Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Healthcare Realty Trust, Inc. 41 238K
2: EX-10.18 Amendment No. 5 to Term Credit Agreement 8 26K
3: EX-10.19 Amendment No. 6 to Term Credit Agreement 8 23K
4: EX-10.20 Amendment No. 7 to Term Credit Agreement 18 63K
5: EX-10.21 Bank Joinder Agreement 3 11K
6: EX-13 Certain Portions of the Annual Report 27 169K
7: EX-21 Subsidiaries of the Registrant 2 11K
8: EX-23 Consent of Ernst & Young LLP 1 8K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
(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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
COMMISSION FILE NUMBER: 1-11852
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HEALTHCARE REALTY TRUST INCORPORATED
(Exact name of Registrant as specified in its charter)
MARYLAND 62-1507028
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3310 WEST END AVENUE
SUITE 700
NASHVILLE, TENNESSEE 37203
(Address of principal executive offices)
(615) 269-8175
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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Name of Each Exchange
Title of Each Class on Which Registered
-----------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value per share New York Stock Exchange
8 7/8% Series A Voting Cumulative Preferred Stock, $.01 par value per share New York Stock Exchange
10 1/2% Convertible Subordinated Debentures due 2002 New York Stock Exchange
6.55% Convertible Subordinated Debentures due 2002 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
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 shares of Common Stock and Preferred
Stock (based upon the closing prices of these shares on the New York Stock
Exchange, Inc. on March 15, 2001) of the Registrant held by non-affiliates on
March 15, 2001, were approximately $857,090,954 and $63,810,000, respectively.
As of March 15, 2001, 40,547,885 shares of the Registrant's Common
Stock and 3,000,000 shares of the Registrant's Preferred Stock were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Documents incorporated by reference and the part of Form 10-K into
which the document is incorporated:
Portions of the Registrant's 2000 Annual Report to Shareholders are
incorporated into Part II of this Report.
Portions of the Registrant's definitive Proxy Statement relating to the
Annual Meeting of Shareholders to be held on May 15, 2001 are incorporated into
Part III of this Report.
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TABLE OF CONTENTS
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Page
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Item 1. Business......................................................................................... 4
The Company...................................................................................... 4
Property Dispositions............................................................................ 6
Commitments...................................................................................... 6
Mortgage Portfolio............................................................................... 7
Competition...................................................................................... 7
Government Regulation............................................................................ 8
Environmental Matters............................................................................ 9
Insurance........................................................................................ 10
Employees........................................................................................ 10
Executive Officers of the Registrant............................................................. 10
Federal Income Tax Information................................................................... 11
ERISA Considerations............................................................................. 23
Cautionary Statements............................................................................ 25
Item 2. Properties....................................................................................... 29
Item 3. Legal Proceedings................................................................................ 29
Item 4. Submission of Matters to a Vote of Securityholders............................................... 29
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................ 29
Item 6. Selected Financial Data.......................................................................... 30
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 30
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....................................... 30
Item 8. Financial Statements and Supplementary Data...................................................... 30
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............. 31
Item 10. Directors and Executive Officers of the Registrant............................................... 32
Directors........................................................................................ 32
Executive Officers............................................................................... 32
Section 16(a) Compliance......................................................................... 32
Item 11. Executive Compensation........................................................................... 32
Item 12. Security Ownership of Certain Beneficial Owners and Management................................... 32
Item 13. Certain Relationships and Related Transactions................................................... 32
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................. 33
3
PART I
ITEM 1. BUSINESS
THE COMPANY
Healthcare Realty Trust Incorporated ("Healthcare Realty" or the
"Company") was incorporated in Maryland in 1993 and is a self-managed and
self-administered real estate investment trust ("REIT") that integrates owning,
acquiring, managing and developing income-producing real estate properties and
mortgages associated with the delivery of healthcare services throughout the
United States.
On October 15, 1998, Healthcare Realty completed its acquisition of
Capstone Capital Corporation, a Maryland corporation ("Capstone"), through the
merger of HR Acquisition I Corporation, a wholly owned subsidiary of the
Company, into Capstone. The acquisition is accounted for as a tax-free
reorganization for federal income tax purposes and as a purchase for financial
reporting purposes. In the transaction, the Company acquired 111 facilities with
investments of approximately $804.2 million. The Company also acquired $211.6
million in mortgage notes receivable, secured by mortgages on 45 assisted living
facilities, 25 senior nursing facilities and five other facility types.
The Company has investments of approximately $1.7 billion in 267
income-producing real estate properties and mortgages associated with the
delivery of healthcare services. As of December 31, 2000, the Company's real
estate portfolio, containing approximately 9.7 million square feet, was
comprised of nine facility types and was operated pursuant to contractual
arrangements with 46 healthcare providers. Also, the Company's mortgage
portfolio was comprised of four facility types and was operated by 24 healthcare
providers. At December 31, 2000, the Company provided property management
services for 263 healthcare-related properties nationwide, totaling over 87
million square feet, and third-party asset management services for 273
properties nationwide, totaling over 1.5 million square feet. The Company
intends to maintain a portfolio of properties that are focused predominantly on
the outpatient services and medical office segments of the healthcare industry
and are diversified by tenant, geographic location and facility type.
Healthcare Realty believes that it has a competitive advantage in the
healthcare real estate industry as a result of its use of innovative transaction
structures, the strength of its management expertise and its extensive
experience and client relationships with healthcare providers. Management
believes that the Company is the largest fully-integrated real estate company
focused on income-producing real estate properties related to the delivery of
healthcare services. The Company believes that its experience and client
relationships with a diverse group of healthcare providers make it one of a
limited number of companies that can acquire, manage and develop
income-producing real estate related to healthcare services on a national scale.
Unlike other healthcare REITs, the Company seeks to generate internal growth by
actively managing the properties within its portfolio and by controlling and
minimizing operating expenses with respect to its properties, and providing
management services for properties owned by healthcare provider clients.
Healthcare Realty's strategy is to be a full-service provider of
integrated real estate solutions to quality healthcare providers. Consistent
with this strategy, the Company seeks to provide a spectrum of services needed
to own, acquire, manage and develop healthcare properties, including:
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- leasing;
- development;
- management;
- market research;
- budgeting;
- accounting;
- collection;
- construction;
- management;
- tenant coordination; and
- financial services.
The Company's development activities are primarily accomplished through
pre-leased build-to-suit projects.
Healthcare Realty was formed as an independent, unaffiliated healthcare
REIT. The Company acquires income-producing real estate properties associated
with a diverse group of quality healthcare provider clients in markets where the
respective healthcare provider maintains a strong presence. Management believes
that the Company has a strategic advantage in providing its services to a more
diverse group of healthcare providers because the Company is not affiliated with
any of its clients and does not expect to be affiliated with potential clients.
Management believes that client diversification reduces the Company's
potential exposure to unsuccessful healthcare service strategies and to a
concentration of credit with any one healthcare provider. Approximately 64% of
the Company's real estate investments including mortgages, at cost, are in
properties associated with publicly-traded companies or private companies with
an investment-grade credit rating. The following table sets forth the Company's
five largest healthcare provider clients:
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Client Percent of Investments
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HealthSouth Corporation 18.0%
HCA - The Healthcare Company 14.0%
Tenet Healthcare Corporation 6.8%
Life Care Centers of America 5.6%
Senior Lifestyles 4.6%
Healthcare Realty focuses predominantly on outpatient healthcare
facilities, which are designed to provide medical services outside of
traditional inpatient hospital or nursing home settings. Management believes the
outpatient services segment of healthcare provides the most cost-effective
delivery setting and, because of increasing cost pressures, this segment of the
healthcare-related real estate market offers the greatest potential for future
growth. Company assets that are in categories outside of the Company's
outpatient healthcare facility focus, such as its senior living assets, are
under continuing management analysis with a view toward possible disposition
through cash, like-kind exchange or securities transactions.
The Company acquires existing healthcare facilities, provides property
management, leasing and build-to-suit development services, and capital for the
construction of build-to-suit developments for qualified healthcare operators.
The Company owns a diversified portfolio of healthcare properties, most of which
are subject to long-term leases or financial support arrangements to ensure the
continuity of revenues and coverage of costs and expenses relating to the
properties by the tenants and the related healthcare operators.
Development funding arrangements require the Company to provide funding
to enable healthcare operators to build facilities on property owned or leased
by the Company. Prior to making
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any funding advance for a development, the Company enters into a contract to
acquire or ground lease the real estate and enters into a long-term net lease
with a healthcare operator or guarantee of the return on the Company's
investment in the property or similar financial support agreement in favor of
the Company. In most development transactions, the Company either acts as
developer, or employs the healthcare operator to act as the developer of the
property, and has approval authority with regard to plans, specifications,
budgets and time schedules for the completion of the development of the
property. Under its customary development funding format, the Company receives
funding fees (the economic equivalent of construction period interest) on all
funds advanced. Timely completion of the development in compliance with the
plans, specifications, budgets and time schedules is the contractual
responsibility of third parties, and construction costs are guaranteed by the
healthcare operator or developer, or both. All construction and service
contracts relating to the development are collaterally assigned to the Company.
During the term of the development of a facility, funds are advanced pursuant to
requests made by the developer in accordance with the terms and conditions of
the applicable funding agreement based on costs incurred prior to the date of
such requests.
Approximately 98.3% of the Company's investments in properties consist
of properties currently leased to unaffiliated lessees pursuant to long-term net
lease agreements or subject to financial support agreements with the healthcare
operators that provide guarantees of the return on the Company's investment in
the properties. Most of the current property agreements were entered into upon
the conveyance to the Company of the facilities, and have initial terms of ten
to 20 years with, in some cases, one or more renewal terms exercisable by the
healthcare provider of five years each. Most of the agreements are subject to
earlier termination upon the occurrence of certain contingencies. Certain of the
agreements also have an option to repurchase the property at specified times
during the term of the agreements for a price approximately equal to the greater
of the fair market value of such property or the Company's investment in such
property. Base rent or support payments vary by agreement taking into
consideration various factors, including the credit of the property lessee, the
healthcare operator, and the operating performance, location, and physical
condition of the property. Many of the property agreements contain provisions
for additional rent or support payment increases. The existence and nature of
provisions for additional payments in any given agreement relate to, among other
factors, the financial strength of the respective property lessee, the
healthcare operator, or both, as well as other lease terms.
The Company operates so as to qualify as a REIT for federal income tax
purposes. If so qualified, with limited exceptions, the Company will not be
subject to corporate federal income tax with respect to net income distributed
to its shareholders. See "Federal Income Tax Information" below.
PROPERTY DISPOSITIONS
During the fourth quarter of 2000, the Company sold a 16,264 square
foot ancillary hospital facility in San Antonio, Texas and a 19,000 square foot
comprehensive ambulatory care center in Destin, Florida for net proceeds
totaling approximately $5.9 million. The Company recognized a net gain on these
sales of approximately $400,000.
COMMITMENTS
As of December 31, 2000, the Company had a net investment of
approximately $30.9 million in seven build-to-suit developments in progress,
which have a total remaining funding commitment of approximately $51.3 million.
Further, the Company has commitments to provide funding for the enhancement of
existing properties totaling $3.5 million at December 31, 2000.
As part of the Capstone merger, agreements were entered into with three
individuals affiliated with Capstone that restrict competitive practices and
which the Company believes will
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protect and enhance the value of the real estate properties acquired from
Capstone. These agreements provide for the issuance of 150,000 shares per year
of common stock of the Company to the individuals on October 15 of the years
1999, 2000, 2001, and 2002, provided all terms of the agreements are met. The
Company issued 150,000 shares during each of 2000 and 1999 pursuant to these
agreements.
MORTGAGE PORTFOLIO
Mortgage notes receivable, substantially all of which were acquired in
the Capstone merger, were recorded at their fair value at the date of
acquisition. Approximately 42.5% of the mortgage notes receivable are secured by
assisted living facilities and 35.4% are secured by skilled nursing facilities.
The 54 mortgages in the portfolio at December 31, 2000 represent 24 operators.
As of December 31, 2000, the weighted average maturity of the mortgage
portfolio was approximately 5.14 years, with maturity dates ranging from
February 2001 to October 2013. Interest rates ranged from 8.18% to 13.5% and are
generally adjustable each year to reflect increases in the Consumer Price Index.
Substantially all mortgages are subject to a prepayment penalty.
COMPETITION
The Company competes for property acquisitions with, among others:
- Investors;
- Healthcare providers;
- Other healthcare-related REITs;
- Real estate partnerships; and
- Financial institutions.
From 1992 until late 1998, the REIT industry was in an expansion mode,
and capital was readily available to REITs. By the end of 1998, however, market
valuations of REIT shares (including the Company's shares) had declined
substantially with the result that the Company presently has limited access to
capital from the equity market. The Company may not be able to obtain additional
equity or debt capital or dispose of assets at the time it requires additional
capital. Moreover, the Company may not be able to obtain capital on terms that
will enable it to acquire healthcare properties on a competitive basis.
The financial performance of all of the Company's properties is subject
to competition from similar properties. Certain operators of other properties
may have capital resources in excess of those of the operators of the Company's
properties. In addition, the extent to which the Company's properties are
utilized depends upon several factors, including the number of physicians using
the healthcare facilities or referring patients there, competitive systems of
healthcare delivery, and the area population, size and composition. Private,
federal and state payment programs and other laws and regulations may also have
a significant effect on the utilization of the properties. Virtually all of the
Company's properties operate in a competitive environment, and patients and
referral sources, including physicians, may change their preferences for a
healthcare facility from time to time.
The business of providing services relating to the day-to-day
management and leasing of multi-tenanted healthcare properties and to the
supervision of the development of new healthcare facilities is highly
competitive and is subject to price, personnel cost and other competitive
pressures upon its profitability. The Company will compete for management
contracts and development agreements with respect to properties owned or to be
developed by the Company, as well as with respect to properties that are owned
by third parties.
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GOVERNMENT REGULATION
The investments made by the Company are with active participants in the
healthcare industry. The healthcare industry is undergoing substantial changes
due to rising costs in the delivery of healthcare services, rising competition
for patients, and reduction of reimbursement by private and governmental payors.
Further, the healthcare industry is faced with increased scrutiny by federal and
state legislative and administrative authorities, thus presenting the industry
and its individual participants with significant uncertainty. The Company
believes that these changes and uncertainties present significant opportunities
for the Company to assist in providing solutions to some of these pressures;
however, these various changes can affect the economic performance of some or
all of its tenants and clients. The Company cannot predict the degree to which
these changes may affect the economic performance of the Company, positively or
negatively.
The facilities leased by the Company and the manner in which they are
operated are affected by changes in the reimbursement, licensing and
certification policies of federal, state and local governments. Facilities may
also be affected by changes in accreditation standards or procedures of
accrediting agencies that are recognized by governments in the certification
process. In addition, expansion (including the addition of new beds or services
or acquisition of medical equipment) and occasionally the discontinuation of
services of healthcare facilities are, in some states, subjected to state
regulatory approval through certificate of need programs.
The provisions of the Social Security Act addressing illegal
remuneration (the "Anti-Kickback Statute") prohibit providers and others from,
among other things, soliciting, receiving, offering or paying, directly or
indirectly, any remuneration in return for either making a referral for a
service or item covered by a federal healthcare program or ordering or arranging
for or recommending the order of any covered service or item. Violations of this
statute may be punished by a fine of up to $50,000 or imprisonment for each
violation and damages up to three times the total amount of remuneration.
The Stark Law prohibits a practitioner (including a physician, dentist,
or podiatrist) from making referrals for certain designated health services paid
in whole or in part by Medicare and Medicaid to entities with which the
practitioner has a financial relationship. The Stark Law also prohibits the
entity receiving the referral from seeking payment under the Medicare and
Medicaid programs for services rendered pursuant to a prohibited referral. If an
entity is paid for services rendered pursuant to a prohibited referral, it may
incur civil penalties of up to $15,000 per prohibited claim and may be excluded
from participating in Medicare and Medicaid.
Although the Company is not a healthcare provider or in a position to
influence the referral of patients or ordering of services reimbursable by the
federal government, its leases and subleases must be negotiated at arm's length
for fair market value rental rates. To the extent that a healthcare facility
leases space from the Company and, in turn, subleases space to physicians or
other referral sources, at less than fair market rental rate, the Anti-kickback
Statute and the Stark Law could be implicated. The Company's leases require the
lessees to covenant that they will comply with all applicable laws.
A significant portion of the revenue of healthcare operators is derived
from government reimbursement programs, such as Medicare and Medicaid. Although
lease payments to the Company are not directly affected by the level of
government reimbursement, to the extent that changes in these programs adversely
affect healthcare operators, such changes could have an impact on their ability
to make lease payments to the Company. The Medicare program is highly regulated
and subject to frequent and substantial changes. In recent years, fundamental
changes in the Medicare program (including the implementation of a prospective
payment system in which facilities are reimbursed generally a flat amount based
on a patient's diagnosis and not based on the facilities'
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cost for services) have resulted in reduced levels of payment for a substantial
portion of healthcare services.
Considerable uncertainties surround the future determination of payment
levels under government reimbursement programs. In addition, governmental
budgetary concerns may significantly reduce future payments made to healthcare
operators. It is possible that future payment rates will not be sufficient to
cover cost increases in providing services to patients. Reductions in payments
pursuant to government healthcare programs could have an adverse impact on a
healthcare operator's financial condition and, therefore, could adversely affect
the ability of such operator to make rental payments.
Loss by a facility of its ability to participate in government
sponsored programs because of licensing, certification or accreditation
deficiencies or because of program exclusion resulting from violations of law
would have material adverse effects on facility revenues.
Legislative Developments
Each year, legislative proposals are introduced or proposed in Congress
and in some state legislatures that would effect major changes in the healthcare
system, either nationally or at the state level. Among the proposals under
consideration are cost controls on hospitals, insurance market reforms to
increase the availability of group health insurance to small businesses,
requirements that all businesses offer health insurance coverage to their
employees and the creation of a single government health insurance plan that
would cover all citizens. There can be no assurance whether any proposals will
be adopted or, if adopted, what effect, if any, such proposals would have on the
Company's business.
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws, ordinances
and regulations, an owner of real property (such as the Company) may be liable
for the costs of removal or remediation of certain hazardous or toxic substances
at, under or disposed of in connection with such property, as well as certain
other potential costs relating to hazardous or toxic substances (including
government fines and injuries to persons and adjacent property). Most, if not
all, of these laws, ordinances and regulations contain stringent enforcement
provisions including, but not limited to, the authority to impose substantial
administrative, civil and criminal fines and penalties upon violators. Such laws
often impose liability without regard to whether the owner knew of, or was
responsible for, the presence or disposal of such substances and may be imposed
on the owner in connection with the activities of an operator of the property.
The cost of any required remediation, removal, fines or personal or property
damages and the owner's liability therefore could exceed the value of the
property and/or the aggregate assets of the owner. In addition, the presence of
such substances, or the failure to properly dispose of or remediate such
substances, may adversely affect the owner's ability to sell or lease such
property or to borrow using such property as collateral.
A property can also be negatively impacted either through physical
contamination or by virtue of an adverse effect on value, from contamination
that has or may have emanated from other properties. Certain of the properties
owned by the Company or managed or developed by its property management
subsidiary are adjacent to or near properties that contain underground storage
tanks or that have released petroleum products or other hazardous or toxic
materials into the soils or groundwater.
Operations of the properties owned, developed or managed by the Company
are and will continue to be subject to numerous federal, state, and local
environmental laws, ordinances and regulations, including those relating to the
following: the generation, segregation, handling, packaging and disposal of
medical wastes; air quality requirements related to operations of
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generators, incineration devices, or sterilization equipment; facility siting
and construction; disposal of non-medical wastes and ash from incinerators; and
underground storage tanks. Certain properties owned, developed or managed by the
Company contain, and others may contain or at one time may have contained,
underground storage tanks that are or were used to store waste oils, petroleum
products or other hazardous substances. Such underground storage tanks can be
the source of releases of hazardous or toxic materials. Operations of nuclear
medicine departments at some properties also involve the use and handling, and
subsequent disposal of, radioactive isotopes and similar materials, activities
which are closely regulated by the Nuclear Regulatory Commission and state
regulatory agencies. In addition, several of the properties were built during
the period asbestos was commonly used in building construction and other such
facilities may be acquired by the Company in the future. Certain of the
properties contain friable asbestos-containing materials, and other facilities
acquired in the future may contain friable and non-friable asbestos-containing
materials. The presence of such materials could result in significant costs in
the event that any friable asbestos-containing materials requiring immediate
removal and/or encapsulation are located in or on any facilities or in the event
of any future renovation activities.
The Company has had limited environmental site assessments conducted on
substantially all of the properties currently owned. These site assessments are
limited in scope and provide only an evaluation of potential environmental
conditions associated with the property, not compliance assessments of ongoing
operations. The Company is not aware of any environmental condition or liability
that management believes would have a material adverse effect on the Company's
earnings, expenditures or continuing operations. While it is the Company's
policy to seek indemnification relating to environmental liabilities or
conditions, even where sale and purchase agreements do contain such provisions
there can be no assurances that the seller will be able to fulfill its
indemnification obligations. In addition, the terms of the Company's leases or
financial support agreements do not give the Company control over the
operational activities of its lessees or health care operators, nor will the
Company monitor the lessees or healthcare operators with respect to
environmental matters.
INSURANCE
The Company maintains appropriate liability and casualty insurance on
its assets and operations. The Company has also obtained title insurance with
respect to each of the properties it owns in amounts equal to their respective
purchase prices, insuring that the Company holds title to each of the properties
free and clear of all liens and encumbrances except those approved by the
Company. Under their leases or financial support agreements, the healthcare
operators are required to maintain, at their expense, certain insurance
coverages relating to their operations at the leased facilities. In the opinion
of management of the Company, each of the properties owned by the Company is
adequately covered by hazard, liability and rent insurance.
EMPLOYEES
As of March 15, 2001, the Company employed 186 people. None of the
employees is a member of a labor union, and the Company considers its relations
with its employees to be excellent.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are:
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Name Age Position
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David R. Emery.................................. 56 Chairman of the Board, Chief Executive Officer
& President
Timothy G. Wallace.............................. 42 Executive Vice President & Chief Financial
Officer
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Roger O. West................................... 56 Executive Vice President & General Counsel
Mr. Emery formed the Company and has held his current positions since
May 1992. Prior to 1992, Mr. Emery was engaged in the development and management
of commercial real estate in Nashville, Tennessee. Mr. Emery has been active in
the real estate industry for 30 years.
Mr. Wallace has held executive positions with the Company since January
1993. Prior to joining the Company, he was a Senior Manager with responsibility
for healthcare and real estate in the Nashville, Tennessee office of Ernst &
Young LLP from June 1989 to January 1993.
Mr. West has held executive positions with the Company since May 1994.
Prior to joining the Company, he was a senior partner in the law firm of Geary,
Porter and West, P.C. in Dallas, Texas from July 1992 to May 1994. Mr. West has
extensive experience in the areas of corporate, tax and real estate law.
FEDERAL INCOME TAX INFORMATION
The Company is and intends to remain qualified as a REIT under the
Internal Revenue Code of 1986, as amended (the "Code"). As a REIT, the Company's
net income which is distributed as dividends to shareholders will be exempt from
federal taxation. Distributions to the Company's shareholders generally will be
includable in their income; however, dividends distributed which are in excess
of current and/or accumulated earnings and profits will be treated for tax
purposes as a return of capital to the extent of a shareholder's basis and will
reduce the basis of shareholders' shares.
Introduction
The Company is qualified and intends to remain qualified as a REIT for
federal income tax purposes under Sections 856 through 860 of the Code. The
following discussion addresses the material tax considerations relevant to the
taxation of the Company and summarizes certain federal income tax consequences
that may be relevant to certain shareholders. However, the actual tax
consequences of holding particular securities issued by the Company may vary in
light of a prospective securities holder's particular facts and circumstances.
Certain holders, such as tax-exempt entities, insurance companies and financial
institutions, are generally subject to special rules. In addition, the following
discussion does not address issues under any foreign, state or local tax laws.
The tax treatment of a holder of any of the securities issued by the Company
will vary depending upon the terms of the specific securities acquired by such
holder, as well as his particular situation, and this discussion does not
attempt to address aspects of federal income taxation relating to holders of
particular securities of the Company. This summary is qualified in its entirety
by the applicable Code provisions, rules and regulations promulgated thereunder,
and administrative and judicial interpretations thereof. The Code, rules,
regulations, and administrative and judicial interpretations are all subject to
change (possibly on a retroactive basis).
The Company is organized and is operating in conformity with the
requirements for qualification and taxation as a REIT and intends to continue
operating so as to enable it to continue to meet the requirements for
qualification and taxation as a REIT under the Code. The Company's qualification
and taxation as a REIT depend upon its ability to meet, through actual annual
operating results, the various income, asset, distribution, stock ownership and
other tests discussed below. Accordingly, the Company cannot guarantee that the
actual results of operations for any one taxable year will satisfy such
requirements.
If the Company were to cease to qualify as a REIT, and the relief
provisions were found not to apply, the Company's income that it distributed to
shareholders would be subject to the "double
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taxation" on earnings (once at the corporate level and again at the shareholder
level) that generally results from investment in a corporation. Failure to
maintain qualification as a REIT would force the Company to significantly reduce
its distributions and possibly incur substantial indebtedness or liquidate
substantial investments in order to pay the resulting corporate taxes. In
addition, the Company, once having obtained REIT status and having thereafter
lost such status, would not be eligible to reelect REIT status for the four
subsequent taxable years, unless its failure to maintain its qualification was
due to reasonable cause and not willful neglect and certain other requirements
were satisfied. In order to elect again to be taxed as a REIT, just as with its
original election, the Company would be required to distribute all of its
earnings and profits accumulated in any non-REIT taxable year.
Taxation of the Company
As long as the Company remains qualified to be taxed as a REIT, it
generally will not be subject to federal income taxes on that portion of its
ordinary income or capital gain that is currently distributed to shareholders.
However, the Company will be subject to federal income tax as follows:
- The Company will be taxed at regular corporate rates on any
undistributed "real estate investment trust taxable income,"
including undistributed net capital gains.
- Under certain circumstances, the Company may be subject to the
"alternative minimum tax" on its items of tax preference, if
any.
- If the Company has (i) 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
(ii) other nonqualifying income from foreclosure property, it
will be subject to tax on such income at the highest corporate
rate.
- Any net income that the Company has from prohibited
transactions (which are, in general, certain sales or other
dispositions of property other than foreclosure property held
primarily for sale to customers in the ordinary course of
business) will be subject to a 100% tax.
- If the Company should fail to satisfy either the 75% or 95%
gross income test (as discussed below), and has nonetheless
maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax
on the net income attributable to the greater of the amount by
which the Company fails the 75% or 95% gross income test.
- If the Company fails to distribute during each year at least
the sum of (i) 85% of its REIT ordinary income for such year,
(ii) 95% of its REIT capital gain net income for such year,
and (iii) any undistributed taxable income from preceding
periods, then the Company will be subject to a four percent
excise tax on the excess of such required distribution over
the amounts actually distributed.
- To the extent that the Company recognizes gain from the
disposition of an asset with respect to which there existed
"built-in gain" upon its acquisition by the Company from a C
corporation in a carry-over basis transaction and such
disposition occurs within a ten-year recognition period
beginning on the date on which it was acquired by the Company,
the Company will be subject to federal income tax at the
highest regular corporate rate on the amount of its "net
recognized built-in gain."
12
- To the extent that the Company has net income from a taxable
REIT subsidiary ("TRS"), the TRS will be subject to federal
corporate income tax in much the same manner as other non-REIT
C corporations, with the exceptions that the deductions for
debt and rental payments made by the TRS to the Company will
be limited and a 100% excise tax may be imposed on
transactions between the TRS and the Company or its tenants
that are not conducted on an arm's length basis. A TRS is a
corporation in which a REIT owns stock, directly or
indirectly, and for which both the REIT and the corporation
have made TRS elections.
Requirements for Qualification as a REIT
To qualify as a REIT for a taxable year under the Code, the Company
must have no earnings and profits accumulated in any non-REIT year. The Company
also must elect or have in effect an election to be taxed as a REIT and must
meet other requirements, some of which are summarized below, including
percentage tests relating to the sources of its gross income, the nature of the
Company's assets and the distribution of its income to shareholders. Such
election, if properly made and assuming continuing compliance with the
qualification tests described herein, will continue in effect for subsequent
years.
Organizational Requirements and Share Ownership Tests
Section 856(a) of the Code defines a REIT as a corporation, trust or
association:
(1) which is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable
shares or by transferable certificates of beneficial interest;
(3) which would be taxable, but for Sections 856 through 860 of
the Code, as a domestic corporation;
(4) which is neither a financial institution nor an insurance
company subject to certain provisions of the Code;
(5) the beneficial ownership of which is held by 100 or more
persons, determined without reference to any rules of
attribution (the "share ownership test");
(6) that during the last half of each taxable year not more than
50% in value of the outstanding stock of which is owned,
directly or indirectly, by five or fewer individuals (as
defined in the Code to include certain entities) (the "five or
fewer test"); and
(7) which meets certain other tests, described below, regarding
the nature of its income and assets.
Section 856(b) of the Code provides that conditions (1) through (4),
inclusive, must be met during the entire taxable year and that condition (5)
must be met during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of fewer than 12 months. The "five or fewer
test" and the share ownership test do not apply to the first taxable year for
which an election is made to be treated as a REIT.
The Company has issued sufficient shares to a sufficient number of
people to allow it to satisfy the share ownership test and the five or fewer
test. In addition, to assist in complying with the five or fewer test, the
Company's Articles of Incorporation contain provisions restricting share
13
transfers where the transferee (other than specified individuals involved in the
formation of the Company, members of their families and certain affiliates, and
certain other exceptions) would, after such transfer, own (a) more than 9.9%
either in number or value of the outstanding common stock of the Company or (b)
more than 9.9% either in number or value of the outstanding preferred stock of
the Company. Pension plans and certain other tax-exempt entities have different
restrictions on ownership. If, despite this prohibition, stock is acquired
increasing a transferee's ownership to over 9.9% in value of either the
outstanding common stock of the Company or preferred stock of the Company, the
stock in excess of this 9.9% in value is deemed to be held in trust for transfer
at a price which does not exceed what the purported transferee paid for the
stock and, while held in trust, the stock is not entitled to receive dividends
or to vote. In addition, under these circumstances, the Company also has the
right to redeem such stock.
For purposes of determining whether the "five or fewer test" (but not
the "share ownership test") is met, any stock held by a qualified trust
(generally, pension plans, profit-sharing plans and other employee retirement
trusts) is, generally, treated as held directly by the trust's beneficiaries in
proportion to their actuarial interests in the trust, and not as held by the
trust.
Income Tests
In order to maintain qualification as a REIT, two gross income
requirements must be satisfied annually.
- First, at least 75% of the Company's gross income (excluding
gross income from certain sales of property held primarily for
sale) must be derived directly or indirectly from investments
relating to real property (including "rents from real
property") or mortgages on real property. When the Company
receives new capital in exchange for its shares (other than
dividend reinvestment amounts) or in a public offering of debt
instruments with maturities of five years or longer, income
attributable to the temporary investment of such new capital,
if received or accrued within one year of the Company's
receipt of the new capital, is qualifying income under the 75%
test.
- Second, at least 95% of the Company's gross income (excluding
gross income from certain sales of property held primarily for
sale) must be derived from such real property investments,
dividends, interest, certain payments under interest rate swap
or cap agreements, and gain from the sale or other disposition
of stock, securities not held for sale in the ordinary course
of business or from any combination of the foregoing.
The Company may temporarily invest its working capital in short-term
investments. Although the Company will use its best efforts to ensure that its
income generated by these investments will be of a type which satisfies the 75%
and 95% gross income tests, there can be no assurance in this regard (see the
discussion above of the "new capital" rule under the 75% gross income test). The
Company has analyzed its gross income through December 31, 2000 and has
determined that it has met the 75% and 95% gross income tests.
In order to qualify as "rents from real property," the amount of rent
received must not be based on the income or profits of any person, but may be
based on a fixed percentage or percentages of receipts or sales. The Code also
provides that the rents will not qualify as "rents from real property," in
satisfying the gross income tests, if the REIT owns ten percent or more of the
tenant, whether directly or under certain attribution rules. The Company leases
and intends to lease property only under circumstances such that substantially
all, if not all, rents from such property qualify as "rents from real property."
Although it is possible that a tenant could sublease space to a sublessee in
which the Company is deemed to own directly or indirectly ten percent or more of
the tenant, the Company believes that as a result of the provisions of the
Company's Articles of Incorporation that limit ownership to 9.9%, such
occurrence would be unlikely. Application of the ten
14
percent ownership rule is, however, dependent upon complex attribution rules
provided in the Code and circumstances beyond the control of the Company.
Ownership, directly or by attribution, by an unaffiliated third party of more
than ten percent of the Company's stock and more than ten percent of the stock
of any tenant or subtenant would result in a violation of the rule.
In order to qualify as "interest on obligations secured by mortgages on
real property," the amount of interest received must not be based on the income
or profits of any person, but may be based on a fixed percentage or percentages
of receipts or sales.
In addition, the Company must not manage its properties or furnish or
render services to the tenants of its properties, except through an independent
contractor from whom the Company derives no income unless (i) the Company is
performing services which are usually or customarily furnished or rendered in
connection with the rental of space for occupancy only and the services are of
the sort that a tax-exempt organization could perform without being considered
in receipt of unrelated business taxable income or (ii) the income earned by the
Company for other services furnished or rendered by the Company to tenants of a
property or for the management or operation of the property does not exceed a de
minimis threshold generally equal to 1% of the income from such property. The
Company self-manages some of its properties, but does not believe it provides
services to tenants which are outside the exception.
If rent attributable to personal property leased in connection with a
lease of real property is greater than 15% of the total rent received under the
lease, then the portion of rent attributable to such personal property will not
qualify as "rents from real property." Generally, this 15% test is applied
separately to each lease. The portion of rental income treated as attributable
to personal property is determined according to the ratio of the fair market
value of the personal property to the total fair market value of the property
which is rented. The determination of what fixtures and other property
constitute personal property for federal tax purposes is difficult and
imprecise. The Company does not have 15% by value of any of its properties
classified as personal property. If, however, rent payments do not qualify, for
reasons discussed above, as rents from real property for purposes of Section 856
of the Code, it will be more difficult for the Company to meet the 95% and 75%
gross income tests and continue to qualify as a REIT.
The Company is and expects to continue performing third-party
management and development services. If the gross income to the Company from
this or any other activity producing disqualified income for purposes of the 95%
or 75% gross tests approaches a level that could potentially cause the Company
to fail to satisfy these tests, the Company intends to take such corrective
action as may be necessary to avoid failing to satisfy the 95% or 75% gross
income tests.
If the Company were to fail to satisfy one or both of the 75% or 95%
gross income tests for any taxable year, it may nevertheless qualify as a REIT
for such year if it is entitled to relief under certain provisions of the Code.
These relief provisions would generally be available if the Company's failure to
meet such test or tests was due to reasonable cause and not to willful neglect,
if the Company attaches a schedule of the sources of its income to its return,
and if any incorrect information on the schedule was not due to fraud with
intent to evade tax. It is not possible, however, to know whether the Company
would be entitled to the benefit of these relief provisions since the
application of the relief provisions is dependent on future facts and
circumstances. If these provisions were to apply, the Company would be subjected
to tax equal to 100% of the net income attributable to the greater of the amount
by which the Company failed either the 75% or the 95% gross income test.
15
Asset Tests
At the close of each quarter of its taxable year, the Company must also
satisfy four tests relating to the nature of its assets.
- At least 75% of the value of the Company's total assets must
consist of real estate assets (including interests in real
property and interests in mortgages on real property as well
as its allocable share of real estate assets held by joint
ventures or partnerships in which the Company participates),
cash, cash items and government securities.
- Not more than 25% of the Company's total assets may be
represented by securities other than those includable in the
75% asset class.
- Not more than 20% of the Company's total assets may be
represented by securities of affiliated taxable REIT
subsidiaries.
- Of the investments included in the 25% asset class, except for
TRS, the value of any one issuer's securities owned by the
Company may not exceed five percent of the value of the
Company's total assets, and the Company may not own more than
ten percent of any one issuer's outstanding voting securities.
Securities issued by affiliated qualified REIT subsidiaries
("QRS"), which are corporations wholly owned by the Company,
either directly or indirectly, that are not TRS, are not
subject to the 25% of total assets limit, the five percent of
total assets limit or the ten percent of a single issuer's
voting securities limit. The existence of QRS are ignored and
the QRS' assets, income, gain, loss and other attributes are
treated as being owned or generated by the Company for federal
income tax purposes. The Company currently has 46 subsidiaries
and other affiliates which it employs in the conduct of its
business.
If the Company meets the 25% requirement at the close of any quarter,
it will not lose its status as a REIT because of a change in value of its assets
unless the discrepancy exists immediately after the acquisition of any security
or other property which is wholly or partly the result of an acquisition during
such quarter. Where a failure to satisfy the 25% asset test results from an
acquisition of securities or other property during a quarter, the failure can be
cured by disposition of sufficient nonqualifying assets within 30 days after the
close of such quarter. The Company maintains adequate records of the value of
its assets to maintain compliance with the 25% asset test and to take such
action as may be required to cure any failure to satisfy the test within 30 days
after the close of any quarter.
In order to qualify as a REIT, the Company is required to distribute
dividends (other than capital gain dividends) to its shareholders in an amount
equal to or greater than the excess of (A) the sum of (i) 90% of the Company's
"real estate investment trust taxable income" (computed without regard to the
dividends paid deduction and the Company's net capital gain) and (ii) 90% of the
net income, if any, (after tax) from foreclosure property, over (B) the sum of
certain non-cash income (from certain imputed rental income and income from
transactions inadvertently failing to qualify as like-kind exchanges). These
requirements may be waived by the Internal Revenue Service ("IRS") if the
Company establishes that it failed to meet them by reason of distributions
previously made to meet the requirements of the four percent excise tax
described below. To the extent that the Company does not distribute all of its
net long-term capital gain and all of its "real estate investment trust taxable
income," it will be subject to tax thereon. In addition, the Company will be
subject to a four percent excise tax to the extent it fails within a calendar
year to make "required distributions" to its shareholders of 85% of its ordinary
income and 95% of its capital gain net income plus the excess, if any, of the
"grossed up required distribution" for the preceding calendar year over the
amount treated as distributed for such preceding calendar year. For this
purpose, the term "grossed up required distribution" for any calendar year is
the sum of the taxable income of the Company for
16
the taxable year (without regard to the deduction for dividends paid) and all
amounts from earlier years that are not treated as having been distributed under
the provision. Dividends declared in the last quarter of the year and paid
during the following January will be treated as having been paid and received on
December 31 of such earlier year. The Company's distributions for 2000 were
adequate to satisfy its distribution requirement.
It is possible that the Company, from time to time, may have
insufficient cash or other liquid assets to meet the 90% distribution
requirement due to timing differences between the actual receipt of income and
the actual payment of deductible expenses or dividends on the one hand and the
inclusion of such income and deduction of such expenses or dividends in arriving
at "real estate investment trust taxable income" on the other hand. The problem
of not having adequate cash to make required distributions could also occur as a
result of the repayment in cash of principal amounts due on the Company's
outstanding debt, particularly in the case of "balloon" repayments or as a
result of capital losses on short-term investments of working capital.
Therefore, the Company might find it necessary to arrange for short-term, or
possibly long-term, borrowing or new equity financing. If the Company were
unable to arrange such borrowing or financing as might be necessary to provide
funds for required distributions, its REIT status could be jeopardized.
Under certain circumstances, the Company may be able to rectify a
failure to meet the distribution requirement for a year by paying "deficiency
dividends" to shareholders in a later year, which may be included in the
Company's deduction for dividends paid for the earlier year. The Company may be
able to avoid being taxed on amounts distributed as deficiency dividends;
however, the Company may in certain circumstances remain liable for the four
percent excise tax described above.
The Company is also required to request annually (within 30 days after
the close of its taxable year) from record holders of specified percentages of
its shares written information regarding the ownership of such shares. A list of
shareholders failing to fully comply with the demand for the written statements
is required to be maintained as part of the Company's records required under the
Code. Rather than responding to the Company, the Code allows the shareholder to
submit such statement to the IRS with the shareholder's tax return.
Nonqualified REIT Subsidiaries
The Company has participated in the organization of certain
corporations affiliated with the Company that are not qualified REIT
subsidiaries ("Specified Affiliates") to enhance its management flexibility. Tax
law in effect through the year 2000 restricted the ability of REITs to engage in
certain activities, such as certain third party management activities, but these
did not apply to the activities of a company that is not a REIT, such as these
Specified Affiliates, whose income was subject to federal income tax.
In order to permit the Company to participate in the income of its
third party management business and maintain its status as a REIT, portions of
the Company's business were conducted by the Specified Affiliates. The Company
owns approximately 1% of the voting common stock, and senior executives of the
Company own 99% of the voting common stock of the Specified Affiliates. The
voting common stock held by the senior executives of the Company in the
Specified Affiliates is subject to agreements that are designed to ensure that
such stock will be held by officers of the Company.
17
Effective January 1, 2001, the Specified Affiliates became taxable REIT
subsidiaries by election of the Company and the Specified Affiliates.
Federal Income Tax Treatment of Leases
The availability to the Company of, among other things, depreciation
deductions with respect to the facilities owned and leased by the Company
depends upon the treatment of the Company as the owner of the facilities and the
classification of the leases of the facilities as true leases, rather than as
sales or financing arrangements, for federal income tax purposes. The Company
has not requested nor has it received an opinion that it will be treated as the
owner of the portion of the facilities constituting real property and that the
leases will be treated as true leases of such real property for federal income
tax purposes.
Other Issues
With respect to property acquired from and leased back to the same or
an affiliated party, the IRS could assert that the Company realized prepaid
rental income in the year of purchase to the extent that the value of the leased
property exceeds the purchase price paid by the Company for that property. In
litigated cases involving sale-leasebacks which have considered this issue,
courts have concluded that buyers have realized prepaid rent where both parties
acknowledged that the purported purchase price for the property was
substantially less than fair market value and the purported rents were
substantially less than the fair market rentals. Because of the lack of clear
precedent and the inherently factual nature of the inquiry, the Company cannot
give complete assurance that the IRS could not successfully assert the existence
of prepaid rental income in such circumstances. The value of property and the
fair market rent for properties involved in sale-leasebacks are inherently
factual matters and always subject to challenge.
Additionally, it should be noted that Section 467 of the Code
(concerning leases with increasing rents) may apply to those leases of the
Company which provide for rents that increase from one period to the next.
Section 467 provides that in the case of a so-called "disqualified leaseback
agreement," rental income must be accrued at a constant rate. If such constant
rent accrual is required, the Company would recognize rental income in excess of
cash rents and, as a result, may fail to have adequate funds available to meet
the 90% dividend distribution requirement. "Disqualified leaseback agreements"
include leaseback transactions where a principal purpose of providing increasing
rent under the agreement is the avoidance of federal income tax. Since the
Section 467 regulations provide that rents will not be treated as increasing for
tax avoidance purposes where the increases are based upon a fixed percentage of
lessee receipts, additional rent provisions of leases containing such clauses
should not result in these leases being disqualified leaseback agreements. In
addition, the Section 467 regulations provide that leases providing for
fluctuations in rents by no more than a reasonable percentage, 15% for long-term
real property leases, from the average rent payable over the term of the lease
will be deemed to not be motivated by tax avoidance. The Company does not
believe it has rent subject to the disqualified leaseback provisions of Section
467.
Subject to a safe harbor exception for annual sales of up to seven
properties (or properties with a basis of up to 10% of the REIT's assets) that
have been held for at least four years, gain from sales of property held for
sale to customers in the ordinary course of business is subject to a 100% tax.
The simultaneous exercise of options to acquire leased property that may be
granted to certain tenants or other events could result in sales of properties
by the Company that exceed this safe harbor. However, the Company believes that
in such event, it will not have held such properties for sale to customers in
the ordinary course of business.
18
Depreciation of Properties
For tax purposes, the Company's real property is being depreciated over
31.5, 39 or 40 years using the straight-line method of depreciation and its
personal property over various periods utilizing accelerated and straight-line
methods of depreciation.
Failure to Qualify as a REIT
If the Company were to fail to qualify for federal income tax purposes
as a REIT in any taxable year, and the relief provisions were found not to
apply, the Company would be subject to tax on its taxable income at regular
corporate rates (plus any applicable alternative minimum tax). Distributions to
shareholders in any year in which the Company failed to qualify would not be
deductible by the Company nor would they be required to be made. In such event,
to the extent of current and/or accumulated earnings and profits, all
distributions to shareholders would be taxable as ordinary income and, subject
to certain limitations in the Code, eligible for the 70% dividends received
deduction for corporate shareholders. Unless entitled to relief under specific
statutory provisions, the Company would also be disqualified from taxation as a
REIT for the following four taxable years. It is not possible to state whether
in all circumstances the Company would be entitled to statutory relief from such
disqualification. Failure to qualify for even one year could result in the
Company's incurring substantial indebtedness (to the extent borrowings were
feasible) or liquidating substantial investments in order to pay the resulting
taxes.
Taxation of Tax-Exempt Shareholders
The IRS has issued a revenue ruling in which it held that amounts
distributed by a REIT to a tax-exempt employees' pension trust do not constitute
"unrelated business taxable income," even though the REIT may have financed
certain of its activities with acquisition indebtedness. Although revenue
rulings are interpretive in nature and are subject to revocation or modification
by the IRS, based upon the revenue ruling and the analysis therein,
distributions made by the Company to a U.S. shareholder that is a tax-exempt
entity (such as an individual retirement account ("IRA") or a 401(k) plan)
should not constitute unrelated business taxable income unless such tax-exempt
U.S. shareholder has financed the acquisition of its shares with "acquisition
indebtedness" within the meaning of the Code, or the shares are otherwise used
in an unrelated trade or business conducted by such U.S. shareholder.
Special rules apply to certain tax-exempt pension funds (including
401(k) plans but excluding IRAs or government pension plans) that own more than
10% (measured by value) of a "pension-held REIT" at any time during a taxable
year beginning after December 31, 1993. Such a pension fund may be required to
treat a certain percentage of all dividends received from the REIT during the
year as unrelated business taxable income. The percentage is equal to the ratio
of the REIT's gross income (less direct expenses related thereto) derived from
the conduct of unrelated trades or businesses determined as if the REIT were a
tax-exempt pension fund, to the REIT's gross income (less direct expenses
related thereto) from all sources. The special rules will not apply to require a
pension fund to recharacterize a portion of its dividends as unrelated business
taxable income unless the percentage computed is at least 5%.
A REIT will be treated as a "pension-held REIT" if the REIT is
predominantly held by tax-exempt pension funds and if the REIT would otherwise
fail to satisfy the "five or fewer test" discussed above, if the stock or
beneficial interests of the REIT held by such tax-exempt pension funds were not
treated as held directly by their respective beneficiaries. A REIT is
predominantly held by tax-exempt pension funds if at least one tax-exempt
pension fund holds more than 25% (measured by value) of the REIT's stock or
beneficial interests, or if one or more tax-exempt pension funds (each of which
owns more than 10% (measured by value) of the REIT's stock or beneficial
interests) own in the aggregate more than 50% (measured by value) of the REIT's
stock or beneficial
19
interests. The Company believes that it will not be treated as a pension-held
REIT. However, because the shares of the Company will be publicly traded, no
assurance can be given that the Company is not or will not become a pension-held
REIT.
Taxation of Non-U.S. Shareholders
The rules governing United States federal income taxation of any person
other than (i) a citizen or resident of the United States, (ii) a corporation or
partnership created in the United States or under the laws of the United States
or of any state thereof, (iii) an estate whose income is includable in income
for U.S. federal income tax purposes regardless of its source or (iv) 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 fiduciaries have
the authority to control all substantial decisions of the trust ("Non-U.S.
Shareholders") are highly complex, and the following discussion is intended only
as a summary of such rules. Prospective Non-U.S. Shareholders should consult
with their own tax advisors to determine the impact of United States federal,
state, and local income tax laws on investment in stock of the Company,
including any reporting requirements.
In general, Non-U.S. Shareholders are subject to regular United States
income tax with respect to their investment in stock of the Company in the same
manner as a U.S. shareholder if such investment is "effectively connected" with
the Non-U.S. Shareholder's conduct of a trade or business in the United States.
A corporate Non-U.S. Shareholder that receives income with respect to its
investment in stock of the Company that is (or is treated as) effectively
connected with the conduct of a trade or business in the United States also may
be subject to the 30% branch profits tax imposed by the Code, which is payable
in addition to regular United States corporate income tax. The following
discussion addresses only the United States taxation of Non-U.S. Shareholders
whose investment in stock of the Company is not effectively connected with the
conduct of a trade or business in the United States.
Ordinary Dividends
Distributions made by the Company that are not attributable to gain
from the sale or exchange by the Company of United States real property
interests and that are not designated by the Company as capital gain dividends
will be treated as ordinary income dividends to the extent made out of current
or accumulated earnings and profits of the Company. Generally, such ordinary
income dividends will be subject to United States withholding tax at the rate of
30% on the gross amount of the dividend paid unless reduced or eliminated by an
applicable United States income tax treaty. The Company expects to withhold
United States income tax at the rate of 30% on the gross amount of any such
dividends paid to a Non-U.S. Shareholder unless a lower treaty rate applies and
the Non-U.S. Shareholder has filed an IRS Form 1001 with the Company, certifying
the Non-U.S. Shareholder's entitlement to treaty benefits.
Non-Dividend Distributions
Distributions made by the Company in excess of its current and
accumulated earnings and profits to a Non-U.S. Shareholder who holds 5% or less
of the stock of the Company (after application of certain ownership rules) will
not be subject to U.S. income or withholding tax. If it cannot be determined at
the time a distribution is made whether or not such distribution will be in
excess of the Company's current and accumulated earnings and profits, the
distribution will be subject to withholding at the rate applicable to a dividend
distribution. However, the Non-U.S. Shareholder may seek a refund from the IRS
of any amount withheld if it is subsequently determined that such distribution
was, in fact, in excess of the Company's then current and accumulated earnings
and profits.
20
Capital Gain Dividends
As long as the Company continues to qualify as a REIT, distributions
made by the Company that are attributable to gain from the sale or exchange by
the Company of any United States real property interests ("USRPI") will be taxed
to a Non-U.S. Shareholder under the Foreign Investment in Real Property Tax Act
of 1980 ("FIRPTA"). Under FIRPTA, such distributions are taxed to a Non-U.S.
Shareholder as if such distributions were gains "effectively connected" with the
conduct of a trade or business in the United States. Accordingly, a Non-U.S.
Shareholder will be taxed on such distributions at the same capital gain rates
applicable to U.S. Shareholders (subject to any applicable alternative minimum
tax and a special alternative minimum tax in the case of non-resident alien
individuals). Distributions subject to FIRPTA also may be subject to the 30%
branch profits tax in the case of a corporate Non-U.S. Shareholder that is not
entitled to treaty relief or exemption. The Company will be required to withhold
tax from any distribution to a Non-U.S. Shareholder that could be designated by
the Company as a USRPI capital gain dividend in an amount equal to 35% of the
gross distribution. The amount of tax withheld is fully creditable against the
Non-U.S. Shareholder's FIRPTA tax liability, and if such amount exceeds the
Non-U.S. Shareholder's federal income tax liability for the applicable taxable
year, the Non-U.S. Shareholder may seek a refund of the excess from the IRS. In
addition, if the Company designates prior distributions as capital gain
dividends, subsequent distributions, up to the amount of such prior
distributions, will be treated as capital gain dividends for purposes of
withholding.
Disposition of Stock of the Company
Gain recognized by a Non-U.S. Shareholder upon the sale or exchange of
stock of the Company generally will not be subject to United States taxation
unless such stock constitutes a USRPI within the meaning of FIRPTA. The stock of
the Company will not constitute a USRPI so long as the Company is a
"domestically controlled REIT." A "domestically controlled REIT" is a REIT in
which at all times during a specified testing period less than 50% in value of
its stock or beneficial interests are held directly or indirectly by Non-U.S.
Shareholders. The Company believes that it will be a "domestically controlled
REIT," and therefore that the sale of stock of the Company will not be subject
to taxation under FIRPTA. However, because the stock of the Company is publicly
traded, no assurance can be given that the Company is or will continue to be a
"domestically controlled REIT." Notwithstanding the foregoing, gain from the
sale or exchange of stock of the Company that is not otherwise subject to FIRPTA
will be taxable to a Non-U.S. Shareholder if the Non-U.S. Shareholder is a
nonresident alien individual who is present in the United States for 183 days or
more during the taxable year and has a "tax home" in the United States. In such
case, the nonresident alien individual will be subject to a 30% United States
withholding tax on the amount of such individual's gain.
If the Company did not constitute a "domestically controlled REIT,"
gain arising from the sale or exchange by a Non-U.S. Shareholder of stock of the
Company would be subject to United States taxation under FIRPTA as a sale of a
USRPI unless (i) the stock of the Company is "regularly traded" (as defined in
the applicable Treasury regulations) and (ii) the selling Non-U.S. Shareholder's
interest (after application of certain constructive ownership rules) in the
Company is 5% or less at all times during the five years preceding the sale or
exchange. If gain on the sale or exchange of the stock of the Company were
subject to taxation under FIRPTA, the Non-U.S. Shareholder would be subject to
regular United States income tax with respect to such gain in the same manner as
a U.S. Shareholder (subject to any applicable alternative minimum tax, a special
alternative minimum tax in the case of nonresident alien individuals and the
possible application of the 30% branch profits tax in the case of foreign
corporations), and the purchaser of the stock of the Company (including the
Company) would be required to withhold and remit to the IRS 10% of the purchase
price. Additionally, in such case, distributions on the stock of the Company to
the extent they represent a return of capital or capital gain from the sale of
the stock of the Company, rather than dividends, would be subject to a 10%
withholding tax.
21
Capital gains not subject to FIRPTA will nonetheless be taxable in the
United States to a Non-U.S. Shareholder in two cases:
- if the Non-U.S. Shareholder's investment in the stock of the
Company is effectively connected with a U.S. trade or business
conducted by such Non-U.S. Shareholder, the Non-U.S.
Shareholder will be subject to the same treatment as a U.S.
shareholder with respect to such gain, or
- if the Non-U.S. Shareholder is a nonresident alien individual
who was present in the United States for 183 days or more
during the taxable year and has a "tax home" in the United
States, the nonresident alien individual will be subject to a
30% tax on the individual's capital gain.
Information Reporting Requirements and Backup Withholding Tax
The Company will report to its U.S. shareholders and to the IRS the
amount of dividends paid during each calendar year and the amount of tax
withheld, if any, with respect thereto. Under the backup withholding rules, a
U.S. shareholder may be subject to backup withholding, at the rate of 31% on
dividends paid unless such U.S. shareholder
- is a corporation or falls within certain other exempt
categories and, when required, can demonstrate this fact, or
- provides a taxpayer identification number, certifies as to no
loss of exemption from backup withholding, and otherwise
complies with applicable requirements of the backup
withholding rules. A U.S. shareholder who does not provide the
Company with his correct taxpayer identification number also
may be subject to penalties imposed by the IRS. Any amount
paid as backup withholding will be creditable against the U.S.
shareholder's federal income tax liability. In addition, the
Company may be required to withhold a portion of any capital
gain distributions made to U.S. shareholders who fail to
certify their non-foreign status to the Company.
Additional issues may arise pertaining to information reporting and
backup withholding with respect to Non-U.S. Shareholders, and Non-U.S.
Shareholders should consult their tax advisors with respect to any such
information reporting and backup withholding requirements.
State and Local Taxes
The Company and its shareholders may be subject to state or local
taxation in various state or local jurisdictions, including those in which it or
they transact business or reside. The state and local tax treatment of the
Company and its shareholders may not conform to the federal income tax
consequences discussed above. Consequently, prospective holders should consult
their own tax advisors regarding the effect of state and local tax laws on an
investment in the stock of the Company.
Real Estate Investment Trust Tax Proposals
Although there is no current legislation pending specifically addressed
at REITs, investors must recognize that the present federal income tax treatment
of the Company may be modified by future legislative, judicial or administrative
actions or decisions at any time, which may be retroactive in effect, and, as a
result, any such action or decision may affect investments and commitments
previously made. The rules dealing with federal income taxation are constantly
under review by persons involved in the legislative process and by the IRS in
the Treasury Department, resulting in statutory changes as well as promulgation
of new, or revisions to existing, regulations
22
and revised interpretations of established concepts. No prediction can be made
as to the likelihood as to passage of any new tax legislation or other
provisions either directly or indirectly affecting the Company or its
shareholders.
ERISA CONSIDERATIONS
The following is a summary of material considerations arising under
ERISA and the prohibited transaction provisions of Section 4975 of the Code that
may be relevant to a holder of stock of the Company. This discussion does not
propose to deal with all aspects of ERISA or Section 4975 of the Code or, to the
extent not preempted, state law that may be relevant to particular employee
benefit plan shareholders (including plans subject to Title I of ERISA, other
employee benefit plans and IRAs subject to the prohibited transaction provisions
of Section 4975 of the Code, and governmental plans and church plans that are
exempt from ERISA and Section 4975 of the Code but that may be subject to state
law requirements) in light of their particular circumstances.
A fiduciary making the decision to invest in stock of the Company on
behalf of a prospective purchaser which is an ERISA plan, a tax-qualified
retirement plan, an IRA or other employee benefit plan is advised to consult its
own legal advisor regarding the specific considerations arising under ERISA,
Section 4975 of the Code, and (to the extent not preempted) state law with
respect to the purchase, ownership or sale of stock by such plan or IRA.
Employee Benefit Plans, Tax-qualified Retirement Plans and IRAs
Each fiduciary of an employee benefit plan subject to Title I of ERISA
(an "ERISA Plan") should carefully consider whether an investment in stock of
the Company is consistent with its fiduciary responsibilities under ERISA. In
particular, the fiduciary requirements of Part 4 of Title I of ERISA require (i)
an ERISA Plan's investments to be prudent and in the best interests of the ERISA
Plan, its participants and beneficiaries, (ii) an ERISA Plan's investments to be
diversified in order to reduce the risk of large losses, unless it is clearly
prudent not to do so, (iii) an ERISA Plan's investments to be authorized under
ERISA and the terms of the governing documents of the ERISA Plan and (iv) that
the fiduciary not cause the ERISA Plan to enter into transactions prohibited
under Section 406 of ERISA. In determining whether an investment in stock of the
Company is prudent for purposes of ERISA, the appropriate fiduciary of an ERISA
Plan should consider all of the facts and circumstances, including whether the
investment is reasonably designed, as a part of the ERISA Plan's portfolio for
which the fiduciary has investment responsibility, to meet the objectives of the
ERISA Plan, taking into consideration the risk of loss and opportunity for gain
(or other return) from the investment, the diversification, cash flow and
funding requirements of the ERISA Plan and the liquidity and current return of
the ERISA Plan's portfolio. A fiduciary should also take into account the nature
of the Company's business, the length of the Company's operating history and
other matters described below under "Cautionary Statements".
The fiduciary of an IRA or of an employee benefit plan not subject to
Title I of ERISA because it is a governmental or church plan or because it does
not cover common law employees (a "Non-ERISA Plan") should consider that such an
IRA or Non-ERISA Plan may only make investments that are authorized by the
appropriate governing documents, not prohibited under Section 4975 of the Code
and permitted under applicable state law.
23
STATUS OF THE COMPANY UNDER ERISA
A prohibited transaction may occur if the assets of the Company are
deemed to be assets of the investing Plans and "parties in interest" or
"disqualified persons" as defined in ERISA and Section 4975 of the Code,
respectively, deal with such assets. In certain circumstances where a Plan holds
an interest in an entity, the assets of the entity are deemed to be Plan assets
(the "look-through rule"). Under such circumstances, any person that exercises
authority or control with respect to the management or disposition of such
assets is a Plan fiduciary. Plan assets are not defined in ERISA or the Code,
but the United States Department of Labor issued regulations in 1987 (the
"Regulations") that outline the circumstances under which a Plan's interest in
an entity will be subject to the look-through rule.
The Regulations apply only to the purchase by a Plan of an "equity
interest" in an entity, such as common stock or common shares of beneficial
interest of a REIT. However, the Regulations provide an exception to the
look-through rule for equity interests that are "publicly-offered securities."
Under the Regulations, a "publicly-offered security" is a security that
is (i) freely transferable, (ii) part of a class of securities that is
widely-held and (iii) either (a) part of a class of securities that is
registered under section 12(b) or 12(g) of the Securities and Exchange Act of
1934, as amended (the "Exchange Act"), or (b) sold to a Plan as part of an
offering of securities to the public pursuant to an effective registration
statement under the Securities Act and the class of securities of which such
security is a part is registered under the Exchange Act within 120 days (or such
longer period allowed by the Securities and Exchange Commission) after the end
of the fiscal year of the issuer during which the offering of such securities to
the public occurred. Whether a security is considered "freely transferable"
depends on the facts and circumstances of each case. Generally, if the security
is part of an offering in which the minimum investment is $10,000 or less, any
restriction on or prohibition against any transfer or assignment of such
security for the purposes of preventing a termination or reclassification of the
entity for federal or state tax purposes will not of itself prevent the security
from being considered freely transferable. A class of securities is considered
"widely-held" if it is a class of securities that is owned by 100 or more
investors independent of the issuer and of one another.
The Company believes that the stock of the Company will meet the
criteria of the publicly-offered securities exception to the look-through rule
in that the stock of the Company is freely transferable, the minimum investment
is less than $10,000 and the only restrictions upon its transfer are those
required under federal income tax laws to maintain the Company's status as a
REIT. Second, stock of the Company is held by 100 or more investors and at least
100 or more of these investors are independent of the Company and of one
another. Third, the stock of the Company has been and will be part of offerings
of securities to the public pursuant to an effective registration statement
under the Securities Act and will be registered under the Exchange Act within
120 days after the end of the fiscal year of the Company during which an
offering of such securities to the public occurs. Accordingly, the Company
believes that if a Plan purchases stock of the Company, the Company's assets
should not be deemed to be Plan assets and, therefore, that any person who
exercises authority or control with respect to the Company's assets should not
be treated as a Plan fiduciary for purposes of the prohibited transaction rules
of ERISA and Section 4975 of the Code.
24
CAUTIONARY STATEMENTS
This Annual Report on Form 10-K and other materials the Company has
filed or may file with the Securities and Exchange Commission, as well as
information included in oral statements or other written statements made, or to
be made, by senior management of the Company, contain, or will contain,
disclosures which are "forward-looking statements." Forward-looking statements
include all statements that do not relate solely to historical or current facts
and can be identified by the use of words such as "may," "will," "expect,"
"believe," "intend," "plan," "estimate," "project," "continue," "should" and
other comparable terms. These forward-looking statements are based on the
current plans and expectations of management and are subject to a number of
risks and uncertainties, including those set forth below, that could
significantly affect the Company's current plans and expectations and future
financial condition and results. The Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise. Shareholders and investors are
cautioned not to unduly rely on such forward-looking statements when evaluating
the information presented in the Company's filings and reports.
RISKS RELATED TO THE COMPANY'S GENERAL GROWTH STRATEGY
The Company follows a general growth strategy of providing integrated
real estate services to the healthcare industry, including the following:
- Asset management and strategic planning for real estate;
- Property administration, management and leasing services;
- Build-to-suit development of healthcare properties;
- The acquisition of existing healthcare properties; and
- Equity co-investment in healthcare provider acquisition
transactions.
By providing these services, the Company believes it can differentiate
its market position, acquire needed capital, expand its asset base and increase
revenue. The Company believes, however, that there are various risks inherent in
this growth strategy. The following factors, among others, could affect the
Company's ability to grow, and investors should consider them carefully.
THE COMPANY PRESENTLY HAS LIMITED ACCESS TO CAPITAL WHICH WILL SLOW THE
COMPANY'S GROWTH.
A REIT is required to make dividend distributions and retains little
capital for growth. As a result, a REIT is required to grow through the steady
investment of new capital in real estate assets. From 1992 until late 1998, the
REIT industry was in an expansion mode, and capital was readily available to
REITs. By the end of 1999, however, market valuations of REIT shares (including
the Company's shares) had declined substantially with the result that the
Company presently has limited access to capital from the equity market.
Virtually all of the Company's available capital in 2001 will be used to meet
existing commitments and to reduce debt. The Company will require additional
capital to acquire healthcare properties. The Company may not be able to obtain
additional equity or debt capital or dispose of assets at the time it requires
additional capital. Moreover, the Company may not be able to obtain capital on
terms that will permit it to acquire healthcare properties on a competitive
basis.
THE COMPANY MAY NOT BE ABLE TO OBTAIN ADDITIONAL CAPITAL OR DISPOSE OF
ASSETS AT THE TIME IT REQUIRES THE FUNDS TO PAY ITS OBLIGATIONS.
The Company currently has substantial bank and institutional
indebtedness with significant payments due in 2001. The Company may also be
required to borrow money and mortgage its properties to fund any shortfall of
cash necessary to meet cash distribution requirements necessary to maintain its
REIT status. The Company anticipates that it will be able to obtain such
financing, as needed; however, if the Company is unable to obtain sufficient
funds within the necessary time periods, it will default on its obligations.
25
THERE IS CONSIDERABLE COMPETITION IN THE COMPANY'S MARKET.
The Company competes for property management, development and new
purchases with, among others:
- Investors;
- Healthcare providers;
- Other healthcare related real estate investment trusts;
- Real estate partnerships; and
- Financial institutions.
Competition for attractive investments results in investment pressure
on the Company. The Company intends to adhere to its established acquisition
standards; however, increased competition for such assets from other REITs and
traditional and non-traditional equity and debt capital sources may affect the
growth and financial return of the Company. The Company's properties are also
subject to competition from the properties of other healthcare providers, some
of which have greater capital resources than the providers leasing the Company's
facilities. All of the Company's properties operate in a competitive environment
and patients and referral sources, including physicians, may change their
preferences for a healthcare facility from time to time.
FAILURE OF THE COMPANY TO MAINTAIN OR INCREASE ITS DIVIDEND COULD
REDUCE THE MARKET PRICE OF THE COMPANY'S STOCK WHICH COULD MAKE IT DIFFICULT FOR
THE COMPANY TO RAISE ADDITIONAL EQUITY CAPITAL ON FAVORABLE TERMS, IF AT ALL.
The Company has raised its quarterly dividend each consecutive quarter
since the Company's initial public offering. The ability to maintain or raise
its dividend is dependent, to a large part, on growth of funds from operations.
This growth in turn depends upon increased revenues from additional investments,
rental increases and income from administrative and management services.
DEVELOPMENT FUNDING INVOLVES GREATER RISKS THAN ARE ASSOCIATED WITH THE
PURCHASE AND LEASE-BACK OF OPERATING PROPERTIES.
Development funding arrangements require the Company to provide the
funding to enable healthcare operators to build facilities on property owned or
leased by the Company. If the developer or contractor fails to complete the
project under the terms of the development agreement, the Company would be
forced to become involved in the development to ensure completion or the Company
would lose the property.
TRANSFERS OF OPERATIONS OF HEALTHCARE FACILITIES ARE SUBJECT TO
REGULATORY APPROVALS NOT REQUIRED FOR TRANSFERS OF OTHER TYPES OF COMMERCIAL
OPERATIONS AND REAL ESTATE.
Many of the Company's properties are special-purpose facilities that
may not be easily adaptable to uses unrelated to healthcare.
RISKS RELATED TO GROWTH OF REVENUE AND FUNDS FROM OPERATIONS
The Company's general growth strategy requires continuing growth in the
Company's funds from operations which could be negatively affected by the
following factors:
OPERATORS OF SENIOR LIVING ASSETS HAVE COME UNDER INCREASED FINANCIAL
PRESSURE WHICH MAY AFFECT THEIR ABILITY TO MEET THEIR OBLIGATIONS TO THE
COMPANY.
26
Due to increased competition in the senior living assets sector,
operators of senior living facilities have come under increased financial
pressure; additionally, the implementation of the "prospective payment system"
for Medicare reimbursement has increased pressure on these operators. As a
result of the Capstone merger, the Company's portfolio of senior living
facilities increased substantially. Since the Capstone merger, several senior
living facility operators have declared bankruptcy. The Company cannot be
certain that additional operator failures in this sector will not occur.
THE INVESTMENT RETURNS AVAILABLE FROM EQUITY INVESTMENTS IN REAL ESTATE
DEPEND LARGELY ON THE AMOUNT OF INCOME EARNED AND CAPITAL APPRECIATION GENERATED
BY THE RELATED PROPERTIES, AS WELL AS THE EXPENSES INCURRED.
Real property investments are generally subject to varying degrees of
risk. To offset the threat of insufficient revenue to meet operating expenses,
debt service, capital expenditures and dividend payments, the Company requires
net master leases or similar financial support with primary term periods for
most of its investments. Nevertheless, the Company's properties are subject to
all of the normal risks associated with real estate investments.
ADVERSE TRENDS IN HEALTHCARE PROVIDER OPERATIONS CAN NEGATIVELY AFFECT
THE LEASE REVENUES AND VALUES OF THE COMPANY'S INVESTMENTS.
The healthcare service industry continues to be a profitable, growing
segment of the economy, supported by fundamentals that ensure continued growth.
However, the industry is currently experiencing:
- Substantial changes in the method of delivery of healthcare
services;
- Rising competition among healthcare providers for patients;
- Continuing pressure by private and governmental payors; and
- Increased scrutiny by federal and state authorities.
The changes can affect the economic performance of some or all of the tenants
and sponsors who provide financial support to the Company's investments and, in
turn, the lease revenues and the value of the Company's property investments.
THE COMPANY'S CONCENTRATION ON A FEW HEALTHCARE PROVIDERS WOULD MAGNIFY
THE NEGATIVE EFFECT ON THE COMPANY IF A LARGER PROVIDER WERE TO SUFFER FINANCIAL
HARDSHIPS.
Currently, 49% of the Company's real estate portfolio, including
mortgages, is leased to, or supported by its five largest healthcare provider
clients. To varying degrees, these providers have experienced the pressures
listed above. Any financial problems experienced by these providers would
negatively impact the support arrangements that the Company has with these
providers and require the Company to rely solely upon rental revenue from
occupant tenants. If the Company is required to rely solely upon tenant
occupants with respect to one or more properties, it will experience the typical
risks associated with real estate investments enjoying no supplemental credit
support, including competition for individual tenants and the renewal or
roll-over of existing leases.
IF THE INPATIENT OCCUPANCY RATE AT A HOSPITAL NEAR A COMPANY FACILITY
DETERIORATED TO A LEVEL AT WHICH OPERATING CASH FLOWS WOULD BE INSUFFICIENT TO
COVER THE PAYMENTS TO THE COMPANY, THE COMPANY WOULD HAVE TO RELY UPON THE
GENERAL CREDIT OF THE PROVIDER OR THE RELATED GUARANTOR, IF ANY.
Most of the hospitals adjacent to or associated with the Company's
current properties and those to be acquired by the Company are substantially
less than fully occupied on an inpatient basis.
27
Despite such occupancy rates, however, the operating cash flow produced by such
hospitals adequately covers payments to the Company.
IF A PROVIDER LOST ITS LICENSURE OR CERTIFICATION, THE COMPANY WOULD
HAVE TO OBTAIN ANOTHER PROVIDER FOR THE AFFECTED FACILITY.
Healthcare providers are subject to federal and state laws and
regulations which govern financial and other arrangements between healthcare
operators. The Company has no control over its tenants' ability to meet the
numerous state and federal regulatory requirements. If a tenant does not
continue to meet all regulatory requirements, such tenant may lose its ability
to provide or bill for healthcare services. If the Company could not attract
another healthcare provider on a timely basis or on acceptable terms, the
Company's revenues would suffer.
A FAILURE OF THE COMPANY TO REINVEST THE PROCEEDS FROM SECURITIES
OFFERINGS AND PROPERTY DISPOSITIONS COULD HAVE AN ADVERSE EFFECT ON THE
COMPANY'S FUTURE REVENUES.
From time to time, the Company will have cash available from (1) the
proceeds of sales of shares of its securities, (2) the sale of its properties,
including non-elective dispositions, under the terms of master leases or similar
financial support arrangements, and (3) principal payments on its mortgage
investments. These arrangements require, among other items, a disposition of
properties in the event of a healthcare provider's default, and upon the
healthcare provider's exercise of an option to repurchase these properties. The
Company must re-invest these proceeds, on a timely basis, in another healthcare
investment or in a qualified short-term investment. While the Company has been
able to do so in the past, the Company may not be able to invest proceeds on a
timely basis or on acceptable terms in the future.
Delays in acquiring properties will negatively impact revenues and may
have the potential to adversely effect the Company's ability to increase its
distributions to shareholders.
TERMINATION OF PROPERTY MANAGEMENT ENGAGEMENTS CAN RESULT IN LOST
INCOME.
The Company is engaged on its own behalf, and for the benefit of
third-party property owners, in the following activities:
- Asset and property management;
- Day-to-day property management;
- Leasing of multi-tenanted healthcare properties; and
- Supervision of the development of new healthcare properties.
The terms of these service engagements can vary in duration from month-to-month
to 15 years. Additionally, the Company regularly terminates engagements as a
result of completion of the engagement assignment or the sale of managed
properties by the Company or third-party owners. Termination of engagements
results in lost future income stream. In addition, unamortized capital costs
incurred in obtaining engagements must be charged against current revenues or
established reserves. The Company has experienced significant fluctuation in the
number of engagements in effect at any given time. This fluctuation generates
uncertainty as to the predictability of net revenues. The Company is also
subject to significant uncertainties because of the dynamic nature of the
healthcare service industry, and increased competition from other real estate
management companies entering the healthcare services industry. The Company may
not be able to continue to be able to market or cross-sell its property
management services successfully.
28
RISKS RELATED TO THE COMPANY'S STATUS AS A REIT
FAILURE TO MAINTAIN ITS STATUS AS A REIT, EVEN IN ONE TAXABLE YEAR,
COULD CAUSE THE COMPANY TO REDUCE ITS DIVIDENDS DRAMATICALLY.
The Company intends to qualify at all times as a REIT under the Code.
If in any taxable year the Company does not qualify as a REIT, it would be taxed
as a corporation. As a result, the Company could not deduct its distributions to
the shareholders in computing its taxable income. Depending upon the
circumstances, a REIT that loses its qualification in one year may not be
eligible to re-qualify during the four succeeding years. Further, certain
transactions or other events could lead to the Company being taxed at rates
ranging from four to 100 percent on certain income or gains.
ITEM 2. PROPERTIES
The Company's headquarters, located in offices at 3310 West End Avenue
in Nashville, Tennessee, are leased from an unrelated third party. The lease
agreement, covering approximately 22,551 square feet of rented space, expires on
October 31, 2003, with two five-year renewal options. Annual rental is
approximately $423,000.
ITEM 3. LEGAL PROCEEDINGS
On March 22, 1999, HR Acquisitions I Corporation, formerly known as
Capstone Capital Corporation ("HRT"), a wholly-owned subsidiary of the Company,
filed suit against Medistar Corporation and its affiliate, Medix Construction
Company in United States District Court for the Northern District of Alabama,
Southern Division. HRT is seeking damages in excess of four million dollars
arising out of the development and construction of four real estate projects
located in different parts of the United States. Medistar and Medix served as
the developer and contractor, respectively, for the projects. HRT has asserted
claims for damages relating to, among others, alleged breaches of the
development and contracting obligations, failure to perform in accordance with
contract terms and specifications, and other deficiencies in performance by
Medistar and Medix. On June 10, 1999, Medistar and Medix filed its answer and
counterclaim asserting a variety of alleged legal theories, claims for damages
for alleged deficiencies by HRT and the Company in the performance of alleged
obligations, and for damage to their business reputation. Attempts at mediation
have not resulted in a settlement of the disputes. The Company's prosecution of
its claims and defense of the counterclaims will continue to be vigorous. While
the Company cannot predict the range of possible recovery or loss, the Company
believes that, even though the asserted cross claims seek substantial monetary
damages, the allegations made by Medistar and Medix are not factually or legally
meritorious, are subject to sustainable defenses and are, to a significant
extent, covered by liability insurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
No matter was submitted to a vote of shareholders during the fourth
quarter of 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Shares of the Company's common stock are traded on The New York Stock
Exchange under the symbol "HR." As of December 31, 2000, there were
approximately 1,733 shareholders of record. The following table sets forth the
high and low sales prices per common share and the distributions declared per
common share for the periods indicated.
29
[Download Table]
Distributions Declared per
2000 High Low Share
--------------- -------- -------- --------------------------
First Quarter $18.5000 $15.4375 $0.550
Second Quarter 19.0000 15.8125 0.555
Third Quarter 21.8125 17.0625 0.560
Fourth Quarter 21.3125 17.2500 0.565
1999
---------------
First Quarter $23.2500 $18.0000 $0.530
Second Quarter 22.1875 18.1875 0.535
Third Quarter 22.1875 18.6875 0.540
Fourth Quarter 19.7500 14.5000 0.545
On January 23, 2001, the Company declared an increase in its quarterly
common stock dividend from $.565 per share ($2.26 annualized) to $.57 per share
($2.28 annualized) payable to shareholders of record as of February 15, 2001.
This dividend was paid on March 7, 2001. While the Company has no present plans
to change its quarterly common stock dividend policy, the dividend policy is
reviewed each quarter by the Board of Directors. Future distributions will be
declared and paid at the discretion of the Board of Directors and will depend
upon cash generated by operating activities, the Company's financial condition,
capital requirements, annual distribution requirements under the REIT provisions
of the Code and such other factors as the Board of Directors deems relevant.
Should access to new capital not be available, the Company is uncertain of its
ability to increase its quarterly common stock dividends in the future.
On October 15, 2000, the Company issued an aggregate of 150,000 shares
of its Common Stock to three former executive officers of Capstone Capital
Corporation pursuant to Consulting Agreements with such individuals. Such sales
were exempt under the registration requirements of the Securities Act of 1933 in
reliance on the exemption contained in Section 4(2) of such Act.
ITEM 6. SELECTED FINANCIAL DATA
The Company's selected financial data, set forth on page 9 of its 2000
Annual Report to Shareholders under the caption "Selected Financial
Information," is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company's information relating to management's discussion and
analysis of financial condition, set forth on pages 10 through 16 of the
Company's 2000 Annual Report to Shareholders under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations," is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Market Risk" in "Management's Discussion and Analysis of Financial
Condition and Results of Operations," set forth on page 16 of the Company's 2000
Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements and the related notes, together with
the report of Ernst & Young LLP thereon, set forth on pages 17 through 34 of the
Company's 2000 Annual Report to Shareholders, are incorporated herein by
reference.
30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
Information with respect to directors, set forth on pages 1 through 4
of the Company's Proxy Statement relating to the Annual Meeting of Shareholders
to be held on May 15, 2001 under the caption "Election of Directors," is
incorporated herein by reference.
EXECUTIVE OFFICERS
Information with respect to executive officers of the Company is
included in Part I of this Report. Information with respect to the terms of
office of the executive officers of the Company, set forth on pages 8 through 9
of the Company's Proxy Statement relating to the Annual Meeting of Shareholders
to be held on May 15, 2001 under the caption "Executive Compensation -
Employment Contracts and Change-In-Control Arrangements," is incorporated herein
by reference.
SECTION 16(A) COMPLIANCE
Information with respect to compliance with Section 16(a) of the
Securities Exchange Act of 1934, as amended, set forth on pages 5 through 6 of
the Company's Proxy Statement relating to the Annual Meeting of Shareholders to
be held on May 15, 2001 under the caption "Security Ownership of Certain
Beneficial Owners and Management - Section 16(a) Beneficial Ownership Reporting
Compliance," is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation, set forth on pages 6
through 11 of the Company's Proxy Statement relating to the Annual Meeting of
Shareholders to be held on May 15, 2001 under the caption "Executive
Compensation," is incorporated herein by reference. The Comparative Performance
Graph and the Compensation Committee Report on Executive Compensation also
included in the Proxy Statement are expressly not incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to the security ownership of management and
certain beneficial owners, set forth on page 5 of the Company's Proxy Statement
relating to the Annual Meeting of Shareholders to be held on May 15, 2001 under
the caption "Security Ownership of Certain Beneficial Owners and Management," is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to certain relationships and related transactions,
set forth on page 14 of the Company's Proxy Statement relating to the Annual
Meeting of Shareholders to be held on May 15, 2001 under the caption "Certain
Relationships and Related Transactions," is incorporated herein by reference.
32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a) Index to Pro Forma and Historical Financial Statements,
Financial Statement Schedules and Exhibits
(1) FINANCIAL STATEMENTS:
The following financial statements of Healthcare
Realty Trust Incorporated are incorporated by reference in
Item 8 of this Report from the 2000 Annual Report to
Shareholders:
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
- Independent Auditors' Report.
- Consolidated Balance Sheets - December 31, 2000 and 1999.
- Consolidated Statements of Income for the years ended December
31, 2000, December 31, 1999 and December 31, 1998.
- Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2000, December 31, 1999 and December 31,
1998.
- Consolidated Statements of Cash Flows for the years ended
December 31, 2000, December 31, 1999 and December 31, 1998.
- Notes to Consolidated Financial Statements.
(2) FINANCIAL STATEMENT SCHEDULES:
[Enlarge/Download Table]
Schedule II -- Valuation and Qualifying Accounts at December 31, 2000.........................S-1
Schedule III -- Real Estate and Accumulated Depreciation at December 31, 2000.................S-2
Schedule IV - Mortgage Loans on Real Estate at December 31, 2000..............................S-3
All other schedules are omitted because they are not
applicable or not required or because the information is
included in the consolidated financial statements or notes
thereto.
(3) Exhibits:
[Enlarge/Download Table]
Exhibit
Number Description of Exhibits
------ -----------------------
3.1 -- Second Articles of Amendment and Restatement of the Registrant.(1)
3.2 -- Amended and Restated Bylaws of the Registrant. (6)
4 -- Specimen stock certificate.(1)
10.1 -- 1993 Employees Stock Incentive Plan of Healthcare Realty Trust Incorporated.(1)
10.2 -- 1995 Restricted Stock Plan for Non-Employee Directors of Healthcare Realty Trust Incorporated.(4)
10.3 -- Executive Retirement Plan, as amended.(7)
10.4 -- Retirement Plan for Outside Directors.(1)
10.5 -- Non-Qualified Deferred Compensation Plan.(7)
10.6 -- Executive Variable Incentive Compensation Plan. (7)
10.7 -- 2000 Employee Stock Purchase Plan. (7)
10.8 -- Dividend Reinvestment Plan.(2)
10.9 -- Amended and Restated Employment Agreement by and between David R. Emery and Healthcare Realty Trust Incorporated.
(7)
33
[Enlarge/Download Table]
10.10 -- Amended and Restated Employment Agreement by and between Roger O. West and Healthcare Realty Trust Incorporated.
(7)
10.11 -- Amended and Restated Employment Agreement by and between Timothy G. Wallace and Healthcare Realty Trust
Incorporated. (7)
10.12 -- Revolving Credit Agreement, dated as of October 15, 1998, among Healthcare Realty Trust Incorporated, NationsBank,
N.A., First Union National Bank, Societe Generale, and Bank Austria Creditanstalt Corporate Finance, Inc. (5)
10.13 -- Term Credit Agreement, dated as of October 15, 1998, among Healthcare Realty Trust Incorporated, Capstone Capital
Corporation, NationsBank, N.A., and the other lending banks. (5)
10.14 -- Amendment No. 1 to Term Credit Agreement. (6)
10.15 -- Amendment No. 2 to Term Credit Agreement. (7)
10.16 -- Amendment No. 3 to Term Credit Agreement.(8)
10.17 -- Amendment No. 4 to Term Credit Agreement.(9)
10.18 -- Amendment No. 5 to Term Credit Agreement (filed herewith).
10.19 -- Amendment No. 6 to Term Credit Agreement (filed herewith).
10.20 -- Amendment No. 7 to Term Credit Agreement (filed herewith).
10.21 -- Bank Joinder Agreement to Term Credit Agreement (filed herewith).
10.22 -- Form of Note Purchase Agreement, dated as of September 1, 1995, pertaining to $90,000,000 aggregate principal
amount of 7.41% Senior Notes due September 1, 2002.(3)
10.23 -- Form of Note Purchase Agreement, dated as of March 1, 2000, pertaining to $70,000,000 aggregate principal amount
of 9.49% Senior Notes due April 1, 2006.(8)
11 -- Statement re computation of per share earnings (contained in Note 9 to the Notes to the Consolidated Financial
Statement in the Annual Report to Shareholders for the year ended December 31, 2000 filed herewith as Exhibit 13).
13 -- Certain portions of the Company's Annual Report to Shareholders for the year ended December 31, 2000 (filed
herewith).
21 -- Subsidiaries of the Registrant (filed herewith).
23 -- Consent of Ernst & Young LLP, independent auditors (filed herewith).
---------------
(1) Filed as an exhibit to the Company's Registration Statement on Form
S-11 (Registration No. 33-60506) previously filed pursuant to the
Securities Act of 1933 and hereby incorporated by reference.
(2) Filed as an exhibit to the Company's Registration Statement on Form
S-11 (Registration No. 33-72860) previously filed pursuant to the
Securities Act of 1933 and hereby incorporated by reference.
(3) Filed as an exhibit to the Company's Form 10-Q for the quarter ended
September 30, 1995 and hereby incorporated by reference.
(4) Filed as an exhibit to the Company's Form 10-K for the year ended
December 31, 1995 and hereby incorporated by reference.
(5) Filed as an exhibit to the Company's Form 10-K for the year ended
December 31, 1998 and hereby incorporated by reference.
(6) Filed as an exhibit to the Company's Form 10-Q for the quarter ended
September 30, 1999 and hereby incorporated by reference.
(7) Filed as an exhibit to the Company's Form 10-K for the year ended
December 31, 1999 and hereby incorporated by reference.
(8) Filed as an exhibit to the Company's Form 10-Q for the quarter ended
March 31, 2000 and hereby incorporated by reference.
34
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(9) Filed as an exhibit to the Company's Form 10-Q for the quarter ended
June 30, 2000 and hereby incorporated by reference.
35
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
The following is a list of all executive compensation plans and
arrangements filed as exhibits to this Annual Report on Form 10-K:
1. 1993 Employees Stock Incentive Plan of Healthcare Realty Trust
Incorporated (filed as Exhibit 10.1)
2. 1995 Restricted Stock Plan for Non-Employee Directors of
Healthcare Realty Trust Incorporated (filed as Exhibit 10.2)
3. Executive Retirement Plan, as amended (filed as Exhibit 10.3)
4. Retirement Plan for Outside Directors (filed as Exhibit 10.4)
5. Non-Qualified Deferred Compensation Plan (filed as Exhibit
10.5)
6. Executive Variable Incentive Compensation Plan (filed as
Exhibit 10.6)
7. 2000 Employee Stock Purchase Plan (filed as Exhibit 10.7)
8. Amended and Restated Employment Agreement by and between David
R. Emery and Healthcare Realty Trust Incorporated (filed as
Exhibit 10.9)
9. Amended and Restated Employment Agreement by and between Roger
O. West and Healthcare Realty Trust Incorporated (filed as
Exhibit 10.10)
10. Amended and Restated Employment Agreement by and between
Timothy G. Wallace and Healthcare Realty Trust Incorporated
(filed as Exhibit 10.11)
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the fourth
quarter of 2000. The Company furnished in accordance with Regulation FD
the following reports on Form 8-K during the fourth quarter of 2000.
[Download Table]
Date of Earliest
Event Reported Date Filed Items Reported
------------------ ----------------- ------------------------------------------
November 16, 2000 November 16, 2000 Item 9. Regulation FD Disclosure
Item 7. Financial Statements and Exhibits
December 18, 2000 December 18, 2000 Item 9. Regulation FD Disclosure
Item 7. Financial Statements and Exhibits
(c) Exhibits
The response to this portion of Item 14 is submitted as a separate
section of this report. See Item 14(a)(3).
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate
section of this report. See Item 14(a)(2).
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Nashville, State of Tennessee, on March 23, 2001.
HEALTHCARE REALTY TRUST INCORPORATED
By: /s/ David R. Emery
----------------------------------------
David R. Emery
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Company
and in the capacities and on the date indicated.
[Enlarge/Download Table]
Signature Title Date
----------------------------------------------------- ----------------------------------- --------------
/s/ David R. Emery Chairman of the Board and March 23, 2001
----------------------------------------------------- Chief Executive Officer (Principal
David R. Emery Executive Officer)
/s/ Timothy G. Wallace Executive Vice President March 23, 2001
----------------------------------------------------- and Chief Financial Officer
Timothy G. Wallace (Principal Financial Officer)
Senior Vice President - March 23, 2001
/s/ Scott W. Holmes Financial Reporting
----------------------------------------------------- (Principal Accounting Officer)
Scott W. Holmes
/s/ Errol L. Biggs, Ph.D. Director March 23, 2001
-----------------------------------------------------
Errol L. Biggs, Ph.D.
/s/ Charles Raymond Fernandez, M.D. Director March 23, 2001
-----------------------------------------------------
Charles Raymond Fernandez, M.D.
/s/ Batey M. Gresham, Jr. Director March 23, 2001
-----------------------------------------------------
Batey M. Gresham, Jr.
37
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/s/ Marliese E. Mooney Director March 23, 2001
-----------------------------------------------------
Marliese E. Mooney
/s/ Edwin B. Morris, III Director March 23, 2001
-----------------------------------------------------
Edwin B. Morris, III
/s/ John Knox Singleton Director March 23, 2001
-----------------------------------------------------
John Knox Singleton
38
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AT DECEMBER 31, 2000
(dollars in thousands)
[Enlarge/Download Table]
ADDITIONS
------------------------------------------
Balance at Charged to Charged to Assumed from
Beginning costs and other Capstone Balance at
Description of Period expenses accounts Capital Corp. Deductions(1) End of Period
----------------------------------------------------------------------------------------------------------------------------------
2000
Mortgage notes receivable allowance $2,283 $ -- $ -- $ -- $ 574 $1,709
Accounts receivable allowance 995 1,069 -- -- 346 1,718
Preferred stock investment reserve -- 1,000 -- -- -- 1,000
---------------------------------------------------------------------------------------
$3,278 $2,069 -- -- $ 920 $4,427
---------------------------------------------------------------------------------------
1999
Mortgage notes receivable allowance $3,000 $ -- $ -- $ -- $ 717 $2,283
Accounts receivable allowance 419 576 -- -- -- 995
---------------------------------------------------------------------------------------
$3,419 $ 576 $ -- $ -- $ 717 $3,278
---------------------------------------------------------------------------------------
1998
Mortgage notes receivable allowance $ -- $ -- $ -- $3,000 $ -- $3,000
Accounts receivable allowance 15 73 -- 346 15 419
---------------------------------------------------------------------------------------
$ 15 $ 73 $ -- $3,346 $ 15 $3,419
---------------------------------------------------------------------------------------
(1) Write-off or collection of the related receivable accounts.
39
Schedule III - Real Estate and Accumulated Depreciation at December 31, 2000
[Enlarge/Download Table]
Land
-----------------------------------------
Costs Capitalized
Number of Initial Subsequent to
Facility Type Properties States Investment Acquisition Total
---------------------------------------------------------------------------------------------------------------------
Ancillary Hospital Facilities 59 AL, AZ, CA, FL, GA, $ 58,614,173 $1,291,556 $ 59,905,729
KS, MS, NV, PA, TN,
TX, VA, WY
Assisted Living Facilities 41 AL, CA, CT, FL, GA, 10,825,127 0 10,825,127
IL, MO, MS, NC, NJ,
OH, PA, SC, TN, TX,
VA, WY
Comprehensive Ambulatory Care Centers 13 AZ, CA, FL, MO, TX 12,269,618 577,655 12,847,273
Inpatient Rehabilitation Facilities 9 AL, FL, PA, TX 5,834,648 0 5,834,648
Medical Office Buildings 10 FL, PA, TN, TX, VA 6,845,576 2,894 6,848,470
Other Inpatient Facilities 3 MI, PA, TX 4,760,893 150,063 4,910,956
Other Outpatient Facilities 13 AL, AR, CA, FL, GA 7,599,395 436,620 8,036,015
IL, MO, MS, NV, TX
VA
Physician Clinics 32 AL, CA, FL, GA, IL, 29,078,433 268,064 29,346,497
MA, MO, PA, TN, TX,
VA
Skilled Nursing Facilities 33 AZ, CA, CO, FL, IN, 13,430,351 268,774 13,699,125
----------- KS, MI, MO, NC, OK, -------------------------------------------
PA, TN, TX, VA
Total Real Estate Properties 213 149,258,214 2,995,626 152,253,840
Corporate Property 0 0 0 0
----------- -------------------------------------------
Total Property 213 $149,258,214 $2,995,626 $152,253,840
=========== ===========================================
Buildings, Improvements, and CIP
----------------------------------------------------
Costs Capitalized
Initial Subsequent to Personal Total
Facility Type Investment Acquisition Total Property Assets
--------------------------------------------------------------------------------------------------------------------------
Ancillary Hospital Facilities $ 398,440,423 $11,785,485 $ 410,225,908 $ 622,450 $ 470,754,087
Assisted Living Facilities 230,281,040 828,987 231,110,027 0 241,935,154
Comprehensive Ambulatory Care Centers 129,668,826 959,494 130,628,321 88,589 143,564,183
Inpatient Rehabilitation Facilities 148,753,610 313 148,753,922 0 154,588,570
Medical Office Buildings 37,151,455 801,485 37,952,940 576,297 45,377,707
Other Inpatient Facilities 17,419,445 0 17,419,445 0 22,330,401
Other Outpatient Facilities 36,582,832 0 36,582,832 61,355 44,680,202
Physician Clinics 130,148,313 1,413,964 131,562,277 51,777 160,960,551
Skilled Nursing Facilities 174,739,518 2,334,539 177,074,057 215,317 190,988,499
-----------------------------------------------------------------------------------
Total Real Estate Properties 1,303,185,461 18,124,267 1,321,309,727 1,615,786 1,475,179,353
Corporate Property 0 0 4,168,878 4,168,878
-----------------------------------------------------------------------------------
Total Property $1,303,185,461 $18,124,267 $1,321,309,727 $5,784,664 $1,479,348,231
===================================================================================
Accumulated Date Date
Facility Type Depreciation(1) Encumbrances Acquired Constructed
--------------------------------------------------------------------------------------------------------
Ancillary Hospital Facilities $ 45,732,916 $22,375,434 1993-2000 1961-2000
4 under const. (3)
Assisted Living Facilities 12,286,511 0 1998, 2000 1976-2000
Comprehensive Ambulatory Care Centers 11,478,961 16,293,711 1993-1998 1991-1999
1 under const. (3)(2)
Inpatient Rehabilitation Facilities 9,468,161 0 1998 1983-1991
Medical Office Buildings 4,713,842 5,946,166 1993-2000 1988-1998
1 under const. (3)
Other Inpatient Facilities 1,023,219 0 1998, 1999 1983
1 under const. (3)
Other Outpatient Facilities 5,039,456 4,960,000 1993-1999 1906-1998
Physician Clinics 11,505,104 7,520,000 1993-1998 1905-1999
Skilled Nursing Facilities 17,447,457 0 1993-2000 1956-1998
----------------------------
Total Real Estate Properties 118,695,627 57,095,310
Corporate Property 1,826,222 0
----------------------------
Total Property $120,521,849 $57,095,310
============================
(1) Depreciation is provided on buildings and improvements over 31.5 or
39.0 years and personal property over 3.0 to 7.0 years.
(2) Consists of three buildings, with one building being an MOB that is
under construction as of 12/31/00.
(3) Development at 12/31/00.
(4) Total assets at 12/31/00 have an estimated aggregate total cost of
$1,323,446,841 for Federal Income Tax purposes.
(5) Reconciliation of Total Property and Accumulated Depreciation for the
twelve months ended December 31, 2000, 1999, and 1998:
[Enlarge/Download Table]
Year to Date Ending 12/31/00 Year to Date Ending 12/31/99 Year to Date Ending 12/31/98
------------------------------ ------------------------------- ----------------------------
Total Accumulated Total Accumulated Total Accumulated
Property Depreciation Property Depreciation Property Depreciation
------------------------------ ------------------------------- ----------------------------
Beginning Balance $1,399,145,647 $ 83,995,802 $1,387,554,751 $50,116,154 $ 505,698,610 $34,718,380
Retirements/dispositions:
Real Estate (17,185,281) (1,821,351) (46,839,974) (4,027,489) (11,410,200) (423,339)
Corporate Property (21,130) (13,522) 0 0 0 0
Additions during the period:
Real Estate 72,556,057 37,790,216 24,633,438 37,686,289 847,262,872 15,507,502
Corporate Property 623,841 570,704 286,651 220,848 119,603 313,611
Construction in Progress 24,229,097 0 33,510,781 0 45,883,866 0
------------------------------ ------------------------------- ----------------------------
Ending Balance $1,479,348,231 $120,521,849 $1,399,145,647 $83,995,802 $1,387,554,751 $50,116,154
============================== =============================== ============================
40
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
AS OF DECEMBER 31, 2000
(dollars in thousands)
[Enlarge/Download Table]
PERIODIC ORIGINAL
INTEREST MATURITY PAYMENT FACE
DESCRIPTION RATE DATE TERMS AMOUNT
INDIVIDUAL PERMANENT MORTGAGES IN EXCESS OF 3% OF THE
TOTAL CARRYING AMOUNT:
Specialty hospital located in Arizona 9.58% 11/1/04 (1) $ 17,800
Skilled nursing facility located in Maryland 10.30% 2/15/02 (1) 8,800
Skilled nursing facility located in Maryland 10.30% 5/5/03 (1) 6,200
Skilled nursing facility located in Michigan 11.47% 2/15/07 (1) 9,600
Skilled nursing facility located in Tennessee 10.09% 10/27/13 (10) 12,380
Physician clinic facility located in Florida 10.51% 10/5/10 (1) 9,400
Assisted living facility located in Florida 10.06% 1/1/08 (1) 5,800
Assisted living facility located in Florida 8.69% 2/1/09 (1) 6,300
Skilled nursing facility located in California 10.00% 5/1/07 (1) 5,829
Assisted living facility in California 12.00% 5/31/08 (2) 6,800
Acute care hospital located in California 12.23% 8/10/09 (1) 8,000
OTHER MORTGAGES LESS THAN 3% OF THE TOTAL CARRYING AMOUNT:
Twelve skilled nursing facilities located in the states of From From
Alabama, California, Florida, Massachusetts, 8.18% Nov-01
Michigan, Ohio, South Carolina, Tennessee, to to
and Virginia; with face amounts ranging from $ .350 million
to $6.3 million 13.50% Aug-09
Twenty nine assisted living facilities located in the states of
Alabama, Arizona, California, Georgia,
Idaho, Mississippi, Montana, North Carolina, From From
New Mexico, Ohio, Oregon, Pennsylvania, Tennessee, 8.48% May-01
Texas, and Washington; with face amounts ranging to to
from $ .350 million to $6.8 million 13.50% Feb-08
One land investment located in Texas with an original
face amount of $2.4 million 12.50% Feb-01 (10) 2,400
One physician clinic located in Texas with an original face amount 13.00% Sep-10 (12) 752
of $.752 million
CARRYING BALLOON
DESCRIPTION AMOUNT (9) PAYMENT
INDIVIDUAL PERMANENT MORTGAGES IN EXCESS OF 3% OF THE
TOTAL CARRYING AMOUNT:
Specialty hospital located in Arizona $ 17,703 $ 16,409(4)
Skilled nursing facility located in Maryland 8,791 8,498(6)
Skilled nursing facility located in Maryland 6,269 5,995(3)
Skilled nursing facility located in Michigan 9,452 8,463(6)
Skilled nursing facility located in Tennessee 6,374 5,955(5)
Physician clinic facility located in Florida 9,430 8,006(7)
Assisted living facility located in Florida 5,690 4,967(6)
Assisted living facility located in Florida 6,275 5,318(6)
Skilled nursing facility located in California 5,722 4,911(6)
Assisted living facility in California 7,157 7,890(6)
Acute care hospital located in California 7,883 6,979(8)
OTHER MORTGAGES LESS THAN 3% OF THE TOTAL CARRYING AMOUNT:
Twelve skilled nursing facilities located in the states of
Alabama, California, Florida, Massachusetts,
Michigan, Ohio, South Carolina, Tennessee,
and Virginia; with face amounts ranging from $ .350 million
to $6.3 million 23,941
Twenty nine assisted living facilities located in the states of
Alabama, Arizona, California, Georgia,
Idaho, Mississippi, Montana, North Carolina,
New Mexico, Ohio, Oregon, Pennsylvania, Tennessee,
Texas, and Washington; with face amounts ranging
from $ .350 million to $6.8 million 53,577
One land investment located in Texas with an original
face amount of $2.4 million 2,450 2,400(6)
One physician clinic located in Texas with an original face amount 192 0(13)
of $.752 million
----------
TOTAL MORTGAGE NOTES RECEIVABLE $170,906
==========
Notes:
(1) Paid in monthly installments of principal and interest. Principal
payable in full at maturity date. Amortized over 300 months.
(2) Interest only for 5 years. 2% of interest is capitalized.
(3) No prepayment until 3rd anniversary, then Greater of 5% penalty or (6)
Yield Maintenance until December '02. No Penalty after December '02.
(4) No prepayment penalty until 4th year, then 3% penalty scaling down 1%
annually.
(5) Prepayment penalty cannot be determined because future interest rate
fluctuations are based on future Consumer Price Index.
(6) Yield Maintenance Amount is defined generally as % of the Principal
Amount Being Prepaid x [(Present Value of the principal and Interest
payments remaining to maturity at a discount rate) - (Principal Amount
outstanding at the time of prepayment)].
(7) No prepayment until 5th anniversary, then 5% penalty scaling down 1%
per year.
(8) No prepayment before December 2001, then 3% penalty until August 2002,
then scales down 1% per year.
(9) Generally includes purchase accounting adjustment resulting from
Capstone merger.
(10) Interest only until maturity. Then principal is payable in full.
(11) Other deductions consists of 14 mortgages which were converted to
master leases, and net proceeds from a mortgage participation
transaction.
(12) Paid in monthly installments of principal and interest. Amortized over
120 months.
(13) Prepayment may be made with the following penalties: 1.5% penalty
during first loan year, 3.5% during second loan year, 5.5% during third
loan year, 8% until after maturity.
[Enlarge/Download Table]
Years Ended December 31,
-------------------------------------------------
2000 1999 1998
--------- --------- ---------
Balance at beginning of period $ 250,346 $ 234,504 $ 4,708
Additions during period:
New or acquired mortgages 192 0 218,816
Commitments assumed in the Capstone merger 0 16,734 0
Construction fundings 1,444 21,804 19,864
Other 129 407 121
--------- --------- ---------
1,765 38,945 238,801
Deductions during period:
Collections of principal (1,680) (1,931) (164)
Cost of mortgages sold (15,921) (20,249) (8,646)
Amortization of premium (787) (923) (195)
Other (11) (62,817) 0 0
--------- --------- ---------
(81,205) (23,103) (9,005)
--------- --------- ---------
Balance at end of period $ 170,906 $ 250,346 $ 234,504
========= ========= =========
41
Dates Referenced Herein and Documents Incorporated by Reference
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