UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
/ / 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 0-9109 Commission file number 0-9110
MEDITRUST CORPORATION MEDITRUST OPERATING COMPANY
(Exact name of registrant as specified (Exact name of registrant as specified
in its charter) in its charter)
DELAWARE DELAWARE
(State or other jurisdiction of (State or other jurisdiction of
incorporation or organization) incorporation or organization)
95-3520818 95-3419438
(I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.)
909 HIDDEN RIDGE, SUITE 600 909 HIDDEN RIDGE, SUITE 600
IRVING, TX 75038 IRVING, TX 75038
(Address of principal executive (Address of principal executive
offices including zip code) offices including zip code)
(214) 492-6600 (214) 492-6600
(Registrant's telephone number, (Registrant's telephone number,
including area code) including area code)
Indicate by check mark whether the registrants (1) have 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
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
The number of shares outstanding of each of the issuers' classes of common
stock, as of the close of business on July 27, 2000 were:
Meditrust Corporation: 143,431,700
Meditrust Operating Company: 142,126,323
THE MEDITRUST COMPANIES
FORM 10-Q
INDEX
PAGE(S)
-------
Part I. Financial Information
Item 1. Financial Statements
The Meditrust Companies
Combined Consolidated Balance Sheets as of June 30, 2000
(unaudited) and December 31, 1999 1
Combined Consolidated Statements of Operations for the three months
ended June 30, 2000 (unaudited) and 1999 (unaudited) 2
Combined Consolidated Statements of Operations for the six months
ended June 30, 2000 (unaudited) and 1999 (unaudited) 3
Combined Consolidated Statements of Cash Flows for the six
months ended June 30, 2000 (unaudited) and 1999 (unaudited) 4
Meditrust Corporation
Consolidated Balance Sheets as of June 30, 2000 (unaudited)
and December 31, 1999 5
Consolidated Statements of Operations for the three months
ended June 30, 2000 (unaudited) and 1999 (unaudited) 6
Consolidated Statements of Operations for the six months ended
June 30, 2000 (unaudited) and 1999 (unaudited) 7
Consolidated Statements of Cash Flows for the six months ended
June 30, 2000 (unaudited) and 1999 (unaudited) 8
Meditrust Operating Company
Consolidated Balance Sheets as of June 30, 2000 (unaudited)
and December 31, 1999 9
Consolidated Statements of Operations for the three months
ended June 30, 2000 (unaudited) and 1999 (unaudited) 10
Consolidated Statements of Operations for the six months ended
June 30, 2000 (unaudited) and 1999 (unaudited) 11
Consolidated Statements of Cash Flows for the six months ended
June 30, 2000 (unaudited) and 1999 (unaudited) 12
Notes to Combined Consolidated Financial Statements (unaudited) 13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 27
Part II. Other Information
Item 5. Other Information 53
Item 6. Exhibits and Reports on Form 8-K 53
Signatures 54
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE MEDITRUST COMPANIES
COMBINED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999
--------------------------------------
(UNAUDITED)
ASSETS
Real estate investments, net $ 4,250,268 $ 4,672,659
Cash and cash equivalents 9,439 7,220
Fees, interest and other receivables 135,915 79,042
Goodwill, net 469,286 480,673
Other assets, net 182,426 228,163
--------------------------------------
Total assets $ 5,047,334 $ 5,467,757
======================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Indebtedness:
Notes payable, net $ 1,100,533 $ 1,144,406
Convertible debentures, net 136,877 185,468
Bank notes payable, net 955,242 1,154,182
Bonds and mortgages payable, net 87,778 113,382
--------------------------------------
Total indebtedness 2,280,430 2,597,438
Accounts payable, accrued expenses and other liabilities 175,243 197,106
--------------------------------------
Total liabilities 2,455,673 2,794,544
--------------------------------------
Commitments and contingencies - -
Shareholders' equity:
Meditrust Corporation Preferred Stock, $.10 par value; 6,000 shares
authorized; 701 shares issued and outstanding at
June 30, 2000 and December 31, 1999 70 70
Paired Common Stock, $.20 combined par value; 500,000 shares
authorized; 142,013 and 141,015 paired shares issued and
outstanding at June 30, 2000 and December 31, 1999,
respectively 28,402 28,203
Additional paid-in-capital 3,656,702 3,654,358
Unearned compensation (6,229) (6,760)
Accumulated other comprehensive income 795 4,468
Distributions in excess of net income (1,087,919) (1,007,126)
--------------------------------------
2,591,821 2,673,213
Due from shareholders (160) -
--------------------------------------
Total shareholders' equity 2,591,661 2,673,213
--------------------------------------
Total liabilities and shareholders' equity $ 5,047,334 $ 5,467,757
======================================
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements contained within the Companies' Form 10-K for the year
ended December 31, 1999, are an integral part of these financial statements.
1
THE MEDITRUST COMPANIES
COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999
-----------------------------------
Revenue:
Hotel $ 161,949 $ 162,274
Rental 28,403 41,809
Interest 29,100 35,631
-----------------------------------
219,452 239,714
-----------------------------------
Expenses:
Interest 51,541 58,686
Depreciation and amortization 34,090 34,223
Amortization of goodwill 5,688 5,539
General and administrative 13,633 8,612
Hotel operations 81,311 71,441
Rental property operations 7,158 8,814
Loss (gain) on sale of assets 551 (13)
Provision for impairment on real estate assets 61,126 -
Provision for loss on equity securities 39,076 -
Other 8,756 4,316
-----------------------------------
302,930 191,618
-----------------------------------
Income (loss) before income taxes and extraordinary item (83,478) 48,096
Income tax expense - 453
-----------------------------------
Income (loss) before extraordinary item (83,478) 47,643
Extraordinary gain on early extinguishment of debt 9 -
-----------------------------------
Net income (loss) (83,469) 47,643
Preferred stock dividends (4,500) (3,938)
-----------------------------------
Net income (loss) available to Paired Common shareholders $ (87,969) $ 43,705
===================================
Basic earnings per Paired Common Share:
Income (loss) before extraordinary item $ (.62) $ .31
Extraordinary gain - -
-----------------------------------
Net income (loss) $ (.62) $ .31
===================================
Diluted earnings per Paired Common Share:
Income (loss) before extraordinary item $ (.62) $ .31
Extraordinary gain - -
-----------------------------------
Net income (loss) $ (.62) $ .31
===================================
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements contained within the Companies' Form 10-K for the year
ended December 31, 1999, are an integral part of these financial statements.
2
THE MEDITRUST COMPANIES
COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999
-----------------------------------
Revenue:
Hotel $ 312,812 $ 310,808
Rental 60,398 85,521
Interest 60,990 69,833
Other - 856
-----------------------------------
434,200 467,018
-----------------------------------
Expenses:
Interest 106,777 125,343
Depreciation and amortization 70,829 68,082
Amortization of goodwill 11,387 10,847
General and administrative 23,814 17,918
Hotel operations 154,103 138,043
Rental property operations 14,801 17,721
Loss (gain) on sale of assets 4,363 (12,284)
Provision for impairment on real estate assets 61,126 -
Provision for loss on equity securities 39,076 -
Other 21,120 39,203
-----------------------------------
507,396 404,873
-----------------------------------
Income (loss) from continuing operations before benefit for income
taxes and extraordinary item (73,196) 62,145
Income tax benefit - (373)
-----------------------------------
Income (loss) from continuing operations before extraordinary item (73,196) 62,518
Discontinued operations:
Gain (loss adjustment) on disposal of Santa Anita, net - 1,875
Gain (loss adjustment) on disposal of Cobblestone Golf Group, net - 2,994
-----------------------------------
Income (loss) before extraordinary item (73,196) 67,387
Extraordinary gain on early extinguishment of debt 1,403 -
-----------------------------------
Net income (loss) (71,793) 67,387
Preferred stock dividends (9,000) (7,876)
-----------------------------------
Net income (loss) available to Paired Common shareholders $ (80,793) $ 59,511
===================================
Basic earnings per Paired Common Share:
Income (loss) from continuing operations $ (.58) $ .38
Discontinued operations - .03
Extraordinary gain .01 -
-----------------------------------
Net income (loss) $ (.57) $ .41
===================================
Diluted earnings per Paired Common Share:
Income (loss) from continuing operations $ (.58) $ .38
Discontinued operations - .03
Extraordinary gain .01 -
-----------------------------------
Net income (loss) $ (.57) $ .41
===================================
3
THE MEDITRUST COMPANIES
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
(IN THOUSANDS) 2000 1999
----------------------------------
Cash Flows from Operating Activities:
Net income (loss) $ (71,793) $ 67,387
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation of real estate 61,868 64,037
Goodwill amortization 11,387 10,847
Loss (gain) on sale of assets 4,363 (17,153)
Gain on early extinguishment of debt (2,183) -
Other depreciation, amortization and other items, net 13,122 22,139
Other non cash items 111,892 2,423
----------------------------------
Cash Flows from Operating Activities
Available for Distribution 128,656 149,680
Net change in other assets and liabilities of discontinued operations - (148)
Net change in other assets and liabilities (8,556) (19,169)
----------------------------------
Net cash provided by operating activities 120,100 130,363
----------------------------------
Cash Flows from Financing Activities:
Purchase of treasury stock - (103,269)
Proceeds from borrowings on bank notes payable 127,000 790,000
Repayment of bank notes payable (328,700) (1,379,671)
Repayment of notes payable (43,033) -
Repayment of convertible debentures (48,115) -
Equity offering and debt issuance costs (1,000) (801)
Principal payments on bonds and mortgages payable (17,946) (8,392)
Dividends to shareholders (9,000) (140,813)
Proceeds from exercise of stock options - 318
----------------------------------
Net cash used in financing activities (320,794) (842,628)
----------------------------------
Cash Flows from Investing Activities:
Acquisition of real estate and development funding (17,848) (94,061)
Investment in real estate mortgages and development funding (161) (25,032)
Prepayment proceeds and principal payments received on real estate mortgages 21,136 66,598
Net proceeds from sale of assets 235,802 482,358
Payment of costs related to prior year asset sales (25,879) -
Working capital and notes receivable advances, net of repayments and
collections, and other items (10,137) 2,633
----------------------------------
----------------------------------
Net cash provided by investing activities 202,913 432,496
----------------------------------
Net increase (decrease) in cash and cash equivalents 2,219 (279,769)
Cash and cash equivalents at:
Beginning of period 7,220 305,456
----------------------------------
End of period $ 9,439 $ 25,687
==================================
Supplemental disclosure of cash flow information (Note 2)
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements contained within the Companies' Form 10-K and for the year
ended December 31, 1999, are an integral part of these financial statements.
4
MEDITRUST CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999
-------------------------------------------
(UNAUDITED)
ASSETS
Real estate investments, net $ 4,230,498 $ 4,652,631
Cash and cash equivalents 8,483 5,779
Fees, interest and other receivables 113,584 59,004
Goodwill, net 440,242 451,240
Due from Meditrust Operating Company 43,171 30,525
Other assets, net 131,722 175,870
-------------------------------------------
Total assets $ 4,967,700 $ 5,375,049
===========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Indebtedness:
Notes payable, net $ 1,100,533 $ 1,144,406
Convertible debentures, net 136,877 185,468
Bank notes payable, net 955,242 1,154,182
Bonds and mortgages payable, net 87,778 113,382
-------------------------------------------
Total indebtedness 2,280,430 2,597,438
Accounts payable, accrued expenses and other liabilities 110,610 139,833
-------------------------------------------
Total liabilities 2,391,040 2,737,271
-------------------------------------------
Commitments and contingencies - -
Shareholders' equity:
Preferred Stock, $.10 par value; 6,000 shares authorized;
701 shares issued and outstanding at June 30, 2000 and December
31, 1999 70 70
Common Stock, $.10 par value; 500,000 shares authorized; 143,318
and 142,320 shares issued and outstanding at June 30, 2000 and
December 31, 1999, respectively 14,332 14,232
Additional paid-in-capital 3,589,388 3,586,994
Unearned compensation (5,340) (6,104)
Accumulated other comprehensive income 795 4,468
Distributions in excess of net income (1,008,433) (948,018)
-------------------------------------------
2,590,812 2,651,642
Due from Meditrust Operating Company (944) (736)
Due from shareholders (80) -
Note receivable - Meditrust Operating Company (13,128) (13,128)
-------------------------------------------
Total shareholders' equity 2,576,660 2,637,778
-------------------------------------------
Total liabilities and shareholders' equity $ 4,967,700 $ 5,375,049
===========================================
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements contained within the Companies' Form 10-K for the year
ended December 31, 1999, are an integral part of these financial statements.
5
MEDITRUST CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999
---------------------------------
Revenue:
Rent from Meditrust Operating Company $ 76,641 $ 77,322
Rental 28,403 41,809
Interest 29,075 35,741
Interest from Meditrust Operating Company 143 -
Royalty from Meditrust Operating Company 5,270 3,970
Hotel operating revenue 2,899 3,147
---------------------------------
142,431 161,989
---------------------------------
Expenses:
Interest 51,434 58,654
Interest to Meditrust Operating Company - 1,589
Depreciation and amortization 30,719 32,210
Amortization of goodwill 5,493 5,318
General and administrative 5,823 4,224
Hotel operations 1,240 1,007
Rental property operations 7,158 8,814
Loss (gain) on sale of assets 1,521 (13)
Provision for impairment on real estate assets 61,126 -
Provision for loss on equity securities 39,076 -
Other 8,756 4,316
---------------------------------
212,346 116,119
---------------------------------
Income (loss) before extraordinary item (69,915) 45,870
Extraordinary gain on early extinguishment of debt 9 -
---------------------------------
Net income (loss) (69,906) 45,870
Preferred stock dividends (4,500) (3,938)
---------------------------------
Net income (loss) available to Common shareholders $ (74,406) $ 41,932
=================================
Basic earnings per Common Share:
Income (loss) before extraordinary item $ (.52) $ .29
Extraordinary gain - -
---------------------------------
Net income (loss) $ (.52) $ .29
=================================
Diluted earnings per Common Share:
Income (loss) before extraordinary item $ (.52) $ .29
Extraordinary gain - -
---------------------------------
Net income (loss) $ (.52) $ .29
=================================
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements contained within the Companies' Form 10-K for the year
ended December 31, 1999, are an integral part of these financial statements.
6
MEDITRUST CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999
---------------------------------
Revenue:
Rent from Meditrust Operating Company $ 145,521 $ 145,570
Rental 60,398 85,521
Interest 60,928 69,771
Interest from Meditrust Operating Company 284 -
Royalty from Meditrust Operating Company 10,143 7,590
Hotel operating revenue 5,692 6,357
Other - 856
---------------------------------
282,966 315,665
---------------------------------
Expenses:
Interest 106,559 125,201
Interest to Meditrust Operating Company - 1,589
Depreciation and amortization 64,382 64,268
Amortization of goodwill 10,998 10,405
General and administrative 9,822 9,149
Hotel operations 2,567 1,950
Rental property operations 14,801 17,721
Loss (gain) on sale of assets 5,333 (12,284)
Provision for impairment on real estate assets 61,126 -
Provision for loss on equity securities 39,076 -
Other 21,120 8,705
---------------------------------
335,784 226,704
---------------------------------
Income (loss) from continuing operations before extraordinary item (52,818) 88,961
Discontinued operations:
Gain (loss adjustment) on disposal of Santa Anita, net - 6,655
Gain (loss adjustment) on disposal of Cobblestone Golf Group, net - 9,439
---------------------------------
Income (loss) before extraordinary item (52,818) 105,055
Extraordinary gain on early extinguishment of debt 1,403 -
---------------------------------
Net income (loss) (51,415) 105,055
Preferred stock dividends (9,000) (7,876)
---------------------------------
Net income (loss) available to Common shareholders $ (60,415) $ 97,179
=================================
Basic earnings per Common Share:
Income (loss) from continuing operations $ (.43) $ .56
Discontinued operations - .11
Extraordinary gain .01 -
---------------------------------
Net income (loss) $ (.42) $ .67
=================================
Diluted earnings per Common Share:
Income (loss) from continuing operations $ (.43) $ .56
Discontinued operations - .11
Extraordinary gain .01 -
---------------------------------
Net income (loss) $ (.42) $ .67
=================================
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements contained within the Companies' Form 10-K for the year
ended December 31, 1999, are an integral part of these financial statements.
7
MEDITRUST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
(IN THOUSANDS) 2000 1999
----------------- -------------------
Cash Flows from Operating Activities:
Net income (loss) $ (51,415) $ 105,055
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation of real estate 61,528 61,645
Goodwill amortization 10,998 10,405
Loss (gain) on sale of assets 5,333 (28,378)
Gain on early extinguishment of debt (2,183) -
Other depreciation, amortization and other items, net 7,097 16,018
Other non cash items 111,892 (3,033)
----------------- -------------------
Cash Flows from Operating Activities Available for Distribution 143,250 161,712
Net change in other assets and liabilities (22,688) (11,145)
----------------- -------------------
Net cash provided by operating activities 120,562 150,567
----------------- -------------------
Cash Flows from Financing Activities:
Purchase of treasury stock - (101,303)
Proceeds from borrowings on bank notes payable 127,000 790,000
Repayment of bank notes payable (328,700) (1,379,671)
Repayment of notes payable (43,033) -
Repayment of convertible debentures (48,115) -
Equity offering and debt issuance costs (1,000) (801)
Intercompany lending, net (59) 11,908
Principal payments on bonds and mortgages payable (17,946) (8,392)
Dividends to shareholders (9,000) (140,813)
Proceeds from exercise of stock options - 312
----------------- -------------------
Net cash used in financing activities (320,853) (828,760)
----------------- -------------------
Cash Flows from Investing Activities:
Acquisition of real estate and development funding (17,766) (92,969)
Investment in real estate mortgages and development funding (161) (25,032)
Prepayment proceeds and principal payments received on real estate mortgages 21,136 66,598
Payment of costs related to prior year asset sales (25,879) -
Net proceeds from sale of real estate 235,802 458,485
Working capital and notes receivable advances, net of repayments and collections,
and other items (10,137) 2,633
----------------- -------------------
Net cash provided by investing activities 202,995 409,715
----------------- -------------------
Net increase (decrease) in cash and cash equivalents 2,704 (268,478)
Cash and cash equivalents at:
Beginning of period 5,779 292,694
----------------- -------------------
End of period $ 8,483 $ 24,216
================= ===================
Supplemental disclosure of cash flow information (Note 2)
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements contained within the Companies' Form 10-K for the year
ended December 31, 1999, are an integral part of these financial statements.
8
MEDITRUST OPERATING COMPANY
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999
---------------------------------------
(UNAUDITED)
ASSETS
Cash and cash equivalents $ 956 $ 1,441
Fees, interest and other receivables 22,331 20,038
Other current assets, net 12,115 12,643
---------------------------------------
Total current assets 35,402 34,122
Investment in common stock of Meditrust Corporation 37,581 37,581
Goodwill, net 29,044 29,433
Property, plant and equipment, less accumulated depreciation
of $5,907 and $2,572, respectively 53,180 51,669
Other non-current assets 5,179 8,009
---------------------------------------
Total assets $ 160,386 $ 160,814
=======================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 24,525 $ 20,803
Accrued payroll and employee benefits 28,858 21,452
Accrued expenses and other current liabilities 7,149 10,030
Due to Meditrust Corporation 67,699 54,820
---------------------------------------
Total current liabilities 128,231 107,105
Note payable to Meditrust Corporation 13,128 13,128
Other non-current liabilities 4,101 4,988
---------------------------------------
Total liabilities 145,460 125,221
---------------------------------------
Commitments and contingencies - -
Shareholders' equity:
Common Stock, $.10 par value; 500,000 shares authorized; 142,013 and
141,015 shares issued and outstanding at June 30, 2000 and
December 31, 1999, respectively 14,201 14,102
Additional paid-in-capital 104,764 104,814
Unearned compensation (889) (656)
Accumulated deficit (79,486) (59,108)
---------------------------------------
38,590 59,152
Due from shareholders (80) -
Due from Meditrust Corporation (23,584) (23,559)
---------------------------------------
Total shareholders' equity 14,926 35,593
---------------------------------------
Total liabilities and shareholders' equity $ 160,386 $ 160,814
=======================================
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements contained within the Companies' Form 10-K for the year
ended December 31, 1999, are an integral part of these financial statements.
9
MEDITRUST OPERATING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999
---------------------------------------
Revenue:
Hotel $ 159,050 $ 159,127
Interest 25 (110)
Interest from Meditrust Corporation - 1,589
---------------------------------------
159,075 160,606
---------------------------------------
Expenses:
Hotel operations 80,071 70,434
Depreciation and amortization 3,371 2,013
Amortization of goodwill 195 221
Interest and other 107 32
Interest to Meditrust Corporation 143 -
General and administrative 7,810 4,388
Royalty to Meditrust Corporation 5,270 3,970
Rent to Meditrust Corporation 76,641 77,322
Gain on asset sales (970) -
---------------------------------------
172,638 158,380
---------------------------------------
Income (loss) before income taxes (13,563) 2,226
Income tax expense - 453
---------------------------------------
Net income (loss) $ (13,563) $ 1,773
=======================================
Basic earnings per Common Share:
Net income (loss) $ (.10) $ .01
=======================================
Diluted earnings per Common Share:
Net income (loss) $ (.10) $ .01
=======================================
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements contained within the Companies' Form 10-K for the year
ended December 31, 1999, are an integral part of these financial statements.
10
MEDITRUST OPERATING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999
---------------------------------------
Revenue:
Hotel $ 307,120 $ 304,451
Interest 62 62
Interest from Meditrust Corporation - 1,589
---------------------------------------
307,182 306,102
---------------------------------------
---------------------------------------
Expenses:
Hotel operations 151,536 136,093
Depreciation and amortization 6,447 3,814
Amortization of goodwill 389 442
Interest and other 218 142
Interest to Meditrust Corporation 284 -
General and administrative 13,992 8,769
Royalty to Meditrust Corporation 10,143 7,590
Rent to Meditrust Corporation 145,521 145,570
Gain on asset sales (970) -
Other - 30,498
---------------------------------------
327,560 332,918
---------------------------------------
Loss from continuing operations before benefit for income taxes (20,378) (26,816)
Income tax benefit - (373)
---------------------------------------
Loss from continuing operations (20,378) (26,443)
Discontinued operations:
Loss adjustment on disposal of Santa Anita, net - (4,780)
Loss adjustment on disposal of Cobblestone Golf Group, net - (6,445)
---------------------------------------
Net loss $ (20,378) $ (37,668)
=======================================
Basic earnings per Common Share:
Loss from continuing operations $ (.14) $ (.18)
Discontinued operations - (.08)
---------------------------------------
Net income $ (.14) $ (.26)
=======================================
Diluted earnings per Common Share:
Loss from continuing operations $ (.14) $ (.18)
Discontinued operations - (.08)
---------------------------------------
Net income $ (.14) $ (.26)
=======================================
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements contained within the Companies' Form 10-K for the year
ended December 31, 1999, are an integral part of these financial statements.
11
MEDITRUST OPERATING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999
-----------------------------------
Cash Flows from Operating Activities:
Net loss $ (20,378) $ (37,668)
Adjustments to reconcile net loss to net cash used in operating activities:
Goodwill amortization 389 442
Loss (gain) on sale of assets and disposal of discontinued operations (970) 11,225
Other depreciation and amortization and other items 6,365 8,513
Other non-cash items - 5,456
Net change in other assets and liabilities of discontinued operations - (148)
Net change in other assets and liabilities 14,132 (8,024)
-----------------------------------
Net cash used in operating activities (462) (20,204)
-----------------------------------
Cash Flows from Financing Activities:
Purchase of treasury stock - (1,966)
Intercompany borrowing (lending), net 59 (11,908)
Proceeds from stock option exercises - 6
-----------------------------------
Net cash provided by (used in) financing activities 59 (13,868)
-----------------------------------
Cash Flows from Investing Activities:
Capital improvements to real estate (82) (1,092)
Net proceeds from sale of assets - 23,873
-----------------------------------
Net cash provided by (used in) investing activities (82) 22,781
-----------------------------------
Net decrease in cash and cash equivalents (485) (11,291)
Cash and cash equivalents at:
Beginning of period 1,441 12,762
-----------------------------------
End of period $ 956 $ 1,471
===================================
Supplemental disclosure of cash flow information (Note 2)
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements contained within the Companies' Form 10-K for the year
ended December 31, 1999, are an integral part of these financial statements.
12
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Certain information and footnote disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting principles,
have been condensed or omitted in this Form 10-Q in accordance with the Rules
and Regulations of the Securities and Exchange Commission (the "SEC").
The accompanying unaudited combined consolidated financial statements reflect
all adjustments (consisting of normal recurring accruals) necessary to present
fairly the financial position as of June 30, 2000, and the results of operations
for each of the three and six month periods ended June 30, 2000, and 1999 and
cash flows for each of the six month periods ended June 30, 2000 and 1999. The
results of operations for the six month period ended June 30, 2000, are not
necessarily indicative of the results which may be expected for any other
interim period or for the entire year.
In the opinion of Meditrust Corporation ("Realty") and Meditrust Operating
Company and subsidiaries ("Operating Company" or "Operating" and collectively
with Realty the "Companies" or "The Meditrust Companies"), the disclosures
contained in this Form 10-Q are adequate to make the information presented not
misleading. See the Companies' Joint Annual Report on Form 10-K for the year
ended December 31, 1999, for additional information relevant to significant
accounting policies followed by the Companies.
BASIS OF PRESENTATION AND CONSOLIDATION
Separate financial statements have been presented for Realty and for Operating
Company. Combined Realty and Operating Company financial statements have been
presented as The Meditrust Companies. All significant intercompany and
inter-entity balances and transactions have been eliminated in combination. The
Meditrust Companies and Realty use an unclassified balance sheet presentation.
The consolidated financial statements of Realty and Operating Company include
the accounts of the respective entity and its majority-owned subsidiaries,
including unincorporated partnerships and joint ventures, after the elimination
of all significant intercompany accounts and transactions.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates.
RECLASSIFICATION
Certain reclassifications have been made to the 1999 presentation to conform to
the 2000 presentation.
13
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. SUPPLEMENTAL CASH FLOW INFORMATION
Details of other non-cash items follow:
SIX MONTHS ENDED
JUNE 30
-----------------------------------
2000 1999
-----------------------------------
Provision for assets held for sale $ 13,253 $ -
Provision for loss on real estate mortgage and loans receivable 47,873 -
Provision for loss on equity securities 39,076 -
Straight line rent (885) (4,033)
Provision for loss on receivables 2,802 -
Provision for restructuring expenses 7,312 2,458
Accelerated amortization of unearned compensation 2,461 -
Write-off of software development costs - 3,998
================== ===============
$ 111,892 $ 2,423
================== ===============
Details of interest paid and non-cash investing and financing transactions
follow:
THE MEDITRUST COMPANIES:
SIX MONTHS ENDED
JUNE 30,
----------------------------------
(IN THOUSANDS) 2000 1999
----------------- ----------------
Interest paid during the period $ 107,715 $ 125,663
Interest capitalized during the period 578 4,779
Non-cash investing and financing transactions:
Non-cash proceeds of asset sale (see Note 3) 53,900 -
Retirements and write-offs of project costs (4,027) (2,998)
Accumulated depreciation and provision for impairment of
assets sold 86,584 17,471
Debt assumed by buyer of Cobblestone Golf Group - 5,637
Increase in real estate mortgages net of
participation reduction 113 316
Allowance for loan losses on prepaid mortgages 5,027 -
Change in market value of equity securities (42,749) (2,168)
MEDITRUST CORPORATION:
SIX MONTHS ENDED
JUNE 30,
-----------------------------------
(IN THOUSANDS) 2000 1999
----------------- -----------------
Interest paid during the period $ 107,485 $ 125,521
Interest capitalized during the period 446 4,779
Non-cash investing and financing transactions:
Non-cash proceeds of asset sale (see Note 3) 53,900 -
Retirements and write-offs of project costs (4,027) (2,998)
Accumulated depreciation and provision for impairment of
assets sold 86,584 17,471
Debt assumed by buyer of Cobblestone Golf Group - 5,637
Increase in real estate mortgages net of
participation reduction 113 316
Allowance for loan losses on prepaid mortgages 5,027 -
Change in market value of equity securities (42,749) (2,168)
14
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MEDITRUST OPERATING COMPANY:
SIX MONTHS ENDED
JUNE 30,
-----------------------------------
(IN THOUSANDS) 2000 1999
------------------ ----------------
Interest paid during the period $ 230 $ 142
Interest capitalized during the period 132 -
3. REAL ESTATE INVESTMENTS
The following is a summary of the Companies' real estate investments:
JUNE 30, DECEMBER 31,
(IN THOUSANDS) 2000 1999
-------------------- --------------------
Land $ 441,191 $ 444,523
Buildings and improvements, net of accumulated depreciation of
$311,164 and $259,777 and other provisions of $12,256
and $12,330 2,745,137 2,876,418
Real estate mortgages and loans receivable, net of a valuation
allowance of $67,064 and $32,415 934,857 1,059,920
Assets held for sale, net of accumulated depreciation of
$10,010 and $27,565 and other provisions of $32,733 and
$71,266 129,083 291,798
-------------------- --------------------
$ 4,250,268 $ 4,672,659
==================== ====================
During the six months ended June 30, 2000, the Companies provided net funding of
$3,113,000 for ongoing construction of healthcare facilities committed to prior
to November 1998. The Companies also provided net funding of $14,735,000 for
capital improvements related to the lodging segment.
Also during the six months ended June 30, 2000, Realty provided $161,000 for
ongoing construction of mortgaged facilities already in the portfolio.
During the six months ended June 30, 2000, Realty received net proceeds of
$289,702,000, including $7,661,000 of assumed debt and $52,094,000 of
subordinated indebtedness due January 2005 bearing interest at 9.00% (which was
recorded at a discounted value of $46,239,000 due to an imputed interest rate of
12%), from the sale of four long-term care facilities, 12 assisted living
facilities, one retirement living facility and 25 medical office buildings.
Realty realized a net loss on these sales of $5,333,000.
During the six months ended June 30, 2000, Realty received principal payments of
$21,136,000 on real estate mortgages, including $16,539,000 arising from
mortgage repayments in accordance with the Five Point Plan (See Note 8).
At June 30, 2000, Realty was committed to provide additional financing of
approximately $5,000,000 for additions to existing facilities in the portfolio.
As of June 30, 2000, healthcare related facilities (the "Healthcare Portfolio")
comprised approximately 43.2% of Realty's total real estate investments. Life
Care Centers of America ("Lifecare") and Sun Healthcare Group, Inc. ("Sun")
currently operate approximately 20.8% of the total real estate investments, or
48.0% of the Healthcare Portfolio. A schedule of significant healthcare
operators follows:
15
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
% OF % OF
INVESTED ENTIRE # OF HEALTHCARE
Portfolio by Operator (IN THOUSANDS) PORTFOLIO PROPERTIES PORTFOLIO
-------------- --------- ---------- ---------
Life Care Centers of America, Inc. $ 556,856 11.9% 92 27.5%
Sun Healthcare Group, Inc. 415,491 8.9% 42 20.5%
CareMatrix Corporation 182,360 3.9% 11 9.0%
Alterra 161,592 3.4% 57 8.0%
Harborside 103,411 2.2% 18 5.1%
Balanced Care Corporation 92,633 2.0% 19 4.6%
Health Asset Realty Trust 68,943 1.5% 11 3.4%
Tenet Healthcare/Iasis 65,650 1.4% 1 3.2%
Integrated Health Services, Inc. 50,973 1.1% 10 2.5%
Genesis Health Ventures, Inc. 35,639 0.8% 8 1.8%
Assisted Living Concepts 31,487 0.7% 16 1.6%
ARV Assisted Living, Inc. 28,982 0.6% 4 1.4%
HealthSouth 25,270 0.5% 2 1.2%
Other Public Operators 29,718 0.6% 4 1.5%
Other Non-Public Operators 120,754 2.5% 13 6.0%
Paramount Real Estate Services 54,545 1.2% 2 2.7%
----------------------------------------------------------
2,024,304 43.2% 310 100%
=============
LODGING:
La Quinta Companies 2,659,191 56.8% 300
------------------------------------------
Gross Real Estate Assets $ 4,683,495 100% 610
==========================================
In addition, companies in the assisted living sector of the healthcare industry
operate approximately 9.1% of Realty's total real estate investments (and
approximately 21.1% of the Healthcare Portfolio).
Realty monitors credit risk for its Healthcare Portfolio by evaluating a
combination of publicly available financial information, information provided by
the operators themselves and information otherwise available to Realty. The
financial condition and ability of these healthcare operators to meet their
rental and other obligations will, among other things, have an impact on
Realty's revenues, net income (loss), funds available from operations and its
ability to make distributions to its shareholders. The operations of the
long-term care (skilled nursing) companies have been negatively impacted by
changes in Medicare reimbursement rates (PPS), increases in labor costs,
increases in their leverage and certain other factors. In addition, any failure
by these operators to effectively conduct their operations could have a material
adverse effect on their business reputation or on their ability to enlist and
maintain patients in their facilities.
Operators of assisted living facilities are experiencing fill-up periods of a
longer duration, and are being impacted by concerns regarding the potential of
over-building, increased regulation and the use of certain accounting practices.
Accordingly, many of these operators have announced decreased earnings or
anticipated earnings shortfalls and have experienced a significant decline in
their stock prices. These factors have had a detrimental impact on the liquidity
of some assisted living operators, which has caused their growth plans to
decelerate and may have a negative effect on their operating cash flows.
Operators in Bankruptcy
Citing the effects of changes in government regulation relating to Medicare
reimbursement as the precipitating factor, Sun filed for protection under
Chapter 11 of the U.S. Bankruptcy Code on October 14, 1999. As of June 30, 2000,
Realty had a portfolio of 42 properties operated by Sun, which consisted of 38
owned properties with net assets of approximately $299,828,000 and four
mortgages with net assets of approximately $30,450,000. During the six months
ended June 30, 2000, income derived from these properties included rental income
of $23,937,000 from owned properties. No interest income was received on the
four mortgages for the six months ended June 30, 2000.
16
Sun has not formally indicated whether it will accept or reject any of Realty's
leases. However, Sun has indicated that it will continue to make lease payments
to Realty unless and until such leases are rejected. If necessary, Realty has a
plan in place to transition and to continue operating any of Sun's properties.
Realty has not received interest payments related to the mortgages since
November 1, 1999, and accordingly, such mortgages were put on non-accrual
status.
On January 18, 2000, Mariner Health Group, Inc. ("Mariner") filed for protection
under Chapter 11. As of June 30, 2000, Realty had a portfolio of two properties
operated by Mariner, which consisted of one owned property representing net
assets of approximately $7,047,000 and one mortgage representing a net asset
value of approximately $7,043,000. During the six months ended June 30, 2000,
income derived from these properties included rental income of $489,000 from the
owned property. No interest payments related to the Mariner mortgage were
received, and accordingly this mortgage was placed on non-accrual status.
On February 2, 2000, Integrated Health Services, Inc. ("Integrated") filed for
protection under Chapter 11. As of June 30, 2000, Realty had a portfolio of 10
owned properties operated by Integrated, representing net assets of
approximately $37,724,000. During the six months ended June 30, 2000, rental
income derived from these properties was $3,144,000.
On June 26, 2000, Genesis Health Ventures, Inc. ("Genesis") filed for protection
under Chapter 11. As of June 30, 2000, Realty had a portfolio of eight
properties operated by Genesis, which consisted of four owned properties
representing net assets of $15,330,000 and four mortgaged properties
representing net assets of $18,439,000. During the six months ended June 30,
2000, income derived from these properties included rental income of $826,000
from owned properties and interest income of $976,000 from the mortgaged
properties. No interest payments have been received since June 1, 2000, and
accordingly such mortgages were placed on non-accrual status.
Management has initiated various actions to protect the Companies' interests
under its leases and mortgages including the drawdown and renegotiations of
certain escrow accounts and agreements. While the earnings capacity of certain
facilities has been reduced and the reductions may extend to future periods,
management believes that it has recorded appropriate accounting impairment
provisions based on its assessment of current circumstances. However, upon
changes in circumstances, including but not limited to, possible foreclosure or
lease termination, there can be no assurance that the Companies' investments in
healthcare facilities would not be written down below current carrying value
based upon estimates of fair value at such time.
Impairment of real estate assets
During the six months ended June 30, 2000, the Companies classified certain
assets as held for sale based on management having the authority and intent of
entering into commitments for sale transactions expected to close in the next
twelve months. Based on estimated net sale proceeds, the Companies recorded a
provision for loss on assets held for sale of $13,253,000. The provision reduces
the carrying value of four owned properties to the estimated net sales proceeds
less costs to sell.
As of June 30, 2000 the Companies had an impairment allowance of $32,733,000
consisting of 18 owned properties that have been identified as assets held
for sale.
Impairment of mortgage loans
During the six months ended June 30, 2000, the Companies recorded a provision
for the mortgage portfolio, primarily relating to nine mortgage loans, of
$47,873,000. The majority of this provision related to one operator.
Specifically, during the three months ended June 30, 2000, this operator did not
fully remit its interest payments and Realty has entered into discussions for a
discounted payoff of these mortgages. Based on the non-payment of interest and
these discussions, a provision for loan loss was recorded.
As of June 30, 2000 the Companies had provided $67,064,000 in loan valuation
allowances primarily relating to 12 mortgage loans in the portfolio, which
resulted from a balance of $32,415,000 as of December 31, 1999, increased by
the $47,873,000 provision and decreased by $13,224,000 due to sales or
payoffs of mortgage loans during the six months ended June 30, 2000.
The Companies continue to evaluate the assets in its healthcare portfolio as
well as pursue an orderly disposition of a significant portion of its healthcare
assets. There can be no assurance if or when sales will be completed or whether
such sales will be completed on terms that will enable the Companies to realize
the full carrying value of such assets.
17
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. INDEBTEDNESS
On June 30, 2000, Realty repaid the 8.54% convertible debentures, with a balance
of $34,834,000, that were scheduled to mature on July 1, 2000.
Of the $850,000,000 revolving tranche commitment, approximately $349,000,000 was
available at June 30, 2000, at Realty's option of the base rate (11.5%) or LIBOR
plus 2.875% (9.5% weighted average at June 30, 2000).
At June 30, 2000, Realty was a fixed rate payor under interest rate swap
agreements, with an underlying notional amount of $500,000,000, of 5.7% and
received a variable rate of 6.6%. Differentials in the swapped amounts are
recorded as adjustments to interest expense of Realty.
During the six months ended June 30, 2000, the Companies repurchased $47,996,000
of notes payable and $10,500,000 of convertible debentures, which resulted in a
gain on early extinguishment of debt of $2,183,000. The Companies also prepaid
mortgages with principal amounts totaling $14,936,000. In connection with these
mortgage prepayments the Companies paid $780,000 in penalties.
Effective June 30, 2000, Realty reached a third agreement with its bank group to
further amend the Credit Agreement. The third amendment provided for, among
other things, limitations on early debt repayments, limitations on common
dividend payments, which is partially based on a calculation of real estate
investment trust ("REIT") taxable income, and changes to the definition of the
minimum tangible net worth covenant.
5. SHAREHOLDERS' EQUITY
As of June 30, 2000, the following classes of Preferred Stock, Excess Stock and
Series Common Stock were authorized; no shares were issued or outstanding at
either June 30, 2000 or December 31, 1999:
Meditrust Operating Company Preferred Stock $.10 par value; 6,000,000 shares
authorized;
Meditrust Corporation Excess Stock $.10 par value; 25,000,000 shares authorized;
Meditrust Operating Company Excess Stock $.10 par value; 25,000,000 shares
authorized;
Meditrust Corporation Series Common Stock $.10 par value; 30,000,000 shares
authorized;
Meditrust Operating Company Series Common Stock $.10 par value; 30,000,000
shares authorized.
During the six months ended June 30, 2000, 1,000,000 restricted shares of the
Companies' stock were issued to key employees under The Meditrust Corporation
1995 Share Award Plan and The Meditrust Operating Company 1995 Share Award Plan
(collectively known as the "Share Award Plan"). During June 2000, 50,000
restricted shares were forfeited and thus cancelled and retired, and as part of
amendments to certain employment and severance agreements, vesting periods were
accelerated for 390,000 restricted shares.
Under the Share Award Plan participants are entitled to cash dividends and
voting rights on their respective restricted shares. Restrictions generally
limit the sale or transfer of shares during a restricted period, not to exceed
three years. Participants vest in the restricted shares granted upon the
earliest of six months to three years after the date of issuance, or upon
achieving the performance goals as defined, or as the Boards of Directors may
determine.
Unearned compensation was charged for the market value of the restricted shares
on the date of grant and is being amortized over the restricted period. The
unamortized unearned compensation value is reflected as a reduction of
shareholders' equity in the accompanying consolidated and combined consolidated
balance sheets.
18
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. COMPREHENSIVE INCOME (LOSS) AND OTHER ASSETS
Realty has an investment in Nursing Home Properties Plc ("NHP Plc"), a property
investment group which specializes in the financing, through sale leaseback
transactions, of nursing homes located in the United Kingdom. The investment
includes approximately 26,606,000 shares of NHP Plc, representing an ownership
interest in NHP Plc of 19.99% of which Realty has voting rights with respect to
9.99%.
During the six months ended June 30, 2000, the market value of this investment
significantly decreased below the Companies' initial cost. According to
Financial Accounting Standard Board Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"), an entity is required
to determine whether a decline in fair value of an investment accounted for as
"an available for sale security" is other-than-temporary. Further guidance in
Staff Accounting Bulletin Topic 5M ("SAB 5M") suggests that the decline is
other-than-temporary if, among other factors, the decline in market value
persists for a period over six months and the decline is in excess of 20% of
cost. As a result, Realty adjusted the cost basis of its investment in NHP Plc
to fair value and recorded a charge to earnings for the impairment of the
investment in NHP Plc of $39,076,000 based on the difference between the
Companies' cost of $57,204,000 and the market value as of June 30, 2000 of
$18,128,000.
As of June 30, 2000, Realty owns 1,081,000 shares of stock and warrants to
purchase 5,000 shares of stock in Balanced Care Corporation ("BCC"), a
healthcare operator. The stock and warrants have a current market value of
$1,901,000. The difference between current market value and the cost of the BCC
investment, an unrealized gain of $795,000, is included in shareholders' equity
in the accompanying balance sheet.
The following is a summary of the Companies' comprehensive income (loss):
SIX MONTHS ENDED
JUNE 30,
-----------------------------------------
(IN THOUSANDS) 2000 1999
-------------------- --------------------
Net income (loss) $ (71,793) $ 67,387
Other comprehensive income (loss):
Unrealized holding losses arising during the period (42,749) (2,168)
Reclassification adjustment for losses recognized in net loss 39,076 -
-------------------- --------------------
Comprehensive income (loss) $ (75,466) $ 65,219
==================== ====================
Other assets includes investments in NHP Plc and BCC, as well as La Quinta
intangible assets, the Telematrix non-compete agreement, furniture, fixtures and
equipment, and other receivables.
7. DISTRIBUTIONS PAID TO SHAREHOLDERS
On March 31, 2000, Realty paid a dividend of $0.5625 per depository share of
preferred stock to holders of record on March 15, 2000 of its 9.00% Series A
Cumulative Redeemable Preferred Stock. On March 31, 2000, Realty also paid a
quarterly dividend at a rate of 9.00% per annum on the liquidation preference of
$25,000 per share to the holder of the 9.00% Series B Cumulative Redeemable
Convertible Preferred Stock.
On June 30, 2000, Realty paid a dividend of $0.5625 per depository share of
preferred stock to holders of record on June 15, 2000 of its 9.00% Series A
Cumulative Redeemable Preferred Stock. On June 30, 2000, Realty also paid a
quarterly dividend at a rate of 9.00% per annum on the liquidation preference of
$25,000 per share to the holder of the 9.00% Series B Cumulative Redeemable
Convertible Preferred Stock.
19
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. OTHER EXPENSES
During the six months ended June 30, 2000, the Companies recorded approximately
$21,120,000 in other expenses.
On January 28, 2000, the Companies announced that the Boards of Directors had
approved a five point plan of reorganization (the "Five Point Plan"), which
provided for:
- - An orderly disposition of a significant portion of its healthcare assets;
- - Suspension of Realty's REIT common share dividend;
- - Expectation of the declaration of the minimum dividend required to maintain
REIT status in December 2000;
- - Substantial reduction in debt; and
- - Future disciplined investment in the lodging division.
The Companies also announced that consistent with the adoption of the Five Point
Plan to reduce its emphasis on the healthcare division, David F. Benson would be
leaving as Chief Executive Officer, President, and Treasurer of Realty. Realty
also entered into a separation and consulting agreement with Mr. Benson,
pursuant to which Realty made a cash payment of approximately $9,500,000
(including consulting fees), converted 155,000 restricted paired common shares
into unrestricted paired common shares which resulted in approximately
$2,500,000 of accelerated amortization of unearned compensation and continued
certain medical, dental and other benefits.
As part of the Five-Point Plan to position the lodging division for growth when
industry trends improve, the Companies announced that the corporate headquarters
would be moved to Dallas, Texas and that changes would be made to the management
team. Consistent with this objective, the Boards of Directors approved a plan to
reduce by 14 the number of employees, including four officers, as of December
31, 2000. The reduction is primarily in the financial and legal groups of the
Companies' Needham, Massachusetts offices. Accordingly, during the six months
ended June 30, 2000, the Companies recorded $7,312,000 for severance related
expenses expected to be incurred to terminate those employees. The Companies
plan to further reduce staff over the next two years with the intention of
consolidating the remaining healthcare operations in Dallas, Texas by December
31, 2002. As part of the plan to close the Needham office, additional severance
and other payments are expected in future periods.
The Companies also incurred approximately $201,000 of professional fees,
$121,000 in the second quarter, related to implementation of the Five Point
Plan. During the six months ended June 30, 2000, the Companies also recorded
provisions of approximately $315,000, $31,000 in the second quarter, for other
receivables that management considers to be uncollectible. The Companies also
recorded the collection of $1,195,000 in the second quarter of bad debt
recoveries related to receivables written-off in prior years.
The Companies also recorded additional provisions of $2,487,000 for receivables
related to real estate assets.
During the six months ended June 30, 1999, the Companies recorded approximately
$39,203,000 in other expenses.
On May 10, 1999, the Companies entered into a separation agreement with Abraham
D. Gosman, former Director and Chairman of the Companies and Chief Executive
Officer and Treasurer of Meditrust Operating Company. Under the terms of this
separation agreement, Mr. Gosman received severance payments totaling
$25,000,000 in cash and the continuation of certain life insurance benefits. The
Companies established a Special Committee of the Boards of Directors of Realty
and Operating Company (the "Special Committee") to evaluate Mr. Gosman's
employment contract and whether such severance or other payments were
appropriate. Based on the results of the evaluation and recommendation of the
Special Committee, the Boards of Directors concluded that the separation
agreement was in the long-term best interest of the shareholders of the
Companies and approved the separation agreement.
The Companies incurred approximately $10,205,000 of non-recurring costs,
$4,316,000 in the second quarter, associated with the development and
implementation of the comprehensive restructuring plan adopted in November 1998
(the "1998 Plan"). These costs primarily relate to the early repayment and
modification of certain debt and other advisory fees related to the 1998 Plan
and the separation agreement with Mr. Gosman.
20
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. OTHER EXPENSES, CONTINUED
Also, in conjunction with the implementation of the 1998 Plan, which included a
change in the focus of the lodging division to internal growth, La Quinta
management performed a review of the front desk system under development for its
lodging facilities, and made a decision to abandon the project. The decision was
based primarily on management's intent to integrate the front desk system with
new revenue management software, the availability of more suitable and flexible
externally developed software and a shift in information systems philosophy
toward implementation of externally developed software and outsourcing of
related support services. A charge of approximately $3,998,000 to write-off
certain internal and external software development costs related to the project
was recorded during the six months ended June 30, 1999.
9. EARNINGS PER SHARE
COMBINED CONSOLIDATED EARNINGS PER SHARE IS COMPUTED AS FOLLOWS:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE THREE MONTHS
ENDED JUNE 30,
-----------------------------------
2000 1999
----------------- -----------------
Income (loss) before extraordinary item $ (83,478) $ 47,643
Preferred stock dividends (4,500) (3,938)
----------------- -----------------
Income (loss) before extraordinary item available to
common shareholders $ (87,978) $ 43,705
================= =================
Average outstanding shares of paired common stock 141,431 141,129
Dilutive effect of:
Stock options - 5
----------------- -----------------
Dilutive potential paired common stock 141,431 141,134
================= =================
Earnings per share:
Basic $ (.62) $ .31
================= =================
Diluted $ (.62) $ .31
================= =================
Options to purchase 6,203,000 and 5,083,000 paired common shares at prices
ranging from $2.44 to $36.46 were outstanding during the three months ended June
30, 2000 and 1999, respectively, but were not included in the computation of
diluted EPS because the options' exercise price was greater than the average
market price of the paired common shares or because the inclusion would result
in an antidilutive effect in periods where a loss was incurred. The options,
which expire on dates ranging from October 2001 to June 2010, were still
outstanding at June 30, 2000.
Convertible debentures outstanding for the three months ended June 30, 2000 and
1999, of 4,765,000 and 6,540,000, paired common shares, respectively, and
convertible preferred stock for the three months ended June 30, 2000 of
2,680,000 paired common shares are not included in the computation of diluted
EPS because the inclusion would result in an antidilutive effect.
21
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. EARNINGS PER SHARE, CONTINUED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE SIX MONTHS
ENDED JUNE 30,
---------------------------------
2000 1999
----------------- ---------------
Income (loss) before extraordinary item $ (73,196) $ 62,518
Preferred stock dividends (9,000) (7,876)
----------------- ---------------
Income (loss) from continuing operations before extraordinary
item available to common shareholders $ (82,196) $ 54,642
================= ===============
Weighted average outstanding shares of paired common stock 141,330 144,537
Dilutive effect of:
Stock options - 11
----------------- ---------------
Dilutive potential paired common stock 141,330 144,548
================= ===============
Earnings per share:
Basic $ (.58) $ .38
================= ===============
Diluted $ (.58) $ .38
================= ===============
Options to purchase 6,203,000 and 3,697,000 paired common shares at prices
ranging from $2.44 to $36.46 were outstanding during the six months ended June
30, 2000 and 1999, respectively, but were not included in the computation of
diluted EPS because the options' exercise prices were greater than the average
market price of the paired common shares or because the inclusion would result
in an antidilutive effect in periods where a loss was incurred. The options,
which expire on dates ranging from October 2001 to June 2010, were still
outstanding at June 30, 2000.
Convertible debentures outstanding for the six months ended June 30, 2000 and
1999 of 5,471,000 and 6,540,000 paired common shares, respectively, and
convertible preferred stock for the six months ended June 30, 2000 of 2,680,000
paired common shares are not included in the computation of diluted EPS because
the inclusion would result in an antidilutive effect.
MEDITRUST CORPORATION EARNINGS PER SHARE IS COMPUTED AS FOLLOWS:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE THREE MONTHS
ENDED JUNE 30,
--------------------------------------
2000 1999
-------------------- -----------------
Income (loss) before extraordinary item $ (69,915) $ 45,870
Preferred stock dividends (4,500) (3,938)
-------------------- -----------------
Income (loss) before extraordinary item available to
common shareholders $ (74,415) $ 41,932
==================== =================
Average outstanding shares of paired common stock 142,736 142,434
Dilutive effect of:
Stock options - 5
-------------------- -----------------
Dilutive potential paired common stock 142,736 142,439
==================== =================
Earnings per share:
Basic $ (.52) $ .29
==================== =================
Diluted $ (.52) $ .29
==================== =================
Options to purchase 2,016,000 and 3,312,000 paired common shares at prices
ranging from $12.63 to $36.46 were outstanding during the three months ended
June 30, 2000 and 1999, respectively, but were not included in the computation
of diluted EPS because the options' exercise price was greater than the average
market price of the paired common shares or because the inclusion would result
in an antidilutive effect in periods where a loss was incurred. The options,
which expire on dates ranging from October 2001 to June 2009, were still
outstanding at June 30, 2000.
22
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. EARNINGS PER SHARE, CONTINUED
Convertible debentures outstanding for the three months ended June 30, 2000 and
1999, of 4,765,000 and 6,540,000, paired common shares, respectively, and not
convertible preferred stock for the three months ended June 30, 2000 of
2,680,000 paired common shares are not included in the computation of diluted
EPS because the inclusion would result in an antidilutive effect.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE SIX MONTHS
ENDED JUNE 30,
---------------------------------
2000 1999
----------------- ---------------
Income (loss) from continuing operations before extraordinary item $ (52,818) $ 88,961
Preferred stock dividends (9,000) (7,876)
----------------- ---------------
Income (loss) from continuing operations before extraordinary item
available to common shareholders $ (61,818) $ (81,085)
================= ===============
Weighted average outstanding shares of common stock 142,635 145,842
Dilutive effect of:
Stock options - 11
----------------- ---------------
Dilutive potential common stock 142,635 145,853
================= ===============
Earnings per share:
Basic $ (.43) $ 0.56
================= ===============
Diluted $ (.43) $ 0.56
================= ===============
Options to purchase 2,016,000 and 1,919,000 paired common shares at prices
ranging from $12.63 to $36.46 were outstanding during the six months ended June
30, 2000 and 1999, respectively, but were not included in the computation of
diluted EPS because the options' exercise prices were greater than the average
market price of the common shares or because the inclusion would result in an
antidilutive effect in periods where a loss was incurred. The options, which
expire on dates ranging from October 2001 to June 2009, were still outstanding
at June 30, 2000.
Convertible debentures outstanding for the six months ended June 30, 2000 and
1999 of 5,471,000 and 6,540,000 paired common shares, respectively, and
convertible preferred stock for the six months ended June 30, 2000 of 2,680,000
paired common shares are not included in the computation of diluted EPS because
the inclusion would result in an antidilutive effect.
MEDITRUST OPERATING COMPANY EARNINGS PER SHARE IS COMPUTED AS FOLLOWS:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE THREE MONTHS
ENDED JUNE 30,
-----------------------------------
2000 1999
----------------- -----------------
Income (loss) available to common shareholders $ (13,563) $ 1,773
================= =================
Average outstanding shares of paired common stock 141,431 141,129
Dilutive effect of:
Stock options - 5
----------------- -----------------
Dilutive potential paired common stock 141,431 141,134
================= =================
Earnings per share:
Basic $ (.10) $ .01
================= =================
Diluted $ (.10) $ .01
================= =================
Options to purchase 4,186,000 and 1,771,000 paired common shares at prices
ranging from $2.44 to $16.06 were outstanding during the three months ended June
30, 2000 and 1999, respectively, but were not included in the computation of
diluted EPS because the options' exercise price was greater than the average
market price of the paired common shares or because the inclusion would result
in
23
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. EARNINGS PER SHARE, CONTINUED
an antidilutive effect in periods where a loss was incurred. The options, which
expire on dates ranging from December 2008 to June 2010, were still outstanding
at June 30, 2000.
Convertible debentures outstanding for the three months ended June 30, 2000 and
1999, of 4,765,000 and 6,540,000, paired common shares, respectively, and
convertible preferred stock for the three months ended June 30, 2000 of
2,680,000 paired common shares are not included in the computation of diluted
EPS because the inclusion would result in an antidilutive effect.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE SIX MONTHS
ENDED JUNE 30,
-----------------------------------
2000 1999
------------------ ----------------
Loss from continuing operations available to
common shareholders $ (20,378) $ (26,443)
================== ================
Weighted average outstanding shares of common stock 141,330 144,537
Dilutive effect of:
Contingently issuable shares - -
Stock options - -
------------------ ----------------
Dilutive potential common stock 141,330 144,537
================== ================
Earnings per share:
Basic $ (.14) $ (0.18)
================== ================
Diluted $ (.14) $ (0.18)
================== ================
Options to purchase 4,186,000 and 1,778,000 paired common shares at prices
ranging from $2.44 to $16.06 were outstanding during the six months ended June
30, 2000 and 1999, respectively, but were not included in the computation of
diluted EPS because the options' exercise prices were greater than the average
market price of the common shares or because the inclusion would result in an
antidilutive effect in periods where a loss was incurred. The options, which
expire on dates ranging from July 2007 to June 2010, were still outstanding at
June 30, 2000.
Convertible debentures outstanding for the six months ended June 30, 2000 and
1999 of 5,471,000 and 6,540,000 paired common shares, respectively, and
convertible preferred stock for the six months ended June 30, 2000 of 2,680,000
paired common shares are not included in the computation of diluted EPS because
the inclusion would result in an antidilutive effect.
Operating Company holds common shares of Realty which are unpaired pursuant to a
stock option plan approved by the shareholders. The common shares held totaled
1,305,000 as of June 30, 2000. These shares affect the calculations of Realty's
net income per common share but are eliminated in the calculation of net income
per paired common share for The Meditrust Companies.
10. TRANSACTIONS BETWEEN REALTY AND OPERATING COMPANY
Operating Company leases hotel facilities from Realty and its subsidiaries. The
hotel facility lease arrangements between Operating Company and Realty include
base and additional rent provisions and require Realty to assume costs
attributable to property taxes and insurance.
In connection with certain acquisitions, Operating Company issued shares to
Realty and recorded a receivable. Due to the affiliation of Realty and Operating
Company, the receivable from Realty has been classified in Operating Company's
shareholders' equity.
Periodically, Realty and Operating Company issue shares under the Share Award
Plan. Amounts due from Realty and Operating Company in connection with awards of
shares under the Share Award Plan are shown as a reduction of shareholders'
equity in the accompanying consolidated balance sheets of Realty and Operating
Company, respectively.
Realty provides certain services to Operating Company primarily related to
general tax preparation and consulting, legal, accounting, and certain aspects
of human resources. In the opinion of management, the costs associated with
these services were not material and have been excluded from the financial
statements.
24
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11. SEGMENT REPORTING
MEASUREMENT OF SEGMENT PROFIT OR LOSS
The Companies evaluate performance based on contribution from each reportable
segment. Contribution is defined by the Companies as income from operations
before interest expense, depreciation, amortization, gains and losses on sales
of assets, provisions for losses on disposal or impairment of assets, income or
loss from unconsolidated entities, income taxes and nonrecurring income and
expenses. The measurement of each of these segments is made on a combined basis
with revenue from external customers and excludes lease income between Realty
and Operating Company. The Companies account for Realty and Operating Company
transactions at current market prices, as if the transactions were to third
parties.
25
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11. SEGMENT REPORTING (CONTINUED)
The following table presents information used by management by reported segment.
The Companies do not allocate interest expense, income taxes or unusual items to
segments.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- ---------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999 2000 1999
--------------------------------- ---------------------------------
Healthcare:
Rental income $ 28,403 $ 41,809 $ 60,398 $ 85,521
Interest income 29,100 35,631 60,990 69,833
Rental property operating costs (39) (2,042) (557) (4,296)
General and administrative expenses (4,088) (4,218) (6,883) (9,136)
--------------------------------- ---------------------------------
Healthcare Contribution 53,376 71,180 113,948 141,922
--------------------------------- ---------------------------------
Lodging:
Room revenue 150,520 152,677 288,223 291,728
Guest services and other 7,647 9,597 17,272 19,080
Operating expenses (79,126) (71,441) (149,948) (138,043)
General and administrative expenses (8,503) (4,394) (14,997) (8,782)
Rental property operating costs (7,119) (6,772) (14,244) (13,425)
--------------------------------- ---------------------------------
Lodging Contribution 63,419 79,667 126,306 150,558
--------------------------------- ---------------------------------
Other contribution (a) 555 - 1,228 -
--------------------------------- ---------------------------------
Combined Contribution 117,350 150,847 241,482 292,480
--------------------------------- ---------------------------------
Reconciliation to Combined Consolidated Financial Statements:
Interest expense 51,541 58,686 106,777 125,343
Depreciation and amortization 34,090 34,223 70,829 68,082
Amortization of goodwill 5,688 5,539 11,387 10,847
Loss (gain) on sale of assets 551 (13) 4,363 (12,284)
Other income - - - (856)
Provision for impairment on real estate assets 61,126 - 61,126 -
Provision for loss on equity securities 39,076 - 39,076 -
Other expenses 8,756 4,316 21,120 39,203
--------------------------------- ---------------------------------
200,828 102,751 314,678 230,335
--------------------------------- ---------------------------------
Income from continuing operations
before benefit for income taxes and extraordinary item (83,478) 48,096 (73,196) 62,145
Income tax benefit (expense) - (453) - 373
--------------------------------- ---------------------------------
Income from continuing operations before extraordinary item (83,478) 47,643 (73,196) 62,518
Gain (loss adjustment) on disposal of discontinued operations - - - 4,869
--------------------------------- ---------------------------------
Income before extraordinary item (83,478) 47,643 (73,196) 67,387
Extraordinary gain on early extinguishment of debt 9 - 1,403 -
--------------------------------- ---------------------------------
Net income (83,469) 47,643 (71,793) 67,387
Preferred stock dividends (4,500) (3,938) (9,000) (7,876)
--------------------------------- ---------------------------------
Net income available to Paired Common shareholders $ (87,969) $ 43,705 $ (80,793) $ 59,511
================================= =================================
(a) Other contribution includes Telematrix, a provider of telephones and
software and equipment for the lodging industry. Telematrix was acquired in
October 1999 and generated contributions of $555,000 and $1,228,000 during
the three and six month periods ended June 30, 2000, respectively. In the
three months ended June 30, 2000, the Telematrix contribution consisted of
revenue of $3,782,000, operating expenses of $2,185,000 and general and
administrative expenses of $1,042,000. In the six months ended June 30,
2000, the Telematrix contribution consisted of revenue of $7,317,000,
operating expenses of $4,155,000 and general and administrative expenses of
$1,934,000. Operations of Telematrix are included in the lodging revenue
and expense categories of the combined and consolidated statements since
consumation of the acquisition.
26
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
(UNAUDITED)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CERTAIN MATTERS DISCUSSED HEREIN MAY CONSTITUTE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS. THE MEDITRUST COMPANIES (THE
"COMPANIES"), CONSISTING OF MEDITRUST CORPORATION ("REALTY") AND MEDITRUST
OPERATING COMPANY ("OPERATING"), INTEND SUCH FORWARD-LOOKING STATEMENTS TO BE
COVERED BY THE SAFE HARBOR PROVISIONS FOR FORWARD-LOOKING STATEMENTS, AND ARE
INCLUDING THIS STATEMENT FOR PURPOSES OF COMPLYING WITH THESE SAFE HARBOR
PROVISIONS. ALTHOUGH THE COMPANIES BELIEVE THE FORWARD-LOOKING STATEMENTS ARE
BASED ON REASONABLE ASSUMPTIONS, THE COMPANIES CAN GIVE NO ASSURANCE THAT THEIR
EXPECTATIONS WILL BE ATTAINED. ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS
COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN OR CONTEMPLATED BY THE
FORWARD-LOOKING STATEMENTS DUE TO A NUMBER OF FACTORS, INCLUDING, WITHOUT
LIMITATION, GENERAL ECONOMIC AND REAL ESTATE CONDITIONS, THE CONDITIONS OF THE
CAPITAL MARKETS IN GENERAL, THE IDENTIFICATION OF SATISFACTORY PROSPECTIVE
BUYERS FOR HEALTHCARE RELATED ASSETS OF THE COMPANIES AND THE AVAILABILITY OF
FINANCING FOR SUCH PROSPECTIVE BUYERS, THE AVAILABILITY OF FINANCING FOR THE
COMPANIES' CAPITAL INVESTMENT PROGRAM, INTEREST RATES, COMPETITION FOR HOTEL
SERVICES AND HEALTHCARE FACILITIES IN A GIVEN MARKET, THE SATISFACTION OF
CLOSING CONDITIONS TO PENDING TRANSACTIONS DESCRIBED IN THIS FORM 10-Q, THE
ENACTMENT OF LEGISLATION FURTHER IMPACTING THE COMPANIES' STATUS AS A PAIRED
SHARE REAL ESTATE INVESTMENT TRUST ("REIT") OR REALTY'S STATUS AS A REIT, THE
FURTHER IMPLEMENTATION OF REGULATIONS GOVERNING PAYMENTS TO, AS WELL AS THE
FINANCIAL CONDITIONS OF OPERATORS OF, REALTY'S HEALTHCARE RELATED ASSETS,
INCLUDING THE FILING FOR PROTECTION UNDER THE US BANKRUPTCY CODE BY ANY
OPERATORS OF THE COMPANIES' HEALTHCARE ASSETS, THE IMPACT OF THE PROTECTION
OFFERED UNDER THE US BANKRUPTCY CODE FOR THOSE OPERATORS WHO HAVE ALREADY FILED
FOR SUCH PROTECTION AND OTHER RISKS DETAILED FROM TIME TO TIME IN THE FILINGS OF
REALTY AND OPERATING WITH THE SEC, INCLUDING, WITHOUT LIMITATION, THOSE RISKS
DESCRIBED IN ITEM 7 OF THE JOINT ANNUAL REPORT ON FORM 10-K ENTITLED "CERTAIN
FACTORS YOU SHOULD CONSIDER" BEGINNING ON PAGE 67 THEREOF.
OVERVIEW
The basis of presentation includes Management's Discussion and Analysis of
Financial Condition and Results of Operations for the combined and separate
registrants under the Securities and Exchange Act of 1934, as amended.
Management of the Companies believes that the combined presentation is most
informative to the reader.
During 1998, the Companies pursued a strategy of diversifying into additional
new businesses. Implementation of this strategy included the evaluation of
numerous potential acquisition targets. On January 3, and January 11, 1998,
Realty entered into definitive merger agreements with La Quinta Inns, Inc. and
its wholly owned subsidiaries and its unincorporated partnership and joint
venture (collectively "La Quinta" and the "La Quinta Merger") and Cobblestone
Holdings, Inc. and its wholly owned subsidiary (collectively "Cobblestone" and
the "Cobblestone Merger"), respectively. In February 1998, legislation was
proposed which limited the ability of the Companies to utilize the paired share
structure.
The Companies consummated the Cobblestone Merger and the La Quinta Merger on May
29, 1998 and July 17, 1998, respectively. On July 22, 1998, the Internal Revenue
Service Restructuring and Reform Act of 1998 (the "Reform Act") was enacted. The
Reform Act limits the Companies' ability to grow through use of the paired share
structure. While the Companies' use of the paired share structure in connection
with the Cobblestone Merger and the La Quinta Merger was "grandfathered" under
the Reform Act, the ability to use the paired share structure to acquire
additional real estate and operating businesses conducted with the real estate
assets (including the golf and lodging industries) was substantially limited. In
addition, during the summer of 1998, the debt and equity capital markets
available to REITs began to deteriorate, thus limiting the Companies' access to
cost-efficient capital.
BACKGROUND - NOVEMBER 1998 COMPREHENSIVE RESTRUCTURING PLAN
During the third and fourth quarters of 1998, the Companies performed an
analysis of the impact of the Reform Act, the Companies' limited ability to
access the capital markets, and the operating strategy of the Companies'
existing businesses. This analysis included advice from outside professional
advisors and presentations by management on the different alternatives available
to the Companies. The analysis culminated in the development of a comprehensive
restructuring plan (the "1998 Plan") designed to strengthen the Companies'
financial position and clarify its investment and operating strategy by focusing
on the healthcare and lodging business segments. The Plan was announced on
November 12, 1998 and included the following components:
- - Pursue the separation of the Companies' primary businesses, healthcare and
lodging, by creating two separately traded, publicly listed REITs. The
Companies intended to spin-off the healthcare financing business into a
stand-alone REIT;
- - Continue to operate the Companies' healthcare and lodging businesses using
the existing paired-share REIT structure until a healthcare spin-off were
to take place;
- - Sell more than $1 billion of assets, including the portfolio of
golf-related real estate and operating properties (the "Cobblestone
27
Golf Group"), the Santa Anita Racetrack and approximately $550 million of
healthcare properties;
- - Use the proceeds from these asset sales to achieve significant near-term
debt reduction;
- - Settle fully the Companies' forward equity issuance transaction ("FEIT")
with certain affiliates of Merrill Lynch & Co., Inc. (together with its
agent and successor in interest, "MLI"); and
- - Reduce capital investments to respond to the current operating conditions
in each industry.
During the latter part of 1998 and throughout 1999, the Companies implemented
the various parts of the 1998 Plan including:
- - The sale of more than $1.4 billion of assets, including the Cobblestone
Golf Group, the Santa Anita Racetrack and approximately $820 million of
healthcare properties:
- - The repayment of more than $625 million of debt;
- - The full settlement of the FEIT; and
- - The realignment of capital investments to respond to the current operating
environment in the healthcare and lodging industries.
The Companies also endeavored to separate its healthcare and lodging businesses.
However, the ability to separate these businesses was contingent on the ability
of each business to obtain a separate credit facility. The ability to obtain
separate credit facilities was hindered by the capital markets heightened
uncertainty surrounding both the long-term healthcare and mid-priced lodging
industries. The Companies' Boards of Directors continued to evaluate the
Companies' businesses and the capital market's response to these businesses. As
a result, the Boards considered the Companies' alternatives and, after such
consideration, adopted a reorganization plan that is no longer focused on the
separation of the businesses and the spin-off of the healthcare business.
As part of the 1998 Plan, the Companies classified golf and horseracing
activities as discontinued operations for financial reporting purposes.
Accordingly, management's discussion and analysis of the results of operations
are focused on the Companies' primary businesses, healthcare and lodging.
RECENT DEVELOPMENTS - ADOPTION OF FIVE POINT PLAN OF REORGANIZATION
During the latter part of 1999, the Companies continued to analyze and evaluate
the impact of the Companies' continued inability to access the capital markets
and the operating strategy of the Companies' existing businesses. This analysis
included advice from outside professional advisors and presentations by
management on the different alternatives available to the Companies, and
included a review of the current state of the Companies' investments in the
healthcare industry and the long-term prospects of both the healthcare and
lodging industries.
A number of factors have negatively impacted the long-term care and assisted
living sectors of the healthcare industry. These include the federal
government's shift to a Medicare prospective payment system ("PPS") in the
skilled nursing industry, increased labor costs, fill-up periods of longer
duration for assisted living facilities, increased regulation and tighter and
more costly capital markets for both healthcare operating and financing
companies. These factors have caused investment spreads to narrow and have
caused a significant decline in the growth rate in the assisted living and
nursing home industries. Therefore, a decision was made to reduce the Companies'
investment in healthcare assets and focus its resources on its lodging division.
The mid-priced lodging segment has experienced a greater increase in the supply
of available rooms than demand in much of the United States. The relationship
between supply and demand varies by region. Although the mid-priced lodging
segment continues to be impacted by the supply/demand imbalance, the Companies
believe that by focusing on internal growth and improving the efficiency of
operations, the lodging division will be positioned to benefit from improving
industry trends when the supply/demand imbalance begins to moderate.
This analysis culminated in the development of a five-point plan of
reorganization ("Five Point Plan") designed to improve the overall financial
condition of the Companies by substantially deleveraging its balance sheet. The
Five Point Plan takes advantage of the Companies' demonstrated ability to sell
healthcare assets and use the proceeds from these sales to repay debt
obligations. As part of the Five Point Plan, the Companies suspended Realty's
common share dividend to provide additional operating funds to repay debt and
strengthen the Companies' balance sheet. These actions will permit the
Companies, when appropriate, to make disciplined investments to position its
lodging division to benefit from improving industry trends when the
supply/demand imbalance in its sector begins to moderate. The Five Point Plan
was announced on January 28, 2000 and included the following components:
- - An orderly disposition of a significant portion of healthcare assets;
- - Suspension of Realty's REIT common share dividend;
28
- - Expectation of the declaration of the minimum dividend required to maintain
REIT status in December 2000;
- - Substantial reduction in debt; and
- - Future disciplined investment in the lodging division.
The Companies also announced that consistent with the adoption of the Five Point
Plan to reduce its emphasis on the healthcare division, the Chief Executive
Officer of Realty would be leaving. The Boards of Directors, with the assistance
of a professional search firm, conducted a search for candidates with
significant lodging industry experience to assume the role of Chief Executive
Officer in the reorganized Companies. On March 23, 2000, the Companies announced
the appointment of Francis W. ("Butch") Cash as President and Chief Executive
Officer of the Companies. Mr. Cash joined the Companies on April 17, 2000 and is
based in the new headquarters in Dallas, Texas.
As part of the Five-Point Plan to position the lodging division for growth when
industry trends improve, the Companies announced that the corporate headquarters
would be moved to Dallas, Texas and that changes would be made to the management
team. During June of 2000, the Companies announced the appointments of David L.
Rea as Chief Financial Officer of Meditrust Operating Company and Stephen T.
Parker as Senior Vice President of Marketing. On July 20, 2000, the Companies
also announced that it is in the process of developing a franchise program for
the La Quinta brand. As part of the initiation of that program, the Companies
announced the appointment of Alan L. Tallis to the position of Executive Vice
President-Chief Development Officer.
Consistent with this objective, the Boards of Directors approved a plan to
reduce by 14 the number of employees, including four officers, as of December
31, 2000. The reduction is primarily in the financial and legal groups of the
Companies' Needham, Massachusetts offices. The Companies plan to further reduce
staff over the next two years with the intention of consolidating the remaining
healthcare operations in Dallas, Texas by December 31, 2002. As part of the plan
to close the Needham office, additional severance and other payments are
expected in future periods.
THE MEDITRUST COMPANIES--COMBINED RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 VS. THREE MONTHS ENDED JUNE 30, 1999
Revenue for the three months ended June 30, 2000, was $219,452,000 compared to
revenue of $239,714,000 for the three months ended June 30, 1999, a decrease of
$20,262,000. The revenue decrease was primarily attributed to a decrease in
healthcare revenue of $19,937,000. The healthcare revenue decrease primarily
resulted from asset sales and mortgage repayments over the last year net of the
effect of additions to real estate investments made during the same period.
Hotel revenue for the three months ended June 30, 2000 was $158,167,000 compared
to $162,274,000 for the three months ended June 30, 1999, a decrease of
$4,107,000. Hotel operating revenues generally are measured as a function of the
average daily rate ("ADR") and occupancy. The ADR increased to $63.16 for the
second quarter 2000 from $60.45 in the comparable quarter of 1999, an increase
of $2.71 or 4.5%. Occupancy percentage decreased 5.6 percentage points to 67.4%
for the three months ended June 30, 2000, from 73.0% in the same period in 1999.
Revenue per available room ("RevPAR"), which is the product of occupancy
percentage and ADR, decreased 3.5% quarter to quarter. The decrease in RevPAR is
primarily due to a greater increase in the supply of available rooms than in
demand in the segment of the lodging industry in which La Quinta competes. The
relationship between supply and demand varies by region and has impacted La
Quinta to a greater extent than its competitors due to its concentration of
hotels in the West South Central and South Atlantic regions of the United States
where approximately 66% of the La Quinta hotels are located. Other factors
contributing to the decrease in RevPAR include the continuing disruptive impact
of the new property management system and the continuing reorganization of its
operations and sales organizations. The revenue impact of the oversupply of
available rooms was somewhat mitigated by revenue increases resulting from a
higher proportion of room rental income from the Inn & Suites hotels as compared
to the Inns during the comparable periods. Inn & Suites hotels generally have
higher room rental income per night than the Inns. These revenue decreases were
partially offset by the addition of revenues from the acquisition of Telematrix,
Inc. ("Telematrix"), a provider of telephone software and equipment for the
lodging industry in October 1999. Revenues related to Telematrix for the three
months ended June 30, 2000, were $3,782,000.
For the three months ended June 30, 2000, total operating expenses were
$102,102,000 compared to $88,867,000 for the three months ended June 30, 1999,
an increase of $13,235,000. This increase was primarily attributable to the
hotel business and included increases to operating expenses of $7,685,000,
general and administrative expenses of $4,109,000 and rental property operating
expenses of $347,000. The increase in hotel operating expenses and general and
administrative expense is primarily attributable to the first full quarter
impact of expenses associated with operation of 9 new Inn & Suites hotels,
increases in salary and wage rates, expenses related to certain severance and
employment agreements, expenses associated with implementation of the new
property management system and certain other incremental expenses. Hotel
operating and general and administrative expenses include costs associated with
the operation such as salaries, wages, utilities, repair and maintenance, credit
card discounts and room supplies as well as corporate expenses, such as the
costs of general management, office rent, training and field supervision of
hotel managers and other marketing and administrative expenses. In addition,
$2,185,000 of operating expenses and $1,042,000 of general and administrative
expenses were related to the operations of Telematrix. Rental property operating
costs attributed to the lodging segment principally consist of property taxes on
hotel facilities.
29
For the three months ended June 30, 2000, rental property operating expenses
attributable to the healthcare business decreased $2,003,000. Rental property
operating expenses attributed to the healthcare business principally consist of
expenses for the management and operation of medical office buildings. The
decrease was primarily a result of the sale of principally all of the Companies'
medical office buildings in January 2000. General and administrative expenses
related to healthcare decreased by $130,000 primarily due to state tax savings
associated with the restructuring of certain healthcare subsidiaries and
reductions in legal and overhead expenses.
The Companies consider contribution from each primary business in evaluating
performance. Contribution includes revenue from each business, excluding
non-recurring or unusual income, less operating expenses, rental property
operating expenses and general and administrative expenses. The resulting
combined contribution of the healthcare and lodging businesses was $117,350,000
for the three months ended June 30, 2000, of which $53,376,000 related to
healthcare, $63,419,000 to hotels and $555,000 to Telematrix. For the comparable
three months ended June 30, 1999, the combined contribution of the healthcare
and lodging businesses was $150,847,000, of which $71,180,000 related to
healthcare and $79,667,000 related to hotels. The contribution of the healthcare
business decreased $17,804,000 primarily as a result of the impact on revenue of
asset sales and mortgage repayments over the last year net of the impact of
savings in rental and general and administrative expenses.
The lodging contribution was $63,419,000 or 40.1% of lodging revenues during the
three months ended June 30, 2000, compared to $79,667,000 or 49.1% of lodging
revenues during the three months ended June 30, 1999. The decrease in
contribution is primarily attributable to the decline in revenue due to the
impact of the oversupply of available rooms, incremental hotel operating
expenses and general and administrative expense (previously described in this
section), and was somewhat mitigated by revenue increases resulting from a
higher proportion of room rental income from the Inn & Suites hotels as compared
to the Inns during the comparable periods.
In addition, contribution from Telematrix was $555,000 for the three months
ended June 30, 2000. Operations of Telematrix are included in lodging revenue
and expense categories of the combined and consolidated statements since
consummation of the acquisition and separately disclosed as "Other Contribution"
in Note 11 "Segment Reporting" of the combined and consolidated statements.
Interest expense decreased by $7,145,000 due to reductions in debt from amounts
paid as a result of various asset sales and mortgage repayments over the past
twelve months. These decreases were partially offset by increases to borrowing
rates. Depreciation and amortization increased by $16,000.
ASSET SALES
During the three months ended June 30, 2000, the Companies realized losses on
the sale of mortgage loans related to one retirement living facility and two
medical office buildings of $551,000. During the three months ended June 30,
1999, the Companies realized gains on the sale of two assisted living facilities
of $13,000.
PROVISION FOR IMPAIRMENT ON REAL ESTATE ASSETS
Impairment of real estate assets
During the three months ended June 30, 2000, the Companies classified certain
assets as held for sale based on management having the authority and intent of
entering into commitments for sale transactions expected to close in the next
twelve months. Based on estimated net sale proceeds, the Companies recorded a
provision for loss on assets held for sale of $13,253,000. The provision reduces
the carrying value of four owned properties to the estimated net sales proceeds
less costs to sell.
Impairment of mortgage loans
During the three months ended June 30, 2000, the Companies recorded a provision
for the mortgage portfolio, primarily relating to nine mortgage loans, of
$47,873,000. The majority of this provision relates to one operator.
Specifically, during the three months ended June 30, 2000, this operator did not
fully remit its interest payments and Realty has entered into discussions for a
discounted payoff of these mortgages. Based on the non-payment of interest and
these discussions, a provision for loan loss was recorded.
30
PROVISION FOR LOSS ON EQUITY SECURITIES
Realty has an investment in Nursing Home Properties Plc ("NHP Plc"), a property
investment group which specializes in the financing, through sale leaseback
transactions, of nursing homes located in the United Kingdom. The investment
includes approximately 26,606,000 shares of NHP Plc, representing an ownership
interest in NHP Plc of 19.99% of which Realty has voting rights with respect to
9.99%.
During the three months ended June 30, 2000, the market value of this investment
significantly decreased below the Companies' initial cost. According to
Financial Accounting Standard Board Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"), an entity is required
to determine whether a decline in fair value of an investment accounted for as
"an available for sale security" is other-than-temporary. Further guidance in
Staff Accounting Bulletin Topic 5M ("SAB 5M") suggests that the decline is
other-than-temporary if, among other factors, the decline in market value
persists for a period over six months and the decline is in excess of 20% of
cost. As a result, Realty adjusted the cost basis of its investment in NHP Plc
to fair value and recorded a charge to earnings for the impairment of the
investment in NHP Plc of $39,076,000 based on the difference between the
Companies' cost of $57,204,000 and the market value as of June 30, 2000 of
$18,128,000.
OTHER EXPENSES
During the second quarter of 2000, the Companies recorded approximately
$8,756,000 in other expenses.
As part of the Five-Point Plan to position the lodging division for growth when
industry trends improve, the Companies announced that the corporate headquarters
would be moved to Dallas, Texas and that changes would be made to the management
team. Consistent with this objective, the Boards of Directors approved a plan to
reduce by 14 the number of employees, including four officers, as of December
31, 2000. The reduction is primarily in the financial and legal groups of the
Companies' Needham, Massachusetts offices. Accordingly, during the three months
ended June 30, 2000, the Companies recorded $7,312,000 for severance related
expenses expected to be incurred to terminate those employees. The Companies
plan to further reduce staff over the next two years with the intention of
consolidating the remaining healthcare operations in Dallas, Texas by December
31, 2002. As part of the plan to close the Needham office, additional severance
and other payments are expected in future periods.
The Companies also incurred approximately $121,000 of professional fees related
to implementation of the Five Point Plan. During the three months ended June 30,
2000, the Companies also recorded provisions of approximately $31,000 for other
receivables that management considers to be uncollectible. The Companies also
recorded the collection of $1,195,000 of bad debt recoveries related to
receivables written-off in prior years.
The Companies also recorded additional provisions of $2,487,000 for receivables
related to real estate assets.
During the second quarter of 1999, the Companies recorded approximately
$4,316,000 in other expenses. These are non-recurring cost associated with the
implementation of the 1998 Plan and primarily relate to the early repayment and
modification of certain debt as well as professional and other advisory fees.
EXTRAORDINARY ITEM
During the three months ended June 30, 2000, Realty retired $13,696,000 of debt
prior to its maturity date. As a result of these early repayments of debt, a net
gain of $9,000 was realized and is reflected as an extraordinary item.
NET INCOME
The resulting net loss, after deducting preferred share dividends, for the three
months ended June 30, 2000, was $87,969,000 compared to net income available for
common shareholders, after deducting preferred share dividends of $43,705,000
for three months ended June 30, 1999. The net loss per paired common share
(diluted) for the three months ended June 30, 2000 was $0.62 compared to net
income per paired common share (diluted) of $0.31 for the three months ended
June 30, 1999. The per paired common share amount decreased primarily due to the
reduction in contribution as a result of healthcare asset sales during the
twelve month period ended June 30, 2000, the provision for impairment on real
estate assets and the provision for loss on equity securities.
SIX MONTHS ENDED JUNE 30, 2000 VS. SIX MONTHS ENDED JUNE 30, 1999
Revenue for the six months ended June 30, 2000, was $434,200,000 compared to
revenue of $467,018,000 for the six months ended June 30, 1999, a decrease of
$32,818,000. The revenue decrease was primarily attributed to a decrease in
healthcare revenue of $33,966,000. The healthcare revenue decrease primarily
resulted from asset sales and mortgage repayments over the last year net of the
effect of additions to real estate investments made during the same period.
Other nonrecurring income for the six months ended June 30, 1999 was $856,000,
which arose from lease breakage fees received from the sale of healthcare
properties. Hotel revenue for
31
the six months ended June 30, 2000 was $305,495,000 compared to $310,808,000 for
the six months ended June 30, 1999, a decrease of $5,313,000. The ADR increased
to $63.72 in 2000 from $61.06 in 1999, an increase of $2.66 or 4.4%. Occupancy
percentage decreased 5.8 percentage points to 64.3% in 2000 from 70.1% in 1999.
RevPAR decreased 4.3% over 1999. The decrease in RevPAR is primarily due to a
greater increase in the supply of available rooms than in demand in the segment
of the lodging industry in which La Quinta competes. The relationship between
supply and demand varies by region and has impacted La Quinta to a greater
extent than its competitors due to its concentration of hotels in the West South
Central and South Atlantic regions of the United States where approximately 66%
of the La Quinta hotels are located. Other factors contributing to the decrease
in RevPAR include the continuing disruptive impact of the new property
management system and the continuing reorganization of its operations and sales
organizations. The revenue impact of the oversupply of available rooms was
somewhat mitigated by revenue increases resulting from a higher proportion of
room rental income from the Inn & Suites hotels as compared to the Inns during
the comparable periods. Inn & Suites hotels generally have higher room rental
income per night than the Inns. These revenue decreases were partially offset by
the addition of revenues from the acquisition of Telematrix. Revenues related to
Telematrix for the six months ended June 30, 2000, were $7,317,000.
For the six months ended June 30, 2000, total operating expenses were
$192,718,000 compared to $173,682,000 for the six months ended June 30, 1999, an
increase of $19,036,000. This increase was primarily attributable to the hotel
business and included increases to operating expenses of $11,905,000, general
and administrative expenses of $6,215,000 and rental property operating expenses
of $819,000. The increase in hotel operating expenses and general and
administrative expense is primarily attributable to a full six month impact of
expenses associated with the operation of 13 new Inn & Suites hotels, increases
in salary and wage rates, expenses related to certain severance and employment
agreements, expenses associated with implementation of the new property
management system and incremental expenses related to certain other expenses.
Hotel operating and general and administrative expenses include costs associated
with the operation such as salaries, wages, utilities, repair and maintenance,
credit card discounts and room supplies as well as corporate expenses, such as
the costs of general management, office rent, training and field supervision of
hotel managers and other marketing and administrative expenses. In addition,
$4,155,000 of operating expenses and $1,934,000 of general and administrative
expenses were related to the operations of Telematrix. Rental property operating
costs attributed to the lodging segment principally consist of property taxes on
hotel facilities.
For the six months ended June 30, 2000, rental property operating expenses
attributable to the healthcare business decreased $3,739,000. Rental property
operating expenses attributed to the healthcare business principally consist of
expenses for the management and operation of medical office buildings. The
decrease was primarily a result of the sale of principally all of the Companies'
medical office buildings in January 2000. General and administrative expenses
related to healthcare decreased by $2,253,000 primarily due to state tax savings
associated with the restructuring of certain healthcare subsidiaries and
reductions in legal and overhead expenses.
The Companies consider contribution from each primary business in evaluating
performance. Contribution includes revenue from each business, excluding
non-recurring or unusual income, less operating expenses, rental property
operating expenses and general and administrative expenses. The resulting
combined contribution of the healthcare and lodging businesses was $241,482,000
for the six months ended June 30, 2000, of which $113,948,000 related to
healthcare, $126,306,000 to hotels and $1,228,000 to Telematrix. For the
comparable six months ended June 30, 1999, the combined contribution of the
healthcare and lodging businesses was $292,480,000, of which $141,922,000
related to healthcare and $150,558,000 related to hotels. The decrease was
primarily a result of the impact on revenue of asset sales and mortgage
repayments over the last year net of the impact of savings in rental and general
and administrative expenses.
The lodging contribution was $126,306,000 or 41.3% of lodging revenues during
the six months ended June 30, 2000, compared to $150,558,000 or 48.4% of lodging
revenues during the six months ended June 30, 1999. The decrease in contribution
is primarily attributable to the impact of the oversupply of available rooms,
incremental hotel operating and general and administrative expenses, and was
somewhat mitigated by revenue increases resulting from a higher proportion of
room rental income from the Inn & Suites hotels as compared to the Inns during
the comparable periods.
In addition, contribution from Telematrix was $1,228,000 for the six months
ended June 30, 2000. Operations of Telematrix are included in lodging revenue
and expense categories of the combined and consolidated statements since
consummation of the acquisition and separately disclosed as "Other Contribution"
in Note 11 "Segment Reporting" of the combined and consolidated statements.
Interest expense decreased by $18,566,000 due to reductions in debt from amounts
paid as a result of various asset sales and mortgage repayments over the past
twelve months. These decreases were partially offset by increases to borrowing
rates. Depreciation and amortization increased by $3,287,000.
32
ASSET SALES
During the six months ended June 30, 2000, the Companies realized losses on the
sale of healthcare real estate assets of $4,363,000 compared to gains of
$12,284,000 during the comparable six months ended June 30, 1999. For the six
months ended June 30, 2000, sales of healthcare properties included 25 medical
office buildings, 12 assisted living facilities, four long-term care facilities
and one retirement living facility. For the six months ended June 30, 1999 sales
of healthcare properties included 17 assisted living facilities, one
rehabilitation facility, and one long-term care facility. The Companies also
sold one hotel and land held for development on which there was no gain or loss
realized.
PROVISION FOR IMPAIRMENT ON REAL ESTATE ASSETS
Impairment of real estate assets
During the six months ended June 30, 2000, the Companies classified certain
assets as held for sale based on management having the authority and intent of
entering into commitments for sale transactions expected to close in the next
twelve months. Based on estimated net sale proceeds, the Companies recorded a
provision for loss on assets held for sale of $13,253,000. The provision reduces
the carrying value of four owned properties to the estimated net sales proceeds
less costs to sell.
Impairment of mortgage loans
During the six months ended June 30, 2000, the Companies recorded a provision
for the mortgage portfolio, primarily relating to nine mortgage loans, of
$47,873,000. The majority of this provision relates to one operator.
Specifically, during the three months ended June 30, 2000, this operator did not
fully remit its interest payments and Realty has entered into discussions for a
discounted payoff of these mortgages. Based on the non-payment of interest and
these discussions, a provision for loan loss was recorded.
PROVISION FOR LOSS ON EQUITY SECURITIES
Realty has an investment in NHP Plc, a property investment group which
specializes in the financing, through sale leaseback transactions, of nursing
homes located in the United Kingdom. The investment includes approximately
26,606,000 shares of NHP Plc, representing an ownership interest in NHP Plc of
19.99% of which Realty has voting rights with respect to 9.99%.
During the six months ended June 30, 2000, the market value of this investment
significantly decreased below the Companies' initial cost. According to SFAS
115, an entity is required to determine whether a decline in fair value of an
investment accounted for as "an available for sale security" is
other-than-temporary. Further guidance in SAB 5M suggests that the decline is
other-than-temporary if, among other factors, the decline in market value
persists for a period over six months, and the decline is in excess of 20% of
cost. As a result, Realty adjusted the cost basis of its investment in NHP Plc
to fair value and recorded a charge to earnings for the impairment of the
investment in NHP Plc of $39,076,000 based on the difference between the
Companies' cost of $57,204,000 and the market value as of June 30, 2000 of
$18,128,000.
OTHER EXPENSES
During the six months ended June 30, 2000, the Companies recorded approximately
$21,120,000 in other expenses.
On January 28, 2000, Realty entered into a separation and consulting agreement
with the former Chief Executive Officer of Realty. Under the terms of the
separation agreement, Realty paid the former Chief Executive Officer severance
payments totaling $9,500,000 (including consulting fees), converted 155,000
restricted paired common shares into unrestricted paired common shares and
agreed to continue certain medical, dental and other benefits. The vesting of
the shares resulted in a charge of approximately $2,500,000.
As part of the Five-Point Plan to position the lodging division for growth when
industry trends improve, the Companies announced that the corporate headquarters
would be moved to Dallas, Texas and that changes would be made to the management
team. Consistent with this objective, the Boards of Directors approved a plan to
reduce by 14 the number of employees, including four officers, as of December
31, 2000. The reduction is primarily in the financial and legal groups of the
Companies' Needham, Massachusetts offices. Accordingly, during the six months
ended June 30, 2000, the Companies recorded $7,312,000 for severance related
expenses expected to be incurred to terminate those employees. The Companies
plan to further reduce staff over the next two years with the intention of
consolidating the remaining healthcare operations in Dallas, Texas by December
31, 2002. As part of the plan to close the Needham office, additional severance
and other payments are expected in future periods.
The Companies also incurred approximately $201,000 of professional fees related
to implementation of the Five Point Plan. During the six months ended June 30,
2000, the Companies also recorded provisions of approximately $315,000 for other
receivables that
33
management considers to be uncollectible. The Companies also recorded the
collection of $1,195,000 of bad debt recoveries related to receivables
written-off in prior years.
The Companies also recorded additional provisions of $2,487,000 for receivables
related to real estate assets.
During the six months ended June 30, 1999, the Companies recorded approximately
$39,203,000 in other expenses.
On May 10, 1999, the Companies entered into a separation agreement with Abraham
D. Gosman, former Director and Chairman of the Companies and Chief Executive
Officer and Treasurer of Meditrust Operating Company. Under the terms of this
separation agreement, Mr. Gosman received severance payments totaling
$25,000,000 in cash and the continuation of certain life insurance benefits. The
Companies established a Special Committee of the Boards of Directors of Realty
and Operating (the "Special Committee") to evaluate Mr. Gosman's employment
contract and whether such severance or other payments were appropriate. Based on
the results of the evaluation and recommendation of the Special Committee, the
Boards of Directors concluded that the separation agreement was in the long-term
best interest of the shareholders of the Companies and approved the separation
agreement.
The Companies incurred approximately $10,205,000 of non-recurring costs
associated with the development and implementation of the 1998 Plan. These costs
primarily relate to the early repayment and modification of certain debt and
other advisory fees related to the 1998 Plan and the separation agreement with
Mr. Gosman.
Also, in conjunction with the implementation of the 1998 Plan, which included a
change in the focus of the lodging division to internal growth, La Quinta
management performed a review of the front desk system under development for its
lodging facilities, and made a decision to abandon the project. The decision was
based primarily on management's intent to integrate the front desk system with
new revenue management software, the availability of more suitable and flexible
externally developed software and a shift in information systems philosophy
toward implementation of externally developed software and outsourcing of
related support services. A charge of approximately $3,998,000 to write-off
certain internal and external software development costs related to the project
was recorded during the six months ended June 30, 1999.
EXTRAORDINARY ITEM
During the six months ended June 30, 2000 the Companies retired $58,496,000 of
corporate debt at a discount prior to its maturity date, and as part of certain
asset sale transactions repaid secured debt totaling $14,936,000. As a result of
these early repayments of debt, a net gain of $1,403,000 was realized and is
reflected as an extraordinary item.
DISCONTINUED OPERATIONS
For the six months ended June 30, 1999, and as part of the 1998 Plan, the
Companies sold the Santa Anita Racetrack during the fourth quarter of 1998 and
sold the Cobblestone Golf Group during the first quarter of 1999. The Companies
reflected the financial results for 1999 and 1998 of the Santa Anita Racetrack
and the Cobblestone Golf Group as discontinued operations. During the six months
ended June 30, 1999, the Companies adjusted the provision for loss on disposal
of the Cobblestone Golf Group by recording a gain of approximately $2,994,000
which included an estimate of a working capital adjustment to the final selling
price. In addition, during the six months ended June 30, 1999 the Companies
recorded $1,875,000 as an adjustment to the estimated selling price of the Santa
Anita Racetrack.
NET INCOME
The resulting net loss, after deducting preferred share dividends, for the six
months ended June 30, 2000, was $80,793,000 compared to net income available for
common shareholders, after deducting preferred share dividends of $59,511,000
for six months ended June 30, 1999. The net loss per paired common share
(diluted) for the six months ended June 30, 2000 was $0.57 compared to net
income per paired common share (diluted) of $0.41 for the six months ended June
30, 1999. The per paired common share amount decreased primarily due to the
reduction in contribution as a result of healthcare asset sales during the
twelve month period ended June 30, 2000, the provision for impairment on real
estate assets and the provision for loss on equity securities.
THE MEDITRUST COMPANIES - COMBINED LIQUIDITY AND CAPITAL RESOURCES
The Companies earn revenue by (i) leasing healthcare assets under long-term
triple net leases in which the rental rate is generally fixed with annual
escalators; (ii) providing mortgage financing for healthcare facilities in which
the interest is generally fixed with annual escalators subject to certain
conditions and (iii) owning and operating 230 La Quinta Inns and 70 La Quinta
Inn and Suites. Approximately $964,000,000 of the Companies debt obligations are
floating rate obligations in which interest rate and related cash flows vary
with the movements in the London Interbank Offered Rate ("LIBOR"). The general
fixed nature of the Companies' assets and the variable nature of a portion of
the Companies' debt obligations creates interest rate risk. If interest rates
were to rise significantly, the Companies' interest payments may increase
resulting in decreases in net income and funds from operations. To
34
mitigate this risk, the Companies have entered into interest rate swaps to
convert some of their floating rate debt obligations to fixed rate debt
obligations. Interest rate swaps generally involve the exchange of fixed and
floating rate interest payments on an underlying notional amount. At June 30,
2000, the Companies had $500,000,000 of interest rate swaps outstanding in which
the Companies pay a fixed rate of 5.7% to the counterparty and receive LIBOR
from the counterparty. Accordingly, at June 30, 2000, the Companies have
approximately $464,000,000 of variable debt outstanding with interest rates that
fluctuate with changes in LIBOR.
CASH FLOWS FROM OPERATING ACTIVITIES
The principal source of cash to be used to fund the Companies' future operating
expenses, interest expense, recurring capital expenditures and distribution
payments, if any, will be cash flow provided by operating activities. The
Companies' anticipate that cash flow provided by operating activities will
provide the necessary funds on a short and long-term basis to meet operating
cash requirements including distributions to shareholders.
CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES
The Companies provide funding for new investments and costs associated with
restructuring through a combination of long-term and short-term financing
including both debt and equity, as well as the previously announced sale of
healthcare related assets. As part of the Five Point Plan, the Companies have
decided to sell additional healthcare related assets to meet their commitments
and to provide them with additional liquidity. The Companies obtain long-term
financing through the issuance of shares, long-term secured or unsecured notes,
convertible debentures and the assumption of mortgage notes. The Companies
obtain short-term financing through the use of bank lines of credit, which are
replaced with long-term financing as appropriate. From time to time, the
Companies utilize interest rate caps or swaps to attempt to hedge interest rate
volatility. It is the Companies' objective to match mortgage and lease terms
with the terms of their borrowings. The Companies attempt to maintain an
appropriate spread between their borrowing costs and the rate of return on their
investments. When development loans convert to sale/leaseback transactions or
permanent mortgage loans, the base rent or interest rate, as appropriate, is
fixed at the time of such conversion.
During February 1998, the Companies entered into the FEIT with MLI pursuant to
which MLI purchased shares of capital stock of the Companies which were
ultimately converted into paired shares. The FEIT was designed to mature one
year after issuance and provided MLI the right to sell sufficient paired shares
(including the shares originally purchased) to provide MLI with a guaranteed
return. The FEIT also included a purchase price adjustment mechanism which, from
time to time, resulted in the issuance of additional paired shares to MLI as a
result of declines in the paired shares' market price.
After announcing in November 1998 that the Companies intended to settle fully
the FEIT, during December 1998, the Companies repurchased all of the paired
shares issued pursuant to the purchase price adjustment mechanism, as well as
some of the paired shares originally sold to MLI.
On July 17, 1998, Realty entered into a credit agreement (the "Credit
Agreement") which provided Realty with up to $2,250,000,000 in credit
facilities, replacing Realty's then existing $365,000,000 revolving credit
facilities. The Credit Agreement provided for borrowings in four separate
tranches (each a "Tranche"): Tranche A, a $1,000,000,000 revolving loan, amounts
of which if repaid may be reborrowed, which matures July 17, 2001; Tranche B, a
term loan in the amount of $500,000,000, amounts of which if repaid may not be
reborrowed, which matured July 17, 1999 and which had a $250,000,000 mandatory
principal payment on April 17, 1999; Tranche C, a term loan in the amount of
$250,000,000, amounts of which if repaid may not be reborrowed, which matured
July 17, 1999 with a six month extension option which management exercised for a
fee of 12.5 basis points; and Tranche D, a term loan in the amount of
$500,000,000, amounts of which if repaid may not be reborrowed, which matures
July 17, 2001.
The Credit Agreement includes covenants with respect to maintaining certain
financial benchmarks, limitations on the types and percentages of investments in
certain business lines, a subjective acceleration clause contingent upon the
occurrence of an event with a material adverse effect on the Companies,
limitations on dividends of Realty and Operating, and other restrictions.
On November 23, 1998, Realty amended its Credit Agreement to provide for
Realty's cash repayment of a portion of its FEIT, to provide for the amendment
of certain financial covenants to accommodate asset sales, to exclude the impact
of non-recurring charges in certain covenant calculations, and to provide for
future operating flexibility. The amendment also provided for an increase to the
LIBOR pricing of the credit facility by approximately 125 basis points, and the
pledge of stock of the Companies' subsidiaries. This pledge of subsidiary stock
also extended on a pro rata basis to entitled bondholders. Realty also agreed to
a 25 basis point increase to the LIBOR pricing in the event that an equity
offering of at least $100,000,000 had not been completed by February 1, 1999. On
February 1, 1999 this increase went into effect.
On January 8, 1999, Realty repaid $250,000,000 of its Tranche B term loan that
was scheduled to mature on April 17, 1999.
On March 10, 1999, Realty reached a second agreement with its bank group to
further amend the Credit Agreement. The second amendment, became effective upon
the successful completion of the sale of Cobblestone Golf Group and provided for
a portion of the sale proceeds to be applied to the FEIT. The second amendment
also provides for, among other things, upon the sale of Cobblestone
35
Golf Group, the elimination of limitations on certain healthcare related
investments and a lowering of the commitment on the revolving tranche to
$850,000,000.
On March 10, 1999, the Companies entered into an agreement with MLI to use the
proceeds from the sale of the Cobblestone Golf Group in excess of $300,000,000
to repurchase all or a portion of the remaining paired shares originally issued
to MLI in the FEIT. On April 1, 1999, the Companies fully settled the FEIT by
paying MLI $89,840,000 for the repurchase of 6,865,000 paired common shares.
On April 8, 1999, Realty repaid $250,000,000 of its Tranche B term loan and
cancelled a $250,000,000 swap contract. Both were scheduled to mature on July
17, 1999.
On August 16, 1999, Realty repaid $12,500,000 of its notes payable which matured
on that date and bore interest at 7.25%.
On December 24, 1999, Realty repaid $250,000,000 of its Tranche C term loan
which was scheduled to mature on January 17, 2000.
On January 28, 2000, the Companies announced that the Boards of Directors had
approved the Five Point Plan, which provided for:
- An orderly disposition of a significant portion of healthcare assets;
- Suspension of Realty's REIT common share dividend;
- Expectation of the declaration of the minimum dividend required to
maintain REIT status in December 2000;
- Substantial reduction in debt; and
- Future disciplined investment in the lodging division.
The Companies also announced that consistent with the adoption of the Five Point
Plan to reduce its emphasis on the healthcare division, David F. Benson would be
leaving as Chief Executive Officer, President, and Treasurer of Realty.
During the six months ended June 30, 2000, the Companies sold Paramount Real
Estate Services Inc., its medical office building management company, as well as
the majority of its medical office building portfolio. Total consideration of
$204,000,000 included $144,000,000 in cash, $8,000,000 of assumed debt and
$52,000,000 of subordinated indebtedness due January 2005 bearing interest at
9%. The transaction involved the sale of the medical office building management
company, 23 medical office buildings and three medical office building mortgage
loans. Additionally, the Companies sold 12 assisted living facilities for
$28,000,000, four long-term care facilities for $22,000,000, a retirement living
facility mortgage loan for $7,000,000 and two medical office building mortgage
loans for $48,000,000. The Companies also received repayments of one mortgage
loan and partial repayment of one mortgage loan for approximately $12,000,000.
The proceeds from the sale of these healthcare assets and repayments were used
to repay debt maturing in July 2000.
Effective June 30, 2000 Realty reached a third agreement with its bank group to
further amend the Credit Agreement. The third amendment provided for, among
other things, limitations on early debt repayments, limitations on common
dividend payments, which is partially based on a calculation of REIT taxable
income, and changes to the definition of the minimum tangible net worth
covenant.
On June 30, 2000, Realty repaid the 8.54% convertible debentures with a balance
of $34,834,000, that were scheduled to mature on July 1, 2000.
At June 30, 2000, the Companies had approximately $349,000,000 in available
borrowings under its revolving tranche commitment. During the period ending July
1 to December 31, 2000, the Companies have approximately $127,000,000 of debt
maturing, of which approximately $126,000,000 was repaid in July 2000 from
proceeds of asset sales and borrowings under the revolving tranche commitment.
As of August 1, 2000, the Companies had outstanding borrowings under its
revolving tranche commitment of $589,000,000 (9.67% weighted average rate at
August 1, 2000) and capacity for additional borrowing of approximately
$224,000,000.
As of June 30, 2000, the Companies' gross real estate investments totaled
approximately $4,683,495,000 consisting of 300 hotel facilities in service, 193
long-term care facilities, 104 retirement and assisted living facilities, six
medical office buildings, one acute care hospital campus and six other
healthcare facilities. At June 30, 2000, Realty was committed to provide
additional financing of approximately $5,000,000 for additions to existing
facilities in the portfolio.
The Companies had shareholders' equity of $2,591,661,000 and debt constituted
47% of the Companies' total capitalization as of June 30, 2000.
The Companies have an effective shelf registration statement on file with the
SEC under which the Companies may issue $1,825,000,000 of securities including
common stock, preferred stock, debt, series common stock, convertible debt and
warrants to purchase shares, preferred shares, debt, series common stock and
convertible debt.
36
The Companies believe that their various sources of capital, including
availability under Realty's credit facility, operating cash flow and proceeds
from the sale of certain healthcare assets as contemplated under the Five Point
Plan, are adequate to finance their operations as well as their existing
commitments, including financial commitments related to certain healthcare
facilities and repayment of debt, through the second quarter of 2001, however,
the Companies have significant debt maturing during the third quarter of 2001.
As described above, Realty's senior credit facility, consisting of a
$500,000,000 Tranche D term loan and the revolving credit commitment, matures on
July 17, 2001. As of August 1, 2000, Realty had outstanding borrowings under the
revolving credit commitment of $589,000,000 and capacity for additional
borrowings of approximately $224,000,000. The Companies had approximately
$127,000,000 of debt maturing during the third and fourth quarters of 2000, of
which $126,000,000 was repaid during July 2000. Realty also has approximately
$90,000,000 of debt maturing in the first quarter of 2001 and an additional
$75,000,000 of debt maturing in July 2001, at approximately the same time as the
$500,000,000 Tranche D term loan and the revolving credit commitment, with a
maximum capacity of $850,000,000, mature. Realty intends to continue to use
available borrowings under its revolving credit facility, together with cash
flow from operations and proceeds from asset sales, to fund the repayment of
debt obligations other than the senior credit facility as they come due. The
Companies further intend to use cash flow from operations and the proceeds from
sales of healthcare assets under the Five Point Plan to repay amounts due under
the senior credit facility. The Companies also intend to pursue the refinancing
of amounts due under Realty's senior credit facility, which the Companies
believe may be facilitated by the continued sale of healthcare assets.
Although the Companies intend to continue to sell healthcare assets and to
pursue the refinancing of the senior credit facility, the Companies efforts, and
the success of these efforts, will be impacted by many factors, some of which
are outside of the Companies' control. The factors impacting the sale of the
healthcare assets include the nature of the assets being sold (including the
condition (financial or otherwise) of the operators of such assets), the overall
condition of the healthcare real estate market at the time of any such sale, the
nature of the consideration delivered by any purchaser of such assets and the
presence of other similar healthcare properties for sale on the market at the
time of any such sale (including the effect that the presence of such other
properties could have on the prices that can be obtained in such sales and the
availability of financing for prospective purchasers of such assets). The
section entitled "Certain Factors You Should Consider" commencing on page 67 of
the Companies' Joint Annual Report on Form 10-K for the year-ending December 31,
1999 contains additional factors that could impact the Companies efforts, and
the success of those efforts, in selling healthcare assets and refinancing the
senior credit facility.
The above-described factors (including those set forth in the Companies' Joint
Annual Report on Form 10-K) specifically will impact the amount of the
consideration to be received in connection with the sale of any such assets,
which will impact the amount of debt obligations that may be repaid in
connection with such sales, as well as the gain or loss that will be recognized
by Realty in connection with such sale. Further, to the extent Realty enters
into agreements to sell assets at sales prices less than the carrying value of
such assets on Realty's balance sheet (after giving effect to prior adjustments
to such carrying value), Realty will recognize losses related to such sales,
some of which may be substantial as a result of the above-described
transactions, at the time that such agreements are entered into, rather than at
the time such sales are actually consummated. Accordingly, the Companies cannot
assure you that their efforts to sell healthcare assets, or to pursue the
refinancing of the senior credit facility, will be successful.
37
Information Regarding Operators of Healthcare Assets
As of June 30, 2000, healthcare related facilities (the "Healthcare Portfolio")
comprised approximately 43.2% of the Companies' total real estate investments.
Life Care Centers of America ("Lifecare") and Sun Healthcare Group, Inc. ("Sun")
currently operate approximately 20.8% of the total real estate investments, or
48.0% of the Healthcare Portfolio. A schedule of significant healthcare
operators follows:
% OF % OF
INVESTED ENTIRE # OF HEALTHCARE
Portfolio by Operator (IN THOUSANDS) PORTFOLIO PROPERTIES PORTFOLIO
-------------- --------- ---------- ---------
Life Care Centers of America, Inc. $ 556,856 11.9% 92 27.5%
Sun Healthcare Group, Inc. 415,491 8.9% 42 20.5%
CareMatrix Corporation 182,360 3.9% 11 9.0%
Alterra 161,592 3.4% 57 8.0%
Harborside 103,411 2.2% 18 5.1%
Balanced Care Corporation 92,633 2.0% 19 4.6%
Health Asset Realty Trust 68,943 1.5% 11 3.4%
Tenet Healthcare/Iasis 65,650 1.4% 1 3.2%
Integrated Health Services, Inc. 50,973 1.1% 10 2.5%
Genesis Health Ventures, Inc. 35,639 0.8% 8 1.8%
Assisted Living Concepts 31,487 0.7% 16 1.6%
ARV Assisted Living, Inc. 28,982 0.6% 4 1.4%
HealthSouth 25,270 0.5% 2 1.2%
Other Public Operators 29,718 0.6% 4 1.5%
Other Non-Public Operators 120,754 2.5% 13 6.0%
Paramount Real Estate Services 54,545 1.2% 2 2.7%
-----------------------------------------------------------
2,024,304 43.2% 310 100%
==============
LODGING:
La Quinta Companies 2,659,191 56.8% 300
--------------------------------------------
Gross Real Estate Assets $ 4,683,495 100% 610
============================================
In addition, companies in the assisted living sector of the healthcare industry
operate approximately 9.1% of Realty's total real estate investments (and
approximately 21.1% of the Healthcare Portfolio).
Realty monitors credit risk for its Healthcare Portfolio by evaluating a
combination of publicly available financial information, information provided by
the operators themselves and information otherwise available to Realty. The
financial condition and ability of these healthcare operators to meet their
rental and other obligations will, among other things, have an impact on
Realty's revenues, net income (loss), funds available from operations and its
ability to make distributions to its shareholders. The operations of the
long-term care (skilled nursing) companies have been negatively impacted by
changes in Medicare reimbursement rates (PPS), increases in labor costs,
increases in their leverage and certain other factors. In addition, any failure
by these operators to effectively conduct their operations could have a material
adverse effect on their business reputation or on their ability to enlist and
maintain patients in their facilities.
Operators of assisted living facilities are experiencing fill-up periods of a
longer duration, and are being impacted by concerns regarding the potential of
over-building, increased regulation and the use of certain accounting practices.
Accordingly, many of these operators have announced decreased earnings or
anticipated earnings shortfalls and have experienced a significant decline in
their stock prices. These factors have had a detrimental impact on the liquidity
of some assisted living operators, which has caused their growth plans to
decelerate and may have a negative effect on their operating cash flows.
38
OPERATORS IN BANKRUPTCY
Citing the effects of changes in government regulation relating to Medicare
reimbursement as the precipitating factor, Sun filed for protection under
Chapter 11 of the U.S. Bankruptcy Code on October 14, 1999. As of June 30, 2000,
Realty had a portfolio of 42 properties operated by Sun, which consisted of 38
owned properties with net assets of approximately $299,828,000 and four
mortgages with net assets of approximately $30,450,000. During the six months
ended June 30, 2000, income derived from these properties included rental income
of $23,937,000 from owned properties. No interest income was received on the
four mortgages for the six months ended June 30, 2000.
Sun has not formally indicated whether it will accept or reject any of Realty's
leases. However, Sun has indicated that it will continue to make lease payments
to Realty unless and until such leases are rejected. If necessary, Realty has a
plan in place to transition and to continue operating any of Sun's properties.
Realty has not received interest payments related to the mortgages since
November 1, 1999, and accordingly, such mortgages were put on non-accrual
status.
On January 18, 2000, Mariner Health Group, Inc. ("Mariner") filed for protection
under Chapter 11. As of June 30, 2000, Realty had a portfolio of two properties
operated by Mariner, which consisted of one owned property representing net
assets of approximately $7,047,000 and one mortgage representing a net asset
value of approximately $7,043,000. During the six months ended June 30, 2000,
income derived from these properties included rental income of $489,000 from
owned properties. No interest payments related to the Mariner mortgage were
received, and accordingly this mortgage was placed on non-accrual status.
On February 2, 2000, Integrated Health Services, Inc. ("Integrated") filed for
protection under Chapter 11. As of June 30, 2000, Realty had a portfolio of 10
owned properties operated by Integrated, representing net assets of
approximately $37,724,000. During the six months ended June 30, 2000, rental
income derived from these properties was $3,144,000.
On June 26, 2000, Genesis Health Ventures, Inc. ("Genesis") filed for protection
under Chapter 11. As of June 30, 2000, Realty had a portfolio of eight
properties operated by Genesis, which consisted of four owned properties
representing net assets of $15,330,000 and four mortgaged properties
representing net assets of $18,439,000. During the six months ended June 30,
2000, income derived from these properties included rental income of $826,000
from owned properties and interest income of $976,000 from the mortgaged
properties. No interest payments have been received since June 1, 2000, and
accordingly such mortgages were placed on non-accrual status.
Management has initiated various actions to protect the Companies' interests
under its leases and mortgages including the drawdown and renegotiations of
certain escrow accounts and agreements. While the earnings capacity of certain
facilities has been reduced and the reductions may extend to future periods,
management believes that it has recorded appropriate accounting impairment
provisions based on its assessment of current circumstances. However, upon
changes in circumstances, including but not limited to, possible foreclosure or
lease termination, there can be no assurance that the Companies' investments in
healthcare facilities would not be written down below current carrying value
based upon estimates of fair value at such time.
COMBINED FUNDS FROM OPERATIONS
Combined Funds from Operations ("FFO") of the Companies was $94,429,000 and
$117,242,000 for the six months ended June 30, 2000 and 1999, respectively.
Effective January 1, 2000 the National Association of Real Estate Investment
Trusts (NAREIT) adopted a new definition of FFO. The Companies believe that FFO
has been calculated using the new definition for all periods presented in the
table below.
Management considers Funds from Operations to be a key external measurement of
REIT performance. Funds from Operations represents net income or loss available
to common shareholders (computed in accordance with generally accepted
accounting principles), excluding real estate related depreciation, amortization
of goodwill, gains and losses from the sale of assets and provisions for
impairment on owned properties, mortgages and real estate related equity
securities, and extraordinary items.
Funds from Operations should not be considered an alternative to net income or
other measurements under generally accepted accounting principles as an
indicator of operating performance or to cash flows from operating, investing,
or financing activities as a measure of liquidity. Funds from Operations does
not reflect working capital changes, cash expenditures for capital improvements
or principal payments on indebtedness.
The following reconciliation of net income and loss available to common
shareholders to Funds from Operations illustrates the difference between the two
measures of operating performance for the comparative six months ended June 30,
2000 and 1999. Certain reconciling items include amounts reclassified from
discontinued operations and, accordingly, do not agree to revenue and expense
captions in the Companies' financial statements.
39
Combined funds from operations
SIX MONTHS ENDED JUNE 30,
(In thousands) 2000 1999
----------------------------------------
Net income (loss) available to common shareholders $ (80,793) $ 59,511
Depreciation of real estate and intangible amortization 73,255 74,884
Other expenses 99,007 -
Other capital gains and losses 4,363 (12,284)
Gain on disposal of business segments - (4,869)
Extraordinary item: Gain on debt extinguishment (1,403) -
-------------------- -------------------
Funds from Operations $ 94,429 $ 117,242
-------------------- -------------------
Weighted average paired common shares outstanding:
Basic 141,330 144,537
-------------------- -------------------
Diluted 141,330 144,548
REALTY--RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 VS. THREE MONTHS ENDED JUNE 30, 1999
Revenue for the three months ended June 30, 2000, was $142,431,000 compared to
$161,989,000 for three months ended June 30, 1999, a decrease of $19,558,000.
The revenue decrease was primarily attributed to a decrease in healthcare
revenue of $20,072,000. This decrease primarily resulted from asset sales and
mortgage repayments over the last year net of the effect of additions to real
estate investments made during the same period. The revenue decrease was
partially offset by the addition of revenues from the acquisition of Telematrix
in October 1999. Revenues related to Telematrix for the three months ended June
30, 2000 consisted of licensing fees of $1,399,000. Other decreases of $885,000
consisted of changes in rent, interest, and royalties from Operating as well as
hotel operating revenue between the comparable three month periods.
For the three months ended June 30, 2000, total recurring expenses were
$101,867,000 compared to $111,816,000 for the three months ended June 30, 1999,
a decrease of $9,949,000. This decrease was primarily attributable to a decrease
in interest expense of $8,809,000 due to reductions in debt from amounts paid as
a result of various asset sales and mortgage repayments over the past twelve
months. These decreases were partially offset by increases to borrowing rates.
Other decreases of $2,972,000 consisted of decreases in rental property
operations and depreciation and amortization. This was offset by increases in
general and administrative expense of $1,599,000 and hotel operating expenses of
$233,000.
ASSET SALES
During the three months ended June 30, 2000, Realty realized losses on the sale
of mortgage loans related to one retirement living facility and two medical
office buildings of $1,521,000.
During the three months ended June 30, 1999, Realty realized gains on the sale
of two assisted living facilities of $13,000. Sales of healthcare properties
were completed pursuant to the Plan.
PROVISION FOR IMPAIRMENT ON REAL ESTATE ASSETS
Impairment of real estate assets
During the three months ended June 30, 2000, the Companies classified certain
assets as held for sale based on management having the authority and intent of
entering into commitments for sale transactions expected to close in the next
twelve months. Based on estimated net sale proceeds, the Companies recorded a
provision for loss on assets held for sale of $13,253,000. The provision reduces
the carrying value of four owned properties to the estimated net sales proceeds
less costs to sell.
40
Impairment of mortgage loans
During the three months ended June 30, 2000, the Companies recorded a provision
for the mortgage portfolio, primarily relating to nine mortgage loans, of
$47,873,000. The majority of this provision relates to one operator.
Specifically, during the three months ended June 30, 2000, this operator did not
fully remit its interest payments and Realty has entered into discussions for a
discounted payoff of these mortgages. Based on the non-payment of interest and
these discussions, a provision for loan loss was recorded.
PROVISION FOR LOSS ON EQUITY SECURITIES
Realty has an investment in NHP Plc, a property investment group which
specializes in the financing, through sale leaseback transactions, of nursing
homes located in the United Kingdom. The investment includes approximately
26,606,000 shares of NHP Plc, representing an ownership interest in NHP Plc of
19.99% of which Realty has voting rights with respect to 9.99%.
During the three months ended June 30, 2000, the market value of this investment
significantly decreased below the Companies' initial cost. According to SFAS
115, an entity is required to determine whether a decline in fair value of an
investment accounted for as "an available for sale security" is
other-than-temporary. Further guidance in SAB 5M suggests that the decline is
other-than-temporary if, among other factors, the decline in market value
persists for a period over six months and the decline is in excess of 20% of
cost. As a result, Realty adjusted the cost basis of its investment in NHP Plc
to fair value and recorded a charge to earnings for the impairment of the
investment in NHP Plc of $39,076,000 based on the difference between the
Companies' cost of $57,204,000 and the market value as of June 30, 2000 of
$18,128,000.
OTHER EXPENSES
During the second quarter of 2000, Realty recorded approximately $8,756,000 in
other expenses.
As part of the Five-Point Plan to position the lodging division for growth when
industry trends improve, the Companies announced that the corporate headquarters
would be moved to Dallas, Texas and that changes would be made to the management
team. Consistent with this objective, the Boards of Directors approved a plan to
reduce by 14 the number of employees, including four officers, as of December
31, 2000. The reduction is primarily in the financial and legal groups of the
Companies' Needham, Massachusetts offices. Accordingly, during the six months
ended June 30, 2000, Realty recorded $7,312,000 for severance related expenses
expected to be incurred to terminate those employees. The Companies plan to
further reduce staff over the next two years with the intention of consolidating
the remaining healthcare operations in Dallas, Texas by December 31, 2002. As
part of the plan to close the Needham office, additional severance and other
payments are expected in future periods.
Realty also incurred approximately $121,000 of professional fees related to
implementation of the Five Point Plan. During the three months ended June 30,
2000, Realty also recorded provisions of approximately $31,000 for other
receivables that management considers to be uncollectible. Realty also recorded
the collection of $1,195,000 of bad debt recoveries related to receivables
written-off in prior years.
Realty also recorded additional provisions of $2,487,000 for receivables related
to real estate assets.
During the second quarter of 1999, Realty recorded approximately $4,316,000 in
other expenses. These are non-recurring cost associated with the implementation
of the 1998 Plan and primarily relate to the early repayment and modification of
certain debt as well as professional and other advisory fees.
EXTRAORDINARY ITEM
During the three months ended June 30, 2000, Realty retired $13,696,000 of debt
prior to its maturity date. As a result of these early repayments of debt, a net
gain of $9,000 was realized and is reflected as an extraordinary item.
NET INCOME
The resulting net loss to common shareholders, after deducting preferred share
dividends, for the three months ended June 30, 2000, was $74,406,000 compared to
net income available to common shareholders of $41,932,000 for three months
ended June 30, 1999. The net loss per common share (diluted) for the three
months ended June 30, 2000 was $0.52 compared to net income per common share
(diluted) of $0.29 for the three months ended June 30, 1999. The per common
share amount decreased primarily due to the reduction in contribution as a
result of healthcare asset sales during the twelve month period ended June 30,
2000, the provision for impairment on real estate assets and the provision for
loss on equity securities.
SIX MONTHS ENDED JUNE 30, 2000 VS. SIX MONTHS ENDED JUNE 30, 1999
41
Revenue for the six months ended June 30, 2000, was $282,966,000 compared to
$315,665,000 for six months ended June 30, 1999, a decrease of $32,699,000. The
revenue decrease was primarily attributed to a decrease in healthcare revenue of
$33,966,000. This decrease primarily resulted from asset sales and mortgage
repayments over the last year net of the effect of additions to real estate
investments made during the same period. The revenue decrease was partially
offset by the addition of revenues from the acquisition of Telematrix in October
1999. Revenues related to Telematrix for the six months ended June 30, 2000
consisted of licensing fees of $2,710,000. Other decreases of $1,443,000
consisted of changes in rent, interest and royalties from Operating as well as
hotel operating revenue and other income between the comparable six month
periods.
For the six months ended June 30, 2000, total recurring expenses were
$209,129,000 compared to $230,283,000 for the six months ended June 30, 1999, a
decrease of $21,154,000. This decrease was primarily attributable to a decrease
in interest expense of $20,231,000 due to reductions in debt from amounts paid
as a result of various asset sales and mortgage repayments over the past twelve
months. These decreases were partially offset by increases to borrowing rates.
Other decreases of $923,000 consisted of changes in various expenses between the
comparable six month periods. These expenses include hotel operating, rental
property operating, general and administrative, depreciation and amortization.
ASSET SALES
During the six months ended June 30, 2000, Realty realized losses on the sale of
healthcare real estate assets of $5,333,000 compared to gains of $12,284,000
during the comparable six months ended June 30, 1999. For the six months ended
June 30, 2000, sales of healthcare properties included 25 medical office
buildings, 12 assisted living facilities, four long-term care facilities and one
retirement living facility. For the six months ended June 30, 1999, sales of
healthcare properties included 17 assisted living facilities, one rehabilitation
facility, and one long-term care facility, and Realty sold one hotel and land
held for development on which there was no gain or loss realized.
PROVISION FOR IMPAIRMENT ON REAL ESTATE ASSETS
Impairment of real estate assets
During the six months ended June 30, 2000, Realty classified certain assets as
held for sale based on management having the authority and intent of entering
into commitments for sale transactions expected to close in the next twelve
months. Based on estimated net sale proceeds, Realty recorded a provision for
loss on assets held for sale of $13,253,000. The provision reduces the carrying
value of four owned properties to the estimated net sales proceeds less costs to
sell.
Impairment of mortgage loans
During the six months ended June 30, 2000, Realty recorded a provision for the
mortgage portfolio, primarily relating to nine mortgage loans, of $47,873,000.
The majority of this provision relates to one operator. Specifically, during the
three months ended June 30, 2000, this operator did not fully remit its interest
payments and Realty has entered into discussions for a discounted payoff of
these mortgages. Based on the non-payment of interest and these discussions, a
provision for loan loss was recorded.
PROVISION FOR LOSS ON EQUITY SECURITIES
Realty has an investment in NHP Plc, a property investment group which
specializes in the financing, through sale leaseback transactions, of nursing
homes located in the United Kingdom. The investment includes approximately
26,606,000 shares of NHP Plc, representing an ownership interest in NHP Plc of
19.99% of which Realty has voting rights with respect to 9.99%.
During the six months ended June 30, 2000, the market value of this investment
significantly decreased below the Companies' initial cost. According to SFAS
115, an entity is required to determine whether a decline in fair value of an
investment accounted for as "an available for sale security" is
other-than-temporary. Further guidance in SAB 5M suggests that the decline is
other-than-temporary if, among other factors, the decline in market value
persists for a period over six months and the decline is in excess of 20% of
cost. As a result, Realty adjusted the cost basis of its investment in NHP Plc
to fair value and recorded a charge to earnings for the impairment of the
investment in NHP Plc of $39,076,000 based on the difference between the
Companies' cost of $57,204,000 and the market value as of June 30, 2000 of
$18,128,000.
42
OTHER EXPENSES
During the six months ended June 30, 2000, Realty recorded approximately
$21,120,000 in other expenses.
On January 28, 2000, Realty entered into a separation and consulting agreement
with the former Chief Executive Officer of Realty. Under the terms of the
separation agreement, Realty paid the former Chief Executive Officer severance
payments totaling $9,500,000 (including consulting fees), converted 155,000
restricted paired common shares into unrestricted paired common shares and
agreed to continue certain medical, dental and other benefits. The vesting of
the shares resulted in a charge of approximately $2,500,000.
As part of the Five-Point Plan to position the lodging division for growth when
industry trends improve, the Companies announced that the corporate headquarters
would be moved to Dallas, Texas and that changes would be made to the management
team. Consistent with this objective, the Boards of Directors approved a plan to
reduce by 14 the number of employees, including four officers, as of December
31, 2000. The reduction is primarily in the financial and legal groups of the
Companies' Needham, Massachusetts offices. Accordingly, during the six months
ended June 30, 2000, Realty recorded $7,312,000 for severance related expenses
expected to be incurred to terminate those employees. The Companies plan to
further reduce staff over the next two years with the intention of consolidating
the remaining healthcare operations in Dallas, Texas by December 31, 2002. As
part of the plan to close the Needham office, additional severance and other
payments are expected in future periods.
Realty also incurred approximately $201,000 of professional fees related to
implementation of the Five Point Plan. During the six months ended June 30,
2000, Realty also recorded provisions of approximately $315,000 for other
receivables that management considers to be uncollectible. Realty also recorded
the collection of $1,195,000 of bad debt recoveries related to receivables
written-off in prior years.
Realty also recorded additional provisions of $2,487,000 for receivables related
to real estate assets.
During the six months ended June 30, 1999, other non-recurring expenses of
$8,705,000 were incurred which related to the 1998 Plan. Proceeds of asset sales
completed in December 1998 were used to repay debt prior to maturity and
de-lever the balance sheet. As a result, approximately $4,907,000 of capitalized
debt costs and $1,119,000 of breakage fees associated with swap contracts on
repaid debt and approximately $2,679,000 in professional and advisory fees that
were incurred.
EXTRAORDINARY ITEM
During the six months ended June 30, 2000 the Companies retired $58,496,000 of
debt prior to its maturity date, and as part of certain asset sale transactions
repaid secured debt totaling $14,936,000. As a result of these early repayments
of debt, a net gain of $1,403,000 was realized and is reflected as an
extraordinary item.
DISCONTINUED OPERATIONS
Pursuant to the 1998 Plan, Realty classified golf and horseracing activities as
discontinued operations for financial reporting purposes. Accordingly, Realty
presented as discontinued operations approximately $16,094,000 of gains on
disposal of the golf and horseracing segments during the six months ended June
30, 1999.
NET INCOME
The resulting net loss to common shareholders for the six months ended June 30,
2000, was $60,415,000 compared to net income available for common shareholders,
after deducting preferred share dividends of $97,179,000 for six months ended
June 30, 1999. The net loss per common share (diluted) for the six months ended
June 30, 2000 was $0.42 compared to net income per common share (diluted) of
$0.67 for the six months ended June 30, 1999. The per common share amount
decreased primarily due to the reduction in contribution as a result of
healthcare asset sales during the twelve month period ended June 30, 2000, the
provision for impairment on real estate and the provision for loss on equity
securities.
REALTY - LIQUIDITY AND CAPITAL RESOURCES
Realty earns revenue by (i) leasing healthcare assets under long-term triple net
leases in which the rental rate is generally fixed with annual escalators; (ii)
providing mortgage financing for healthcare facilities in which the interest
rate is generally fixed with annual escalators subject to certain conditions and
(iii) leasing its 230 La Quinta Inns and 68 La Quinta Inn and Suites to
Operating. Approximately $964,000,000 of Realty's debt obligations are floating
rate obligations in which interest rate and related cash flows vary with the
movement in LIBOR. The general fixed nature of Realty's assets and the variable
nature of a portion of Realty's debt obligations creates interest rate risk. If
interest rates were to rise significantly, Realty's interest payments may
increase resulting in decreases in net income and funds from operations. To
mitigate this risk, Realty has entered into interest rate swaps to convert some
of their floating rate debt obligations to fixed rate debt obligations. Interest
rate swaps generally involve the exchange of fixed and
43
floating rate interest payments on an underlying notional amount. As of June 30,
2000, Realty had $500,000,000 of interest rate swaps outstanding in which Realty
pays a fixed rate of 5.7% to the counterparty and receives LIBOR from the
counterparty. Accordingly at June 30, 2000, Realty has approximately
$464,000,000 of variable debt outstanding with interest rates that fluctuate
with changes in LIBOR.
CASH FLOWS FROM OPERATING ACTIVITIES
The principal source of cash to be used to fund Realty's future operating
expenses, interest expense, recurring capital expenditures and distribution
payments, if any, will be cash flow provided by operating activities. Realty
anticipates that cash flow provided by operating activities will provide the
necessary funds on a short and long-term basis to meet operating cash
requirements including all distributions to shareholders.
CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES
Realty provides funding for new investments and costs associated with
restructuring through a combination of long-term and short-term financing
including, both debt and equity, as well as the previously announced sale of
healthcare related assets. As part of the Five Point Plan, Realty has decided to
sell additional healthcare related assets to meet their commitments and to
provide them with additional liquidity. Realty obtains long-term financing
through the issuance of shares, long-term secured and unsecured notes,
convertible debentures and the assumption of mortgage notes. Realty obtains
short-term financing through the use of bank lines of credit, which are replaced
with long-term financing as appropriate. From time to time, Realty utilizes
interest rate caps or swaps to attempt to hedge interest rate volatility. It is
Realty's objective to match mortgage and lease terms with the terms of their
borrowings. Realty attempts to maintain an appropriate spread between its
borrowing costs and the rate of return on its investments. When development
loans convert to sale/leaseback transactions or permanent mortgage loans, the
base rent or interest rate, as appropriate, is fixed at the time of such
conversion.
During February 1998, the Companies entered into the FEIT with MLI pursuant to
which MLI purchased shares of capital stock of the Companies which were
ultimately converted into paired shares. The FEIT was designed to mature one
year after issuance and provided MLI the right to sell sufficient paired shares
(including the shares originally purchased) to provide MLI with a guaranteed
return. The FEIT also included a purchase price adjustment mechanism which, from
time to time, resulted in the issuance of additional paired shares to MLI as a
result of declines in the paired shares' market price.
After announcing in November 1998 that the Companies intended to settle fully
the FEIT, during December 1998, the Companies repurchased all of the paired
shares issued pursuant to the purchase price adjustment mechanism, as well as
some of the paired shares originally sold to MLI.
On July 17, 1998, Realty entered into a Credit Agreement which provided Realty
with up to $2,250,000,000 in credit facilities, replacing Realty's then existing
$365,000,000 revolving credit facilities. The Credit Agreement provided for
borrowings in four separate Tranches: Tranche A, a $1,000,000,000 revolving
loan, amounts of which if repaid may be reborrowed, which matures July 17, 2001;
Tranche B, a term loan in the amount of $500,000,000, amounts of which if repaid
may not be reborrowed, which matured July 17, 1999 and which had a $250,000,000
mandatory principal payment on April 17, 1999; Tranche C, a term loan in the
amount of $250,000,000, amounts of which if repaid may not be reborrowed, which
matured July 17, 1999 with a six month extension option which management
exercised for a fee of 12.5 basis points; and Tranche D, a term loan in the
amount of $500,000,000, amounts of which if repaid may not be reborrowed, which
matures July 17, 2001.
The Credit Agreement includes covenants with respect to maintaining certain
financial benchmarks, limitations on the types and percentages of investments in
certain business lines, a subjective acceleration clause contingent upon the
occurrence of an event with a material adverse effect on the Companies,
limitations on dividends of Realty and Operating, and other restrictions.
On November 23, 1998, Realty amended its Credit Agreement to provide for
Realty's cash repayment of a portion of its FEIT, to provide for the amendment
of certain financial covenants to accommodate asset sales, to exclude the impact
of non-recurring charges in certain covenant calculations and to provide for
future operating flexibility. The amendment also provided for an increase to the
LIBOR pricing of the credit facility by approximately 125 basis points, and the
pledge of stock of the Companies' subsidiaries. This pledge of subsidiary stock
also extended on a pro rata basis to entitled bondholders. Realty also agreed to
a 25 basis point increase to the LIBOR pricing in the event that an equity
offering of at least $100,000,000 had not been completed by February 1, 1999. On
February 1, 1999 this increase went into effect.
On January 8, 1999, Realty repaid $250,000,000 of its Tranche B term loan that
was scheduled to mature on April 17, 1999.
On March 10, 1999, Realty reached a second agreement with its bank group to
further amend the Credit Agreement. The second amendment became effective upon
the successful completion of the sale of Cobblestone Golf Group and provided for
a portion of the sale proceeds to be applied to the FEIT. The second amendment
also provided for, among other things, upon the sale of Cobblestone
44
Golf Group, the elimination of limitations on certain healthcare related
investments and a lowering of the commitment on the revolving tranche to
$850,000,000.
On March 10, 1999, Realty entered into an agreement with MLI to use the proceeds
from the sale of the Cobblestone Golf Group in excess of $300,000,000 to
purchase all or a portion of the remaining paired shares originally issued to
MLI in the FEIT. On April 1, 1999, the Companies fully settled the FEIT by
paying MLI $89,840,000 for the repurchase of 6,865,000 paired common shares.
On April 8, 1999, Realty repaid $250,000,000 of its Tranche B term loan and
cancelled a $250,000,000 swap contract. Both were scheduled to mature on July
17, 1999.
On August 16, 1999, Realty repaid $12,500,000 of its notes payable which matured
on that date and bore interest at 7.25%.
On December 24, 1999, Realty repaid $250,000,000 of its Tranche C term loan
which was scheduled to mature on January 17, 2000.
On January 28, 2000, the Companies announced that the Boards of Directors had
approved the Five Point Plan, which provided for:
- An orderly disposition of a significant portion of healthcare assets;
- Suspension of Realty's REIT common share dividend;
- Expectation of the declaration of the minimum dividend required to
maintain REIT status in December 2000;
- Substantial reduction in debt; and
- Future disciplined investment in the lodging division.
The Companies also announced that consistent with the adoption of the Five Point
Plan to reduce its emphasis on the healthcare division, David F. Benson would be
leaving as Chief Executive Officer, President, and Treasurer of Realty.
During the six months ended June 30, 2000, Realty sold Paramount Real Estate
Services Inc., its medical office building management company, as well as the
majority of its medical office building portfolio. Total consideration of
$204,000,000 included $144,000,000 in cash, $8,000,000 of assumed debt and
$52,000,000 of subordinated indebtedness due January 2005 bearing interest at
9%. The transaction involved the sale of the medical office building management
company, 23 medical office buildings and three medical office building mortgage
loans. Additionally, Realty sold 12 assisted living facilities for $28,000,000,
four long-term care facilities for $22,000,000, a retirement living facility
mortgage loan for $7,000,000 and two medical office building mortgage loans for
$48,000,000. Realty also received repayments of one mortgage loan and partial
repayment of one mortgage loan for approximately $12,000,000. The proceeds from
the sale of these healthcare assets and repayments were used to repay debt
maturing in July 2000.
Effective June 30, 2000 Realty reached a third agreement with its bank group to
further amend the Credit Agreement. The third amendment provided for, among
other things, limitations on early debt repayments, limitations on common
dividend payments, which is partially based on a calculation of REIT taxable
income, and changes to the definition of the minimum tangible net worth
covenant.
On June 30, 2000, Realty repaid the 8.54% convertible debentures with a balance
of $34,834,000, that were scheduled to mature on July 1, 2000.
At June 30, 2000, the Companies had approximately $349,000,000 in available
borrowings under its revolving tranche commitment. During the period ending July
1 to December 31, 2000, the Companies have approximately $127,000,000 of debt
maturing, of which approximately $126,000,000 was repaid in July 2000 from
proceeds of asset sales and borrowings under the revolving tranche commitment.
As of August 1, 2000, the Companies had outstanding borrowings under its
revolving tranche commitment of $589,000,000 (9.67% weighted average rate at
August 1, 2000) and capacity for additional borrowing of approximately
$224,000,000.
As of June 30, 2000, Realty's gross real estate investments totaled
approximately $4,662,532,000 consisting of 298 hotel facilities in service, 193
long-term care facilities, 104 retirement and assisted living facilities, six
medical office buildings, one acute care hospital campus and six other
healthcare facilities. At June 30, 2000, Realty was committed to provide
additional financing of approximately $5,000,000 for additions to existing
facilities in the portfolio.
Realty had shareholders' equity of $2,576,660,000 and debt constituted 47% of
the Companies' total capitalization as of June 30, 2000.
Realty has an effective shelf registration statement on file with the SEC under
which the Companies may issue $1,825,000,000 of securities including common
stock, preferred stock, debt, series common stock, convertible debt and warrants
to purchase shares, preferred shares, debt, series common stock and convertible
debt.
The Companies believe that their various sources of capital, including
availability under Realty's credit facility, operating cash flow and proceeds
from the sale of certain healthcare assets as contemplated under the Five Point
Plan, are adequate to finance their operations as well as their existing
commitments, including financial commitments related to certain healthcare
facilities and
45
repayment of debt, through the second quarter of 2001, however, the Companies
have significant debt maturing during the third quarter of 2001.
As described above, Realty's senior credit facility, consisting of a
$500,000,000 Tranche D term loan and the revolving credit commitment, matures on
July 17, 2001. As of August 1, 2000, Realty had outstanding borrowings under the
revolving credit commitment of $589,000,000 and capacity for additional
borrowings of approximately $224,000,000. The Companies had approximately
$127,000,000 of debt maturing during the third and fourth quarters of 2000, of
which $126,000,000 was repaid during July 2000. Realty also has approximately
$90,000,000 of debt maturing in the first quarter of 2001 and an additional
$75,000,000 of debt maturing in July 2001, at approximately the same time as the
$500,000,000 Tranche D term loan and the revolving credit commitment, with a
maximum capacity of $850,000,000, mature. Realty intends to continue to use
available borrowings under its revolving credit facility, together with cash
flow from operations and proceeds from asset sales, to fund the repayment of
debt obligations other than the senior credit facility as they come due. The
Companies further intend to use cash flow from operations and the proceeds from
sales of healthcare assets under the Five Point Plan to repay amounts due under
the senior credit facility. The Companies also intend to pursue the refinancing
of amounts due under Realty's senior credit facility, which the Companies
believe may be facilitated by the continued sale of healthcare assets.
Although the Companies intend to continue to sell healthcare assets and to
pursue the refinancing of the senior credit facility, the Companies efforts, and
the success of these efforts, will be impacted by many factors, some of which
are outside of the Companies' control. The factors impacting the sale of the
healthcare assets include the nature of the assets being sold (including the
condition (financial or otherwise) of the operators of such assets), the overall
condition of the healthcare real estate market at the time of any such sale, the
nature of the consideration delivered by any purchaser of such assets and the
presence of other similar healthcare properties for sale on the market at the
time of any such sale (including the effect that the presence of such other
properties could have on the prices that can be obtained in such sales and the
availability of financing for prospective purchasers of such assets). The
section entitled "Certain Factors You Should Consider" commencing on page 67 of
the Companies' Joint Annual Report on Form 10-K for the year-ending December 31,
1999 contains additional factors that could impact the Companies efforts, and
the success of those efforts, in selling healthcare assets and refinancing the
senior credit facility.
The above-described factors (including those set forth in the Companies' Joint
Annual Report on Form 10-K) specifically will impact the amount of the
consideration to be received in connection with the sale of any such assets,
which will impact the amount of debt obligations that may be repaid in
connection with such sales, as well as the gain or loss that will be recognized
by Realty in connection with such sale. Further, to the extent Realty enters
into agreements to sell assets at sales prices less than the carrying value of
such assets on Realty's balance sheet (after giving effect to prior adjustments
to such carrying value), Realty will recognize losses related to such sales,
some of which may be substantial as a result of the above-described
transactions, at the time that such agreements are entered into, rather than at
the time such sales are actually consummated. Accordingly, the Companies cannot
assure you that their efforts to sell healthcare assets, or to pursue the
refinancing of the senior credit facility, will be successful.
46
Information Regarding Operators of Healthcare Assets
As of June 30, 2000, the Healthcare Portfolio comprised approximately 43.2% of
the Companies' total real estate investments. Lifecare and Sun currently operate
approximately 20.8% of the total real estate investments, or 48.0% of the
Healthcare Portfolio. A schedule of significant healthcare operators follows:
% OF % OF
INVESTED ENTIRE # OF HEALTHCARE
Portfolio by Operator (IN THOUSANDS) PORTFOLIO PROPERTIES PORTFOLIO
-------------- --------- ---------- ---------
Life Care Centers of America, Inc. $ 556,856 11.9% 92 27.5%
Sun Healthcare Group, Inc. 415,491 8.9% 42 20.5%
CareMatrix Corporation 182,360 3.9% 11 9.0%
Alterra 161,592 3.4% 57 8.0%
Harborside 103,411 2.2% 18 5.1%
Balanced Care Corporation 92,633 2.0% 19 4.6%
Health Asset Realty Trust 68,943 1.5% 11 3.4%
Tenet Healthcare/Iasis 65,650 1.4% 1 3.2%
Integrated Health Services, Inc. 50,973 1.1% 10 2.5%
Genesis Health Ventures, Inc. 35,639 0.8% 8 1.8%
Assisted Living Concepts 31,487 0.7% 16 1.6%
ARV Assisted Living, Inc. 28,982 0.6% 4 1.4%
HealthSouth 25,270 0.5% 2 1.2%
Other Public Operators 29,718 0.6% 4 1.5%
Other Non-Public Operators 120,754 2.5% 13 6.0%
Paramount Real Estate Services 54,545 1.2% 2 2.7%
-------------------------------------------------------
2,024,304 43.2% 310 100%
============
LODGING:
La Quinta Companies 2,659,191 56.8% 300
---------------------------------------
Gross Real Estate Assets $ 4,683,495 100% 610
=======================================
In addition, companies in the assisted living sector of the healthcare industry
operate approximately 9.1% of Realty's total real estate investments (and
approximately 21.1% of the Healthcare Portfolio).
Realty monitors credit risk for its Healthcare Portfolio by evaluating a
combination of publicly available financial information, information provided by
the operators themselves and information otherwise available to Realty. The
financial condition and ability of these healthcare operators to meet their
rental and other obligations will, among other things, have an impact on
Realty's revenues, net income (loss), funds available from operations and its
ability to make distributions to its shareholders. The operations of the
long-term care (skilled nursing) companies have been negatively impacted by
changes in Medicare reimbursement rates (PPS), increases in labor costs,
increases in their leverage and certain other factors. In addition, any failure
by these operators to effectively conduct their operations could have a material
adverse effect on their business reputation or on their ability to enlist and
maintain patients in their facilities.
Operators of assisted living facilities are experiencing fill-up periods of a
longer duration, and are being impacted by concerns regarding the potential of
over-building, increased regulation and the use of certain accounting practices.
Accordingly, many of these operators have announced decreased earnings or
anticipated earnings shortfalls and have experienced a significant decline in
their stock prices. These factors have had a detrimental impact on the liquidity
of some assisted living operators, which has caused their growth plans to
decelerate and may have a negative effect on their operating cash flows.
OPERATORS IN BANKRUPTCY
Citing the effects of changes in government regulation relating to Medicare
reimbursement as the precipitating factor, Sun filed for protection under
Chapter 11 of the U.S. Bankruptcy Code on October 14, 1999. As of June 30, 2000,
Realty had a portfolio of 42 properties operated by Sun, which consisted of 38
owned properties with net assets of approximately $299,828,000 and four
mortgages with net assets of approximately $30,450,000. During the six months
ended June 30, 2000, income derived from these
47
properties included rental income of $23,937,000 from owned properties. No
interest income was received on the four mortgages for the six months ended June
30, 2000.
Sun has not formally indicated whether it will accept or reject any of Realty's
leases. However, Sun has indicated that it will continue to make lease payments
to Realty unless and until such leases are rejected. If necessary, Realty has a
plan in place to transition and to continue operating any of Sun's properties.
Realty has not received interest payments related to the mortgages since
November 1, 1999, and accordingly, such mortgages were put on non-accrual
status.
On January 18, 2000, Mariner filed for protection under Chapter 11. As of June
30, 2000, Realty had a portfolio of two properties operated by Mariner, which
consisted of one owned property representing net assets of approximately
$7,047,000 and one mortgage representing a net asset value of approximately
$7,043,000. During the six months ended June 30, 2000, income derived from these
properties included rental income of $489,000 from owned properties. No interest
payments related to the Mariner mortgage were received, and accordingly this
mortgage was placed on non-accrual status.
On February 2, 2000, Integrated filed for protection under Chapter 11. As of
June 30, 2000, Realty had a portfolio of 10 owned properties operated by
Integrated, representing net assets of approximately $37,724,000. During the six
months ended June 30, 2000, rental income derived from these properties was
$3,144,000.
On June 26, 2000, Genesis filed for protection under Chapter 11. As of June 30,
2000, Realty had a portfolio of eight properties operated by Genesis, which
consisted of four owned properties representing net assets of $15,330,000 and
four mortgaged properties representing net assets of $18,439,000. During the six
months ended June 30, 2000, income derived from these properties included rental
income of $826,000 from owned properties and interest income of $976,000 from
the mortgaged properties. No interest payments have been received since June 1,
2000, and accordingly such mortgages were placed on non-accrual status.
Management has initiated various actions to protect the Companies' interests
under its leases and mortgages including the drawdown and renegotiations of
certain escrow accounts and agreements. While the earnings capacity of certain
facilities has been reduced and the reductions may extend to future periods,
management believes that it has recorded appropriate accounting impairment
provisions based on its assessment of current circumstances. However, upon
changes in circumstances, including but not limited to, possible foreclosure or
lease termination, there can be no assurance that the Companies' investments in
healthcare facilities would not be written down below current carrying value
based upon estimates of fair value at such time.
OPERATING--RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 VS. THREE MONTHS ENDED JUNE 30, 1999
Hotel revenues for the three months ended June 30, 2000 were $155,268,000
compared to $159,127,000 for the three months ended June 30, 1999, a decrease of
$3,859,000. Approximately $150,520,000 or 97% of hotel revenues were derived
from room rentals. Hotel operating revenues generally are measured as a function
of the ADR and occupancy. The ADR increased to $63.16 during the three months
ended June 30, 2000 from $60.45 during the three months ended June 30, 1999, an
increase of $2.71 or 4.5%. Occupancy percentage decreased 5.6 percentage points
to 67.4% in 2000 from 73.0% in 1999. RevPAR decreased 3.5% over 1999. The
decrease in RevPAR is primarily due to a greater increase in the supply of
available rooms than in demand in the segment of the lodging industry in which
La Quinta competes. The relationship between supply and demand varies by region
and has impacted La Quinta to a greater extent than its competitors due to its
concentration of hotels in the West South Central and South Atlantic regions of
the United States where approximately 66% of the La Quinta hotels are located.
Other factors contributing to the decrease in RevPAR include the continuing
disruptive impact of the new property management system and the continuing
reorganization of its operations and sales organizations. The revenue impact of
the oversupply of available rooms was somewhat mitigated by revenue increases
resulting from a higher proportion of room rental income from the Inn & Suites
hotels as compared to the Inns during the comparable periods. Inn & Suites
hotels generally have higher room rental income per night than the Inns. The
hotel revenue decrease was offset by the addition of revenues from the
acquisition of Telematrix in October 1999. Revenues related to Telematrix for
the three months ended June 30, 2000 were $3,782,000.
For the three months ended June 30, 2000, total operating expenses were
$173,608,000 compared to $158,380,000 for the same period in 1999, or an
increase of $15,228,000. This increase was primarily attributable to lodging
related expenses, which include an increase in operating expenses of $9,637,000,
and an increase to general and administrative expenses of $3,422,000. The
increase in hotel operating expenses and general and administrative expense is
primarily attributable to the first full quarter impact of expenses associated
with operation of 9 new Inn & Suites hotels, increases in salary and wage rates,
expenses related to certain severance and employment agreements, expenses
associated with implementation of the new property management system and certain
other incremental expense. The increase to hotel operating expenses also
includes $1,934,000 of operating costs incurred related to the operations of
Telematrix. Hotel operating and general and administrative expenses include
costs associated with the operation such as salaries, wages, utilities, repair
and maintenance, credit card discounts and room supplies as well as corporate
expenses, such as the costs of general management, office rent, training and
field supervision of hotel managers and other marketing and administrative
48
expenses. Depreciation and amortization for the three months ended June 30,
2000, was $3,566,000 compared to $2,234,000 for the same period in 1999, or an
increase of $1,332,000.
NET LOSS
The resulting net loss for the three months ended June 30, 2000, was $13,563,000
compared to net income of $1,773,000 for the three months ended June 30, 1999.
The net loss per common share for the three months ended June 30, 2000 was $0.10
compared to net income per common share of $0.01 for the three months ended June
30, 1999. The per common share amount decreased primarily as a result of the
decline in RevPAR and increased operating and general administrative expenses
(previously described in this section) incurred during the three months ended
June 30, 2000.
SIX MONTHS ENDED JUNE 30, 2000 VS. SIX MONTHS ENDED JUNE 30, 1999
Hotel revenues for the six months ended June 30, 2000 were $299,803,000 compared
to $304,451,000 for the six months ended June 30, 1999, a decrease of
$4,648,000. Approximately $288,223,000 or 96% of hotel revenues were derived
from room rentals. Hotel operating revenues generally are measured as a function
of the ADR and occupancy. The ADR increased to $63.72 during the six months
ended June 30, 2000 from $61.06 during the six months ended June 30, 1999, an
increase of $2.66 or 4.4%. Occupancy percentage decreased 5.8 percentage points
to 64.3% in 2000 from 70.1% in 1999. RevPAR decreased 4.3% over 1999. The
decrease in RevPAR is primarily due to a greater increase in the supply of
available rooms than in demand in the segment of the lodging industry in which
La Quinta competes. The relationship between supply and demand varies by region
and has impacted La Quinta to a greater extent than its competitors due to its
concentration of hotels in the West South Central and South Atlantic regions of
the United States where approximately 66% of the La Quinta hotels are located.
Other factors contributing to the decrease in RevPAR include the continuing
disruptive impact of the new property management system and the continuing
reorganization of its operations and sales organizations. The revenue impact of
the oversupply of available rooms was somewhat mitigated by revenue increases
resulting from a higher proportion of room rental income from the Inn & Suites
hotels as compared to the Inns during the comparable periods. Inn & Suites
hotels generally have higher room rental income per night than the Inns. The
hotel revenue decrease was offset by the addition of revenues from the
acquisition of Telematrix in October 1999. Revenues related to Telematrix for
the six months ended June 30, 2000 were $7,317,000.
For the six months ended June 30, 2000, total operating expenses were
$328,530,000 compared to $302,420,000 for the same period in 1999, or an
increase of $26,110,000. This increase was primarily attributable to lodging
related expenses, which include an increase in operating expenses of
$15,443,000, increases to rent, royalty and interest due Realty of $2,788,000
and an increase to general and administrative expenses of $5,223,000. The
increase in hotel operating expenses and general and administrative expense is
primarily attributable to a full six month impact of expenses associated with
the operation of 13 new Inn & Suites hotels, increases in salary and wage rates,
expenses related to certain severance and employment agreements, expenses
associated with implementation of the new property management system and
incremental expenses related to certain other expenses. The increase to hotel
operating expenses also includes $3,663,000 of operating costs incurred related
to the operations of Telematrix. Hotel operating and general and administrative
expenses include costs associated with the operation such as salaries, wages,
utilities, repair and maintenance, credit card discounts and room supplies as
well as corporate expenses, such as the costs of general management, office
rent, training and field supervision of hotel managers and other marketing and
administrative expenses. Depreciation and amortization for the six months ended
June 30, 2000, was $6,836,000 compared to $4,256,000 for the same period in
1999, or an increase of $2,580,000.
OTHER EXPENSES
During the six months ended June 30, 1999, Operating recorded approximately
$30,498,000 in other expenses.
On May 10, 1999, the Companies entered into a separation agreement with Abraham
D. Gosman, former Director and Chairman of the Companies and Chief Executive
Officer and Treasurer of Operating. Under the terms of this separation
agreement, Mr. Gosman received severance payments totaling $25,000,000 in cash
and the continuation of certain life insurance benefits. The Companies
established a Special Committee to evaluate Mr. Gosman's employment contract and
whether such severance or other payments were appropriate. Based on the results
of the evaluation and recommendation of the Special Committee, the Boards of
Directors concluded that the separation agreement was in the long-term best
interest of the shareholders of the Companies and approved the separation
agreement.
In conjunction with the implementation of the 1998 Plan, which included a change
in the focus of the lodging division to internal growth, La Quinta management
performed a review of the front desk system under development for its lodging
facilities, and made a decision to abandon the project. The decision was based
primarily on management's intent to integrate the front desk system with new
revenue management software, the availability of more suitable and flexible
externally developed software and a shift in information systems philosophy
toward implementation of externally developed software and outsourcing of
related support services. A charge of approximately $3,998,000 to write-off
certain internal and external software development costs related to the project
was recorded in the first quarter of 1999. Operating also incurred approximately
$1,500,000 of non-recurring costs associated with advisory fees related to the
separation agreement with Mr. Gosman.
49
DISCONTINUED OPERATIONS
Pursuant to the 1998 Plan, Operating classified golf and horseracing activities
as discontinued operations for financial reporting purposes. Accordingly,
Operating presented as discontinued operations approximately $11,225,000 of
losses on disposal from the golf and horseracing segments during the six months
ended June 30, 1999. Operating recorded a loss of $6,445,000 related to the sale
of the Cobblestone Golf Group, which was sold on March 31, 1999. The loss
includes an estimate of working capital balances at the sale date. The
horseracing segment was sold on December 10, 1998. During the six months ended
June 30, 1999, a loss of $6,655,000 was recorded which related to an adjustment
of the selling price between Realty and Operating. This loss was partially
offset by an estimated gain of $1,875,000 arising from an adjustment relating to
working capital balances at the sale date.
NET LOSS
The resulting net loss for the six months ended June 30, 2000, was $20,378,000
compared to $37,668,000 for the six months ended June 30, 1999. The net loss per
common share for the six months ended June 30, 2000 was $0.14 compared to $0.26
for the six months ended June 30, 1999. The per common share amount increased
primarily as a result of other expenses incurred during the six months ended
June 30, 1999, which did not recur in the six month period ended June 30, 2000.
This increase was partially offset by increases to operating expenses and the
loss on discontinued operations during the six months ended June 30, 1999, which
did not recur in the six months ended June 30, 2000.
OPERATING - LIQUIDITY AND CAPITAL RESOURCES
Operating is dependent upon Realty for its financing and is a guarantor on
Realty's debt. As a result, the Liquidity and Capital Resources discussion of
Realty is relevant to Operating.
CASH FLOWS FROM OPERATING ACTIVITIES
The principal source of cash to be used to fund Operating's future operating
expenses and recurring capital expenditures will be cash flow provided by
operating activities and borrowings from Realty. Operating anticipates that cash
flow provided by operating activities and borrowings from Realty will provide
the necessary funds on a short and long-term basis to meet operating cash
requirements.
CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES
Operating provides funding for costs associated with the restructuring
through a combination of long-term and short-term financing including, both
debt and equity. Operating obtains long-term financing through the issuance
of common shares and unsecured notes. Operating obtains short-term financing
through borrowings from Realty.
During February 1998, the Companies entered into the FEIT with MLI pursuant to
which MLI purchased shares of capital stock of the Companies which were
ultimately converted into paired shares. The FEIT was designed to mature one
year after issuance and provided MLI the right to sell sufficient paired shares
(including the shares originally purchased) to provide MLI with a guaranteed
return. The FEIT also included a purchase price adjustment mechanism which, from
time to time, resulted in the issuance of additional paired shares to MLI as a
result of declines in the paired shares' market price.
After announcing in November 1998 that the Companies intended to settle fully
the FEIT, during December 1998, the Companies repurchased all of the paired
shares issued pursuant to the purchase price adjustment mechanism, as well as
some of the paired shares originally sold to MLI.
On July 17, 1998, Realty entered into a Credit Agreement which provided Realty
with up to $2,250,000,000 in credit facilities, replacing Realty's then existing
$365,000,000 revolving credit facilities. The Credit Agreement provided for
borrowings in four separate Tranches: Tranche A, a $1,000,000,000 revolving
loan, amounts of which if repaid may be reborrowed, which matures July 17, 2001;
Tranche B, a term loan in the amount of $500,000,000, amounts of which if repaid
may not be reborrowed, which matured July 17, 1999 and which had a $250,000,000
mandatory principal payment on April 17, 1999; Tranche C, a term loan in the
amount of $250,000,000, amounts of which if repaid may not be reborrowed, which
matured July 17, 1999 with a six month extension option which management
exercised for a fee of 12.5 basis points; and Tranche D, a term loan in the
amount of $500,000,000, amounts of which if repaid may not be reborrowed, which
matures July 17, 2001.
The Credit Agreement includes covenants with respect to maintaining certain
financial benchmarks, limitations on the types and percentages of investments in
certain business lines, a subjective acceleration clause contingent upon the
occurrence of an event with a material adverse effect on the Companies,
limitations on dividends of Realty and Operating, and other restrictions.
50
On November 23, 1998, Realty amended its Credit Agreement to provide for
Realty's cash repayment of a portion of its FEIT to provide for the amendment of
certain financial covenants to accommodate asset sales, to exclude the impact of
non-recurring charges in certain covenant calculations and to provide for future
operating flexibility. The amendment also provided for an increase to the LIBOR
pricing of the credit facility by approximately 125 basis points, and the pledge
of stock of the Companies' subsidiaries. This pledge of subsidiary stock also
extended on a pro rata basis to entitled bondholders. Realty also agreed to a 25
basis point increase to the LIBOR pricing in the event that an equity offering
of at least $100,000,000 had not been completed by February 1, 1999. On February
1, 1999 this increase went into effect.
On January 8, 1999, Realty repaid $250,000,000 of its Tranche B term loan that
was scheduled to mature on April 17, 1999.
On March 10, 1999, Realty reached a second agreement with its bank group to
further amend the Credit Agreement. The second amendment became effective upon
the successful completion of the sale of Cobblestone Golf Group and provided for
a portion of the sale proceeds to be applied to the FEIT. The second amendment
also provided for, among other things, upon the sale of Cobblestone Golf Group,
elimination of limitations on certain healthcare related investments and a
lowering of the commitment on the revolving tranche to $850,000,000.
On March 10, 1999, the Companies entered into an agreement with MLI to use the
proceeds from the sale of the Cobblestone Golf Group in excess of $300,000,000
to purchase all or a portion of the remaining paired shares originally issued to
MLI in the FEIT. On April 1, 1999, the Companies fully settled the FEIT by
paying MLI $89,840,000 for the repurchase of 6,865,000 paired common shares.
On April 8, 1999, Realty repaid $250,000,000 of its Tranche B term loan and
cancelled a $250,000,000 swap contract. Both were scheduled to mature on July
17, 1999.
On August 16, 1999, Realty repaid $12,500,000 of its notes payable which matured
on that date and bore interest at 7.25%.
On December 24, 1999, Realty repaid $250,000,000 of its Tranche C term loan
which was scheduled to mature on January 17, 2000.
On January 28, 2000, the Companies announced that the Boards of Directors had
approved the Five Point Plan, which provided for:
- An orderly disposition of a significant portion of healthcare assets;
- Suspension of Realty's REIT common share dividend;
- Expectation of the declaration of the minimum dividend required to
maintain REIT status in December 2000;
- Substantial reduction in debt; and
- Future disciplined investment in the lodging division.
Effective June 30, 2000 Realty reached a third agreement with its bank group to
further amend the Credit Agreement. The third amendment provided for, among
other things, limitations on early debt repayments, limitations on common
dividend payments, which is partially based on a calculation of REIT taxable
income, and changes to the definition of the minimum tangible net worth
covenant.
On June 30, 2000, Realty repaid the 8.54% convertible debentures with a balance
of $34,834,000, that were scheduled to mature on July 1, 2000.
Operating had shareholders' equity of $14,926,000 as of June 30, 2000.
The Companies have an effective shelf registration statement on file with the
SEC under which the Companies may issue 1,825,000,000 of securities including
common stock, preferred stock, debt, series common stock, convertible debt and
warrants to purchase shares, preferred shares, debt, series common stock and
convertible debt.
The Companies believe that their various sources of capital, including
availability under Realty's credit facility, operating cash flow and proceeds
from the sale of certain healthcare assets as contemplated under the Five Point
Plan, are adequate to finance their operations as well as their existing
commitments, including financial commitments related to certain healthcare
facilities and repayment of debt, through the second quarter of 2001, however,
the Companies have significant debt maturing during the third quarter of 2001.
As described above, Realty's senior credit facility, consisting of a
$500,000,000 Tranche D term loan and the revolving credit commitment, matures on
July 17, 2001. As of August 1, 2000, Realty had outstanding borrowings under the
revolving credit commitment of $589,000,000 and capacity for additional
borrowings of approximately $224,000,000. The Companies had approximately
$127,000,000 of debt maturing during the third and fourth quarters of 2000, of
which $126,000,000 was repaid during July 2000. Realty also has approximately
$90,000,000 of debt maturing in the first quarter of 2001 and an additional
$75,000,000 of debt maturing in July 2001, at approximately the same time as the
$500,000,000 Tranche D term loan and the revolving credit commitment, with a
maximum capacity of $850,000,000, mature. Realty intends to continue to use
available borrowings under its
51
revolving credit facility, together with cash flow from operations and proceeds
from asset sales, to fund the repayment of debt obligations other than the
senior credit facility as they come due. The Companies further intend to use
cash flow from operations and the proceeds from sales of healthcare assets under
the Five Point Plan to repay amounts due under the senior credit facility. The
Companies also intend to pursue the refinancing of amounts due under Realty's
senior credit facility, which the Companies believe may be facilitated by the
continued sale of healthcare assets.
Although the Companies intend to continue to sell healthcare assets and to
pursue the refinancing of the senior credit facility, the Companies efforts, and
the success of these efforts, will be impacted by many factors, some of which
are outside of the Companies' control. The factors impacting the sale of the
healthcare assets include the nature of the assets being sold (including the
condition (financial or otherwise) of the operators of such assets), the overall
condition of the healthcare real estate market at the time of any such sale, the
nature of the consideration delivered by any purchaser of such assets and the
presence of other similar healthcare properties for sale on the market at the
time of any such sale (including the effect that the presence of such other
properties could have on the prices that can be obtained in such sales and the
availability of financing for prospective purchasers of such assets). The
section entitled "Certain Factors You Should Consider" commencing on page 67 of
the Companies' Joint Annual Report on Form 10-K for the year-ending December 31,
1999 contains additional factors that could impact the Companies efforts, and
the success of those efforts, in selling healthcare assets and refinancing the
senior credit facility.
The above-described factors (including those set forth in the Companies' Joint
Annual Report on Form 10-K) specifically will impact the amount of the
consideration to be received in connection with the sale of any such assets,
which will impact the amount of debt obligations that may be repaid in
connection with such sales, as well as the gain or loss that will be recognized
by Realty in connection with such sale. Further, to the extent Realty enters
into agreements to sell assets at sales prices less than the carrying value of
such assets on Realty's balance sheet (after giving effect to prior adjustments
to such carrying value), Realty will recognize losses related to such sales,
some of which may be substantial as a result of the above-described
transactions, at the time that such agreements are entered into, rather than at
the time such sales are actually consummated. Accordingly, the Companies cannot
assure you that their efforts to sell healthcare assets, or to pursue the
refinancing of the senior credit facility, will be successful.
RECENT LEGISLATIVE DEVELOPMENTS
The Ticket to Work and Work Incentives Improvement Act of 1999 (the "Act"),
signed into law by the President of the United States on December 17, 1999, has
modified certain provisions of federal income tax law applicable to REITs. All
of the changes described below will be effective with respect to the Companies
beginning after the year ending December 31, 2000. These changes include new
rules permitting a REIT to own up to 100% of the stock of a corporation (a
"taxable REIT subsidiary"), taxable as a C corporation, that may provide
non-customary services to the REIT's tenants and may engage in certain other
business activities. However, the taxable REIT subsidiary cannot directly or
indirectly operate or manage a lodging or healthcare facility. Although the
taxable REIT subsidiary may lease a lodging facility (i.e., a hotel) from the
REIT (provided no gambling revenues were derived from the hotel or on its
premises), with the lodging facility operated by an "eligible independent
contractor," such eligible independent contractor must be actively engaged in
the trade or business of operating lodging facilities for persons or entities
unrelated to the REIT. On account of the foregoing restrictions imposed on the
use of taxable REIT subsidiaries in the case of lodging and healthcare
facilities, the opportunity for the Companies to make use of taxable REIT
subsidiaries will be limited.
The Act also replaces the former rule permitting a REIT to own more than 10% of
a corporate subsidiary by value, provided its ownership of the voting power is
limited to 10% (a "decontrolled subsidiary"), with a new rule prohibiting a REIT
from owning more than 10% of a corporation by vote or value, other than a
taxable REIT subsidiary (described above) or a "qualified REIT subsidiary" (a
wholly owned corporate subsidiary that is treated as part of the REIT for all
federal income tax purposes). Existing decontrolled subsidiaries are
grandfathered, but will lose such status if they engage in a substantial new
line of business or acquire any substantial new asset after July 12, 1999, other
than pursuant to a contract binding on such date and at all times thereafter
prior to acquisition. Accordingly, and taking into account the Companies'
general inability to utilize taxable REIT subsidiaries, the Act severely limits
the ability of Realty to own substantial ownership interests in taxable
corporate subsidiaries. Direct ownership by Realty of assets that otherwise
would be held in a decontrolled subsidiary may not be possible without
disqualifying Realty as a REIT, and transfer of such assets to Operating
similarly may not be possible without causing Realty to recognize taxable income
or jeopardizing the Companies' current grandfather status under the 1998
anti-paired share legislation enacted as part of the Reform Act.
Other provisions in the Act include a reduction in the annual minimum
distribution requirement from 95% to 90% of its taxable income (excluding net
capital gain) and a provision which allows a REIT to own and operate a
healthcare facility for at least two years (with extensions for up to another
four years possible) if the facility is acquired by the termination or
expiration of a lease, with net income with respect to such property subject to
corporate tax but not counted as disqualifying income for purposes of
qualification as a REIT.
NEWLY ISSUED ACCOUNTING STANDARDS
Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133") requires that all
derivative investments be recorded in the balance sheet at fair value. Changes
in the fair value of derivatives are
52
recorded each period in current earnings or comprehensive income depending on
whether a derivative is designated as part of a hedge transaction, and the type
of hedge transaction. The Companies anticipate that due to their limited use of
derivative instruments, the adoption of SFAS 133 will not have a material effect
on the financial statements.
During 1999, Financial Accounting Standards Board Statement No. 137, "Accounting
for Derivative Instruments and Hedging Activities--deferral of the Effective
Date of the Statement of Financial Accounting Standards No 133" ("SFAS 137") was
issued. This statement amended SFAS 133 by deferring the effective date to
fiscal quarters of all fiscal years beginning after June 15, 2000.
During 2000, Financial Accounting Standards Board Statement No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging - an Amendment to the
Statement of Financial Accounting Standards No 133" ("SFAS 138") was issued.
This statement amends the accounting and reporting standards of SFAS 133 for
certain derivative instruments and certain hedging activities.
In December 1999, the Staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). This SAB summarizes certain of the Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. The Companies do not expect the provisions of SAB 101 to have a
material impact on its financial statements.
SEASONALITY
The lodging industry is seasonal in nature. Generally, hotel revenues are
greater in the second and third quarters than in the first and fourth quarters.
This seasonality can be expected to cause quarterly fluctuations in revenue,
profit margins and net earnings. In addition, opening of new construction hotels
and/or timing of hotel acquisitions may cause variation of revenue from quarter
to quarter.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no changes in the qualitative or quantitative market risk of the
Companies since the prior reporting period.
53
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
PART II: OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On June 12, 2000, Meditrust Operating Company entered into an employment
agreement with David L. Rea ("Mr. Rea"), whereby Mr. Rea became Chief Financial
Officer and Treasurer of Meditrust Operating Company effective June 12, 2000.
The full text of Mr. Rea's employment agreement is attached hereto as Exhibit
10.1.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No.
Title Method of Filing
3.1 Amended and Restated Certificate of Incorporation of Incorporated by reference to Exhibit 3.1 to Form
Meditrust Corporation filed with the Secretary of State 10-K of Meditrust for the fiscal year ended
of Delaware on June 21, 1999 December 31, 1999.
3.2 Amended and Restated Certificate of Incorporated by reference to Exhibit 3.2 to Form
Incorporation of Meditrust Operating 10-K of Meditrust for the fiscal year ended
Company filed with the Secretary December 31, 1999.
of State of Delaware on June 21, 1999
3.3 Amended and Restated By-laws of Meditrust Incorporated by reference to Exhibit 3.5 to
Corporation the Joint Registration Statement on Form
S-4 of Meditrust Corporation and Meditrust
Operating Company (File Nos. 333-47737
and 333-47737-01)
3.4 Amended and Restated By-laws of Meditrust Incorporated by reference to Exhibit 3.6 to
Operating Company the Joint Registration Statement on Form
S-4 of Meditrust Corporation and Meditrust
Operating Company (File Nos. 333-47737
and 333-47737-01)
10.1 Employment Agreement dated as of June 12, 2000, Filed herewith
by and between Meditrust Corporation and David L. Rea
10.2 Amendment to Employment Agreement effective as of June 12, Filed herewith
2000 by and among Meditrust Corporation, Meditrust Operating
Company and David L. Rea
10.3 Third Amendment to Credit Agreement dated as of Filed herewith
June 30, 2000 by and among Meditrust Corporation,
Morgan Guaranty Trust Company of New York and the other
Banks set forth therein.
27.1 Financial Data Schedule Filed herewith
27.2 Financial Data Schedule Filed herewith
54
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
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 hereunto duly authorized.
MEDITRUST CORPORATION
August 8, 2000 /s/ Laurie T. Gerber
--------------------
Laurie T. Gerber
Chief Financial Officer and Treasurer
MEDITRUST OPERATING COMPANY
August 8, 2000 /s/ David L. Rea
----------------
David L. Rea
Chief Financial Officer and Treasurer
55