genesis Health Ventures, Inc.
Burlington, NJ Nursing Home 1994 150 13,007
----------------- --------------
150 13,007
Private Company Tenants
Fresno, CA Nursing Home 1985 180 3,503
Grove City, OH Nursing Home 1965 200 3,445
34
Built/ Invest-
Location Property Type Renovated(1) Units/Beds(2) ment(3)
------------------------------------------- ----------------------- ----------------- ----------------- -----------
St. Joseph, MO Nursing Home 1976 120 1,333
Huron, SD Nursing Home 1977 163 3,256
Huron, SD Assisted Living 1968 59 1,014
Sioux Falls, SD Nursing Home 1979 139 3,319
Seattle, WA Nursing Home 1964 103 5,192
----------------- --------------
964 21,062
----------------- --------------
Total Portfolio 11,212 $593,199
================= ==============
(1) The dates presented are the later of the date of original construction or the date of substantial renovation as evidenced by
capital expenditures in excess of 20% of the investment shown in the last column.
(2) Units/beds are a customary measure of property values used in the senior housing industry.
(3) Represents our costs before depreciation and, in some cases, is net of impairment loss write-downs.
(4) On January 2, 2002, the five nursing home properties in Massachusetts were exchanged for two rehabilitation hospitals. See
"Item 1. Business - Recent Developments." The investment in the two new hospitals is $43,308, the net book value of the five
nursing home properties given up at the time of the exchange. The information related to the two new properties is as follows
(headings are subject to the applicable footnotes above):
Location Property Type Built/Renovated Units/Beds Investment
-------- ------------- --------------- ---------- ----------
Woburn, MA Rehabilitation Hospital 1984 198 $23,558
Braintree, MA Rehabilitation Hospital 1975 166 19,750
---------------- --------------
364 $43,308
================ ==============
Item 3. Legal Proceedings
In the ordinary course of business we are and may become involved in
legal proceedings. We are not aware of any pending or threatened legal
proceedings affecting us or any of our properties the outcome of which we expect
to have a material impact upon us.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of shareholders during the fourth
quarter of the year covered by this Annual Report on Form 10-K.
35
PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters
Our common shares are traded on the New York Stock Exchange (symbol:
SNH). The following table sets forth for the periods indicated the high and low
closing sale prices for our shares as reported in the New York Stock Exchange
Composite Transactions reports.
2001 High Low
Fourth Quarter......................... $13.95 $12.21
Third Quarter.......................... 13.85 12.40
Second Quarter......................... 13.15 11.06
First Quarter.......................... 11.27 9.75
2000
Fourth Quarter......................... $10.31 $8.81
Third Quarter.......................... 9.56 7.94
Second Quarter......................... 10.25 7.33
First Quarter.......................... 13.56 8.19
The closing price of our common shares on the New York Stock Exchange
on March 15, 2002, was $13.94.
As of March 15, 2002, there were approximately 3,990 record holders of
our common shares, and we estimate that as of that date there were in excess of
85,000 beneficial owners of our common shares.
The following table sets forth the amount of distributions paid and
payable in 2001 and 2000 and the respective annualized rates.
Common Annualized
Distribution Common
Date Paid Per Share Distribution Rate
2001
November 27, 2001...................... $0.30 $1.20
August 21, 2001........................ 0.30 1.20
May 21, 2001........................... 0.30 1.20
January 24, 2001....................... 0.30 1.20
2000
November 21, 2000...................... $0.30 $1.20
August 24, 2000........................ 0.30 1.20
May 25, 2000........................... 0.30 1.20
February 24, 2000...................... 0.60 2.40
In addition to the distributions shown above, a non-cash distribution
of $0.726 per share was made on December 31, 2001 in connection with the Five
Star Spin-Off. Under IRC rules applicable to REITs, the distribution paid on
January 24, 2001 was reported for tax purposes in 2000. As a result, the total
distributions per share reported for tax purposes in 2001 and 2000 was $1.63 per
share and $1.80 per share, respectively. The 2001 distributions are classified
for tax purposes as 48.51% ordinary income and 51.49% return of capital. The
2000 distributions were classified for tax purposes as 12.95% ordinary income
and 87.05% capital gain (of which, 30.1% was unrecaptured depreciation).
36
In order to qualify for the beneficial tax treatment accorded to REITs
by Sections 856 through 860 of the IRC, we are required to make distributions to
shareholders which annually are equal to at least 90% (in our 2000 taxable year
this requirement was 95%) of our taxable income. All distributions are made at
the discretion of our Board of Trustees. Our Board of Trustees determines the
amounts of distributions based upon our earnings, our cash flow available for
distribution, our financial condition and other factors that the Trustees deem
relevant.
Item 6. Selected Financial Data
Set forth below is selected financial data for the periods and dates
indicated. Prior to October 12, 1999, we and our properties were owned by HRPT.
The following data is presented as if we were a separate entity from HRPT for
all periods. This financial data has been derived from HRPT's historical
financial statements for periods prior to October 12, 1999. Per share data has
been presented as if our shares were outstanding for all periods prior to
October 12, 1999. The following table includes pro rata allocations of HRPT's
interest expense and general and administrative expenses for periods prior to
October 12, 1999. In the opinion of our management, the methods used for
allocating interest and general and administrative expenses are reasonable.
However, it is impossible to estimate all operating costs that we would have
incurred as a public company separate from HRPT. Accordingly, the net income and
funds from operations shown are not necessarily indicative of results that we
would have realized as a separate company. Additionally, year to year
comparisons are impacted by property acquisitions during historical periods.
This data should be read in conjunction with, and is qualified in its entirety
by reference to, the consolidated financial statements and accompanying notes
included in this Annual Report on Form 10-K. Amounts are in thousands, except
per share information.
Income Statement Data: Year Ended December 31,
------------------------------------------------------------------
2001 2000 1999 1998 1997
------------------------------------------------------------------
Total revenues (1) $279,012 $ 75,522 $ 90,790 $ 88,306 $ 84,171
Income before gain on sale of
properties (2) 17,018 31,022 14,834 46,236 44,723
Net income (2) (3) 17,018 58,437 14,834 46,236 44,723
Funds from operations (4) 44,517 47,638 67,091 64,533 62,549
Distributions(5) 79,613 46,722 15,601 -- --
Weighted average shares outstanding 30,859 25,958 26,000 26,000 26,000
Per share:
Income before gain on sale of
properties (2) $ 0.55 $ 1.20 $ 0.57 $ 1.78 $ 1.72
Net income (2) (3) 0.55 2.25 0.57 1.78 1.72
Distributions(5) 1.63 1.80 0.60 -- --
Balance Sheet Data: At December 31,
------------------------------------------------------------------
2001 2000 1999 1998 1997
------------------------------------------------------------------
Real estate properties, at cost $593,199 $593,395 $708,739 $732,393 $720,987
Real estate mortgages receivable, net -- -- 22,939 37,826 38,134
Total assets 867,303 530,573 654,000 686,296 692,586
Total indebtedness 252,707 97,000 200,000 -- --
Total shareholders' equity 574,624 422,310 409,406 642,069 646,938
(1) Includes patient revenues from facilities' operations in 2001. Includes a gain on foreclosures and
lease terminations of $7.1 million in 2000.
(2) Includes $4.2 million ($0.14 per share) of non-recurring general and administrative expenses related
to the foreclosures and lease terminations and Five Star Spin-Off costs of $3.7 million ($0.12 per
share) in 2001, a gain on foreclosures and lease terminations of $7.1 million ($0.27 per share) and
$3.5 million ($0.14 per share) of non-recurring general and administrative expenses related to
foreclosures and lease terminations in 2000, and an impairment loss write-down and loan loss reserve
totaling $30.0 million ($1.15 per share) in 1999.
(3) Includes a gain on sale of properties of $27.4 million ($1.06 per share) in 2000.
(4) Funds from operations or "FFO," is defined in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on the next page.
(5) Includes a non-recurring distribution of Five Star common shares in 2001. Cash distributions with
respect to 2001 were $29.6 million ($0.90 per share).
37
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following information should be read in conjunction with the
consolidated financial statements included in Item 14 of this Annual Report on
Form 10-K.
This discussion includes references to funds from operations ("FFO").
FFO is net income calculated in accordance with generally accepted accounting
principles ("GAAP"): plus depreciation, amortization, other non-cash expenses
and non-recurring items; and less gains on property sales and gain on
foreclosures and lease terminations. FFO is further defined in the White Paper
on Funds from Operations as approved by the Board of Governors of the National
Association of Real Estate Investments Trusts ("NAREIT") in March 1995 and as
clarified from time to time thereafter. We consider FFO to be an appropriate
measure of performance for an equity REIT, along with cash flow from operating
activities, financing activities and investing activities, because it provides
investors with an indication of an equity REIT's ability to incur and service
debt, make capital expenditures, pay distributions and fund other cash needs. We
compute FFO using the standards established by NAREIT, but exclude unusual and
non-recurring items, certain non-cash items, and gains on sales of undepreciated
properties, which may not be comparable to FFO reported by other REITs that
define the term differently. FFO does not represent cash generated by operating
activities in accordance with GAAP and should not be considered as an
alternative to net income, determined in accordance with GAAP, as an indication
of financial performance or cash flow from operating activities, determined in
accordance with GAAP, as a measure of liquidity. Cash flows provided by
operating activities and cash available for distribution may not necessarily
equal FFO because cash flows are affected by factors not included in the FFO
calculation, such as changes in assets and liabilities.
RESULTS OF OPERATIONS
Year Ended December 31, 2001, Compared to Year Ended December 31, 2000
Total revenues for the year ended December 31, 2001, were $279.0
million, compared to total revenues of $75.5 million for the year ended December
31, 2000. Included in total revenues for the year ended December 31, 2001, are
revenues from facilities' operations of $229.2 million. On July 1, 2000, we
assumed nursing home operations from bankrupt former tenants. Because we had not
received substantially all of the licenses required to operate these facilities,
we accounted for the facilities' operations using the equity method of
accounting during 2000. Included in total revenues for the year ended December
31, 2000, is Other Real Estate Income of $2.5 million, which represented the net
operating income from these nursing home operations that we assumed as of July
1, 2000. As of January 1, 2001, we had obtained substantially all of the
necessary licenses for these facilities and we consolidated the facilities'
operations. On December 31, 2001, we distributed substantially all of our
ownership of Five Star, one of our wholly-owned subsidiaries, to our
shareholders, resulting in Five Star becoming a separate public company. Five
Star was created to conduct the operations of the 56 facilities that were
operated for our account through December 31, 2001. In connection with the Five
Star Spin-Off, Five Star, which is not a REIT, leased 55 facilities from us and
directly assumed a third party lease for an additional property. Beginning
January 1, 2002, we will no longer consolidate the operations of the facilities
which are conducted by Five Star, but we will receive rental income from Five
Star.
For the year ended December 31, 2001, compared to the year ended
December 31, 2000, rental income decreased to $47.4 million from $64.4 million.
This decrease is primarily due to the sale of seven properties in 2000 and the
tenant bankruptcies and resulting terminated leases and assumed operations by
us.
Also included in total revenues for the year ended December 31, 2000,
is a gain on foreclosures and lease terminations of $7.1 million, which
represented the excess of the security deposits forfeited, properties received
and acceleration of deferred revenues, over the professional fees incurred,
third party liabilities incurred, fixed asset impairment write-downs and a
reserve for funds to cure deferred maintenance, arising from the foreclosures
and lease terminations settled in 2000.
38
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
Total expenses for the year ended December 31, 2001, were $262.0
million, compared to total expenses of $44.5 million for the year ended December
31, 2000. Total expenses for the year ended December 31, 2001 include expenses
of $223.2 million from facilities' operations, which were consolidated beginning
January 1, 2001. During 2000, we accounted for the facilities' operations using
the equity method of accounting and did not report expenses of facilities'
operations.
Interest expense was $9.5 million lower in the year ended December 31,
2001, compared to the same period in 2000 because the average balance
outstanding and the weighted average interest rates on our credit facility were
lower during the 2001 period. The decrease in the average balance outstanding is
due mainly to our issuance of $27.4 million of trust preferred securities and
17.5 million of our common shares for net proceeds of $213.7 million during 2001
and the application of these net proceeds to borrowings outstanding under our
revolving bank credit facility. The decrease in interest expense was partially
offset by distributions on the trust preferred securities.
Depreciation expense decreased in the year ended December 31, 2001, by
$709,000 primarily due to the sale of seven properties in 2000 and the net
effect of the assets disposed of versus the assets acquired in the settlement
with our former tenants, offset by depreciation related to equipment purchases
made since December 31, 2000.
Recurring general and administrative expense decreased by $1.3 million
primarily due to the impact of the sale of seven properties in 2000. During the
year ended December 31, 2001, we incurred nonrecurring general and
administrative costs totaling approximately $4.2 million compared to $3.5
million in the prior year. These costs were incurred in connection with the
establishment of operating systems for foreclosed and repossessed properties.
Also during 2001, we incurred $3.7 million of non-recurring costs in connection
with the Five Star Spin-Off.
Net income was $17.0 million, or $0.55 per share, for the year ended
December 31, 2001, as compared to $58.4 million, or $2.25 per share, for the
year ended December 31, 2000. This decrease in net income is primarily the
consequence of the gain of $27.4 million on the sale of properties in 2000 and
of the changes in revenues and expenses resulting from the tenant bankruptcies,
settlements and sales of properties in 2000 as described above. FFO for the year
ended December 31, 2001, was $44.5 million compared to $47.7 million for the
same period in 2000. The decrease of $3.1 million is due primarily to the same
factors impacting the decrease in net income. Cash distributions paid or payable
for the years ended December 31, 2001 and 2000, were $29.6 million, or $.90 per
share, and $46.7 million, or $1.80 per share, respectively.
Year Ended December 31, 2000, Compared to Year Ended December 31, 1999
Total revenues for the year ended December 31, 2000, were $75.5
million, compared to total revenues of $90.8 million for the year ended December
31, 1999. Rental income decreased by $20.5 million and interest and other income
decreased by $4.4 million. These decreases are primarily the result of the
tenant bankruptcies and the sale of properties during 2000. Included in total
revenues for the year ended December 31, 2000, is Other Real Estate Income of
$2.5 million, which represents the net operating income from nursing home
operations that we assumed as of July 1, 2000. Also included in total revenues
for the year ended December 31, 2000, is a gain on foreclosures and lease
terminations of $7.1 million which represents the excess of the security
deposits forfeited, properties received and acceleration of deferred revenues,
over the professional fees incurred, third party liabilities incurred, fixed
asset impairment write-downs and a reserve for funds to cure deferred
maintenance, arising from the foreclosures and lease terminations settled in
2000.
Total expenses for the year ended December 31, 2000, were $44.5
million, compared to total expenses of $76.0 million for the year ended December
31, 1999. Interest expense was $3.4 million lower in 2000 compared to 1999
because actual interest expense incurred during 2000 was less than HRPT's
interest expense allocated to us in 1999. This decline also reflects the fact
that we used the net proceeds of property sales to pay down debt.
39
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
Depreciation expense decreased in 2000 by $2.1 million compared to
1999, primarily due to the sale of properties in 2000, a reduction in asset
values as a result of impairment losses recorded in 1999, and the net effect of
the assets disposed of versus the assets acquired as a result of the settlements
with our bankrupt former tenants.
Recurring general and administrative expense increased by $534,000 for
2000, compared to 1999, because actual expenses incurred during 2000 were
greater than HRPT's general and administrative expenses allocated to us in 1999.
During 2000, we incurred nonrecurring general and administrative costs totaling
$3.5 million in connection with the establishment of operating systems for
foreclosed and repossessed properties. Also included in the 1999 period is $30.0
million of losses resulting from the impairment of some of our properties and
previously held mortgage investments.
In 1999 and 2000 several of our tenants filed for bankruptcy. Our 2000
revenues and net income were adversely impacted by the settlements with these
former bankrupt tenants compared to the rental income and mortgage interest
income we previously received from them. The following chart summarizes our
total portfolio of properties and the impact upon our revenues from property
sales, tenant bankruptcies and the settlement agreements with former bankrupt
tenants for the years ended December 31, 2000 and 1999 (dollars in thousands):
Year Ended December 31, 2000 Year Ended December 31, 1999
------------------------------- --------------------------------
No. of No. of
Tenant Properties Revenues1 Properties Revenues1
---------------------------------------------------------------------------------- --------------------------------
Marriott International, Inc. 14 $30,141 14 $30,893
Brookdale Living Communities, Inc. 2 -- 9,366 4 11,174
Genesis Health Ventures, Inc. 1 1,459 1 1,449
Two private company tenants 2 684 2 651
Sun Healthcare Group, Inc. 3
The Frontier Group, Inc. 3, 4 -- 360 3 2,160
One subtenant 1 720 1 686
Mariner Post-Acute Network, Inc. 3 -- 7,006 26 15,449
Two subtenants 4 1,735 -- --
Integrated Health Services, Inc. 3 1 1,200 39 26,615
Settlement agreement revenues -- 2,500 -- --
HEALTHSOUTH Corporation 5 5 9,267 -- --
Operating facilities (other real estate income) 6 58 2,520 -- --
------------------------------- --------------------------------
Totals 86 $66,958 90 $89,077
=============================== ================================
1. The 2000 and 1999 periods include $61 and $4,196 of mortgage interest income, respectively.
2. These properties were sold in October 2000.
3. Former bankrupt tenant.
4. These properties were sold in February 2000.
5. Properties formerly leased to Integrated. HEALTHSOUTH was a co-obligor on the Integrated lease for these
properties.
6. Includes properties formerly leased or mortgaged to former bankrupt tenants where we assumed operations effective
July 1, 2000, subject to appropriate licensure.
Net income was $58.4 million for the year ended December 31, 2000,
compared to $14.8 million for the same period in 1999. The increase in net
income for the 2000 period is due primarily to a gain of $27.4 million
recognized from the sale of four independent living properties, a net gain of
$7.1 million from the foreclosures and lease terminations that occurred in 2000
and $30 million of impairment losses recognized in 1999. FFO for the year ended
December 31, 2000, was $47.6 million compared to $67.1 million for the same
period in 1999. The FFO decrease of $19.5 million is due primarily to the
consequences of the settlements with bankrupt former
40
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
tenants. Distributions paid or payable for the years ended December 31, 2000 and
1999, were $46.7 million, or $1.80 per share, and $15.6 million, or $0.60 per
share, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Total assets at December 31, 2001, were $867.3 million, compared to
$530.6 million at December 31, 2000. The increase is due primarily to our
issuance of $27.4 million of trust preferred securities, 17.5 million of our
common shares for net proceeds of $213.7 million and $245.0 million of senior
unsecured notes. The net proceeds from these issuances were applied to
borrowings outstanding under our revolving bank credit facility. The remaining
cash, which totaled $352.0 million, was available for working capital, general
business purposes and acquisitions, including our then pending acquisition of 31
properties for $600.0 million, which closed on January 11, 2002.
At December 31, 2001, we had a $270.0 million, interest only, secured,
revolving bank credit facility. The interest rate is LIBOR plus a premium (3.87%
per annum at December 31, 2001). This bank credit facility is available for
acquisitions, working capital and for general business purposes. We have the
ability to repay and redraw amounts under this bank credit facility until its
maturity in September 2002. On December 31, 2001, zero was outstanding and
$270.0 million was available for borrowing under this revolving bank credit
facility. As of March 15, 2002, there was $35.0 million outstanding and $235.0
million available for borrowing.
In June and July 2001, SNH Capital Trust I, one of our wholly-owned
finance subsidiaries, issued 1,095,750 shares of 10.125% trust preferred
securities with a liquidation preference of $25 per share, for a total
liquidation amount of $27.4 million. The trust preferred securities represent an
undivided beneficial ownership interest in the assets of SNH Capital Trust I.
Proceeds from the issuance of the trust preferred securities were used to
acquire our 10.125% junior subordinated debentures due June 15, 2041. SNH
Capital Trust I exists solely to issue the trust preferred securities and its
own common securities and to acquire and hold our debentures, which are its only
assets. We used the net proceeds from the sale of the debentures to repay some
of our debt outstanding under our revolving bank credit facility.
In July 2001, we issued 3,445,000 common shares of beneficial interest,
raising net proceeds of $42.2 million. These net proceeds received were used to
repay some of our debt outstanding under our revolving bank credit facility.
In July 2001, we obtained mortgage financing of $9.1 million secured by
two of our properties in Michigan. The mortgages require interest to be paid
monthly at prime less a discount (2.75% at December 31, 2001). These mortgages
mature in July 2003.
On August 9, 2001, we entered an agreement with Crestline Capital
Corporation ("Crestline") to acquire all of the capital stock of a Crestline
subsidiary which owned 31 senior living communities with 7,487 living units. The
purchase price was $600.0 million and this acquisition closed on January 11,
2002. The funding for this acquisition was as follows: $24.1 million of assumed
debt; a $25 million purchase note; approximately $350.0 million of available
cash on December 31, 2001; and the balance by drawings under our revolving bank
credit facility.
In October 2001, we issued a total of 14,047,000 common shares of
beneficial interest, raising net proceeds of $171.5 million. The net proceeds
were applied to reduce our outstanding obligations under our revolving bank
credit facility to zero. The remaining cash was subsequently used to fund a
portion of the Crestline transaction.
In December 2001, we issued $245.0 million of 8?% senior unsecured
notes due 2012, raising net proceeds, after a discount and costs of issuance, of
$238.9 million. These net proceeds were held as cash at December 31, 2001, and
subsequently used to fund a portion of the Crestline transaction.
41
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
On December 31, 2001, we completed the Five Star Spin-Off. In
connection with the Five Star Spin-Off, we provided initial capitalization of
$50.0 million to Five Star, which consisted of the net working capital related
to the operations of 56 facilities, title to two facilities and the balance in
cash. In addition, we paid all of the costs relating to the Five Star Spin-Off,
which totaled $3.7 million.
We have filed shelf registration statements with the SEC which enable
us to raise capital on an expedited basis. On May 21, 2001, our shelf
registration statement for the issuance of up to $500 million of equity and debt
securities was declared effective by the SEC. During 2001, we utilized the full
capacity of this shelf registration statement. On January 30, 2002, our shelf
registration statement for the issuance of up to $2.0 billion of equity and debt
securities was declared effective by the SEC. As of March 15, 2002, $1.8 billion
was available to be used under this effective shelf registration statement.
In February 2002, we issued 15,000,000 common shares of beneficial
interest, raising net proceeds of $195.2 million. These net proceeds were used
to repay the $25 million purchase note provided at the closing of the Crestline
transaction and the remainder was used to repay some of our debt outstanding
under our revolving bank credit facility, which had been drawn in connection
with the closing of the Crestline transaction.
At December 31, 2001, we had cash and cash equivalents of $352.0
million. For the years ended December 31, 2001, 2000 and 1999: cash provided by
operating activities was $17.4 million, $31.0 million and $64.1 million,
respectively; cash (used for) provided by investing activities was $(25.8)
million, $94.3 million and $387,000, respectively; and cash provided by (used
for) financing activities was $352.8 million, $(141.9) million and $(47.5)
million, respectively. The working capital required for our operations,
including our facilities' operations, was provided by our operations and by
drawings under our revolving bank credit facility. At March 15, 2002, we had
$5.8 million of cash and availability of drawings under our revolving bank
credit facility of $235.0 million. We believe that our current cash, cash
equivalents, and availability under our revolving bank credit facility will be
sufficient to meet our short-term and long-term capital requirements for
operations and to temporarily fund acquisitions. To the extent we make
acquisitions we expect to repay borrowings with new long term debt or equity
issuances. We believe long term debt or equity issuances will be available to
us, but we can provide no assurance that they will be.
Debt Instruments and Covenants
Our principal debt obligations at December 31, 2001, were our revolving
bank credit facility and our $245.0 million of publicly held unsecured debt. Our
revolving bank credit facility is secured by 14 properties leased to Marriott.
Our public debt is governed by an indenture. This indenture and our credit
agreement contain a number of financial ratio covenants which generally restrict
our ability to incur debts, including debts secured by mortgages on our
properties in excess of calculated amounts, require us to maintain a minimum net
worth, as defined, restrict our ability to make distributions under certain
circumstances and require us to maintain other ratios, as defined. During the
period from our incurrence of these debts through December 31, 2001, we were in
compliance with all of our covenants under our indenture and our credit
agreement. In addition to our principal debt obligations, we have $9.1 million
of mortgage notes and $27.4 million of trust preferred securities outstanding at
December 31, 2001. Our mortgage notes are secured by two properties leased to
Five Star and a certificate of deposit for the approximate value of the mortgage
notes. Our trust preferred securities are governed by an indenture of trust
which is generally less restrictive than the indenture governing our public debt
and the terms of our credit facility.
None of our indentures, our revolving bank credit facility or our
mortgage notes contain provisions for acceleration or otherwise which could be
triggered by our senior debt or other ratings. Our public debt indentures
contain cross default provisions to any other debts equal to or in excess of $10
million. Similarly, a default on
42
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
any of our public indentures would constitute a default on our credit agreement.
As of December 31, 2001, we have no commercial paper, private loans,
derivatives, swaps, hedges, guarantees, joint ventures or partnerships. We have
no "off balance sheet" arrangements.
On January 11, 2002, we acquired 31 properties for approximately $600.0
million. Part of the financing to close this transaction included our assumption
of two capitalized leases, tax exempt bonds secured by one property and
borrowings under our revolving bank credit facility.
Related Party Transactions
We have an agreement with REIT Management & Research LLC ("RMR"), for
RMR to provide investment, management and administrative services to us. RMR is
owned by Barry M. Portnoy and Gerard M. Martin, each a Managing Trustee and
member of our Board of Trustees. Each of our executive officers are also
officers of RMR. Our independent trustees, including all of our trustees other
than Messrs. Portnoy and Martin, review our contract with RMR at least annually
and make the determinations regarding negotiation, renewal or termination. Any
termination of our contract with RMR would cause a default under our revolving
bank credit facility, if not approved by a majority of lenders. Our current
contract term with RMR expires on December 31, 2002. RMR is compensated at an
annual rate equal to a percentage of our average real estate investments, as
defined. The percentage applied to our investments at the time we were spun-off
from HRPT is 0.5%. The annual compensation percentage for the first $250.0
million of investments made since our spin-off from HRPT is 0.7% and thereafter
is 0.5%. RMR is also entitled to an incentive fee based upon increases in funds
from operations per share, as defined. Incentive fees when due are paid in our
shares at market value. To date, no incentive fees have been paid to RMR.
As a result of the nursing home bankruptcies and settlements, we
assumed operating responsibilities for healthcare facilities effective July 1,
2000. Under IRC laws and regulations applicable to REITs, we were required to
engage a contractor to manage these properties after a 90 day transition period.
We entered into management agreements with FSQ, Inc. to provide these services
beginning in 2000. FSQ, Inc. was owned by Messrs. Martin and Portnoy, our
Managing Trustees. Under these management agreements, during the first 90 days
FSQ, Inc. was paid its costs and expenses incurred in managing the facilities
for us and thereafter it was paid a fee equal to five percent of patient
revenues at the managed facilities. As a result of the Five Star Spin-Off, we no
longer have a relationship with FSQ, Inc. In order for Five Star to acquire the
personnel, systems and assets necessary to operate facilities which it leases
from us, FSQ, Inc. merged into a Five Star subsidiary and Five Star entered into
a shared services agreement with RMR pursuant to which RMR agreed to provide
services similar to the services previously provided by RMR to FSQ, Inc. The
FSQ, Inc. merger into Five Star was concluded on January 2, 2002.
Critical Accounting Policies
Our most critical accounting policies concern our investments in real
property. These policies affect our:
o allocation of purchase prices between various asset categories and the
related impact on our recognition of depreciation expense;
o assessment of the carrying value of long-lived assets; and
o classification of our leases.
These policies involve significant judgments based upon our experience,
including judgments about current valuations, ultimate realizable value,
estimated useful lives, salvage or residual values, the ability of our tenants
and operators to perform their obligations to us, and the current and likely
future operating and competitive environments in which our properties operate.
In the future we may need to revise our assessments to incorporate information
which is not now known, and such revisions could increase or decrease our
depreciation expense
43
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - continued
related to properties we own, result in the classification of our leases as
other than operating leases or decrease the carrying values of our assets.
During 2000, we assumed the operations of nursing homes from bankrupt
tenants, pursuant to negotiated settlement agreements. Although these
settlements as approved by the Bankruptcy Courts had financial effect as of July
1, 2000, the implementation of these settlements was subject to material
conditions subsequent, including our obtaining health care regulatory licenses
and Medicare and Medicaid provider contracts necessary to operate these nursing
homes. Because the majority of the licenses and provider contracts had not been
received prior to December 31, 2000, we reported the results of these nursing
home operations using the equity method of accounting from July 1, 2000, through
December 31, 2000. Working capital invested in these nursing home operations was
included in Net Investment in Facilities' Operations in our Consolidated Balance
Sheets at December 31, 2000 and net income from these nursing homes was reported
as Other Real Estate Income in our Consolidated Statements of Income for the
year ended December 31, 2000. During the first quarter of 2001, we obtained
substantially all of the healthcare regulatory licenses and Medicare and
Medicaid provider agreements necessary for these nursing home operations, and we
consolidated the nursing home operations effective January 1, 2001. With respect
to the consolidated facilities' operations, our most critical accounting
policies in 2001 involved revenue recognition and our assessment of the net
realizable value of the facilities' accounts receivable. These policies involved
significant judgments based upon our experience, including judgments about
changes in payment methodology, contract modifications and economic conditions
that affect the collectibility of the facilities' accounts receivable. As a
result of the Five Star Spin-Off, we no longer operate any facilities and we
will not recognize any facilities' operations revenues beginning January 1,
2002. Also, the accounts receivable related to facilities' operations were
transferred to Five Star as part of the initial capitalization of Five Star. As
a result of this transfer, these receivables are not included on our
consolidated balance sheet as of December 31, 2001.
Impact of Inflation
Inflation might have both positive and negative impacts upon us.
Inflation might cause the value of our real estate investments to increase. In
an inflationary environment, the percentage rents which we receive based upon a
percentage of our tenants' revenues should increase. Offsetting these benefits,
inflation might cause our costs of equity and debt capital and other operating
costs to increase. An increase in our capital costs or in our operating costs
will result in decreased earnings unless it is offset by increased revenues. In
periods of rapid inflation, nursing home operating costs usually increase faster
than revenues and this fact may have an adverse impact upon us if our tenants'
operating income from our properties becomes insufficient to pay our rent. To
mitigate the adverse impact of increased operating costs at our leased
properties, we generally require our tenants to guarantee our rent. To mitigate
the adverse impact of increased costs of debt capital in the event of material
inflation, we previously have purchased interest rate cap agreements and we may
enter into similar interest rate hedge arrangements in the future. The decision
to enter into these agreements was and will be based on the amount of floating
rate debt outstanding, our belief that material interest rate increases are
likely to occur and upon requirements of our borrowing arrangements.
Seasonality
Nursing home operations have historically reflected modest seasonality.
During calendar fourth quarter holiday periods nursing home patients are
sometimes discharged to join in family celebrations and admission decisions are
often deferred. The first quarter of each calendar year usually coincides with
increased illness among nursing home residents which can result in increased
costs or discharges to hospitals. As a result of these factors and others,
nursing home operations sometimes produce greater earnings in the second and
third quarters of each calendar year and lesser earnings in the fourth and first
calendar quarters. We do not expect these seasonal differences to have any
impact upon the ability of our tenants to pay our rent.
44
Certain Considerations
THIS DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS REQUIRES US TO MAKE ESTIMATES AND ASSUMPTIONS AND CONTAINS STATEMENTS
OF OUR BELIEFS, INTENT OR EXPECTATIONS CONCERNING PROJECTIONS, PLANS, FUTURE
EVENTS AND PERFORMANCE. THE ESTIMATES, ASSUMPTIONS, STATEMENTS AND IMPLICATIONS,
SUCH AS THOSE RELATING TO OUR ABILITY TO EXPAND OUR PORTFOLIO, THE PERFORMANCE
OF OUR TENANTS AND PROPERTIES, OUR ABILITY TO PAY INTEREST AND PRINCIPAL AND
MAKE DISTRIBUTIONS, OUR POLICIES AND PLANS REGARDING INVESTMENTS, FINANCINGS AND
OTHER MATTERS, OUR TAX STATUS AS A REAL ESTATE INVESTMENT TRUST, OUR ABILITY TO
APPROPRIATELY BALANCE THE USE OF DEBT AND EQUITY AND TO ACCESS CAPITAL MARKETS
OR OTHER SOURCES OF FUNDS, DEPEND UPON VARIOUS FACTORS OVER WHICH WE HAVE OR MAY
HAVE LIMITED OR NO CONTROL. THOSE FACTORS INCLUDE, WITHOUT LIMITATION, THE
IMPACT OF CHANGES IN THE ECONOMY AND THE CAPITAL MARKETS (INCLUDING PREVAILING
INTEREST RATES) ON US AND OUR TENANTS, COMPLIANCE WITH AND CHANGES TO
REGULATIONS AND PAYMENT POLICIES WITHIN THE REAL ESTATE, SENIOR HOUSING AND
HEALTHCARE INDUSTRIES, CHANGES IN FINANCING TERMS, COMPETITION WITHIN THE REAL
ESTATE, SENIOR HOUSING AND HEALTHCARE INDUSTRIES, CHANGES TO FEDERAL, STATE, AND
LOCAL LEGISLATION AND OTHER FACTORS. WE CANNOT PREDICT THE IMPACT OF THESE
FACTORS, IF ANY. HOWEVER, THESE FACTORS COULD CAUSE OUR ACTUAL RESULTS FOR
SUBSEQUENT PERIODS TO BE DIFFERENT FROM THOSE STATED, ESTIMATED, ASSUMED OR
IMPLIED IN THIS DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. WE BELIEVE THAT OUR ESTIMATES AND ASSUMPTIONS ARE REASONABLE AT
THIS TIME. HOWEVER, YOU SHOULD NOT RELY UPON FORWARD LOOKING STATEMENTS EXCEPT
AS STATEMENTS OF OUR PRESENT INTENTIONS AND OF OUR PRESENT EXPECTATIONS WHICH
MAY OR MAY NOT OCCUR.
45
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market changes in interest rates. We manage our
exposure to this market risk through our monitoring of available financing
alternatives. Our strategy to manage exposure to changes in interest rates is
unchanged from December 31, 2000. Other than as described below, we do not
foresee any significant changes in our exposure to fluctuations in interest
rates or in how we manage this exposure in the near future.
At December 31, 2001, our outstanding debt included $245.0 million of 8
5/8% senior unsecured notes due 2012. The interest on these notes is payable
semi-annually. No principal payments are due under these notes until maturity.
Because these notes bear interest at fixed rates, changes in market interest
rates during the term of this debt will not affect our operating results. If at
maturity these notes are refinanced at interest rates which are 10% higher than
the current coupon rate, our per annum interest cost would increase by
approximately $2.1 million. Changes in the interest rate also affect the fair
value of our debt obligations; increases in market interest rates decrease the
fair value of our fixed rate debt, while decreases in market interest rates
increase the fair value of our fixed rate debt. Based on the balances
outstanding as of December 31, 2001, a hypothetical immediate one percentage
point increase in interest rates would decrease the fair value of our fixed
rated debt obligations by approximately $15.8 million. We are allowed to make
prepayments on these senior notes at par plus a make whole provision. These
prepayment rights may afford us the opportunity to mitigate the risk of
refinancing at maturity at higher rates by refinancing prior to maturity.
At December 31, 2001, we had $27.4 million of trust preferred
securities outstanding, the dividends of which are dependent upon our making
required payments on our 10.125% junior subordinated debentures due 2041. No
principal repayments are due on the debentures until maturity. If the debentures
were to be refinanced at interest rates which are 10% higher, our per annum
interest cost would increase $277,000. Our trust preferred securities are listed
on the New York Stock Exchange and their market value is principally determined
by supply and demand factors. The market price, if any, of our debentures as of
December 31, 2001, may be sensitive to changes in interest rates. Typically, if
market rates of interest increase, the current market price of a fixed rate
obligation will decrease. Conversely, if market rates of interest decrease, the
current market price of a fixed rate obligation will typically increase. Based
on the balance outstanding at December 31, 2001, and discounted cash flow
analysis, a hypothetical immediate one percentage point increase in interest
rates would decrease the fair value of our fixed rate debentures by
approximately $2.4 million. Our debentures have provisions that allow us to make
repayments earlier than the stated maturity date. These prepayment rights may
afford us the opportunity to mitigate the risk of refinancing at maturity at
higher rates by refinancing at lower rates prior to maturity. Our ability to
prepay the debentures at par will also effect the change in the fair value of
the debentures which would result from a change in interest rates. For example,
discounted cash flow analysis of a one percentage point increase in interest
rates calculated only to the par prepayment option date for our trust preferred
securities would decrease the value of those securities by $1.1 million.
Our outstanding debt at December 31, 2001 also included $9.1 million of
floating rate debt secured by two of our properties in Michigan. The mortgages
are also secured by a $9.2 million certificate of deposit which earns interest
at a floating rate. Because the interest rates on the mortgages and the
certificate of deposit are both based on prime less a spread, a change in the
prime rate will not effect our operating results because the resulting change in
interest expense will be offset by the change in interest income. Because
interest on our mortgage debt is at a floating rate, changes in interest rates
will not affect its value.
The foregoing statements present a so-called "shock" analysis, which
assumes that the interest rate change of 10% is in effect for a whole year. If
interest rates were to change gradually over one year, the impact would be
gradual and the impact during the year in which the change occurred would be
less.
Our revolving bank credit facility bears interest at floating rates and
matures in September 2002. As of December 31, 2001, we had zero outstanding and
$270 million available for drawing under our revolving bank credit facility. Our
revolving bank credit facility is available for acquisitions, working capital
and for general business purposes. Our exposure to fluctuations in interest
rates may increase in the future if we incur debt to fund acquisitions or
otherwise. A change in interest rates would not affect the value of this
floating rate debt but would affect the interest which we must pay on this debt.
46
We borrow in U.S. dollars. Our floating rate borrowings under our
revolving bank credit facility are subject to interest at LIBOR plus a premium.
Our mortgages are subject to interest at prime less a discount. Accordingly, we
are vulnerable to changes in U.S. dollar based short-term rates, specifically
LIBOR and prime. During the past year, short-term U.S. dollar based interest
rates have decreased. We are unable to predict the direction or amount of
interest rate changes during the next year. However, we may incur additional
debt at floating or fixed rates in the future, which would increase our exposure
to market changes in interest rates.
Item 8. Financial Statements and Supplementary Data
The information required by this item is included in Item 14 of this
Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
The information in Part III (Items 10, 11, 12 and 13) is incorporated
by reference to our definitive Proxy Statement, which will be filed not later
than 120 days after the end of our fiscal year.
47
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Index to Financial Statements and Financial Statement Schedules
The following consolidated financial statements and financial statement
schedules of Senior Housing Properties Trust are included on the pages
indicated:
Page
Report of Ernst & Young LLP, Independent Auditors F-1
Consolidated Balance Sheets as of December 31, 2001 and 2000 F-2
Consolidated Statements of Income for each of the three years in the
period ended December 31, 2001 F-3
Consolidated Statements of Shareholders' Equity for each of the three
years in the period ended December 31, 2001 F-4
Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 2001 F-5
Notes to Consolidated Financial Statements F-7
Schedule III - Real Estate and Accumulated Depreciation S-1
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions, or are inapplicable, and therefore have been omitted.
(b) Reports on Form 8-K
During the fourth quarter of 2001, we filed the following Current Reports on
Form 8-K:
(i) Current Report on Form 8-K, dated September 21, 2001, relating to
(1) the proposed spin-off of the Company's wholly owned subsidiary
Five Star Quality Care, Inc. ("Five Star"); (2) the proposed
acquisition of 31 senior living facilities from Crestline Capital
Corporation (the "Crestline Transaction"); (3) supplementary
income tax considerations and (4) pro forma financial information
giving effect to these and certain other transactions described
therein (Items 5 and 7).
(ii) Current Report on Form 8-K, dated October 3, 2001 relating to (1)
the issuance and sale of 13 million common shares of beneficial
interest; (2) the reorganization of REIT Management & Research,
Inc.; (3) the election of a new Treasurer and Chief Financial
Officer and (4) pro forma financial information giving effect to
these and certain other transactions described therein (Items 5
and 7).
(iii) Amended Current Report on Form 8-K/A, dated October 3, 2001 (as
amended, the "October Form 8-K").
(iv) Current Report on Form 8-K, dated November 5, 2001 supplementing
the Company's October Form 8-K relating to (1) the capitalization
of Five Star; (2) an amendment to the stock purchase agreement
executed in connection with the Crestline Transaction and (3) pro
forma financial information giving effect to these and certain
other transactions described therein (Items 5 and 7).
(v) Current Report on Form 8-K, dated December 6, 2001 relating to the
possible sale of $200 million of senior unsecured notes and pro
forma financial information giving effect to this and certain
other transactions described therein (Items 5 and 7).
48
(vi) Current Report on Form 8-K, dated December 13, 2001 relating to
the issuance of $200 million in aggregate principal amount of
8-5/8% Senior Notes due 2012 and pro forma financial information
giving effect to this and certain other transactions described
therein (Items 5 and 7).
(vii) Current Report on Form 8-K, dated December 18, 2001 filing as an
exhibit the Form of Supplemental Indenture No. 1 to Indenture by
and between Senior Housing Properties Trust and State Street Bank
and Trust Company. (Item 7)
(viii) Current Report on Form 8-K, dated December 20, 2001 relating to
the sale of an additional $45 million aggregate principal amount
of 8-5/8% Senior Notes due 2012 and pro forma financial
information giving effect to this and certain other transactions
described therein (Items 5 and 7).
(c) Exhibits
3.1 Amended and Restated Declaration of Trust, dated September 20,
1999. (Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999.)
3.2 Articles Supplementary, dated May 11, 2000. (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000.)
3.3 Articles of Amendment to the Company's Declaration of Trust, dated
February 13, 2002. (Incorporated by reference to the Company's
Current Report on Form 8-K dated February 13, 2002.)
3.4 Amended and Restated Bylaws, dated May 11, 2000. (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000.)
4.1 Form of common share certificate. (Incorporated by reference to
the Company's Annual Report on Form 10-K for the year ended
December 31, 2000.)
4.2 Junior Subordinated Indenture between Senior Housing Properties
Trust and State Street Bank and Trust Company as trustee dated
June 21, 2001. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2001.)
4.3 Supplemental Indenture No. 1 by and between Senior Housing
Properties Trust and State Street Bank and Trust Company as
Trustee dated June 21, 2001. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 2001.)
4.4 Amended and Restated Trust Agreement among SNH Capital Trust
Holdings as sponsor, State Street Bank and Trust Company as
property trustee and the regular trustees named therein relating
to SNH Capital Trust I dated June 21, 2001. (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001.)
4.5 Guarantee Agreement between Senior Housing Properties Trust and
State Street Bank and Trust Company as trustee dated June 21,
2001. (Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2001.)
4.6 Agreement as to Expenses and Liabilities between Senior Housing
Properties Trust and SNH Capital Trust I dated June 21, 2001.
(Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2001.)
4.7 Indenture, dated as of December 20, 2001, between Senior Housing
Properties Trust and State Street Bank and Trust Company
(Incorporated by reference to the Company's Registration Statement
on Form S-3, File No. 333-76588.)
49
4.8 Supplemental Indenture No. 1 by and between Senior Housing
Properties Trust and State Street Bank and Trust Company.
(Incorporated by reference to the Company's Current Report on Form
8-K dated February 13, 2002.)
4.9. Supplemental Indenture No. 2 by and between Senior Housing
Properties Trust and State Street Bank and Trust Company.
(Incorporated by reference to the Company's Current Report on Form
8-K dated February 13, 2002.)
8.1 Opinion of Sullivan & Worcester LLP as to certain tax matters.
(Filed herewith.)
10.1 Advisory Agreement, dated as of October 12, 1999, between the
Company and REIT Management & Research, Inc. (+) (Incorporated by
reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 1999.)
10.2 1999 Incentive Share Award Plan. (+) (Incorporated by reference to
the Company's Registration Statement on Form S-11, File No.
333-69703.)
10.3 Revolving Loan Agreement, dated as of September 15, 1999, among
the Company, Dresdner Bank AG, the Other Lenders Party Thereto,
SPTMRT Properties Trust and SPTBROOK Properties Trust, together
with Exhibits and Form of Mortgage, Form of Deed of Trust and Form
of Pledge Agreement. (Incorporated by reference to the Company's
Registration Statement on Form S-11, File No. 333-69703.)
10.4 Transaction Agreement, dated September 21, 1999, between HRPT
Properties Trust and the Company. (Incorporated by reference to
the Current Report on Form 8-K filed on October 26, 1999 by HRPT
Properties Trust.)
10.5 Form of Master Management Agreement, dated as of October 1, 2000,
between Five Star Quality Care, Inc., and SHOPCO-AZ, LLC,
SHOPCO-CA, LLC, SHOPCO-COLORADO, LLC, SHOPCO-CT, LLC, SHOPCO-GA,
LLC, SHOPCO-IA, LLC, SHOPCO-KS, LLC, SHOPCO-MI, LLC, SHOPCO-MO,
LLC, SHOPCO-NE, LLC, SHOPCO-WY, LLC, SNH-NEBRASKA, INC., SNH-IOWA,
INC., SNH-CALIFORNIA, INC. and SNH-MICHIGAN, INC. (+)
(Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 2000.)
10.6 Purchase and Sale Agreement, dated July 26, 2000, between SPTBROOK
Properties Trust, as Seller, and Brookdale Living Communities,
Inc., as Purchaser. (Incorporated by reference to the Company's
Current Report on Form 8-K filed on November 15, 2000.)
10.7 Representative Lease for properties leased to subsidiaries of
Marriott International, Inc. (Incorporated by reference to the
Company's Registration Statement on Form S-11, File No.
333-69703.)
10.8 Representative Guaranty of Tenant Obligations, dated as of October
8, 1993, by Marriott International, Inc. in favor of HMC
Retirement Properties, Inc. (Incorporated by reference to the
Company's Registration Statement on Form S-11, File No.
333-69703.)
10.9 Representative First Amendment to Lease for properties leased to
subsidiaries of Marriott International, Inc. (Incorporated by
reference to the Company's Registration Statement on Form S-11,
File No. 333-69703.)
10.10 Representative Assignment and Assumption of Leases, Guarantees and
Permits for properties leased to subsidiaries of Marriott
International, Inc. (Incorporated by reference to the Company's
Registration Statement on Form S-11, File No. 333-69703.)
50
10.11 Representative Second Amendment of Lease for properties leased to
subsidiaries of Marriott International, Inc. (Incorporated by
reference to the Company's Registration Statement on Form S-11,
File No. 333-69703.)
10.12 Representative First Amendment of Guaranty by Marriott
International, Inc., dated as of May 16, 1994, in favor of HMC
Retirement Properties, Inc. (Incorporated by reference to the
Company's Registration Statement on Form S-11, File No.
333-69703.)
10.13 Assignment of Lease, dated as of June 16, 1994, by HMC Retirement
Properties, Inc. in favor of Health and Rehabilitation Properties
Trust. (Incorporated by reference to the Company's Registration
Statement on Form S-11, File No. 333-69703.)
10.14 Third Amendment to Facilities Lease, dated as of June 30, 1994,
between HMC Retirement Properties, Inc. and Marriott Senior Living
Services, Inc. (Incorporated by reference to the Company's
Registration Statement on Form S-11, File No. 333-69703.)
10.15 Third Amendment to Facilities Lease, dated as of June 30, 1994,
between HMC Retirement Properties, Inc. and Marriott Senior Living
Services, Inc. (Incorporated by reference to the Company's
Registration Statement on Form S-11, File No. 333-69703.)
10.16 Third Amendment of Lease, dated August 4, 2000, between SPTMRT
Properties Trust and Marriott Living Services, Inc. (Incorporated
by reference to the Company's Annual Report on Form 10-K for the
year ended December 31, 2000.)
10.17 Representative Fourth Amendment of Lease for properties leased to
subsidiaries of Marriott International, Inc. (Incorporated by
reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 2000.)
10.18 Representative Fifth Amendment of Lease for properties leased to
subsidiaries of Marriott International, Inc. (Incorporated by
reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 2000.)
10.19 Settlement Agreement, dated as of March 20, 2000, among the
Company, SPTMNR Properties Trust, Five Star Quality Care, Inc.,
SHOPCO-AZ, LLC, SHOPCO-CA, LLC, SHOPCO-COLORADO, LLC, SHOPCO-WI,
LLC, Mariner Post-Acute Network, Inc., GranCare, Inc., AMS
Properties, Inc. and GCI Health Care Centers, Inc. (Incorporated
by reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2000.)
10.20 Order of the United States Bankruptcy Court for the District of
Delaware, dated May 10, 2000, in re: Mariner Post-Acute Network,
Inc., a Delaware Corporation, and affiliates, Debtors.
(Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000.)
10.21 Letter Agreement, dated as of June 30, 2000, amending Settlement
Agreement dated as of March 20, 2000, among Senior Housing
Properties Trust, SPTMNR Properties Trust, Five Star Quality Care,
Inc., SHOPCO-AZ, LLC, SHOPCO-CA, LLC, SHOPCO-COLORADO, LLC,
SHOPCO-WI, LLC, Mariner Post-Acute Network, Inc., Grancare, Inc.,
AMS Properties, Inc. and GCI Health Care Centers, Inc.
(Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000.)
10.22 Interim Management Agreement, dated as of July 1, 2000, among
Mariner Post-Acute Network, Inc., AMS Properties, Inc., GCI Health
Care Centers, Inc., SHOPCO-AZ, LLC, SHOPCO-CA, LLC,
SHOPCO-COLORADO, LLC, SHOPCO-WI, LLC and Five Star Quality Care,
Inc. (Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2000.)
51
10.23 Amended and Restated Lease Agreement, dated as of January 1, 2000,
between HRES1 Properties Trust and IHS Acquisition 135, Inc.
(Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000.)
10.24 Guaranty, dated as of January 1, 2000, made by Integrated Health
Services, Inc. in favor of HRES1 Properties Trust. (Incorporated
by reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000.)
10.25 Settlement Agreement, dated as of April 11, 2000, among the
Company, SPTIHS Properties Trust, HRES1 Properties Trust, HRES2
Properties Trust, SHOPCO-COLORADO, LLC, SHOPCO-CT, LLC, SHOPCO-GA,
LLC, SHOPCO-IA, LLC, SHOPCO-KS, LLC, SHOPCO-MA, LLC, SHOPCO-MI,
LLC, SHOPCO-MO, LLC, SHOPCO-NE, LLC, SHOPCO-WY, LLC, SNH-NEBRASKA,
INC., SNH-IOWA, INC., SNH-MASSACHUSETTS, INC., SNH-MICHIGAN, INC.,
Five Star Quality Care, Inc., Advisors Healthcare Group, Inc.,
Integrated Health Services, Inc., Community Care of America, Inc.,
ECA Holdings, Inc., Community Care of Nebraska, Inc., W.S.T. Care,
Inc., Quality Care of Lyons, Inc., CCA Acquisition I, Inc.,
MARIETTA/SCC, Inc., Glenwood/SCC, Inc., Dublin/SCC, Inc., College
Park/SCC, Inc., IHS Acquisition No. 108, Inc., IHS Acquisition No.
112, Inc., IHS Acquisition No. 113, Inc., IHS Acquisition No. 135,
Inc., IHS Acquisition No. 148, Inc., IHS Acquisition No. 152,
Inc., IHS Acquisition No. 153, Inc., IHS Acquisition 154, Inc.,
IHS Acquisition No. 155, Inc., IHS Acquisition No. 175, Inc.,
Integrated Health Services at Grandview Care Center, Inc., ECA
Properties, Inc., CCA of Midwest, Inc. and Quality Care of
Columbus, Inc. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
2000.)
10.26 Amendment to Settlement Agreement, dated as of June 29, 2000,
among Integrated Health Services, Inc., Community Inc., Community
Care of America, Inc., ECA Holdings, Inc., Community Care of
Nebraska, Inc., W.S.T. Care, Inc., Quality Care of Lyons, Inc.,
CCA Acquisition I, Inc., Marietta/SCC, Inc., Glenwood/SCC, Inc.,
Dublin/SCC, Inc., College Park/SCC, Inc., IHS Acquisition No. 108,
Inc., IHS Acquisition No. 112, Inc., IHS Acquisition No. 113,
Inc., IHS Acquisition No. 135, Inc., IHS Acquisition No. 148,
Inc., IHS Acquisition No. 152, Inc., IHS Acquisition No. 153,
Inc., IHS Acquisition No. 154, Inc., IHS Acquisition No. 155,
Inc., IHS Acquisition No. 175, Inc., Integrated Health Services at
Grandview Care Center, Inc., ECA Properties, Inc., CCA of Midwest,
Inc., Quality Care of Columbus, Inc., Senior Housing Properties
Trust, SPTIHS Properties Trust, HRES1 Properties Trust, HRES2
Properties Trust, SHOPCO-COLORADO, LLC, SHOPCO-CT, LLC, SHOPCO-GA,
LLC, SHOPCO-IA, LLC, SHOPCO-KS, LLC, SHOPCO-MA, LLC, SHOPCO-MI,
LLC, SHOPCO- 11 MO, LLC, SHOPCO-NE, LLC, SHOPCO-WY, LLC,
SNH-Nebraska, Inc., SNH-Iowa, Inc., SNH-Massachusetts, Inc.,
SNH-Michigan, Inc., Advisors Healthcare Group, Inc. and Five Star
Quality Care, Inc. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2000.)
10.27 Order of the United States Bankruptcy Court for the District of
Delaware, dated July 7, 2000, in re: Integrated Health Services,
Inc., et al., Debtors. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2000.)
10.28 Management and Servicing Agreement, dated as of July 10, 2000,
among Integrated Health Services, Inc., ECA Holdings, Inc., ECA
Properties, Inc., Community Care of Nebraska, Inc., W.S.T. Care,
Inc., Quality Care of Lyons, Inc., Integrated Health Services at
Grandview Care Center, Inc., Quality Care of Columbus, Inc.,
Marietta/SCC, Inc., Glenwood/SCC, Inc., Dublin/SCC, Inc., College
Park/SCC, Inc., IHS Acquisition No. 112, Inc., IHS Acquisition No.
113, Inc., IHS Acquisition No. 175, Inc., Senior Housing
Properties Trust, Five Star Quality Care, Inc., SHOPCO-COLORADO,
LLC, SHOPCO-CT, LLC, SHOPCO-GA, LLC, SHOPCO-IA,
52
LLC, SHOPCO-KS, LLC, SHOPCO-MI, LLC, SHOPCO-MO, LLC, SHOPCO-NE,
LLC, SHOPCO-WY, LLC and Advisors Healthcare Group, Inc.
(Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000.)
10.29 Stock Purchase Agreement, dated as of August 9, 2001, among Senior
Housing Properties Trust, SNH/CSL Properties Trust, Crestline
Capital Corporation and CSL Group, Inc., including forms of
Promissory Note, Escrow Agreement and Tax Allocation Agreement.
(Incorporated by reference to the Company's Current Report on Form
8-K filed October 1, 2001.)
10.30 Amendment to Stock Purchase Agreement among Senior Housing
Properties Trust, SNH/CSL Properties Trust, Crestline Capital
Corporation and CSL Group, Inc., dated November 5, 2001.
(Incorporated by reference to the Company's Current Report on Form
8-K filed November 7, 2001.)
10.31 Transaction Agreement, dated December 7, 2001 by and among Senior
Housing Properties Trust, certain subsidiaries of Senior Housing
Properties Trust party thereto, Five Star Quality Care, Inc.,
certain subsidiaries of Five Star Quality Care, Inc. party
thereto, FSQ, Inc., Hospitality Properties Trust, HRPT Properties
Trust and Reit Management & Research LLC. (Incorporated by
reference to the Company's Current Report on Form 8-K filed
December 17, 2001.)
10.32 Agreement of Merger, dated December 5, 2001 among Five Star
Quality Care, Inc., FSQ Acquisition, Inc. and FSQ, Inc.
(Incorporated by reference the Company's Current Report on Form
8-K filed December 17, 2001.)
10.33 Master Lease Agreement by and among certain affiliates of Senior
Housing Properties Trust, as Landlords, and Five Star Quality Care
Trust, as Tenant, dated December 31, 2001. (Incorporated by
reference to the Company's Current Report on 8-K filed January 24,
2002.)
10.34 Guaranty Agreement made by Five Star Quality Care, Inc., as
Guarantor, for the benefit of certain affiliates of Senior Housing
Properties Trust dated December 31, 2001, relating to the Maser
Lease Agreement by and among certain affiliates of Senior Housing
Properties Trust, as Landlord, and Five Star Quality Care Trust,
as Tenant, dated December 31, 2001. (Incorporated by reference to
the Company's Current Report on 8-K filed January 24, 2002.)
10.35 Amended Master Lease Agreement by and among certain affiliates of
Senior Housing Properties Trust, as Landlords, and FS Tenant
Holding Company Trust, as Tenant, dated January 11, 2002.
(Incorporated by reference to the Company's Current Report on 8-K
filed January 24, 2002.)
10.36 Guaranty Agreement made by Five Star Quality Care, Inc., as
Guarantor, for the benefit of certain affiliates of Senior Housing
Properties Trust dated January 11, 2002, relating to the Amended
Master Lease Agreement by and among certain affiliates of Senior
Housing Properties Trust, as Landlord, and FS Tenant Holding
Company Trust and FS Tenant Pool III Trust, as Tenant, dated
January 11, 2002. (Incorporated by reference to the Company's
Current Report on 8-K filed January 24, 2002.)
12.1 Ratio of Earnings to Fixed Charges. (Filed herewith.)
21.1 List of Subsidiaries. (Filed herewith.)
23.1 Consent of Sullivan & Worcester LLP. (Contained In Exhibit 8.1.)
23.2 Consent of Ernst and Young LLP. (Filed herewith.)
----------------------
(+) Management contract or compensatory plan or arrangement.
53
REPORT OF INDEPENDENT AUDITORS
To the Trustees and Shareholders of Senior Housing Properties Trust
We have audited the accompanying consolidated balance sheets of Senior Housing
Properties Trust and subsidiaries, as of December 31, 2001 and 2000, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 2001. Our audits
also included the financial statement schedule listed in the Index at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Senior Housing
Properties Trust and subsidiaries as of December 31, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 22, 2002
F-1
SENIOR HOUSING PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
December 31,
----------------------
2001 2000
--------- ---------
ASSETS
Real estate properties, at cost:
Land $ 59,308 $ 60,060
Buildings and improvements 533,891 533,335
--------- ---------
593,199 593,395
Less accumulated depreciation 124,252 106,681
--------- ---------
468,947 486,714
Cash and cash equivalents 352,026 515
Restricted cash 17,701 801
Investments 8,841 7,563
Deferred financing fees, net 6,578 --
Net investment in facilities' operations -- 29,046
Due from affiliates 3,275 --
Other assets 9,935 5,934
--------- ---------
$ 867,303 $ 530,573
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank credit facility $ -- $ 97,000
Senior notes, net of discount 243,607 --
Mortgages payable 9,100 --
Prepaid rent 7,114 56
Security deposits 1,520 235
Distribution payable -- 7,775
Other liabilities 3,677 3,184
Due to affiliate 267 13
Trust preferred securities 27,394 --
Commitments and contingencies
Shareholders' equity:
Common shares of beneficial interest, $0.01 par value:
50,000,000 shares authorized, 43,421,700 shares and
25,916,100 shares issued and outstanding at December
31, 2001 and 2000, respectively 434 259
Additional paid-in capital 658,348 444,638
Cumulative net income 55,691 38,673
Cumulative distributions (141,936) (62,323)
Unrealized gain on investments 2,087 1,063
--------- ---------
Total shareholders' equity 574,624 422,310
--------- ---------
$ 867,303 $ 530,573
========= =========
See accompanying notes
F-2
SENIOR HOUSING PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31,
------------------------------
2001 2000 1999
-------- -------- --------
Revenues:
Rental income $ 47,430 $ 64,377 $ 84,881
Facilities' operations 229,235 -- --
Other real estate income -- 2,520 --
Interest and other income 2,347 1,520 5,909
Gain on foreclosures and lease
terminations -- 7,105 --
-------- -------- --------
Total revenues 279,012 75,522 90,790
-------- -------- --------
Expenses:
Interest 5,879 15,366 18,768
Depreciation 19,431 20,140 22,247
Facilities' operations 223,201 -- --
General and administrative
- Recurring 4,129 5,475 4,941
- Related to foreclosures and lease
terminations 4,167 3,519 --
Five Star spin-off costs 3,732 -- --
Loan loss reserve -- -- 14,500
Impairment of assets -- -- 15,500
-------- -------- --------
Total 260,539 44,500 75,956
-------- -------- --------
Income before distributions on trust preferred
securities and gain on sale of properties 18,473 31,022 14,834
Distributions on trust preferred securities 1,455 -- --
-------- -------- --------
Income before gain on sale of properties 17,018 31,022 14,834
Gain on sale of properties -- 27,415 --
-------- -------- --------
Net income $ 17,018 $ 58,437 $ 14,834
======== ======== ========
Weighted average shares outstanding (Note 2) 30,859 25,958 26,000
======== ======== ========
Basic and diluted earnings per share:
Income before gain on sale of properties $ 0.55 $ 1.20 $ 0.57
======== ======== ========
Net income $ 0.55 $ 2.25 $ 0.57
======== ======== ========
See accompanying notes
F-3
SENIOR HOUSING PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
Ownership
Cumulative Interest Accumulated
Additional Net of HRPT Other
Number of Common Paid-in Income Cumulative Properties Comprehensive
Shares Shares Capital (Loss) Distribution Trust Income Totals
---------- ------- ---------- ---------- ------------ ----------- ------------- -------
Balance at
December 31, 1998 26,374,760 $ 264 $ -- $ -- $ -- $ 641,805 $ -- $ 642,069
Net income (January 1
to October 11) -- -- -- -- -- 34,598 -- 34,598
Owner distribution, net -- -- -- -- -- (31,919) -- (31,919)
Cancellation of shares (374,760) (4) -- -- -- 4 -- --
Distribution of
shares to HRPT
shareholders -- -- 444,488 -- -- (644,488) -- (200,000)
Net loss (October 12
to December 31) -- -- -- (19,764) -- -- -- (19,764)
Distributions -- -- -- -- (15,601) -- -- (15,601)
Stock grants 1,500 -- 23 -- -- -- -- 23
---------- ----- --------- -------- ---------- --------- -------- ---------
Balance at
December 31, 1999 26,001,500 260 444,511 (19,764) (15,601) -- -- 409,406
Comprehensive
Income:
Net income -- -- -- 58,437 -- -- -- 58,437
Unrealized gain on
investments -- -- -- -- -- -- 1,063 1,063
---------- ----- --------- -------- ---------- --------- -------- ---------
Total comprehensive
income -- -- -- 58,437 -- -- 1,063 59,500
Distributions -- -- -- -- (46,722) -- -- (46,722)
Cancellation of shares (100,000) (1) 1 -- -- -- -- --
Stock grants 14,600 -- 126 -- -- -- -- 126
---------- ----- --------- -------- ---------- --------- -------- ---------
Balance at
December 31, 2000 25,916,100 259 444,638 38,673 (62,323) -- 1,063 422,310
Comprehensive
Income:
Net income -- -- -- 17,018 -- -- -- 17,018
Unrealized gain on
investments -- -- -- -- -- -- 1,024 1,024
---------- ----- --------- -------- ---------- --------- -------- ---------
Total comprehensive
income -- -- -- 17,018 -- -- 1,024 18,042
Distributions -- -- -- -- (29,613) -- -- (29,613)
Distribution of Five
Star Quality Care,
Inc. shares -- -- -- -- (50,000) -- -- (50,000)
Issuance of shares 17,492,000 175 213,534 -- -- -- -- 213,709
Stock grants 13,600 -- 176 -- -- -- -- 176
---------- ----- --------- -------- ---------- --------- -------- ---------
Balance at December
31, 2001 43,421,700 $ 434 $ 658,348 $ 55,691 $ (141,936) $ -- $ 2,087 $ 574,624
========== ===== ========= ======== ========== ========= ======== =========
See accompanying notes
F-4
SENIOR HOUSING PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Year Ended December 31,
-------------------------------------------------
2001 2000 1999
----------- ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 17,018 $ 58,437 $ 14,834
Adjustments to reconcile net income to cash
provided by operating activities:
Other real estate income -- (2,520) --
Depreciation 19,431 20,140 22,247
Impairment of assets and loan loss reserve -- -- 30,000
Gain on sale of properties -- (27,415) --
Gain on foreclosures and lease terminations -- (7,105) --
Changes in assets and liabilities:
Restricted cash (16,900) (47) (37)
Other assets 3,763 339 (3,363)
Prepaid rent 7,058 (7,612) (1,551)
Other liabilities (13,219) (2,880) 1,628
Due to affiliate 254 (314) 327
--------- --------- ---------
Cash provided by operating activities 17,404 31,023 64,085
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of real estate, net -- 135,178 --
Real estate and personal property acquisitions (2,176) (2,300) --
Security deposits 1,285 -- --
Cash contribution to Five Star in connection with spin-off (24,943) -- --
Repayments of real estate mortgages receivable -- -- 387
Investment in facilities' operations -- (38,530) --
--------- --------- ---------
Cash (used for) provided by investing activities (25,834) 94,348 387
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares, net 213,710 -- --
Proceeds from issuance of trust preferred securities 27,394 -- --
Distributions to shareholders (37,388) (38,947) (15,601)
Proceeds from borrowings on revolving bank credit facility 43,000 49,000 200,000
Repayments of borrowings on revolving bank credit facility (140,000) (152,000) --
Proceeds from issuance of senior notes, net of discount 243,607 -- --
Proceeds from issuance of mortgages payable 9,100 -- --
Deferred financing fees (6,659) -- --
Repayment of formation debt due to HRPT
Properties Trust -- -- (200,000)
Owner's net distribution -- -- (31,919)
--------- --------- ---------
Cash provided by (used for) financing activities 352,763 (141,947) (47,520)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 344,333 (16,576) 16,952
Cash and cash equivalents at beginning of period 515 17,091 139
Cash and cash equivalents at facilities' operations at
beginning of period 7,178 -- --
--------- --------- ---------
Cash and cash equivalents at end of period $ 352,026 $ 515 $ 17,091
========= ========= =========
See accompanying notes
F-5
SENIOR HOUSING PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Year Ended December 31,
---------------------------------------------
2001 2000 1999
---------- ---------- ----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 6,248 $ 15,344 $ 2,446
NON-CASH INVESTING ACTIVITIES:
Net working capital contributed to Five Star in
connection with spin-off 22,153 -- --
Real estate and related property received -- (27,869) --
Real estate and related property conveyed, net 2,904 10,759 --
Real estate mortgage receivable conveyed, net -- 4,277 --
Real estate mortgages receivable foreclosed -- 17,779 --
Shares of HRPT Properties Trust received -- 6,500 --
NON-CASH FINANCING ACTIVITIES:
Formation debt due to HRPT Properties Trust -- -- 200,000
Issuance of common shares 176 126 23
F-6
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization
Senior Housing Properties Trust (the "Company"), a Maryland real estate
investment trust ("REIT") was organized on December 16, 1998, as a 100% owned
subsidiary of HRPT Properties Trust ("HRPT"). On October 12, 1999, HRPT
distributed 50.7% of its ownership in the Company to HRPT shareholders (the
"1999 Spin-Off"). These consolidated financial statements are presented as if
the Company was a separate legal entity from HRPT prior to the 1999 Spin-Off,
although no such entity existed until October 12, 1999. During 2001, the Company
leased 28 properties to third party operators and 56 properties were operated
for the Company's own account. On December 31, 2001, the Company distributed
substantially all of its ownership of Five Star Quality Care, Inc. ("Five
Star"), one of its wholly-owned subsidiaries which conducted the operations of
the 56 facilities operated for the Company's own account, to the Company's
shareholders (the "Five Star Spin-Off"). At the time of the Five Star Spin-Off,
the Company entered into a lease with Five Star for 55 facilities and Five Star
assumed the Company's lease for one facility, as more fully described in Note 7.
At December 31, 2001, the Company owned 83 properties in 23 states.
Note 2. Summary of Significant Accounting Policies
BASIS OF PRESENTATION. Subsequent to the 1999 Spin-Off, the consolidated
financial statements include the accounts of the Company and all of its
subsidiaries. All intercompany transactions have been eliminated.
Prior to the 1999 Spin-Off, the Company was owned by HRPT and transactions are
presented on HRPT's historical basis. Substantially all of the rental income and
mortgage interest income received by HRPT from the Company's tenants and
mortgagors was deposited in and commingled with HRPT's general funds. Funds for
capital investments and other cash required by the Company were provided by
HRPT. Interest expense, general and administrative costs and other HRPT costs
were allocated to the Company based on the percentage of HRPT's average
historical costs of real estate investments assigned to the Company in the 1999
Spin-Off. In the opinion of management, the methods for allocating these costs
and expenses for periods prior to the 1999 Spin-Off are reasonable. It is not
practicable to estimate additional costs that would have been incurred by the
Company as a separate entity.
During 2000, the Company assumed the operations of nursing homes from bankrupt
tenants, Integrated Health Services, Inc. ("IHS") and Mariner Post-Acute
Network, Inc. ("Mariner"), pursuant to negotiated settlement agreements.
Although these settlements, as approved by the Bankruptcy Courts, had financial
effect as of July 1, 2000, the implementation of these settlements was subject
to material conditions subsequent, including the Company's obtaining healthcare
regulatory licenses and Medicare and Medicaid provider contracts necessary to
operate these nursing homes. Because the majority of the licenses and provider
contracts had not been received prior to December 31, 2000, the Company reported
the results of these nursing home operations using the equity method of
accounting from July 1, 2000, through December 31, 2000. Working capital
invested in these nursing home operations was included in Net Investment in
Facilities' Operations in the Company's Consolidated Balance Sheets at December
31, 2000 and net income from these nursing homes was reported as Other Real
Estate Income in the Company's Consolidated Statements of Income for the year
ended December 31, 2000. During the first quarter of 2001, the Company obtained
substantially all of the healthcare regulatory licenses and Medicare and
Medicaid provider agreements necessary for these nursing home operations.
Accordingly, the Company consolidated the nursing home operations effective
January 1, 2001.
REAL ESTATE PROPERTIES. Depreciation on real estate properties is expensed on a
straight-line basis over estimated useful lives of up to 40 years for buildings
and improvements and up to 12 years for personal property. During 1999 the
estimated useful lives of certain real estate properties were changed. As a
result, net income and net income per share for the period ended December 31,
1999, was reduced by $3.8 million, or $0.15 per share. Impairment losses on
properties are recognized when indicators of impairment are present and
F-7
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
the estimated, undiscounted cash flows to be generated by the properties are
less than the carrying amount of such properties.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents, consisting of overnight
repurchase agreements and short-term investments with original maturities of
three months or less at the date of purchase, are carried at cost plus accrued
interest, which approximates market.
INVESTMENTS. The Company owns 1,000,000 common shares of HRPT which are
classified as available for sale and carried at fair value, with unrealized
gains and losses reported as a separate component of shareholders' equity. At
December 31, 2001, the Company's investment in HRPT had a fair value of $8.6
million and unrealized holding gains of $2.1 million. At February 22, 2002, this
investment had a fair value of $8.7 million and unrealized holding gains of $2.2
million. The Company also owns 35,000 common shares of Five Star which it
retained or received in connection with the Five Star Spin-Off. At December 31,
2001, the Company's investment in Five Star had a fair value of $254,000 and
unrealized holding gains of zero. At February 22, 2002, this investment had a
fair value of $294,000 and unrealized holding gains of $40,000.
DEFERRED FINANCE COSTS. Issuance costs related to borrowings are capitalized and
amortized over the terms of the respective loans. The unamortized balance of
deferred finance costs and accumulated amortization were $6.6 million and
$81,000 at December 31, 2001, respectively. There were no deferred finance costs
prior to 2001.
INTEREST RATE CAP AGREEMENTS. The Company had an interest rate cap agreement to
limit its exposure to the risk of rising interest rates. This arrangement had a
notional amount of $200.0 million and expired in December 2001. At the time of
its expiration and as of December 31, 2000, the interest rate cap agreement had
a carrying value and a fair market value of zero.
REVENUE RECOGNITION. Rental income from operating leases is recognized on a
straight-line basis over the life of lease agreements. Interest income is
recognized as earned over the terms of real estate mortgages. Percentage rent
and supplemental mortgage interest income are recognized as earned in accordance
with Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). The Company adopted SAB 101 beginning January 1, 2000,
without restatement of prior periods. SAB 101 had no impact on the Company's
annual results of operations. The adoption of SAB 101 required the Company to
defer percentage rental income from the first, second and third quarters to the
fourth quarter within the year. For the years ended December 31, 2001, 2000 and
1999, percentage rent and supplemental mortgage interest income aggregated $3.2
million, $3.0 million, and $4.0 million, respectively.
Revenues from facilities' operations were derived primarily from providing
healthcare services to residents. Approximately 76% of 2001 revenues were
derived from payments under federal and state medical assistance programs. The
Company accrued for revenues when services were provided at standard charges
adjusted to amounts estimated to be received under governmental programs and
other third-party contractual arrangements. Revenues were reported at their
estimated net realizable amounts and are subject to audit and retroactive
adjustment. However, as a result of the Five Star Spin-Off, the Company no
longer operates any facilities and will not recognize any facilities' operations
revenues beginning January 1, 2002. Any impact on facilities' operations
revenues due to audit or retroactive adjustment will be recognized by Five Star
and not by the Company.
EARNINGS PER COMMON SHARE. Earnings per common share is computed using the
weighted average number of shares outstanding during the period. The Company has
no common share equivalents, instruments convertible into common shares or other
dilutive instruments.
F-8
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Because the Company's operations were included in the consolidated financial
statements of HRPT prior to the 1999 Spin-Off, there were no shareholder equity
accounts for the Company prior to October 12, 1999. Common shares outstanding of
26,000,000 at October 12, 1999, have been included in the earnings per share
calculation as if the shares were outstanding for all periods prior to October
12, 1999.
USE OF ESTIMATES. Preparation of these financial statements in conformity with
accounting principles generally accepted in the Unites States requires
management to make estimates and assumptions that may affect the amounts
reported in these financial statements and related notes. The actual results
could differ from these estimates.
INCOME TAXES. Prior to the 1999 Spin-Off, the Company's operations were included
in HRPT's income tax returns. The Company and HRPT qualify as real estate
investment trusts under the Internal Revenue Code of 1986, as amended ("IRC").
Accordingly, they are not expected to be subject to federal income taxes
provided they distribute their taxable income and continue to meet the other
requirements for qualifying as a real estate investment trust. However, they are
subject to some state and local taxes on their income and property.
NEW ACCOUNTING PRONOUCEMENTS. In 1998 and 2000, the Financial Accounting
Standards Board (the "FASB") issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133") and SFAS No. 138 "Accounting for
Certain Derivative Instruments and Hedging Activities" ("FAS 138"), which were
effective for fiscal years beginning after June 15, 2000. Effective January 1,
2001, the Company adopted the provisions of FAS 133, as amended by FAS 138. The
adoption of FAS 133, as amended, did not have a material impact on the Company's
financial position or results of operations.
In 2001 the FASB issued SFAS No. 141 "Business Combinations" ("FAS 141") which
requires all business combinations initiated after June 30, 2001, to be
accounted for using the purchase method, SFAS No. 142 "Goodwill and Other
Intangible Assets" ("FAS 142") which provides new guidance in accounting for
goodwill and intangible assets and SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets" ("FAS 144"). The adoption of FAS 141 had no
effect on the Company's financial position or results of operations. The Company
is required to adopt FAS 142 and FAS 144 on January 1, 2002, and does not expect
that the adoption of FAS 142 and FAS 144 will have a material effect on the
Company's financial position or results of operations.
RECLASSIFICATIONS. Reclassifications have been made to the prior years'
financial statements to conform to the current year's presentation.
Note 3. Real Estate Properties
The Company's properties that are leased to third parties are generally leased
on a triple net basis, pursuant to noncancellable, fixed term, operating leases
expiring between 2002 and 2018. Generally, the leases to a single tenant or
group of affiliated tenants are cross-defaulted and cross-guaranteed, and
provide for all or none tenant renewal options at existing or market rent rates.
These triple net leases generally require the lessee to pay all property
operating costs. The cost, after impairment write downs, and the carrying value
of the properties leased were $593.2 million and $468.9 million at December 31,
2001, respectively which includes the properties involved in the Five Star
Spin-Off. The future minimum lease payments to be received during the current
terms of the Company's leases as of December 31, 2001, are $51.8 million in
2002, $51.9 million in 2003, $51.5 million in 2004, $51.6 million in 2005, $39.1
million in 2006 and $260.7 million thereafter. This does not include the impact
of the transactions which were completed after December 31, 2001, as discussed
in Note 16.
During 2000, the Company sold four independent living properties and three
nursing homes and recognized a gain of $27.4 million. Net proceeds from these
sales were used to reduce amounts outstanding under the
F-9
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Company's revolving bank credit facility. Also in 2000, the Company acquired a
90 bed assisted living facility from HRPT for $2.3 million.
Note 4. Gain on Foreclosures and Lease Terminations
In connection with the foreclosures and lease terminations discussed in Note 2,
the Company retained a forfeited $15.0 million security deposit, 1,000,000
common shares of HRPT valued at $6.5 million, 100,000 common shares of the
Company, nine properties valued at $10.1 million and the personal property at
all of the foreclosed properties and repossessed leased properties. In addition,
recognition of rental income previously deferred related to these properties
totaling $19.0 million was accelerated. These income items were offset by the
value of properties deeded to the former tenant, the forgiveness of mortgage
debt due from a bankrupt borrower, legal and professional costs, licensing
costs, and impairment write-downs of $9.7 million related to certain of the
properties and a reserve for repairs and deferred maintenance at these
properties of $10.0 million. The net result of assets received and accelerated
deferred income over the assets traded and debts forgiven, various costs, the
impairment write-downs and the repairs and maintenance reserve was recorded in
the fourth quarter of 2000 as a $7.1 million gain on foreclosures and lease
terminations.
Note 5. Net Investment in Facilities' Operations
As discussed in Note 2, the Company assumed operating responsibility for 17
Mariner facilities and 40 IHS facilities effective July 1, 2000, pending final
regulatory approvals which are required in the healthcare industry. The Company
entered into management arrangements with FSQ, Inc., formerly known as Five Star
Quality Care, Inc. ("FSQ"), pursuant to which FSQ managed the properties for the
Company following relicensing. Mariner and IHS agreed with the Company and FSQ
to perform transition services with respect to the nursing facilities formerly
operated by them until appropriate licenses were received by the Company and
FSQ. At December 31, 2000, all approvals had not been received. Since such
approvals were not received, the Company reported the net income from these
facilities as Other Real Estate Income in the Consolidated Statements of Income
for the year ended December 31, 2000. The capital invested in these operations
by the Company was included in Net Investment in Facilities' Operations in the
Consolidated Balance Sheet at December 31, 2000. The Company consolidated the
results of facilities' operations beginning on January 1, 2001.
Summary financial data for these facilities' operations was as follows
(dollars in thousands):
July 1 through
December 31, 2000 December 31, 2000
------------------ -----------------
Current assets $55,938 Revenues $114,483
Property and equipment, net 2,399 Expenses 111,963
------------------ -----------------
$58,337 Other real estate income $ 2,520
================== =================
Current liabilities $29,291
Net investment in facilities'
operations 29,046
------------------
$58,337
==================
Note 6. Shareholders' Equity
On July 3 and July 11, 2001, the Company issued a total of 3,445,000 common
shares of beneficial interest, in an underwritten public offering for gross
proceeds of approximately $44.8 million. The proceeds received, net of
underwriting commissions and costs of issuance of $2.6 million, were applied to
reduce the Company's outstanding obligations under its revolving bank credit
facility.
F-10
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On October 9 and October 12, 2001, the Company issued a total of 14,047,000
common shares of beneficial interest, in an underwritten public offering for
gross proceeds of approximately $181.2 million. The proceeds received, net of
underwriting commissions and costs of issuance of $9.7 million, were applied to
reduce the Company's outstanding obligations under its revolving bank credit
facility to zero. The excess remaining cash was available for working capital,
general business purposes and for acquisitions.
The Company has reserved 1,300,000 shares of the Company's common shares under
the terms of the 1999 Incentive Share Award Plan (the "Award Plan"). During the
year ended December 31, 2001, 12,100 common shares were awarded to officers of
the Company and certain employees of the Company's investment manager pursuant
to this plan. In addition, the Company's Independent Trustees are each awarded
500 common shares annually as part of their annual fees. The shares awarded to
the Trustees vest immediately. The shares awarded to the Company's officers and
certain employees of its investment manager vest over a three-year period. At
December 31, 2001, 1,270,300 of the Company's common shares remain reserved for
issuance under the Award Plan.
Cash distributions paid or payable by the Company for the years ended December
31, 2001, 2000 and 1999, were $0.90 per share, $1.80 per share and $0.60 per
share, respectively. In connection with the Five Star Spin-Off, the Company
distributed one share of Five Star for every ten shares of the Company to the
Company's shareholders on December 31, 2001, which was valued at $.726 per
common share of the Company for income tax purposes.
Note 7. Spin-off Transaction
As discussed in Note 1, the Company completed the Five Star Spin-Off by
distributing 4,342,170 common shares of Five Star to its shareholders on
December 31, 2001. Concurrent with the Five Star Spin-Off, the Company entered
into a lease agreement with Five Star for 55 healthcare facilities expiring in
2018 and Five Star assumed the Company's leasehold for one additional facility.
The minimum rent for these facilities is $7.0 million per year. In addition,
percentage rent will be due starting in 2004, in amounts equal to three percent
of net patient revenues at each facility in excess of net patient revenues at
such facility in 2003. The Company also entered into a transaction agreement to
govern the initial capitalization of Five Star and other events related to the
Five Star Spin-Off. Pursuant to the transaction agreement, the Company provided
initial capitalization of $50.0 million of equity to Five Star which consisted
of cash and working capital related to the operations of the 56 facilities and
two facilities with a net book value of $2.2 million. Simultaneous with the Five
Star Spin-Off, Five Star became a public company listed on the American Stock
Exchange. The Company incurred $3.7 million of expenses relating to the Five
Star Spin-Off, which included costs of distributing Five Star shares to
shareholders, legal and accounting fees, Securities and Exchange Commission
filing fees and Five Star's American Stock Exchange listing fees.
Note 8. Transactions with Affiliates
The Company has an agreement with REIT Management & Research LLC ("RMR") for RMR
to provide investment, management and administrative services to the Company.
RMR is owned by Gerard M. Martin and Barry M. Portnoy, each a Managing Trustee
and member of the Company's Board of Trustees. RMR is compensated annually based
on a formula amount of gross invested real estate assets. RMR is also entitled
to an annual incentive fee, which is based on a formula and paid in restricted
shares of the Company. Investment advisory fees paid to RMR for the years ended
December 31, 2001, 2000 and 1999, were $3.2 million, $3.7 million and $3.9
million, respectively. To date, the Company has not paid and RMR is not due any
incentive fees.
As a result of the nursing home bankruptcies and settlements discussed in Notes
2 and 5, subject to the receipt of necessary healthcare licenses, the Company
assumed operating responsibilities for healthcare facilities effective
F-11
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
July 1, 2000. Nursing care and other services were provided at these properties
to approximately 5,000 residents. Under IRC laws and regulations applicable to
REITs, the Company was required to engage a contractor to manage these
properties after a 90 day transition period. The Company entered into management
agreements with FSQ to provide these services beginning in 2000. FSQ was owned
by Messrs. Martin and Portnoy, the Company's Managing Trustees, until January 2,
2002. Under these management agreements, during the first 90 days FSQ was paid
its costs and expenses incurred in managing the facilities for the Company and
thereafter it was paid a fee equal to five percent of patient revenues at the
managed facilities. During 2001 and 2000, the fees paid to FSQ by the Company
totaled $11.5 million and $5.1 million, respectively. This amount includes fees
with respect to all services provided by FSQ to the Company including those
described in this paragraph and in the next paragraph.
As part of the bankruptcy settlement agreement between the Company and IHS
described in Note 2, in partial satisfaction of its financial obligations to the
Company, IHS conveyed nine nursing homes free of debt to the Company. Under IRC
laws and regulations applicable to REITs during 2000, the Company was unable to
operate nursing homes that were not previously owned and leased or mortgaged by
the Company. Accordingly, new corporations were created to take title to and
operate these nine nursing homes, and Messrs. Martin and Portnoy each purchased
0.5% of the beneficial ownership and 50% of the voting control while the Company
retained 99% of the beneficial ownership and no voting control (the "99-1
Corporations"). Effective January 1, 2001, applicable laws were changed to
permit REITs to have voting control of taxable REIT subsidiaries ("TRSs").
Effective January 1, 2001, Messrs. Martin and Portnoy sold their beneficial
ownership and voting control of the 99-1 Corporations to the Company for their
historical investment. The nursing homes owned by these 99-1 Corporations and
TRSs were managed by FSQ.
In connection with the Five Star Spin-Off the Company entered into a transaction
agreement with Five Star, FSQ and RMR. The transaction agreement provided for,
among other things, (i) the capitalization of Five Star by the Company with
$50.0 million of equity consisting of cash and working capital, (ii) the
spin-off of Five Star, (iii) the lease of 55 senior living facilities to Five
Star, which became effective December 31, 2001, (iv) the lease to Five Star of
31 senior living facilities to be acquired from Crestline Capital Corporation
("Crestline"), which became effective when this acquisition closed on January
11, 2002 (see Note 16), and (v) a right of first refusal granted by Five Star to
the Company, before it acquires or finances any real estate investments of the
type in which the Company invests. In order to acquire the personnel, systems
and assets necessary for Five Star to operate facilities which it leases from
the Company, the transaction agreement also provided for the merger of FSQ into
a Five Star subsidiary and for Five Star's entering into a shared services
agreement with RMR pursuant to which RMR agreed to provide services similar to
the services previously provided by RMR to FSQ. That FSQ merger into Five Star
was concluded on January 2, 2002, and as consideration in the merger, Five Star
issued 125,000 shares of its common stock to each of Messrs. Martin and Portnoy,
having a total value (based on the average high and low trading price of Five
Star's common stock on the American Stock Exchange on January 2, 2002) of $1.9
million ($7.50 per share). In connection with this merger, the Company's Board
of Trustees received an opinion from an internationally recognized investment
banking firm to the effect that the consideration provided for in the merger
agreement was fair, from a financial point of view, to Five Star.
Pursuant to the Five Star Spin-Off transaction agreement, the Company agreed to
contribute $50.0 million of equity consisting of cash and working capital to
Five Star on December 31, 2001. Amounts were estimated on December 31, 2001 and
the transaction agreement provided that a true up of amounts contributed would
be completed subsequent to the year end. The amount owed to the Company by Five
Star is approximately $3.3 million as of December 31, 2001 and is included in
Due from Affiliates in the Consolidated Balance Sheet at December 31, 2001.
F-12
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 9. Indebtedness
The Company has a $270.0 million, interest only, revolving bank credit facility.
The revolving bank credit facility is secured by 14 properties with a net book
value of $270.5 million at December 31, 2001, and matures in September 2002. The
revolving bank credit facility bears interest at LIBOR plus a premium. The
interest rate at December 31, 2001, was 3.87%. The bank credit facility is
available for acquisitions, working capital and for general business purposes.
On July 12, 2001, the Company obtained mortgage financing secured by two of its
properties in Michigan, for a total of $9.1 million. The mortgages require
interest (2.75% at December 31, 2001) to be paid monthly at prime less a
discount. These mortgages mature in July 2003. The two properties were operated
for the Company's own account during 2001, and subsequent to the Five Star
Spin-Off were leased to Five Star.
In December 2001, the Company sold $245.0 million of senior unsecured notes at a
discount. The notes carry interest at a fixed rate of 8.625% per annum and are
due in 2012. Net proceeds from the sale of the notes, after the discount and
costs of issuance, were $238.9 million. Interest on the notes is payable
semi-annually in arrears. No principal payments are due until maturity. The
unamortized balance of the discount at December 31, 2001 was $1.4 million.
Note 10. Trust Preferred Securities
In June and July 2001, SNH Capital Trust I (the "Issuer"), a wholly-owned
finance subsidiary of the Company, issued 1,095,750 shares of 10.125% trust
preferred securities (the "Trust Preferred Securities"), with a liquidation
preference of $25 per share, for a total liquidation amount of $27.4 million.
The Trust Preferred Securities represent an undivided beneficial ownership
interest in the assets of the Issuer. Proceeds from the issuance of the Trust
Preferred Securities were used to acquire 10.125% junior subordinated debentures
(the "Debentures") due June 15, 2041 issued by the Company. The Issuer exists
solely to issue the Trust Preferred Securities and its own common securities and
acquire and hold the Debentures, which are its sole assets. The net proceeds
from the sale of the Debentures were applied to reduce the Company's outstanding
obligations under its revolving bank credit facility. The underwriting
commissions and other costs are being amortized over the 40 year life of the
Trust Preferred Securities and the Debentures. The Company can redeem the
Debentures for their liquidation value before their maturity in whole or in part
on or after June 15, 2006. The Issuer will redeem all of the outstanding Trust
Preferred Securities when the Debentures are redeemed or repaid at maturity. The
Company has guaranteed the payments of distributions, redemption amounts and
liquidation payments due on the Trust Preferred Securities to the extent the
Issuer has funds available for the payments (the "Guarantee"). The obligations
of the Company under the Guarantee are subordinate to its obligations to its
other creditors, to the same extent as the Debentures. The Company's obligations
relating to the Trust Preferred Securities include obligations to make payments
on the Debentures and obligations under the related junior subordinated
indenture (as supplemented by the supplemental indenture) of the Company, the
Guarantee and the amended and restated trust agreement of the Issuer. Taken
together, these obligations represent a full and unconditional guarantee of
amounts of the Trust Preferred Securities.
F-13
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 11. Segment Information
During 2001, the Company operated in two segments: leasing and facilities'
operations. Revenues of the leasing segment were derived from rental agreements
for properties that are leased to third party operators. Revenues of the
facility operations segment were derived from services provided to patients at
the healthcare facilities operated for the Company's account. Performance is
measured based on the return on investments for the leased properties and on
contribution margin of the facilities' operations. The following table is a
summary of these reportable segments as of the year ended December 31, 2001.
Because the Company operated in only the leasing segment before January 1, 2001,
a comparative table is not presented (dollars in thousands):
Year Ended December 31, 2001
------------------------------------------------------
Facilities'
Leasing Operations Unallocated Total
------------------------------------------------------
Revenues $ 47,430 $ 229,235 $ 2,347 $ 279,012
Expenses:
Interest -- -- 5,879 5,879
Depreciation 13,129 6,302 -- 19,431
Facilities' operations -- 223,201 -- 223,201
General and administrative
- Recurring 4,129 -- -- 4,129
- Related to foreclosures
and lease terminations -- -- 4,167 4,167
Five Star spin-off costs -- -- 3,732 3,732
--------- --------- --------- ---------
Total 17,258 229,503 13,778 260,539
--------- --------- --------- ---------
Income before distributions on
trust preferred securities 30,172 (268) (11,431) 18,473
Distributions on trust preferred
securities -- -- 1,455 1,455
--------- --------- --------- ---------
Net income (loss) $ 30,172 $ (268) $ (12,886) $ 17,018
========= ========= ========= =========
Real estate properties, at cost $ 448,561 $ 144,638 -- $ 593,199
As a result of the Five Star Spin-Off, after January 1, 2002, the Company
operates in a single segment: leasing.
Note 12. Fair Value of Financial Instruments and Commitments
The financial statements presented include rents receivable, senior notes,
mortgages payable, other liabilities, security deposits and Trust Preferred
Securities. The fair values of the financial instruments were not materially
different from their carrying values at December 31, 2001 and 2000. The fair
values of the senior notes, mortgage debt and Trust Preferred Securities are
based on estimates using discounted cash flow analysis and currently prevailing
market rates.
F-14
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Note 13. Concentration of Credit Risk
The assets included in these financial statements are primarily income producing
senior housing real estate located throughout the United States. The following
is a summary of the significant lessees as of and for the years ended December
31, 2001 and 2000 (dollars in thousands):
Year Ending
December 31, 2001 December 31, 2001
---------------------------- -------------------------
Investment(1) % of Total Revenue % of Total
-------------- ---------- ------------ ----------
Marriott International, Inc. $325,472 73% $ 30,894 65%
HEALTHSOUTH Corporation 73,422 16% 10,271 22%
All others 49,667 11% 6,265 13%
-------- ------ -------- ------
$448,561 100% $ 47,430 100%
======== ====== ======== ======
Year Ending
December 31, 2000 December 31, 2000
----------------------------- -----------------------------
Investment(1) % of Total Revenue(2) % of Total
-------------- ---------- ----------- ------------
Marriott International, Inc. $325,472 73% $ 30,141 47%
Brookdale Living Communities, Inc. -- -- 9,366 14
HEALTHSOUTH Corporation 73,422 16 9,267 14
Mariner Post-Acute Network, Inc. -- -- 7,006 11
All others 49,667 11 8,658 14
-------- ------ -------- ------
$448,561 100% $ 64,438 100%
======== ====== ======== ======
(1) Historical costs before previously recorded depreciation and, in certain instances, after
impairment losses.
(2) Included in revenue is $61 of mortgage interest income in 2000.
Note 14. Selected Quarterly Financial Data (unaudited)
The following is a summary of the unaudited quarterly results of operations of
the Company for 2001 and 2000 (dollars in thousands, except per share amounts):
2001
-----------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-----------------------------------------------------
Revenues(1) $68,722 $67,242 $68,916 $74,132
Net income 2,836 2,750 5,522 5,910
Per share data:
Net income 0.11 0.11 0.19 0.14
(1) 2001 revenues include patient revenues from facilities' operations.
F-15
SENIOR HOUSING PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2000
-------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------------------------------------------------
Revenues $18,597 $18,632 $15,208 $23,085(2)
Income before gain on sale of properties 7,560 7,268 4,374 11,820
Gain on sale of properties -- -- -- 27,415
Net income 7,560 7,268 4,374 39,235
Per share data:
Income before gain on sale of properties 0.29 0.28 0.17 0.46
Net income 0.29 0.28 0.17 1.51
(2) Includes a gain on foreclosures and lease terminations, as described in Note 4.
Note 15. Commitments
On August 9, 2001, the Company entered an agreement to acquire 31 senior living
communities with 7,487 units from Crestline for approximately $600.0 million.
These communities were acquired on January 11, 2002, as described below.
Note 16. Subsequent Events
On January 2, 2002, a tenant, HEALTHSOUTH Corporation ("HEALTHSOUTH"), settled a
non-monetary default with the Company by exchanging properties. The Company
delivered to HEALTHSOUTH title to five nursing homes which HEALTHSOUTH leased
from the Company, one of which was closed by HEALTHSOUTH which created the
non-monetary default. In exchange, HEALTHSOUTH delivered to the Company title to
two rehabilitation hospitals which HEALTHSOUTH leases from the Company. As part
of this settlement, HEALTHSOUTH's lease was extended to December 2011, from
January 2006, and the annual rent was reduced from $10.3 million to $8.7
million.
On January 11, 2002, the Company acquired 31 senior living communities for $600
million from Crestline using cash on hand from the offerings of equity and
senior unsecured notes described in Notes 6 and 9, borrowings on the Company's
revolving bank credit facility and assumption of certain liabilities. These
communities are managed by a subsidiary of Marriott International, Inc. and are
leased to Five Star. The initial lease to Five Star is to December 2017 and the
minimum rent is $63 million per year plus a varying percentage of gross revenues
each year which is paid as additional rent to the Company and escrowed for
future capital expenditures at the leased facilities. In addition, percentage
rent will be due, starting in 2003, in amounts equal to five percent (5%) of net
patient revenues at each facility in excess of net patient revenues at such
facility in 2002.
On February 15, 2002, the Company issued 15,000,000 common shares of beneficial
interest, in an underwritten public offering for gross proceeds of $205.8
million. The proceeds received, net of underwriting commissions and costs of
issuance of approximately $10.3 million, were applied to reduce the Company's
outstanding borrowings under its revolving bank credit facility.
F-16
SENIOR HOUSING PROPERTIES TRUST
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2001
(Dollars in Thousands)
Initial Gross Amount Carried at
Cost to Company Close of Period 12/31/01
----------------- ----------------------------
Build- Costs Build- (2)
ings Capitalized ings Accum- Original
and Subsequent and ulated (3) Construc-
Equip- to Equip- (1) Depre- Date tion
Location State Land ment Acquisition Impairment Land ment Total ciation Acquired Date
------------------------------------------------------------------------------------------------------------------------------------
Yuma AZ $103 $604 $28 $-- $103 $632 $735 $169 06/30/92 1984
Phoenix AZ 655 2,525 43 -- 655 2,568 3,223 696 06/30/92 1963
Yuma AZ 223 2,100 63 -- 223 2,163 2,386 574 06/30/92 1984
Scottsdale (4) AZ 979 8,807 91 -- 941 8,936 9,877 1,703 05/16/94 1990
Sun City (4) AZ 1,174 10,569 173 -- 1,189 10,727 11,916 2,022 06/17/94 1990
Arleta CA 230 2,070 168 -- 230 2,238 2,468 66 11/01/00 1976
Fresno CA 738 2,577 188 -- 738 2,765 3,503 890 12/28/90 1963
Van Nuys CA 716 378 258 -- 718 634 1,352 224 12/28/90 1969
Thousand Oaks CA 622 2,522 354 -- 622 2,876 3,498 893 12/28/90 1965
Lancaster CA 601 1,859 1,071 -- 601 2,930 3,531 879 12/28/90 1969
Stockton CA 382 2,750 47 -- 382 2,797 3,179 756 06/30/92 1968
Laguna Hills (4) CA 3,132 28,184 475 -- 3,172 28,619 31,791 5,218 09/09/94 1975
Littleton CO 185 5,043 471 -- 185 5,514 5,699 1,697 12/28/90 1965
Lakewood CO 232 3,766 818 -- 232 4,584 4,816 1,362 12/28/90 1972
Grand Junction CO 204 3,875 388 -- 204 4,263 4,467 1,053 12/30/93 1968
Grand Junction CO 6 2,583 1,390 -- 136 3,843 3,979 855 12/30/93 1978
Colorado Springs CO 245 5,236 195 (3,031) 245 2,400 2,645 84 09/26/97 1972
Delta CO 167 3,570 143 -- 167 3,713 3,880 401 09/26/97 1963
Canon City CO 292 6,228 172 (3,512) 292 2,888 3,180 93 09/26/97 1970
Waterbury CT 1,003 9,023 988 (5,694) 1,003 4,317 5,320 1,324 05/11/92 1974
New Haven CT 1,681 14,953 1,303 (12,154) 1,681 4,102 5,783 1,474 05/11/92 1971
Deerfield Beach (4) FL 1,664 14,972 299 -- 1,690 15,245 16,935 2,905 05/16/94 1986
Palm Harbor (4) FL 3,327 29,945 591 -- 3,379 30,484 33,863 5,809 05/16/94 1992
Boca Raton (4) FL 4,404 39,633 799 -- 4,474 40,362 44,836 7,691 05/20/94 1994
Port St. Lucie (4) FL 1,223 11,009 219 -- 1,242 11,209 12,451 2,136 05/20/94 1993
Fort Myers (4) FL 2,349 21,137 419 -- 2,385 21,520 23,905 3,968 08/16/94 1984
Marietta GA 300 2,702 87 -- 300 2,789 3,089 462 05/15/96 1967
Dublin GA 442 3,982 186 -- 442 4,168 4,610 684 05/15/96 1968
Glenwood GA 174 1,564 50 -- 174 1,614 1,788 258 05/15/96 1972
College Park GA 300 2,702 75 -- 300 2,777 3,077 479 05/15/96 1985
Mediapolis IA 94 1,776 336 -- 94 2,112 2,206 503 12/30/93 1973
Winterset IA 111 2,099 583 -- 111 2,682 2,793 626 12/30/93 1973
S-1
SENIOR HOUSING PROPERTIES TRUST
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2001
(Dollars in Thousands)
Initial Gross Amount Carried at
Cost to Company Close of Period 12/31/01
----------------- ----------------------------
Build- Costs Build- (2)
ings Capitalized ings Accum- Original
and Subsequent and ulated (3) Construc-
Equip- to Equip- (1) Depre- Date tion
Location State Land ment Acquisition Impairment Land ment Total ciation Acquired Date
------------------------------------------------------------------------------------------------------------------------------------
Clarinda IA 77 1,453 469 -- 77 1,922 1,999 439 12/30/93 1968
Pacific Junction IA 32 306 37 -- 32 343 375 66 04/01/95 1978
Council Bluffs IA 225 893 283 -- 225 1,176 1,401 252 04/01/95 1963
Des Moines IA 123 627 49 -- 123 676 799 22 07/01/00 1965
Glenwood IA 322 2,098 44 -- 322 2,142 2,464 68 07/01/00 1964
Arlington Heights (4) IL 3,621 32,587 534 -- 3,665 33,077 36,742 6,031 09/09/94 1986
Ellinwood KS 130 1,137 110 -- 130 1,247 1,377 221 04/01/95 1972
Middleboro MA 1,771 15,752 -- -- 1,771 15,752 17,523 6,760 05/01/88 1970
Worcester MA 1,829 15,071 1,869 -- 1,829 16,940 18,769 8,749 05/01/88 1970
Boston MA 2,164 20,836 1,978 -- 2,164 22,814 24,978 11,253 05/01/89 1968
Hyannis MA 829 7,463 -- -- 829 7,463 8,292 3,226 05/11/92 1972
North Andover MA 410 3,450 -- -- 410 3,450 3,860 126 07/01/00 1973
Farmington (5) MI 474 3,682 34 -- 474 3,716 4,190 162 07/01/00 1969
Howell (5) MI 703 4,227 46 -- 703 4,273 4,976 192 07/01/00 1966
Silver Spring (4) MD 3,229 29,065 786 -- 3,301 29,779 33,080 5,552 07/25/94 1992
St. Joseph MO 111 1,027 195 -- 111 1,222 1,333 246 06/04/93 1976
Tarkio MO 102 1,938 492 -- 102 2,430 2,532 563 12/30/93 1970
Grand Island NE 119 1,446 470 -- 119 1,916 2,035 300 04/01/95 1963
Ainsworth NE 25 420 25 -- 25 445 470 35 07/01/00 1966
Ashland NE 28 1,823 55 -- 28 1,878 1,906 93 07/01/00 1965
Blue Hill NE 56 1,063 39 -- 56 1,102 1,158 54 07/01/00 1967
Central City NE 21 919 56 -- 21 975 996 50 07/01/00 1969
Edgar NE 1 138 40 -- 1 178 179 16 07/01/00 1971
Exeter NE 4 626 47 -- 4 673 677 39 07/01/00 1965
Gretna NE 267 673 51 -- 267 724 991 49 07/01/00 1972
Lyons NE 13 797 50 -- 13 847 860 51 07/01/00 1969
Milford NE 24 880 40 -- 24 920 944 47 07/01/00 1967
Columbus NE 89 561 39 -- 89 600 689 31 07/01/00 1955
Sutherland NE 19 1,251 36 -- 19 1,287 1,306 49 07/01/00 1970
Utica NE 21 569 55 -- 21 624 645 35 07/01/00 1966
Waverly NE 529 686 49 -- 529 735 1,264 42 07/01/00 1989
Burlington NJ 1,300 11,700 7 -- 1,300 11,707 13,007 1,830 09/29/95 1994
S-2
SENIOR HOUSING PROPERTIES TRUST
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2001
(Dollars in Thousands)
Initial Gross Amount Carried at
Cost to Company Close of Period 12/31/01
----------------- ----------------------------
Build- Costs Build- (2)
ings Capitalized ings Accum- Original
and Subsequent and ulated (3) Construc-
Equip- to Equip- (1) Depre- Date tion
Location State Land ment Acquisition Impairment Land ment Total ciation Acquired Date
------------------------------------------------------------------------------------------------------------------------------------
Grove City OH 332 3,081 32 -- 332 3,113 3,445 664 06/04/93 1965
Canonsburg PA 1,499 13,493 606 -- 1,518 14,080 15,598 6,466 03/01/91 1985
Huron SD 45 968 1 -- 45 969 1,014 258 06/30/92 1968
Sioux Falls SD 253 3,062 4 -- 253 3,066 3,319 820 06/30/92 1960
Huron SD 144 3,108 4 -- 144 3,112 3,256 829 06/30/92 1968
Bellaire (4) TX 1,223 11,010 177 -- 1,238 11,172 12,410 2,128 05/16/94 1991
Virginia Beach (4) VA 881 7,926 141 -- 893 8,055 8,948 1,535 05/16/94 1990
Charlottesville (4) VA 2,936 26,422 471 -- 2,976 26,853 29,829 5,062 06/17/94 1991
Arlington (4) VA 1,859 16,734 296 -- 1,885 17,004 18,889 3,170 07/25/94 1992
Seattle WA 256 4,869 67 -- 256 4,936 5,192 1,245 11/01/93 1964
Brookfield WI 834 3,849 8,092 (6,552) 834 5,389 6,223 769 12/28/90 1964
Clintonville WI 49 1,625 157 -- 30 1,801 1,831 542 12/28/90 1965
Clintonville WI 14 1,695 80 -- 14 1,775 1,789 544 12/28/90 1960
Madison WI 144 1,633 145 -- 144 1,778 1,922 547 12/28/90 1920
Waukesha WI 68 3,452 2,294 -- 68 5,746 5,814 1,503 12/28/90 1958
Milwaukee WI 277 3,883 61 -- 277 3,944 4,221 1,124 03/27/92 1969
Pewaukee WI 984 2,432 78 -- 984 2,510 3,494 753 09/10/98 1963
Worland WY 132 2,503 675 -- 132 3,178 3,310 724 12/30/93 1970
Laramie WY 191 3,632 274 -- 191 3,906 4,097 966 12/30/93 1964
------------------------------------------------------------------------------------
Grand Totals $58,747 $531,284 $34,111 ($30,943) $59,308 $533,891 $593,199 $124,252
====================================================================================
(1) Aggregate cost for federal income tax purposes is approximately $638.3 million.
(2) Depreciation is provided on buildings and improvements for periods ranging up to 40 years and on equipment up to 12 years.
(3) Includes acquisition dates of HRPT Properties Trust, our predecessor.
(4) These properties are collateral for our $270 million revolving bank credit facility.
(5) These properties are collateral for our $9.1 million of mortgage notes.
S-3
SENIOR HOUSING PROPERTIES TRUST
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2001
(Dollars in Thousands)
Reconciliation of the carrying amount of real estate and equipment and
accumulated depreciation during the period:
Real Estate Accumulated
and Equipment Depreciation
------------- ------------
Balance at December 31, 1998 $ 732,393 $ 94,616
Additions -- 22,247
Impairment (23,654) (8,154)
--------- ---------
Balance at December 31, 1999 708,739 108,709
Additions 30,169 20,140
Disposals (130,968) (17,273)
Impairment (14,545) (4,895)
--------- ---------
Balance at December 31, 2000 593,395 106,681
Balance at December 31, 2000 included in net
investment in facilities' operations 2,609 210
Additions 2,169 19,431
Disposals (4,974) (2,070)
--------- ---------
Balance at December 31, 2001 $ 593,199 $ 124,252
========= =========
S-4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SENIOR HOUSING PROPERTIES TRUST
By: /s/ David J. Hegarty
David J. Hegarty
President and Chief Operating Officer
Dated: March 28, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons, or by their attorney-in-fact, in
the capacities and on the dates indicated.
Signature Title Date
/s/ David J. Hegarty President and March 28, 2002
David J. Hegarty Chief Operating Officer
/s/ John R. Hoadley Treasurer and March 28, 2002
John R. Hoadley Chief Financial Officer
/s/ Frank J. Bailey Trustee March 28, 2002
Frank J. Bailey
/s/ Arthur G. Koumantzelis Trustee March 28, 2002
Arthur G. Koumantzelis
/s/ John L. Harrington Trustee March 28, 2002
John L. Harrington
/s/ Gerard M. Martin Trustee March 28, 2002
Gerard M. Martin
/s/ Barry M. Portnoy Trustee March 28, 2002
Barry M. Portnoy