ElderTrust Operating Limited Partnership 10-Q 2006 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006

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:	333-89312-02
	333-90756-03 333-101598-03 333-107942-05 333-119261-27 333-120642-27 333-127262-45 333-131342-56 333-133115-61

Eldertrust Operating Limited Partnership

(Exact name of registrant as specified in its charter)

Delaware	23-2915846
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

10350 Ormsby Park Place, Suite 300

Louisville, Kentucky

(Address of principal executive offices)

40223

(Zip Code)

(502) 357-9000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨ Accelerated filer  ¨ Non-accelerated filer   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

ELDERTRUST OPERATING LIMITED PARTNERSHIP

FORM 10-Q

INDEX

		Page
PART I—FINANCIAL INFORMATION		3
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005	3
	Condensed Consolidated Statements of Income For the Three Months Ended March 31, 2006 and 2005	4
	Condensed Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2006 and 2005	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17
Item 4.	Controls and Procedures	17
PART II—OTHER INFORMATION		19
Item 6.	Exhibits	19

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ELDERTRUST OPERATING LIMITED PARTNERSHIP

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

	March 31, 2006			December 31, 2005
	(Unaudited)			(Audited)
ASSETS
Assets:
Real estate investments, at cost	$	139,882		$	139,754
Less – accumulated depreciation		(11,493	)		(10,162	)
Land		15,601			15,601
Net real estate investments		143,990			145,193
Cash and cash equivalents		463			439
Restricted cash		5,741			5,616
Accounts receivable, net of allowance of $7 and $36, respectively		1,541			1,401
Investment in affiliates		9,039			9,039
Other assets		221			473
Total assets	$	160,995		$	162,161
LIABILITIES AND PARTNERS’ CAPITAL
Liabilities:
Debt	$	66,850		$	67,200
Note payable to affiliate		7,648			7,500
Accrued interest		429			434
Accounts payable and other accrued liabilities		162			233
Other liabilities		2,819			2,958
Total liabilities		77,908			78,325
Partners’ capital		83,087			83,836
Total liabilities and partners’ capital	$	160,995		$	162,161

See notes to condensed consolidated financial statements.

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ELDERTRUST OPERATING LIMITED PARTNERSHIP

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per unit amounts)

	For the Three Months Ended March 31,
	2006		2005
Revenues:
Rental income	$	4,111	$	4,077
Interest and other income		32		10
Total revenues		4,143		4,087
Expenses:
Interest		1,422		1,446
Depreciation		1,330		1,326
Property-level operating expenses		331		331
General, administrative and professional fees		299		384
Total expenses		3,382		3,487
Income before discontinued operations		761		600
Discontinued operations		—		(38	)
Net income	$	761	$	562
Net income allocated to Class A general partner	$	1	$	1
Net income allocated to Class A limited partners		726		559
Net income allocated to Class C limited partner		3		2
Net income allocated to Class D limited partners		31		—
Net income per unit:
Class A general partnership units	$	0.13	$	0.13
Class A limited partnership units		0.09		0.07
Class C limited partnership units		0.10		0.06
Class D limited partnership units		0.09		—
Units used to compute per unit amount:
Class A general partnership units		8		8
Class A limited partnership units		8,041		8,041
Class C limited partnership units		31		31
Class D limited partnership units		345		—

See notes to condensed consolidated financial statements.

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ELDERTRUST OPERATING LIMITED PARTNERSHIP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	For the Three Months Ended March 31,
	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	761		$	562
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation (including amounts in discontinued operations		1,330			1,372
Straight-lining of rental income		(131	)		(119	)
Other		(29	)		3
Net changes in assets and liabilities:
Increase in restricted cash		(125	)		(278	)
Decrease in accounts receivable and other assets		20			48
Increase (decrease) in accounts payable and accrued liabilities		4			(658	)
Other		253			21
Net cash provided by operating activities		2,083			951
CASH FLOWS FROM INVESTING ACTIVITIES:
Net investment in real estate properties		(128	)		—
Net cash used in investing activities		(128	)		—
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to unit holders		(1,581	)		(1,350	)
Repayment of debt		(350	)		(326	)
Net cash used in financing activities		(1,931	)		(1,676	)
Net increase (decrease) in cash and cash equivalents		24			(725	)
Cash and cash equivalents, beginning of period		439			1,210
Cash and cash equivalents, end of period	$	463		$	485

See notes to condensed consolidated financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—ORGANIZATION

ElderTrust Operating Limited Partnership (together with its subsidiaries, unless otherwise indicated or except where the context otherwise requires, “we,” “us,” “our,” “ETOP” or the “Partnership”) is a limited partnership organized under the laws of the State of Delaware on July 30, 1997. We invest in seniors housing and other healthcare facilities, primarily skilled nursing facilities, assisted and independent living facilities and medical and other office buildings. ElderTrust, a Maryland real estate investment trust (“ElderTrust”), is our sole general partner. On February 5, 2004, ElderTrust became a wholly owned direct subsidiary of Ventas, Inc. (“Ventas”), a healthcare real estate investment trust based in Louisville, Kentucky, whose common stock is publicly traded on the New York Stock Exchange.

As of March 31, 2006, our consolidated assets included seventeen properties located in three states, consisting of nine seniors housing facilities, five skilled nursing facilities, two medical office buildings and a financial office building. Except with respect to our office buildings, we lease these facilities to third-party healthcare providers, generally under “triple-net” leases, which require the tenants to pay all property-related expenses.

NOTE 2—BASIS OF PRESENTATION

The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management of our general partner, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of results for the interim period have been included. Operating results for the three months ended March 31, 2006 are not necessarily an indication of the results that may be expected for the year ending December 31, 2006. The Condensed Consolidated Balance Sheet as of December 31, 2005 has been derived from our audited consolidated financial statements for the year ended December 31, 2005. The accompanying Condensed Consolidated Financial Statements and related notes should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2005. Certain prior year amounts have been reclassified to conform to current year presentation.

We operate through one reportable segment: investment in real estate. Our primary business consists of financing, owning and leasing healthcare-related and seniors housing facilities and leasing or subleasing those facilities to third parties. With the exception of our office buildings, we do not operate our facilities nor do we allocate capital to maintain our properties. Substantially all depreciation and interest expenses reflected in the condensed consolidated statements of income relates to our investment in real estate.

Gain on Sale of Facilities

We recognize sales of facilities only upon the closing of the transaction with the purchaser. Payments received from purchasers prior to closing are recorded as deposits and classified as other assets in the consolidated balance sheet. Gains on facilities sold are recognized using the full accrual method upon closing when the collectibility of the sales price is reasonably assured, we are not obligated to perform significant activities after the sale to earn the profit, we have received adequate initial investment from the buyer, and other profit recognition criteria have been satisfied. Gains may be deferred in whole or in part until the sales satisfy the requirements of gain recognition on sales of real estate under the Financial Accounting Standards Board Statement of Financial Accounting Standards No. 66, “Accounting for Sales of Real Estate.”

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NOTE 3—CONCENTRATION OF CREDIT RISK

As of March 31, 2006, approximately 53.6% and 35.2% of our properties, based on their original cost, were leased to or managed by Genesis HealthCare Corporation (“Genesis HealthCare”) and certain of its related entities (collectively “Genesis”) and Benchmark Assisted Living LLC and certain of its related entities (collectively “Benchmark”), respectively. Approximately 49.7% and 30.9% of our total rental revenue for the three months ended March 31, 2006 were derived from leases with Genesis and Benchmark, respectively.

Because we lease a substantial portion of our properties to Genesis and Benchmark and they are each a significant source of our total revenues, their financial condition and ability and willingness to satisfy their obligations under their respective leases and certain other agreements with us will significantly impact our revenues and our ability to service our indebtedness and to make distributions to our partners. We cannot assure you that Genesis or Benchmark will have sufficient assets, income and access to financing to enable it to satisfy its obligations under its respective leases and other agreements with us, and any inability or unwillingness on its part to do so would have a material adverse effect on our business, financial condition, results of operation and liquidity, on our ability to service our indebtedness and on our ability to make distributions to our partners.

Genesis HealthCare is subject to the reporting requirements of the Securities and Exchange Commission (the “Commission”) and is required to file with the Commission annual reports containing audited financial information and quarterly reports containing unaudited interim financial information. The information related to Genesis HealthCare contained or referred to in this Quarterly Report on Form 10-Q is derived from filings made by Genesis HealthCare with the Commission or other publicly available information, or has been provided to us by Genesis HealthCare. We have not verified this information either through an independent investigation or otherwise. We have no reason to believe that this information is inaccurate in any material respect, but we cannot assure you that all such information is accurate. Genesis HealthCare’s filings with the Commission can be found at the Commission’s website atwww.sec.gov. We are providing this data for informational purposes only, and you are encouraged to obtain Genesis HealthCare’s publicly available filings from the Commission.

NOTE 4—DISCONTINUED OPERATIONS

In October 2005, we completed the sale of one seniors housing facility. The operating results of this facility are presented in discontinued operations in the Condensed Consolidated Statement of Income for the three months ended March 31, 2005.

During the three months ended March 31, 2006, we did not dispose of any operating assets or have any operating assets classified as held for sale and, therefore, no amounts were reported in discontinued operations.

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Set forth below is a summary of the results of operations of the facility sold in October 2005:

	For the Three Months Ended March 31, 2005
Revenues:
Rental income	$	203
Interest and other income		20
Total revenues		223
Expenses:
Interest		196
Depreciation		46
General and administrative		19
Total expenses		261
Discontinued operations	$	(38	)

NOTE 5—RELATED PARTY TRANSACTIONS

In accordance with our Limited Partnership Agreement, our general partner uses an allocation method for its general, administrative and professional fees and charges these to us on a quarterly basis. This allocation method is based on our total revenues in relation to the consolidated revenues of the general partner. Other direct expenses are incurred by us and expensed at the time incurred. Approximately 86.3% and 94.0% of our consolidated general, administrative and professional fees for the three months ended March 31, 2006 and 2005, respectively, related to this allocation.

NOTE 6—NOTE PAYABLE TO AFFILIATE

In April 2004, we entered into a promissory note in the amount of $7.5 million with Ventas Realty, Limited Partnership, a wholly owned subsidiary of Ventas. Under the terms of the note, interest is paid quarterly at an annual rate of 8.0% beginning on July 1, 2004. The note has a maturity date of December 31, 2013, at which time a principal balloon payment equal to the full amount of the note is due. As of March 31, 2006, the note had an outstanding balance of $7.6 million, which included accrued but unpaid interest.

NOTE 7—CONDENSED CONSOLIDATING INFORMATION

We and certain of our direct and indirect wholly owned subsidiaries (the “ETOP Subsidiary Guarantors”) have provided full and unconditional guarantees, on a joint and several basis with Ventas and certain of Ventas’s direct and indirect wholly owned subsidiaries, of the obligation to pay principal and interest with respect to each series of senior notes issued by Ventas Realty, Limited Partnership and Ventas Capital Corporation (collectively, the “Ventas Issuers”), both wholly owned subsidiaries of Ventas. The total aggregate principal amount of senior notes outstanding as of March 31, 2006 was $1.1 billion. Certain of our other subsidiaries (the “ETOP Non-Guarantor Subsidiaries”) have not provided the guarantee of the senior notes and therefore are not directly obligated with respect to the senior notes. Contractual and legal restrictions, including those contained in the instruments governing certain of the ETOP Non-Guarantor Subsidiaries’ outstanding indebtedness, may under certain circumstances restrict our ability to obtain cash from the ETOP Non-Guarantor Subsidiaries for the purpose of satisfying our debt service obligations, including our guarantee of payment of principal and interest on the senior notes. Additionally, certain of the ETOP Subsidiary Guarantors’ properties are subject to mortgages.

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CONDENSED CONSOLIDATING BALANCE SHEET

As of March 31, 2006

(In thousands)	ETOP and ETOP Subsidiary Guarantors			ETOP Non-Guarantor Subsidiaries		Consolidated Elimination			Consolidated
Assets
Net real estate investments	$	55,666		$	88,324	$	—		$	143,990
Cash and cash equivalents		—			463		—			463
Restricted cash		—			5,741		—			5,741
Equity in affiliates		80,851			15		(80,866	)		—
Investment in affiliates		9,039			—		—			9,039
Other		549			1,213		—			1,762
Total assets	$	146,105		$	95,756	$	(80,866	)	$	160,995
Liabilities and partners’ capital
Liabilities:
Debt	$	421		$	66,429	$	—		$	66,850
Intercompany		(5,120	)		5,120		—			—
Note payable to affiliate		7,648			—		—			7,648
Accrued interest		—			429		—			429
Accounts payable and other accrued liabilities		104			2,877		—			2,981
Total liabilities		3,053			74,855		—			77,908
Total partners’ capital		143,052			20,901		(80,866	)		83,087
Total liabilities and partners’ capital	$	146,105		$	95,756	$	(80,866	)	$	160,995

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CONDENSED CONSOLIDATING BALANCE SHEET

As of December 31, 2005

(In thousands)	ETOP and ETOP Subsidiary Guarantors			ETOP Non-Guarantor Subsidiaries		Consolidated Elimination			Consolidated
Assets
Net real estate investments	$	56,201		$	88,992	$	—		$	145,193
Cash and cash equivalents		1			438		—			439
Restricted cash		26			5,590		—			5,616
Equity in affiliates		80,390			15		(80,405	)		—
Investment in affiliates		9,039			—		—			9,039
Other assets		508			1,366		—			1,874
Total assets	$	146,165		$	96,401	$	(80,405	)	$	162,161
Liabilities and partners’ capital
Liabilities:
Debt	$	424		$	66,776	$	—		$	67,200
Intercompany		(4,804	)		4,804		—			—
Note payable to affiliate		7,500			—		—			7,500
Accrued interest		3			431		—			434
Accounts payable and other accrued liabilities		174			3,017		—			3,191
Total liabilities		3,297			75,028		—			78,325
Total partners’ capital		142,868			21,373		(80,405	)		83,836
Total liabilities and partners’ capital	$	146,165		$	96,401	$	(80,405	)	$	162,161

CONDENSED CONSOLIDATING STATEMENT OF INCOME

For the three months ended March 31, 2006

(In thousands)	ETOP and ETOP Subsidiary Guarantors			ETOP Non-Guarantor Subsidiaries			Consolidated Elimination		Consolidated
Revenues:
Rental income	$	1,422		$	2,689		$	—	$	4,111
Equity loss in affiliates		(22	)		—			22		—
Interest and other income		—			32			—		32
Total revenues		1,400			2,721			22		4,143
Expenses:
Interest		157			1,265			—		1,422
Depreciation		535			795			—		1,330
Property-level operating expenses		—			331			—		331
General, administrative and professional fees		115			184			—		299
Intercompany interest		(168	)		168			—		—
Total expenses		639			2,743			—		3,382
Net income (loss)	$	761		$	(22	)	$	22	$	761

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CONDENSED CONSOLIDATING STATEMENT OF INCOME

For the three months ended March 31, 2005

(In thousands)	ETOP and ETOP Subsidiary Guarantors			ETOP Non-Guarantor Subsidiaries			Consolidated Elimination		Consolidated
Revenues:
Rental income	$	1,419		$	2,658		$	—	$	4,077
Interest and other income		—			10			—		10
Equity loss in affiliates		(286	)		—			286		—
Total revenues		1,133			2,668			286		4,087
Expenses:
Interest		11			1,435			—		1,446
Depreciation		535			791			—		1,326
Property-level operating expenses		—			331			—		331
General, administrative and professional fees		155			229			—		384
Intercompany interest		(168	)		168			—		—
Total expenses		533			2,954			—		3,487
Income before discontinued operations		600			(286	)		286		600
Discontinued operations		(38	)		—			—		(38	)
Net income (loss)	$	562		$	(286	)	$	286	$	562

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the three months ended March 31, 2006

(In thousands)	ETOP and ETOP Subsidiary Guarantors			ETOP Non-Guarantor Subsidiaries			Consolidated Elimination		Consolidated
Net cash provided by operating activities	$	579		$	1,504		$	—	$	2,083
Net cash used in investing activities		—			(128	)		—		(128	)
Cash flows from financing activities:
Repayment of debt		(3	)		(347	)		—		(350	)
Distributions to unit holders		(577	)		(1,004	)		—		(1,581	)
Net cash used in financing activities		(580	)		(1,351	)		—		(1,931	)
Net (decrease) increase in cash and cash equivalents		(1	)		25			—		24
Cash and cash equivalents at beginning of period		1			438			—		439
Cash and cash equivalents at end of period	$	—		$	463		$	—	$	463

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the three months ended March 31, 2005

(In thousands)	ETOP and ETOP Subsidiary Guarantors			ETOP Non-Guarantor Subsidiaries			Consolidated Elimination		Consolidated
Net cash provided by (used in) operating activities	$	1,205		$	(254	)	$	—	$	951
Net cash provided by investing activities		—			—			—		—
Cash flows from financing activities:
Repayment of debt		(3	)		(323	)		—		(326	)
Distributions to unit holders		(1,208	)		(142	)		—		(1,350	)
Net cash used in financing activities		(1,211	)		(465	)		—		(1,676	)
Net decrease in cash and cash equivalents		(6	)		(719	)		—		(725	)
Cash and cash equivalents at beginning of period		37			1,173			—		1,210
Cash and cash equivalents at end of period	$	31		$	454		$	—	$	485

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unless otherwise indicated or except where the context otherwise requires, the terms “we,” “us,” “our,” “ETOP” and the “Partnership” and other similar terms in this Quarterly Report on Form 10-Q refer to ElderTrust Operating Limited Partnership and its consolidated subsidiaries.

Forward-Looking Statements

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements regarding our expected future financial position, results of operations, cash flows, financing plans, business strategy, budgets, projected costs, capital expenditures, competitive positions, growth opportunities, expected lease income, plans and objectives of management for future operations and statements that include words such as “anticipate,” “if,” “believe,” “plan,” “estimate,” “expect,” “intend,” “may,” “could,” “should,” “will” and other similar expressions are forward-looking statements. These forward-looking statements are inherently uncertain, and security holders must recognize that actual results may differ from our expectations. We do not undertake a duty to update such forward-looking statements, which speak only as of the date on which they are made.

Our actual future results and trends may differ materially depending on a variety of factors discussed in our filings with the Securities and Exchange Commission (the “Commission”). Factors that may affect our plans or results include without limitation:

• the ability and willingness of our tenants and operators, including Genesis HealthCare Corporation (“Genesis HealthCare”) and certain of its related entities (collectively, “Genesis”), and Benchmark Assisted Living LLC and certain of its related entities (collectively, “Benchmark”) to meet and/or perform the obligations under their various contractual arrangements with us;

• the ability of our tenants and operators to maintain the financial strength and liquidity necessary to satisfy their respective obligations and liabilities to third parties, including without limitation obligations under their existing credit facilities;

• the nature and extent of future competition;

• the extent of future or pending healthcare reform and regulation, including cost containment measures and changes in reimbursement policies, procedures and rates;

• increases in our cost of borrowing;

• the ability of our operators to deliver high quality care and to attract patients;

• the results of litigation affecting us;

• changes in general economic conditions and/or economic conditions in the markets in which we may, from time to time, compete;

• our ability to pay down, refinance, restructure and/or extend our indebtedness as it becomes due;

• the movement of interest rates;

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• the ability and willingness of our tenants to renew their leases with us upon expiration of the leases and our ability to relet our properties on the same or better terms in the event such leases expire and are not renewed by the existing tenants; and

• the impact on the liquidity, financial condition and results of operations of our tenants and operators resulting from increased operating costs and uninsured liabilities for professional liability claims, and the ability of our tenants and operators to accurately estimate the magnitude of such liabilities.

Many of these factors are beyond our control and the control of our management.

General

We are a limited partnership organized under the laws of the State of Delaware on July 30, 1997. We invest in seniors housing and other healthcare facilities, primarily skilled nursing facilities, assisted and independent living facilities and medical and other office buildings. ElderTrust, a Maryland real estate investment trust (“ElderTrust”), is our sole general partner. On February 5, 2004, ElderTrust became a wholly owned direct subsidiary of Ventas, Inc. (“Ventas”), a healthcare real estate investment trust based in Louisville, Kentucky, whose common stock is publicly traded on the New York Stock Exchange.

As of March 31, 2006, our consolidated assets included seventeen properties, located in three states, consisting of nine seniors housing facilities, five skilled nursing facilities, two medical office buildings and a financial office building with an aggregate net book value of $144.0 million. Except with respect to our office buildings, we lease these facilities to third-party healthcare providers, generally under “triple-net” leases, which require the tenants to pay all property-related expenses.

As of March 31, 2006, approximately 53.6% and 35.2% of our properties, based on their original cost, were operated by Genesis and Benchmark, respectively. Approximately 49.7% and 30.9% of our total rental revenue for the three months ended March 31, 2006 were derived from leases with Genesis and Benchmark, respectively. As a result of these relationships with Genesis and Benchmark, our revenues and ability to meet our obligations depend, in significant part, upon the ability of Genesis and Benchmark to meet their lease obligations. Any failure of Genesis and/or Benchmark to continue their operations and/or to continue to make lease payments to us could have a significant adverse impact on our operations and cash flows.

Recent Developments Regarding Government Regulation

Medicare Reimbursement; Skilled Nursing Facilities

On April 12, 2006, the Centers for Medicare & Medicaid Services (“CMS”) placed on public display a proposed rule to revise the hospital inpatient prospective payment system and to implement the Deficit Reduction Act of 2005, which proposed rule may also affect skilled nursing facilities. Under the proposed rule, for skilled nursing facility cost reporting periods beginning on or after October 1, 2005, reimbursement of uncollectible Medicare coinsurance amounts for all beneficiaries (other than beneficiaries of both Medicare and Medicaid) is reduced from 100% to 70%. CMS estimates that the change in the treatment of bad debt will result in a decrease in payments to skilled nursing facilities of $490 million over the five-year period from fiscal year 2006 to 2010.

The proposed rule also includes various options for classifying and weighing patients transferred to a skilled nursing facility after a hospital stay less than the mean length of stay associated with that particular diagnosis-related group. This change in methodology could affect skilled nursing facility admissions, although, we currently cannot predict what impact it will have on the liquidity or profitability of the operators of our skilled nursing facilities.

Finally, under the proposed rule, the $1,740 annual cap on Medicare part B reimbursement for physical therapy and speech-language pathology services and the separate annual cap of $1,740 on occupational therapy would be lifted for those patients who can demonstrate medical necessity. Unless Congress takes prior action, the caps will go back into effect on January 1, 2007.

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On August 4, 2005, CMS published a final rule under the prospective payment system for skilled nursing facilities. Pursuant to the rule, CMS, among other things, adopted a refinement to the resource utilization groups (“RUGs”) used to determine payment for beneficiaries in skilled nursing facilities which increases the number of RUGs from 44 to 53. CMS also increased the case mix index adjustment for all RUGs categories, and implemented a market basket increase of 3%. The market basket increase became effective on October 1, 2005, and the RUGs refinements became effective January 1, 2006. The overall effect of these changes in 2006 is projected by CMS to be a 0.1% increase in aggregate Medicare payments, but within this aggregate CMS expects some facilities to have modest decreases and some to have modest increases.

Medicaid Reimbursement; Skilled Nursing Facilities

The April 12, 2006 rule proposed by CMS also mitigates both state and federal Medicaid expenditures by establishing additional Medicaid eligibility restrictions. Collectively, these Medicaid eligibility restrictions are anticipated to reduce Medicaid payments to skilled nursing facility operators in the future.

At this time, it is not possible to predict whether significant Medicaid rate freezes, cuts or other program changes will be adopted, and if so, by how many states or the impact of such action on our operators. However, severe and widespread Medicaid rate cuts or freezes could have a material adverse effect on our skilled nursing facility operators and in turn could have an adverse effect on us.

Critical Accounting Policies and Estimates

Our Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles, which requires us to make estimates and judgments that affect the reported amounts in the financial statements and the related disclosures. We believe that the following critical accounting policies, among others, affect our more significant estimates and judgments used in the preparation of our financial statements.

Long-Lived Assets

Investments in real estate properties are recorded at cost. We account for acquisitions using the purchase method of accounting. The cost of the properties acquired is allocated among tangible land, buildings and improvements and recognized intangibles based upon estimated fair values in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations.” We estimate fair values of the components of assets acquired as of the acquisition date or engage a third-party appraiser as necessary. Recognized intangibles, if any, include the value of acquired lease contracts and related customer relationships.

Our method for determining fair value varies with the categorization of the asset acquired. We estimate the fair value of buildings on an as-if-vacant basis, and depreciate the building value over the estimated remaining life of the building. We determine the allocated value of other fixed assets based upon the replacement cost and depreciate such value over the estimated remaining useful lives. We determine the value of land either based on real estate tax assessed values in relation to the total value of the asset, internal analyses of recently acquired and existing comparable properties within our portfolio or third party appraisals. The fair value of in-place leases, if any, reflects (i) above and below market leases, if any, determined by discounting the difference between the estimated current market rent and the in-place rentals, the resulting intangible asset of which is amortized to rental revenue over the remaining life of the associated lease plus any fixed rate renewal periods, if applicable, (ii) the estimated value of the cost to obtain tenants, including tenant allowances, tenant improvements and leasing commissions, which is amortized over the remaining life of the associated lease, and (iii) an estimated value of the absorption

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period to reflect the value of the rents and recovery costs foregone during a reasonable lease-up period, as if the acquired space was vacant, which is amortized over the remaining life of the associated lease. We also estimate the value of tenant or other customer relationships acquired by considering the nature and extent of existing business relationships with the tenant, growth prospects for developing new business with such tenant, such tenant’s credit quality, expectations of lease renewals with such tenant, and the potential for significant, additional future leasing arrangements with such tenant. We amortize such value, if any, over the expected term of the associated arrangements or leases, which would include the remaining lives of the related leases and any expected renewal periods.

Impairment of Long-Lived Assets

We periodically evaluate our long-lived assets, primarily consisting of investments in real estate, for impairment indicators. If indicators of impairment are present, we evaluate the carrying value of the related real estate investments in relation to the future undiscounted cash flows of the underlying operations and adjust the net book value of leased properties and other long-lived assets to fair value if the sum of the expected future cash flow or sales proceeds is less than book value. An impairment loss is recognized at the time we make any such adjustment. Future events could occur which would cause management to conclude that impairment indicators exist and an impairment loss is warranted.

Revenue Recognition

Certain of our leases provide for periodic and determinable increases in base rent. Base rental revenues under these leases are recognized on a straight-line basis over the term of the applicable lease. Certain of our other leases provide for an annual increase in rental payments only if certain revenue parameters or other contingencies are met. We recognize the increased rental revenue under these leases only if the revenue parameters or other contingencies are met, rather than on a straight-line basis over the term of the applicable lease. We recognize income from rent, lease termination fees and other income once all of the following criteria are met in accordance with the Commission’s Staff Accounting Bulletin 104: (i) the agreement has been fully executed and delivered; (ii) services have been rendered; (iii) the amount is fixed or determinable; and (iv) the collectibility is reasonably assured.

Gain on Sale of Facilities

We recognize sales of facilities only upon the closing of the transaction with the purchaser. Payments received from purchasers prior to closing are recorded as deposits and classified as other assets in the consolidated balance sheet. Gains on facilities sold are recognized using the full accrual method upon closing when the collectibility of the sales price is reasonably assured, we are not obligated to perform significant activities after the sale to earn the profit, we have received adequate initial investment from the buyer, and other profit recognition criteria have been satisfied. Gains may be deferred in whole or in part until the sales satisfy the requirements of gain recognition on sales of real estate under SFAS No. 66, “Accounting for Sales of Real Estate.”

Results of Operations

There was no material change in our revenues from the first quarter of 2005. The majority of our general, administrative and professional fees results from the allocation of corporate expenses from our general partner. The decrease in this expense during the first quarter of 2006 is attributable primarily to lower allocations from the general partner. There were no other material changes in our other expenses from the first quarter of 2005. Discontinued operations in 2005 relates to the operating results of a seniors housing facility that was sold in October 2005.

Liquidity and Capital Resources

During the three months ended March 31, 2006, our principal source of liquidity was cash flows from operations. We anticipate that cash flows from operations will be sufficient to fund our business operations and distributions to unit holders for the foreseeable future.

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We had cash and cash equivalents of $0.5 million and restricted cash of $5.7 million as of March 31, 2006.

Net cash provided by operating activities was $2.1 million and $1.0 million for the three months ended March 31, 2006 and 2005, respectively. This increase is due primarily due to operational improvements and favorable changes in operating assets and liabilities at March 31, 2006.

Net cash used in investing activities was $0.1 million for the three months ended March 31, 2006 and related solely to building improvements for our medical office buildings. No similar investments were made during the same period in 2005.

Net cash used in financing activities was $1.9 million and $1.7 million for the three months ended March 31, 2006 and 2005, respectively. This increase is primarily the result of cash distributions to a greater number of unit holders.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We receive revenue primarily by leasing our assets under long-term triple-net leases in which the rental rate is generally fixed with annual escalators, subject to certain limitations. Our bonds payable and substantially all of our mortgage indebtedness bear interest at fixed rates. We do not utilize interest rate swaps or any other type of derivative financial instruments to mitigate interest rate risk.

For fixed rate debt, changes in interest rates generally affect the fair market value of the underlying indebtedness, but not earnings or cash flows. We generally cannot prepay fixed rate debt prior to maturity without premium. Therefore, interest rate risk and changes in fair market value should not have a significant impact on the fixed rate debt until we would be required to refinance such debt.

To highlight the sensitivity of the fixed rate debt to changes in interest rates, the following summary shows the effects of a hypothetical instantaneous change of 100 basis points (BPS) in interest rates as of March 31, 2006 and December 31, 2005 (in thousands):

	Fixed Rate Debt
	As of March 31, 2006		As of December 31, 2005
Book value	$	74,077	$	74,276
Fair value		76,930		79,778
Fair value reflecting change in interest rates:
-100 BPS		80,990		84,197
+100 BPS		73,294		75,831

The fair market value of our fixed rate debt is based on current interest rates at which similar borrowings could be made by us. These sensitivity analyses are limited in that they were performed at a particular point in time and are subject to the accuracy of the various assumptions used.

We may borrow additional money with variable interest rates in the future. Increases in interest rates, therefore, would result in increases in interest expense, which could adversely affect our cash flow and our ability to pay our obligations.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures to ensure that material information relating to us is timely communicated to the officers who certify our financial reports and to other members of our management, including ElderTrust’s Board of Trustees.

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Based upon their evaluation as of March 31, 2006, the Chief Executive Officer and Chief Financial Officer of ElderTrust, our general partner, have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are effective to ensure that information required to be disclosed by us in our Exchange Act filings is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.

Changes in Internal Control Over Financial Reporting

During the first quarter of 2006, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) or in other factors that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 6. EXHIBITS

Exhibit Number	Description of Document
31.1	Certification of Debra A. Cafaro, President and Chief Executive Officer of ElderTrust, general partner of the Partnership, pursuant to 13a-14(a) under the Securities Exchange Act of 1934, as amended.
31.2	Certification of Richard A. Schweinhart, Chief Financial Officer of ElderTrust, general partner of the Partnership, pursuant to 13a-14(a) under the Securities Exchange Act of 1934, as amended.
32.1	Certification of Debra A. Cafaro, President and Chief Executive Officer of ElderTrust, general partner of the Partnership, pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. 1350.
32.2	Certification of Richard A. Schweinhart, Chief Financial Officer of ElderTrust, general partner of the Partnership pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. 1350.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: May 12, 2006

ELDERTRUST OPERATING LIMITED PARTNERSHIP
By:	ELDERTRUST, its general partner
By:	/s/ Debra A. Cafaro
	Debra A. Cafaro
	President and Chief Executive Officer
By:	/s/ Richard A. Schweinhart
	Richard A. Schweinhart
	Chief Financial Officer

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Exhibit Number	Description of Document
31.1	Certification of Debra A. Cafaro, President and Chief Executive Officer of ElderTrust, general partner of the Partnership, pursuant to 13a-14(a) under the Securities Exchange Act of 1934, as amended.
31.2	Certification of Richard A. Schweinhart, Chief Financial Officer of ElderTrust, general partner of the Partnership, pursuant to 13a-14(a) under the Securities Exchange Act of 1934, as amended.
32.1	Certification of Debra A. Cafaro, President and Chief Executive Officer of ElderTrust, general partner of the Partnership, pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. 1350.
32.2	Certification of Richard A. Schweinhart, Chief Financial Officer of ElderTrust, general partner of the Partnership pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. 1350.

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