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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ JOINT ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 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 (State or other jurisdiction of
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, TEXAS IRVING, TEXAS
75038 75038
(Address of principal executive offices, including zip (Address of principal executive offices, including zip
code) code)
(214) 492-6600 (214) 492-6600
(Registrant's telephone number, including area code) (Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS AND NAME OF EACH EXCHANGE TITLE OF EACH CLASS AND NAME OF EACH EXCHANGE
ON WHICH REGISTERED ON WHICH REGISTERED
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Common Stock $0.10 Par Value, Common Stock $0.10 Par Value,
New York Stock Exchange New York Stock Exchange
9% Convertible Debentures due 2002,
New York Stock Exchange
7.5% Convertible Debentures due 2001,
New York Stock Exchange
7.6% Notes due 2001,
New York Stock Exchange
Cumulative Redeemable Preferred Stock represented by
depository shares representing
1/10th of a share of Series A Preferred Stock,
New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None None
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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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. Yes /X/ No / /
Aggregate market value of the paired voting stock of Meditrust Corporation
and of Meditrust Operating Company held by non-affiliates as of March 28, 2001
was $414,918,242 based upon the closing price of $3.59 on the New York Stock
Exchange Composite Tape (for this computation, the registrants have excluded the
market value of all shares of common stock reported as beneficially owned by
executive officers and directors of the registrants). The number of shares of
common stock, par value $0.10 per share, outstanding as of March 28, 2001 for
Meditrust Corporation was 144,299,000 and Meditrust Operating Company was
142,994,000.
The following documents are incorporated by reference into the indicated
Part of this Form 10-K.
DOCUMENT PART
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Definitive Proxy Statement for the 2001 Annual Meeting of III (items 10, 11,
Shareholders, to be filed pursuant to Regulation 14A...... 12 and 13)
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THE MEDITRUST COMPANIES
INDEX TO FORM 10-K
PAGE
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PART I
Item 1. Business
The Meditrust Companies..................................... 1
Meditrust Corporation....................................... 16
Meditrust Operating Company................................. 18
Item 2. Properties.................................................. 19
Item 3. Legal Proceedings........................................... 26
Item 4. Submission of Matters to a Vote of Security Holders......... 26
Item 4a. Executive Officers of the Registrants....................... 26
PART II
Item 5. Market for Registrants' Common Equity and Related
Stockholder Matters......................................... 29
Item 6. Selected Financial Information.............................. 31
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 36
Certain Factors You Should Consider......................... 63
Item 7a. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 76
Item 8. Financial Statements and Supplementary Data................. 77
The Meditrust Companies
Combined Consolidated Balance Sheets as of December 31, 2000
and 1999.................................................... 77
Combined Consolidated Statements of Operations for the years
ended December 31, 2000, 1999 and 1998...................... 78
Combined Consolidated Statements of Changes in Shareholders'
Equity and Other Comprehensive Income for the years ended
December 31, 2000, 1999 and 1998............................ 79
Combined Consolidated Statements of Cash Flows for the years
ended December 31, 2000, 1999 and 1998...................... 81
Meditrust Corporation
Consolidated Balance Sheets as of December 31, 2000 and
1999........................................................ 82
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998............................ 83
Consolidated Statements of Changes in Shareholders' Equity
and Other Comprehensive Income for the years ended
December 31, 2000, 1999 and 1998............................ 84
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998............................ 86
PAGE
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Meditrust Operating Company
Consolidated Balance Sheets as of December 31, 2000 and
1999........................................................ 87
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998............................ 88
Consolidated Statements of Changes in Shareholders' Equity
and Other Comprehensive Income for the years ended
December 31, 2000, 1999 and 1998............................ 89
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998............................ 90
Notes to Combined Consolidated Financial Statements......... 91
Report of Independent Accountants..................................... 135
Report of Independent Accountants on Financial Statement Schedules.... 136
Schedule II: Valuation and Qualifying Accounts........................ 137
Schedule III: Real Estate and Accumulated Depreciation as of
December 31, 2000................................................... 138
Schedule IV: Mortgage Loans on Real Estate as of December 31, 2000.... 140
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 142
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 142
Item 11. Executive Compensation...................................... 142
Item 12. Security Ownership of certain Beneficial Owners and
Management.................................................. 142
Item 13. Certain Relationships and Related Transactions.............. 142
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K (a)..................................................... 142
Signatures............................................................ 143
CERTAIN MATTERS DISCUSSED HEREIN MAY CONSTITUTE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF THE PRIVATE LITIGATION REFORM ACT OF 1995. 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 ABILITY OF THE COMPANIES TO
REFINANCE AND/OR PAY OFF NEAR TERM DEBT MATURITIES, 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, IF ANY, DESCRIBED IN
THIS FORM 10-K, 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 SECURITIES AND EXCHANGE COMMISSION
("SEC") INCLUDING, WITHOUT LIMITATION, THOSE RISKS DESCRIBED IN THE SECTION OF
THIS JOINT ANNUAL REPORT ON FORM 10-K ENTITLED "CERTAIN FACTORS YOU SHOULD
CONSIDER" BEGINNING ON PAGE 63 HEREOF.
ITEM 1. BUSINESS
THE MEDITRUST COMPANIES
GENERAL
The Meditrust Companies consist of two separate companies, Meditrust
Corporation ("Realty") and Meditrust Operating Company ("Operating"), whose
shares of common stock are attached and traded together as a single unit on the
New York Stock Exchange (the "NYSE") under the symbol "MT" pursuant to a stock
pairing arrangement. Realty is a REIT and Operating is a taxable corporation.
Realty and Operating were each incorporated in the State of Delaware in 1979. As
used herein, the terms "Realty" and "Operating" include wholly owned
subsidiaries of Realty and Operating unless the context requires otherwise.
References to "The Meditrust Companies" or "Companies" refer to Realty and
Operating, collectively. This document constitutes the Joint Annual Report on
Form 10-K for both Realty and Operating.
The Companies maintain an organizational structure called a "paired share
structure." This structure permits the shares of common stock of both Realty and
Operating to trade and to be transferable as a single unit. A predecessor of
Realty ("Meditrust's Predecessor"), which was organized as a Massachusetts
business trust and was known as "Meditrust", acquired the paired share structure
in 1997 by acquiring, together with an affiliate of Meditrust's Predecessor,
Santa Anita Realty Enterprises, Inc. and Santa Anita Operating Company
(collectively, the "Santa Anita Companies"). The Santa Anita Companies had
operated under the paired share structure since 1979. The paired share structure
permitted the shareholders of The Meditrust Companies to enjoy the economic
benefits of being a company that owns and leases real estate, namely Realty and
a company that operates a business that uses real estate, namely Operating. The
benefits attributable to future use of the paired share structure have been
limited, however, by federal legislation adopted in July 1998. A more detailed
discussion of this legislation can be found on page 3 herein.
1
On April 3, 2001, Meditrust announced the transfer of its beneficial
ownership interest in certain healthcare properties and mortgages with a net
book value of $436 million related to 78 long term care facilities and one
medical office building. The Companies received gross proceeds of $441 million
consisting of $406 million in cash and $35 million in subordinated indebtedness
due April 2006.
Net proceeds from the transaction have been applied towards debt reduction.
As a result, as of April 3, 2001, bank notes payable have been reduced to
$86 million from $487 million as of March 1, 2001, total debt maturing in 2001
has been reduced to $223 million from $628 million at December 31, 2000, and
total indebtedness has been reduced to $1.2 billion from $1.6 billion at
December 31, 2000. The Companies anticipate meeting remaining 2001 debt
maturities by refinancing existing debt, as well as through additional asset
sales and cash flow generated from operating activities.
The information contained within this Joint Annual Report on Form 10-K does
not reflect the transaction described above, except where discussed in the
Subsequent Events footnote to the Companies' financial statements contained
elsewhere herein. The Companies intend to file a joint current report on
Form 8-K which will provide additional information about the transaction and the
Companies' remaining healthcare assets.
REALTY
At December 31, 2000, Realty's real estate investments were principally in
hotels. In addition, Realty had investments in healthcare related real estate.
As a REIT, Realty is not permitted to operate the businesses conducted at or
with the real estate that it owns; rather, Realty must lease its properties to
the operators of the businesses. In the case of its hotels, Realty owns,
maintains leasehold interest in or invests in real estate that it leases to
Operating. As more fully described below, Operating operates the lodging
business conducted on the lodging related real estate that it leases from
Realty. In the case of its healthcare related real properties, Realty either
leases facilities that it owns or invests in, or provides financing to,
third-party operators principally of long-term care (skilled nursing) and
assisted living facilities and psychiatric and substance abuse facilities.
Realty is headquartered in Irving, Texas.
OPERATING
Operating operates the lodging related real estate owned or leased by
Realty. Operating does not conduct any activities related to Realty's healthcare
related real estate. Operating's business is conducted under the La
Quinta-Registered Trademark- brand name and is headquartered in Irving, Texas at
the Companies' corporate headquarters. As more fully described below, the La
Quinta-Registered Trademark- brand name, hotels and operations were acquired by
The Meditrust Companies in July 1998.
BUSINESS SEGMENTS
The Meditrust Companies conduct their businesses and make their investments
through two principal business units: lodging operations and healthcare related
real estate financing. As described more fully below, the primary focus of the
Companies is the lodging business, which is conducted through the La Quinta
division. This business unit owns and operates 299 mid-priced lodging
facilities, as well as franchises La Quinta-Registered Trademark- branded
lodging facilities to independent owners/operators. The lodging related real
estate assets are owned by Realty and operated by Operating. The other business
unit of the Companies is the financing of healthcare related real estate. This
business is conducted solely through Realty and had interests in 199 healthcare
related facilities as of December 31, 2000.
LODGING
The Companies' lodging business is conducted under the La
Quinta-Registered Trademark- brand name. At December 31, 2000, the La
Quinta-Registered Trademark- division owned and operated an aggregate of 229 La
Quinta-Registered Trademark- Inns and 70 La Quinta-Registered Trademark- Inn &
Suites in 28 states with over 38,000 hotel rooms. La
Quinta-Registered Trademark- is a recognized brand name in the mid-priced
lodging segment that appeals to both business and leisure travelers. La
2
Quinta is a fully-integrated lodging company that focuses on owning, operating,
developing and franchising mid-priced hotels throughout the United States.
Realty acquired La Quinta Inns, Inc., its subsidiaries, its unincorporated
partnership and joint venture entities (collectively, "La Quinta") on July 17,
1998 by merging La Quinta Inns, Inc. into Realty (the "La Quinta Merger"). The
headquarters of this division was moved from San Antonio, Texas to Irving, Texas
in August 1999.
HEALTHCARE
At December 31, 2000, Realty owned or provided financing for 199
geographically dispersed healthcare facilities operated by approximately 20
different third-party operators. This business unit typically does not operate
any healthcare facilities. Instead, it typically leases the real estate to
independent operators of long-term care (skilled nursing), assisted living and
other healthcare related facilities. As more fully described below, since 1998,
Realty has been selling its interests in certain healthcare related assets.
Additional segment information can be found in the financial statements and
the notes thereto appearing elsewhere in this Joint Annual Report on Form 10-K.
BACKGROUND
The Meditrust Companies consummated the La Quinta Merger on July 17, 1998.
On July 22, 1998, the President of the United States signed into law the
Internal Revenue Service Restructuring and Reform Act of 1998 (the "Reform
Act"), which limited the Companies' ability to continue to grow through the use
of the paired share structure. While the Companies' use of the paired share
structure in connection with the La Quinta Merger was "grandfathered" under the
Reform Act, the ability to continue to use the paired share structure to acquire
real estate and the operating businesses conducted with the real estate assets
(including the lodging industry) was substantially limited. In addition, during
the summer of 1998 and thereafter, the debt and equity capital markets available
to REITs generally and healthcare and lodging REITs specifically, deteriorated,
thus limiting the Companies' access to cost-efficient capital.
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 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 Companies' healthcare and
lodging business segments. The 1998 Plan was announced on November 12, 1998. One
key element was the intent to sell more than $1 billion of non-strategic assets,
including the portfolio of golf-related real estate and operating properties
(the "Cobblestone Golf Group"), the Santa Anita Racetrack and approximately
$550 million of healthcare properties. The proceeds from these sales were
targeted to achieve significant near-term debt reduction as well as settle fully
the Companies' forward equity issuance transaction ("FEIT") with certain
affiliates of Merrill Lynch & Co.
During the latter part of 1998 and throughout 1999, the Companies
implemented 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 in debt; and
- The full settlement of the FEIT.
During 1999, the Companies' Boards of Directors (the "Boards"), with outside
professional advisors, continued to evaluate the Companies' businesses and the
capital market's response to these
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businesses. On January 28, 2000, the Companies announced that the Boards had
approved a five point plan of reorganization (the "Five Point Plan") that was
intended to further strengthen the position of the Companies. The Five Point
Plan provided for:
- An orderly disposition of a significant portion of healthcare assets;
- Suspension of the 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.
During 2000, the Companies successfully implemented various parts of the
Five Point Plan including:
- The sale of certain healthcare assets and early repayment of healthcare
related mortgages totaling approximately $1 billion;
- The repayment of more than $1 billion in debt; and
- The hiring of an experienced senior management team focused on the lodging
business.
Looking forward into 2001, the Companies will:
- Continue to improve the results of the lodging business.
- Continue to focus on selling a significant portion of the healthcare
assets. There are ongoing signs that the healthcare industry is recovering
and the Companies are cautiously optimistic about the prospects for future
asset sales.
- Continue the work of refinancing the $628 million of debt which comes due
in 2001. Debt reduction and a restructure of the Companies' 2001 debt
maturities are top priorities; and
- Review the common stock dividend policy on a quarterly basis in
conjunction with its review of the Companies' progress toward meeting the
objectives of the Five Point Plan. The current common stock dividend
policy is to declare the minimum dividend required to maintain REIT
status. Any common stock dividends in 2001 will be dependent upon, among
other things, factors such as further healthcare asset sales, the
refinancing of the 2001 debt maturities, continued progress at La Quinta
and the amount of progress made in reducing indebtedness.
LODGING BUSINESS
The operations of the lodging business are contained within Operating, while
the ownership of the lodging related real estate assets and trademarks are
contained within Realty. All of the Companies' lodging operations are conducted
under the La Quinta-Registered Trademark- brand name. La Quinta is a franchisor
of and one of the largest owners/operators of hotels in the mid-priced segment
of the lodging industry in the United States. La Quinta operated Inns and Inn &
Suites hotels with a combined total of approximately 38,000 rooms at the end of
2000. The following table sets forth La Quinta's occupancy percentage, average
daily room rate ("ADR"), revenue per available room ("RevPAR"), number of inns
open, number
4
of rooms available and earnings before interest, taxes, depreciation and
amortization ("EBITDA") over the last five years:
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
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2000 1999 1998(E) 1997(E) 1996(E)
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(IN THOUSANDS, EXCEPT FOR NUMBER OF
HOTELS AND STATISTICAL DATA)
Number of Hotels............................... 299 302 301 296 266
Available Rooms(a)............................. 14,256 14,059 13,072 12,008 11,251
Occupancy Percentage........................... 63.4% 66.6% 67.0% 69.4% 68.9%
ADR(b)......................................... $ 62.62 $ 61.02 $ 59.29 $ 56.83 $ 53.83
RevPAR(c)...................................... $ 39.73 $ 40.64 $ 39.69 $ 39.45 $ 37.06
EBITDA(d)...................................... $222,022 $274,549 $274,644 $238,684 $204,372
Hotel Maintenance Capital Expenditures......... $ 28,340 $ 22,010 $ 24,405 $ 20,215 $ 23,288
Hotel Renovation and Construction
Expenditures................................. $ 7,964 $ 60,951 $276,521 $334,937 $242,439
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(a) Available rooms in thousands
(b) Represents average daily rate
(c) Represents revenue per available room
(d) EBITDA is defined as income from continuing operations plus interest, income
taxes, depreciation and amortization; adjusted for loss or gain on sale of
assets, other income, impairment provisions, provision for loss on equity
securities and other expenses.
(e) Financial results for 1998 and prior include La Quinta results for
pre-merger periods.
As highlighted above, the 2000 operational and financial results for La
Quinta were not acceptable. As detailed more fully in this Joint Annual Report
on Form 10-K, current management believes that many of the issues experienced by
La Quinta during 2000 related to controllable, company-specific actions and to a
lesser degree to supply/demand trends within La Quinta markets. As a result, La
Quinta took steps in late 2000 to address these controllable issues and
continues to focus attention on further actions to improve results.
Consistent with the Five Point Plan's focus on the lodging operations of the
Companies, the Boards of Directors made certain changes in the executive
management team in 2000 which included the consolidation of Realty's and
Operating's chief executive, financial and legal functions. A number of new
senior executives with extensive limited-service lodging experience joined the
Companies during 2000. In April 2000, Francis W. ("Butch") Cash joined the
Companies as President and Chief Executive Officer. In addition, David L. Rea
joined as Executive Vice President, Chief Financial Officer and Treasurer,
Stephen T. Parker joined as Senior Vice President of Sales and Marketing, Alan
L. Tallis joined as Executive Vice President and Chief Development Officer and
Wayne B. Goldberg joined as Group Vice President of Operations. More recently,
A. John Novak has also joined as Senior Vice President and Chief Information
Officer. During the latter part of 2000 and in early 2001, this new senior
management team has been focused on making various changes to La Quinta in order
improve the results of the lodging segment.
PRODUCT
La Quinta-Registered Trademark- Inns and Inn & Suites are designed to appeal
to guests who desire high-quality rooms, convenient locations and competitive
prices, but who do not require in-house restaurants, cocktail lounges or room
service. By eliminating the costs of these management-intensive facilities and
services, the Companies believe that La Quinta offers its customers exceptional
value by providing rooms that are comparable in quality to full-service hotels
at lower prices.
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The Inn & Suites hotels offer rooms designed to accommodate the needs of the
guest, irrespective of the purpose or length of stay. The King Plus Extra rooms
and deluxe two-room suites include features that may be desirable for longer
stays. In addition, the Inn & Suites hotels offer fitness centers and courtyards
with gazebos and spas.
The typical La Quinta Inn and Inn & Suites contains approximately 130
spacious, quiet and comfortably furnished guest rooms averaging 300 square feet
in size. Guests at La Quinta hotels are offered a wide range of amenities and
services, such as complimentary continental breakfast, free unlimited local
telephone calls, a swimming pool, same-day laundry and dry cleaning, fax
services, 24-hour front desk message service and free parking. Room amenities
include 25-inch remote control televisions with expanded free television channel
choices, movies-on-demand, interactive video games, internet service, in room
coffee makers, hairdryers, irons and ironing boards and dataport telephones for
computer connections. Additional amenities available at La Quinta Inn & Suites
include two room suites with microwaves and refrigerators, fitness centers and
courtyards with gazebos and spas. La Quinta guests typically have convenient
access to food service at adjacent freestanding restaurants, including national
chains such as Cracker Barrel, International House of Pancakes and Denny's.
Realty has an ownership interest in 97 of these adjacent buildings, which are
generally leased to restaurant operators.
To maintain the overall quality of La Quinta's hotels, each hotel undergoes
refurbishments and capital improvements as needed. Historically, refurbishing
has been provided at intervals of five to seven years, based on an annual review
of the condition of each hotel. La Quinta spent approximately $36,304,000 in
capital improvements to existing hotels during fiscal year 2000. La Quinta has
invested approximately $305,660,000 in maintenance and renovation improvements
to existing La Quinta Inns and Inn & Suites during the period 1996-2000.
STRATEGY
La Quinta intends to continue to operate as a high-quality provider in the
mid-priced segment of the lodging industry. La Quinta's growth strategy is
focused on three key areas:
INCREASE THE PROFITABILITY OF COMPANIES-OWNED HOTELS. The Companies intend
to increase the cash flow of La Quinta by:
- Improving RevPAR results--The Companies believe that it will be able to
increase RevPAR due to changes made in the fall of 2000 to La Quinta's
operating and pricing policies in conjunction with other factors.
Specifically, La Quinta changed the pricing and operational oversight of
the hotels from a centralized operating philosophy which focused on tight
controls by a limited number of management personnel to a more
decentralized philosophy which emphasizes more local control by trained
general mangers and 19 Regional Vice Presidents of Operations. Management
believes that this more decentralized operating structure will allow La
Quinta to adjust the ADR so that it responds to dynamic local market
conditions more effectively, as well as provide more focused regional
operational oversight necessary to ensure product quality standards. In
addition, during 2000, La Quinta experienced information system issues
which impacted the reservation system and the hotel property management
systems. During 2000 and continuing into 2001, La Quinta has worked to
address these issues and minimize their impact on revenues. Also, the
Companies believe that it will be able to increase RevPAR by stimulating
room demand through the use of effective marketing and promotion
activities aimed at creating first-time trial business as well as
rewarding frequent guests.
- Increasing customer satisfaction--After conducting a survey of La Quinta's
hotel facilities, management has decided to implement a new capital
reinvestment program aimed at reinforcing La Quinta's reputation for
offering quality lodging accommodations at a reasonable price. In 2001, La
Quinta has budgeted approximately $20 million dollars of additional
capital (above normal annual capital requirements) for upgrading primarily
interiors of approximately 80 La Quinta Inns. Upon completion of this
program, management believes that these properties will be more
competitively positioned to attract and retain customers. The Companies
also believe that
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increased RevPAR can be achieved following the completion of its ongoing
capital reinvestment program.
- Improving cost controls--In the fall of 1999, after years of successfully
using a decentralized operating structure at La Quinta, former La Quinta
management downsized and centralized the pricing and operational oversight
functions. During the fall of 1999 and continuing into 2000, La Quinta
experienced a decline in RevPAR as well as increases in its variable costs
per rented room. As previously mentioned, during the fall of 2000, La
Quinta's new management team changed the operating structure back to a
more decentralized operational structure. Management believes that while
the decentralized operating structure requires higher operations
management payroll, it allows La Quinta to more effectively manage
controllable costs at its 299 hotels located throughout 28 states within
the United States. Management anticipates that the change back to a more
decentralized operating structure coupled with enhancement to information
systems will result in savings from more effective control of variable
hotel operating costs such as front desk service representatives,
housekeeping and room attendant labor costs, bad debt expense and credit
card discounts that will more than offset the higher operations management
personnel costs.
PURSUE SELECT REDEVELOPMENT AND NEW DEVELOPMENT OPPORTUNITIES. La Quinta
owns several older hotels in locations that have experienced substantial growth
around the hotel site. Management believes that La Quinta has the opportunity to
redevelop some of these Inns with a new La Quinta product that will produce
stronger operating results than the existing facility. During 2001, La Quinta
will be redeveloping three existing locations at a net cost of approximately
$18.5 million. In addition, La Quinta intends to pursue select new development
in high visibility locations, such as airports and downtown urban locations,
which will enhance brand awareness.
GROW FEE-BASED INCOME. La Quinta intends to increase cash flow and return
on invested capital by leveraging the value of the La
Quinta-Registered Trademark- brand through a franchising program. The
franchising program is focused on developing relationships with high quality,
experienced third-party hotel owners/operators who will develop, own and operate
new hotels using the La Quinta Inns or La Quinta Inn & Suites trademarks or
convert existing hotels to one of these trademarks. Management believes that
this program allows La Quinta to expand the brand nationally without substantial
capital investments from the Companies. The franchise program will increase the
Companies' revenues and cash flows while maintaining consistent quality
standards across the entire chain.
OPERATIONS
Management of the La Quinta chain is coordinated from its headquarters in
Irving, Texas. Centralized corporate services and functions include marketing,
financing, purchasing, quality control, development, legal and training.
Accounting, information systems and reservations functions are centralized in
service centers located in San Antonio, Texas.
Hotel operations are currently organized into 19 regions with each region
headed by a Regional Vice President. Each Regional Vice President is responsible
for supervising operations of approximately 16 hotels, who in turn report to La
Quinta senior management, including two Group Vice Presidents of Operations. The
Regional Vice Presidents are responsible for the service, cleanliness and
profitability of the inns in their respective regions.
A typical hotel employs approximately 20 employees, including the general
manager, front desk service representatives, housekeepers, room attendants,
laundry personnel, maintenance personnel and night auditors. Each
Companies-owned hotel is operated as an independent profit center, with hotel
general managers responsible for overseeing the day-to-day operation and
profitability of a specific hotel. These managers receive management training in
service, cleanliness, labor management, budgeting, cost control, sales and basic
repair skills. La Quinta's professionally trained managers are substantially
relieved of responsibility for management intensive areas such as food service
and are,
7
therefore, better able to devote their attention to assuring friendly guest
service and quality facilities, consistent with chain-wide standards.
La Quinta has implemented target driven operational budgets that are
structured to reward general managers for exceeding certain cash flow and
customer satisfaction targets. Both the general managers and senior management
agree to these targets. The general managers and senior management continually
review rates charged to customers so that they can be appropriately adapted to
prevailing market conditions at each hotel.
INFORMATION TECHNOLOGY
The operations, reservations, marketing and sales, financial reporting and
management reporting functions of La Quinta are dependent upon the information
systems capabilities of Operating. La Quinta has three key systems which link to
each other: the property management system, the reservation system and the
accounting and financial reporting system. During the later part of 1999, La
Quinta installed a new property management system. Following the implementation
of this system, La Quinta began to experience operational challenges which,
combined with other factors, management believes contributed to a decline in La
Quinta's RevPAR results and an increase in operating costs in 2000. During the
later part of 2000 and continuing into 2001, La Quinta is devoting substantial
resources to further address these issues. Among other actions taken, La Quinta
has already upgraded the property management system to address certain
operations issues and will enter into an agreement to outsource to a nationally
recognized third-party provider the maintenance and support of much of La
Quinta's information systems infrastructure. Management will continue to
evaluate La Quinta's information systems and their related capabilities.
CUSTOMER BASE AND MARKETING
La Quinta's combination of consistent, high-quality accommodations and good
value is attractive to business customers, who account for more than 48% of
rooms rented. These core customers typically visit a given area several times a
year and include salespeople and technicians covering a specific territory and
government and military personnel. La Quinta also targets both vacation
travelers and senior citizens. For the convenience of these targeted customer
groups, hotels are generally located near suburban office parks, major traffic
arteries or destination areas such as airports and convention centers.
La Quinta has developed a strong following among its customers. An external
industry survey shows La Quinta's frequent guests are among the most loyal of
the mid-priced segment. La Quinta focuses a number of its marketing programs on
maintaining a high number of repeat customers. For example, La Quinta promotes a
"Returns Club" offering members preferred status at La Quinta properties, along
with rewards for frequent stays. The Returns Club had over 820,000 members as of
December 31, 2000.
La Quinta focuses on reaching its target markets through advertising, direct
sales, repeat traveler incentive programs and other marketing programs targeted
at specific customer segments. It advertises through television, radio and print
advertisements which focus on quality, value and a strong call-to-action
message. La Quinta uses the same campaign concept throughout the country with
minor modifications made to address regional differences. La Quinta also uses
billboard advertisements posted along major highways to advertise the existence
and location of La Quinta Inns or Inn & Suites hotels in the proximity.
La Quinta markets directly to companies and other organizations through its
direct sales force. During the latter part of 2000, La Quinta restructured its
sales force to provide a more efficient and effective sales organization. This
sales force calls on companies that have a significant number of individuals
traveling in the regions in which La Quinta operates and which are capable of
producing a high volume of room nights.
8
La Quinta provides a central reservation system,
"teLQuik-Registered Trademark-," which currently accounts for advance
reservations approximating 30% of room nights. The teLQuik-Registered Trademark-
system allows customers to make reservations by dialing 1-800-531-5900 toll free
or from reservations phones placed in all La Quinta hotels. These phones enable
guests to make their next night's reservation from their previous night's La
Quinta inn. In addition, approximately 45% of room nights reflect advance
reservations made directly with individual inns. In total, advance reservations
account for approximately 75% of room nights. La Quinta operates two reservation
centers. La Quinta, through its regional sales managers, markets its reservation
services to travel agents and corporate travel planners who may access
teLQuik-Registered Trademark- through four global distribution systems (airline
reservation systems). La Quinta also distributes its product via leading
websites such as Travelocity and Expedia. Additionally, as of November 2000, La
Quinta sells room inventory through Priceline.com.
Information regarding hotel locations, services and amenities, as well as
reservation capabilities, is also available to La Quinta's customers at
http://www.laquinta.com. The Companies do not intend that this website, nor any
information contained therein, shall be part of or incorporated by reference in
this Joint Annual Report on Form 10-K.
FRANCHISING
In the fall of 2000, La Quinta initiated the sale of franchises. As of
March 28, 2001, La Quinta had approved 29 franchise applications. La Quinta's
goal for 2001 is to have 15 franchised properties open by December 31, 2001.
Franchise applicants are evaluated on previous hotel operating expertise,
sufficient financial resources and an acceptable credit history. Approved
franchise applicants are granted the right (as detailed in La Quinta's Franchise
Agreement) to operate under the La Quinta-Registered Trademark- brand name,
obtain reservations from La Quinta's central reservation system and use La
Quinta's hotel designs, operating systems and procedures. In return, franchisees
will pay La Quinta an affiliation fee as well as ongoing fees. These ongoing
fees are based upon a percentage of gross room revenues (as defined in the
Franchise Agreement) at the franchised properties.
Generally, a franchisee is required to pay a royalty fee of 4.0% of gross
room revenues during the first two years after opening of a hotel and then 4.5%
of gross room revenues for all periods thereafter. La Quinta's Franchise
Agreement also contains a unique rebate feature. A franchisee can receive a
rebate of 0.5% of gross room revenue (as detailed in La Quinta's Uniform
Franchise Offering Circular) if, in any calendar year, the franchised hotel
achieves superior customer satisfaction ratings. In addition to the royalty
fees, a franchisee must pay, as a percentage of gross room revenues, a marketing
fund fee of 2.5% and a reservation fee of 2.0% to support the cost of providing
reservation services.
Before a franchised hotel opens, La Quinta will inspect and approve the
hotel to ensure that it conforms to the quality and design standards set by La
Quinta. Once the hotel opens, La Quinta intends to provide ongoing sales support
as well as assistance in day-to-day operations and training issues.
The La Quinta Inns & La Quinta Inn and Suites trademarks are currently owned
by Realty and licensed to Operating. Operating has the right to utilize the
trademarks in the operations of the existing Realty-owned La Quinta hotels and
has the right to license the trademark to third-party hotel owners/ operators
through a subsidiary of Operating.
COMPETITION
Each La Quinta hotel competes in its market area with numerous
limited-service lodging brands, especially in the mid-priced segment and with
numerous other hotels, motels and other lodging establishments. Chains such as
Hampton Inns, Fairfield Inns and Comfort Inns are direct competitors of La
Quinta. Other competitors include Holiday Inns, Ramada Inns and Sleep Inns.
There is no single competitor or group of competitors of La Quinta that is
dominant in the mid-priced lodging segment. Competitive factors in the industry
include reasonableness of room rates, quality of accommodations, service level
and convenience of locations.
9
The profitability of hotels operated by La Quinta is subject to general
economic conditions, competition, the desirability of particular locations, the
relationship between supply of and demand for hotel rooms and other factors. La
Quinta has historically operated hotels in markets that contain numerous
competitors and the continued success of its hotels will be dependent, in large
part, upon the ability of these facilities to compete in such areas as
reasonableness of room rates, quality of accommodations, service level and
convenience of locations. The lodging industry in general, including La Quinta,
may be adversely affected by national and regional economic conditions and
government regulations. The demand for accommodations at a particular hotel may
be adversely affected by many factors including changes in travel and weather
patterns, local and regional economic conditions and the degree of competition
with other lodging establishments in the area. The Companies cannot assure you
that demographic, geographic, economic or other changes in markets will not
adversely affect the convenience or desirability of the locations of La Quinta's
hotels. Furthermore, there are no assurances that, in the markets in which La
Quinta inns operate, competing hotels will not provide greater competition for
guests than currently exists and that new hotels will not enter such markets.
SUPPLY AND DEMAND
In recent years, construction of mid-priced hotels in the United States has
resulted in an excess supply of available rooms, particularly in the west south
central region of the United States where 45% of La Quinta's rooms are located.
This oversupply has had an adverse effect on occupancy levels and room rates in
this segment. The mid-priced segment of the lodging industry has been adversely
impacted by and may continue to be negatively affected in the future by (i) an
oversupply of available rooms, (ii) national and regional economic conditions,
(iii) changes in travel patterns, (iv) taxes and government regulations which
influence or determine wages, prices, interest rates, construction procedures
and costs, (v) the availability of credit and (vi) the availability of qualified
labor.
According to Smith Travel Research, for the year ended December 31, 2000,
the mid-priced chains without food and beverage segment of the lodging industry
experienced a 4.7% increase in RevPAR and a 10.2% increase in room supply while
the west south central regions of the U.S. lodging industry experienced a RevPAR
increase of 5.2% and a room supply increase of 3.9%. These results contrast to
the decline in RevPAR at La Quinta of 2.2%. As a result, management believes
that while the addition of room supply to La Quinta's markets has had some
negative impact on results, the more significant factors impacting La Quinta in
2000 relate to company-specific issues detailed elsewhere in this Joint Annual
Report on Form 10-K.
SEASONALITY
The lodging industry is seasonal in nature. Generally, La Quinta's 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 the revenue, profit margins, cash flows and net earnings of La
Quinta.
LODGING INDUSTRY OPERATING RISKS
La Quinta is subject to all operating risks common to the lodging industry.
These risks include, but are not limited to, (i) competition for guests from
other hotels, a number of which may have greater marketing and financial
resources than La Quinta, (ii) increases in operating costs due to inflation and
other factors, which increases may not have been offset in recent years and may
not be offset in the future, by increased room rates, (iii) dependence on
business and commercial travelers and tourism, which may fluctuate and be
seasonal, (iv) increases in energy costs and other expenses which may deter
travelers, (v) adverse effects of general and local economic conditions and
(vi) the general dependence upon certain information technology systems, the
loss or malfunction of which may impact operating costs and hotel revenues.
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CONSTRUCTION
La Quinta may from time to time experience shortages of materials or
qualified trades people or experience volatile increases in the cost of certain
construction materials, resulting in longer than normal construction and
remodeling periods, loss of revenue and increased costs. La Quinta relies
heavily on local contractors, who may be inadequately capitalized or
understaffed. The inability or failure of one or more local contractors to
perform may result in construction delays, increased costs and loss of revenue.
EMPLOYMENT AND OTHER GOVERNMENTAL REGULATION
La Quinta's business is subject to extensive federal, state and local
regulatory requirements, including building and zoning requirements, all of
which can prevent, delay, make uneconomic or significantly increase the cost of
constructing additional hotels. In addition, La Quinta is subject to laws
governing its relationship with employees, including minimum wage requirements,
overtime pay, working conditions, work permit requirements and discrimination
claims. An increase in the minimum wage rate, employee benefit costs or other
costs associated with employees could adversely affect La Quinta. Under the
Americans with Disabilities Act of 1990 (the "ADA"), all public accommodations
are required to meet certain federal requirements related to access and use by
disabled persons. While La Quinta believes that its hotels are substantially in
compliance with these requirements, a determination that La Quinta is not in
compliance with the ADA could result in the imposition of fines or an award of
damages to private litigants. These and other initiatives could adversely affect
La Quinta.
EMPLOYEES
Operating's employees consist of La Quinta employees. La Quinta's future
success will depend, in part, on its continuing ability to attract, retain and
motivate highly qualified personnel. At December 31, 2000, La Quinta employed
approximately 7,500 people, of whom approximately 88% were compensated on an
hourly basis. Approximately 500 individuals were employed at the corporate
headquarters or support services centers and 7,000 were employed directly in
hotel operations. La Quinta's employees are not currently represented by labor
unions and management believes its ongoing labor relations are good.
HEALTHCARE REAL ESTATE FINANCING BUSINESS
All of the healthcare real estate financing activities are conducted by
Realty. Consistent with the 1998 Plan as well as the Five Point Plan, the
operations and assets of the healthcare segment have been decreasing as a result
of continued success in selling these assets to other healthcare real estate
investors or to the operators of the facilities. The net book values of
healthcare related leases and mortgages over the last five years were as
follows:
DECEMBER 31,
-------------------------------------------------------------
2000(A) 1999(A) 1998(A) 1997 1996
--------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Leases.......................... $681,714 $1,090,586 $1,699,948 $1,502,947 $1,006,260
Mortgages....................... 222,571 1,059,920 1,197,634 1,432,825 1,181,818
-------- ---------- ---------- ---------- ----------
Total........................... $904,285 $2,150,506 $2,897,582 $2,935,772 $2,188,078
======== ========== ========== ========== ==========
- ------------------------
(a) Includes valuation allowance for impairment of real estate assets and
impairment of mortgage loans of $177,162,000, $116,011,000 and $66,909,000
as of December 31, 2000, 1999 and 1998, respectively.
Historically, healthcare real estate investments were made by Realty as both
leases to operators as well as mortgages on operator-owned assets. Realty
typically targeted a 10.0% to 10.5% unleveraged return on invested capital for
these types of investments.
11
TYPES OF INVESTMENTS
- Sale/Leaseback Transactions--Substantially all of Realty's healthcare
facilities, which are the subject of sale/leaseback transactions, are
leased under triple net leases which are accounted for as operating leases
and generally require that the third-party operator pay for all
maintenance, repairs, insurance and taxes on the property. Realty has
historically earned fixed monthly rents, although in some circumstances
Realty has earned periodic additional rents. Generally, multiple leases
with one operator are cross-collateralized and contain cross-default
provisions tied to each of the operator's other leases with Realty.
- Permanent Mortgage Loan Financing--Permanent mortgage financing provided
by Realty has historically consisted of either construction or development
loans made to a third-party operator to construct a new healthcare
facility which were converted to permanent mortgage loans or permanent
mortgage loan financing put in place at the time the third-party operator
bought or refinanced an existing healthcare facility. The permanent
mortgage loans are secured by first mortgage liens on the underlying real
estate and personal property of the mortgagor.
- Equity Investments--Between July 1996 and August 1998, Realty invested an
aggregate of approximately $57,204,000 to purchase 26,606,000 shares of
common stock, representing a 19.99% interest in, Nursing Home
Properties Plc ("NHP Plc"), a property investment group that specializes
in the financing, through sale/leaseback transactions, of nursing homes
located in the United Kingdom. Realty does not have the right to vote in
excess of 9.99% of the shares of common stock of NHP Plc. As of
September 30, 2000 (NHP Plc's year end), NHP Plc had invested
approximately L669,200,000 in 378 nursing homes with a total of
approximately 18,960 beds. The facilities are leased to 25 different
United Kingdom-based nursing home operators on terms and conditions
similar to those contained in Realty's leases with its third-party
operators. As of December 31, 2000, the market value of this investment
was $7,759,000 and is included in Realty's and the Companies' financial
statements. The resulting difference, believed by management to be
other-than-temporary, of $49,445,000, between the current market value and
the aggregate cost of the NHP Plc shares was taken as a charge to earnings
in 2000. On January 22, 2001, the Companies sold their investment in
NHP Plc for net proceeds of $7,737,000 and recorded a charge to earnings
of $22,000 in the 2001 financial statements.
- Realty invested an aggregate of approximately $1,105,000 to purchase
1,081,000 shares of capital stock in Balanced Care Corporation, a
healthcare operator. This investment had a market value of $271,000 at
December 31, 2000 and was included in Realty's and the Companies'
financial statements. The difference of $834,000 between the market value
and the aggregate cost of the shares, believed by management to be
other-than-temporary, was taken as a charge to earnings in fiscal year
2000 in Realty's and the Companies' financial statements.
HEALTHCARE PORTFOLIO REDUCTIONS
During 2000, Realty received net proceeds of $947,973,000 from the sale of
certain healthcare assets, of which an aggregate of $664,740,000 represented
principal repayments on permanent mortgage loans from third-party operators of
healthcare facilities. Realty intends to continue to sell certain healthcare
assets and use the proceeds to substantially reduce its debt. In the past,
Realty has typically sold assets to (or received mortgage prepayments from) the
operators of the facilities and to a lesser extent from third-party investors.
Currently, a significant portion of Realty's healthcare portfolio operators are
operating under the protection of Chapter 11 reorganization. As a result, Realty
may not be able to sell assets back to these operators at this time or in the
future at prices that are consistent with past sales or that are otherwise
acceptable to Realty.
COMPETITION IN THE HEALTHCARE INDUSTRY
The operators of Realty's healthcare investments compete on a local and
regional basis with other operators of comparable facilities. They compete with
independent operators as well as companies
12
managing multiple facilities, some of which are substantially larger and have
greater resources than the operators of Realty's facilities. Some of these
facilities are operated for profit while others are owned by governmental
agencies or tax-exempt not-for-profit organizations.
GOVERNMENT REGULATION
Realty recognizes a portion of revenue from percentage, supplemental and/or
additional rent or interest. This revenue can be a contractual amount or be
based on the healthcare facility operator's gross revenues which, in most cases,
is subject to changes in the reimbursement and licensure policies of federal,
state and local governments. In addition, the acquisition of healthcare
facilities is generally subject to state and local regulatory approval.
MEDICARE, MEDICAID, BLUE CROSS AND OTHER PAYORS
Third-party healthcare operators who lease facilities from Realty or who
obtained loan financing from Realty receive payments for patient care from
federal Medicare programs for elderly and disabled patients, state Medicaid
programs for medically indigent and cash grant patients, private insurance
carriers, employers and Blue Cross plans, health maintenance organizations,
preferred provider organizations and directly from patients. Historically,
Medicare payments for long-term care services, psychiatric care and
rehabilitative care were based on allowable costs plus a return on equity for
proprietary facilities. On August 5, 1997, the Balanced Budget Act ("BBA") was
enacted. The BBA included, among other things, significant changes to Medicare
reimbursement for long-term care services. The new reimbursement system is
intended to reduce the growth in Medicare spending by creating incentives for
the lowest cost delivery of long-term care services. The prospective payment
system ("PPS") was implemented over a twelve-month period (based upon each
facility's year-end cost report) beginning July 1, 1998, with the majority of
nursing homes converting to PPS on January 1, 1999. Reimbursement under the new
PPS rates is being phased in over the next four years. PPS has resulted in
reduced Medicare revenue for long-term care facilities with significant Medicare
patient populations. Success under PPS is dependent on several factors,
including the third-party operator's management team's effectiveness. During
2000, many operators of these long-term care facilities have experienced
liquidity problems and have cited the PPS reimbursement system as one of the
causes. Five of Realty's operators have filed for protection under Chapter 11 of
the US Bankruptcy Code. Other operators of Realty's facilities may also file for
protection under Chapter 11 of the US Bankruptcy Code.
Payments from state Medicaid programs for psychiatric care are based on
reasonable costs or are at fixed rates. Long-term care facilities are generally
paid by the various states' Medicaid programs at rates based upon cost
reimbursement principles. Reimbursement rates are typically determined by the
state from cost reports filed annually by each facility on a prospective or
retrospective basis. Most Medicare and Medicaid payments are below retail rates.
Payments from other payors are generally also below retail rates. Blue Cross
payments in different states and areas are based on costs, negotiated rates or
retail rates.
REGULATION OF HEALTHCARE PROPERTIES AND THIRD-PARTY OPERATORS
Regulation of long-term care facilities is exercised primarily through the
licensing of such facilities. The particular agency having regulatory authority
and the license qualification standards vary from state to state and, in some
instances, from locality to locality. Licensure standards are constantly under
review and undergo periodic revision. Governmental authorities generally have
the power to review the character, competence and community standing of the
operator and the financial resources and adequacy of the facility, including the
physical buildings and equipment, personnel and standards of medical care.
Long-term care facilities may be certified under the Medicare program and are
normally eligible to qualify under state Medicaid programs, although not all
participate in the Medicaid programs. Long-term care facilities are subject to
periodic inspection by governmental and other authorities to assure continued
compliance with the various standards necessary for their licensing and
accreditation.
13
Rehabilitation hospitals are also subject to extensive federal, state and
local legislation and regulation. Rehabilitation hospitals are subject to
periodic inspections and licensure requirements. Inpatient rehabilitation
facilities are cost-reimbursed, receiving the lower of reasonable costs or
reasonable charges. Typically, the fiscal intermediary pays a set rate per day
based on the prior year's costs for each facility. Annual cost reports are filed
with the operator's fiscal intermediary and adjustments are made, if necessary.
The individual physicians, groups of physicians and healthcare providers
that occupy medical office buildings are subject to a variety of federal, state
and local regulations applicable to their specific areas of practice. Since
medical office buildings may contain numerous types of medical services, a wide
variety of regulations may apply. In addition, medical office buildings must
comply with the requirements of municipal building codes, health codes and local
fire departments.
Acute care hospitals are subject to extensive federal, state and local
legislation and regulation relating to, among other things, the adequacy of
medical care, equipment, personnel, hygiene, operating policies and procedures,
fire prevention, rate-setting and compliance with building codes and
environmental protection laws. Hospitals must maintain strict standards in order
to obtain their state hospital licenses from a department of health or other
applicable agency in each state. In granting and renewing licenses, the
department of health considers, among other things, the physical buildings and
equipment, the qualifications of the administrative personnel and nursing staff,
the quality of care and continuing compliance with the laws and regulations
relating to the operation of the facilities. State licensing of facilities is a
prerequisite to certification under the Medicare and Medicaid programs. Various
other licenses and permits also are required in order to dispense narcotics,
operate pharmacies, handle radioactive materials and operate certain equipment.
Hospital facilities are subject to periodic inspection by governmental and other
authorities to assure continued compliance with the various standards necessary
for their licensing and accreditation.
Residential assisted living facilities are subject to varying degrees of
regulation and licensing by local and state health and social service agencies
and other regulatory authorities specific to their location. Typically, these
regulations and licensing requirements relate to fire safety, sanitation, staff
training, staffing levels and living accommodations, as well as requirements
specific to certain health related services offered. Levels of service provided
and corresponding regulation vary considerably from operator to operator.
Alcohol and substance abuse treatment facilities must comply with the
licensing requirements of federal, state and local health agencies and with the
requirements of municipal building codes, health codes and local fire
departments. In granting and renewing a facility's license, a state health
agency considers, among other things, the physical buildings and equipment, the
qualifications of the administrative personnel and healthcare staff, the quality
of nursing and other services and the continuing compliance of such facility
with the laws and regulations applicable to its operations.
Psychiatric hospitals generally are subject to extensive federal, state and
local legislation and regulation. Licensing requirements for psychiatric
hospitals include periodic inspections regarding standards of medical care,
equipment and hygiene. In addition, there are specific laws regulating civil
commitment of patients and disclosure of information regarding patients being
treated for chemical dependency. Many states have adopted a "patient's bill of
rights" which sets forth standards, such as using the least restrictive
treatment, allowing patient access to the telephone and mail, allowing the
patient to see a lawyer and requiring the patient to be treated with dignity.
Insurance reimbursement for psychiatric treatment generally is more limited than
for general healthcare.
EMPLOYEES
All of the healthcare segment employees are employees of Realty. As of
December 31, 2000, the operations of the healthcare business were maintained by
13 employees. These employees are responsible for monitoring the existing
healthcare related real estate portfolio as well as negotiating the
14
sale (or early repayment) of a significant portion of Realty's existing
healthcare portfolio assets. Realty has not experienced any significant labor
problems and believes that its employee relations are good.
CAPITAL AND LIQUIDITY CONSIDERATIONS
CREDIT AGREEMENT
During July 1998, Realty entered into an unsecured bank facility (the
"Credit Facility") in the amount of $2,250,000,000. The Credit Facility was
amended in November 1998, March 1999, June 2000 and September 2000. Also during
2000, $58,000,000 of the Credit Facility's principal was permanently repaid. At
December 31, 2000, the Credit Facility consisted of two tranches: Tranche A, a
revolving credit facility with total borrowing availability of $400,000,000 and
Tranche D, a $400,000,000 term loan. The Credit Facility matures on July 17,
2001 and bears interest at the prime rate plus 2.0% (or "Base Rate"), or LIBOR
plus 2.875% plus the commitment fee and is secured by a pledge of all of the
Companies' subsidiaries' capital stock.
Of the $400,000,000 revolving tranche, $366,000,000 (net of outstanding
letters of credit) was available at December 31, 2000, with interest at the Base
Rate of prime rate plus 2% (11.5% at December 31, 2000 or LIBOR plus 2.875%
(9.5% at December 31, 2000). As of March 28, 2001, $265,874,000 was available on
the revolving tranche.
SHELF REGISTRATION STATEMENT
The Companies have an effective shelf registration statement on file with
the SEC under which the Companies may issue up to $1,825,000,000 of securities
including common stock, preferred stock, debt, series common stock, convertible
debt and warrants to purchase common stock, preferred stock, debt, series common
stock and convertible debt.
CAPITAL REQUIREMENTS AND AVAILABILITY OF FINANCING
The Companies' business is capital intensive and it will have significant
capital requirements in the future. The Companies' leverage could affect its
ability to obtain financing in the future or to undertake refinancings on terms
and subject to conditions deemed acceptable by the Companies. In the event that
the Companies' cash flow and working capital are not sufficient to fund the
Companies' expenditures or to service its indebtedness, it would be required to
raise additional funds through the sale of additional equity securities, the
refinancing of all or part of its indebtedness, the incurrence of additional
permitted indebtedness or the sale of assets. As detailed in the combined
Liquidity and Capital Resources Section of this Joint Annual Report on
Form 10-K, the Companies have $628,000,000 of debt maturing in fiscal year 2001;
therefore, there can be no assurance that any of these sources of funds would be
available in amounts sufficient for the Companies to meet its obligations
including debt that matures in fiscal year 2001. Moreover, even if the Companies
were able to meet its obligations, its leveraged capital structure could
significantly limit its ability to finance its capital expenditures, to compete
effectively or to operate successfully under adverse economic conditions.
Additionally, financial and operating restrictions contained in the Companies'
existing indebtedness may limit the Companies' ability to secure additional
financing and may prevent the Companies from engaging in transactions that might
otherwise be beneficial to the Companies and to holders of the Companies' common
stock. The Companies' ability to satisfy its obligations will also be dependent
upon its future performance, which is subject to prevailing economic conditions
and financial, business and other factors beyond the Companies' control.
SHORT-TERM INVESTMENTS
The Companies invest their cash in certain short-term investments during
interim periods between the receipt of revenues and payment of obligations and
dividends (if any). Cash not used by the business segments may be invested in
interest-bearing bank accounts, certificates of deposit, short-term money-market
securities, short-term United States government securities, mortgage-backed
securities guaranteed by the Government National Mortgage Association, mortgages
insured by the
15
Federal Housing Administration or guaranteed by the Veterans Administration,
mortgage loans, mortgage loan participations and certain other similar
investments. The Companies' ability to make certain of these investments may be
limited by tax considerations. The Companies' return on these short-term
investments may be more or less than its return on real estate investments.
BORROWING POLICIES
The Companies may incur additional indebtedness when, in the opinion of the
Boards, it is advisable. For short-term purposes, the Companies may, from time
to time, negotiate lines of credit, arrange for other short-term borrowings from
banks or others or issue commercial paper. The Companies may arrange for
long-term borrowing from banks, insurance companies, public offerings or private
placements to institutional investors.
In addition, the Companies may incur mortgage indebtedness on real estate
which it has acquired through purchase, foreclosure or otherwise. When terms are
deemed favorable, the Companies may invest in properties subject to existing
loans or mortgages. The Companies also may obtain financing for unleveraged
properties in which it has invested or may refinance properties acquired on a
leveraged basis. There is no limitation on the number or amount of mortgages
that may be placed on any one property, but overall restrictions on mortgage
indebtedness are provided under documents pertaining to certain existing
indebtedness.
MEDITRUST CORPORATION ("REALTY")
GENERAL
Realty is a self-administered REIT which operates under the provisions of
the Internal Revenue Code of 1986, as amended (the "Code") and is incorporated
in the State of Delaware. As of December 31, 2000, Realty had investments in 498
facilities consisting of 299 hotels and 199 healthcare facilities.
Realty had a net decrease in gross real estate investments of $1,172,520,000
during 2000 principally due to the sale of certain healthcare assets to
operators of healthcare properties, land and the repayment of principal on
permanent mortgage loans and development loans.
Realty's principal executive offices are located at 909 Hidden Ridge,
Suite 600, Irving, TX 75038 and its telephone number is (214) 492-6600.
For a discussion of certain factors that could impact the financial
condition, results of operations and/or business of Realty, you are encouraged
to read the section entitled "Certain Factors You Should Consider" beginning on
page 63 of this Joint Annual Report on Form 10-K.
LODGING RELATED REAL ESTATE
As of December 31, 2000, Realty had investments in 299 hotels including 229
La Quinta-Registered Trademark- Inns, 68 La Quinta-Registered Trademark- Inn &
Suites hotels and two hotels owned by Realty, which are marketed under a brand
name other than La Quinta. These hotels, which are located in 28 states and have
an aggregate of 38,000 rooms in service, are leased by Realty (or the respective
property owning subsidiary) to a subsidiary of Operating. Additionally, two La
Quinta Inn & Suites hotels are owned and operated by subsidiaries of Operating.
A complete discussion of the lodging business is presented in the Companies
portion of the Business section of this Joint Annual Report on Form 10-K.
HEALTHCARE RELATED REAL ESTATE
As of December 31, 2000, Realty had investments in 199 healthcare facilities
including 93 long-term care facilities, 94 assisted living facilities, 5 medical
office buildings, one acute care hospital campus and six other healthcare
facilities. As of December 31, 2000, third-party operators leased 163 of
Realty's healthcare facilities and 36 facilities constituted investments through
the provision of permanent
16
mortgage loan financing. Realty's healthcare properties are located in 29 states
and are operated by 20 different operators. Sun Healthcare Group, Inc. ("Sun")
and Alternative Living Services, Inc. ("Alterra") operate approximately 43% of
Realty's healthcare real estate investments in the aggregate. No other
healthcare operator operates more than 10% of Realty's healthcare related real
estate investments. A complete discussion of the healthcare real estate
financing business is presented in the Companies portion of the Business section
of this Joint Annual Report on Form 10-K.
LEGAL PROCEEDINGS
Realty is and is likely in the future to be, subject to certain types of
litigation, including negligence and other tort claims. The costs and effects of
such legal and administrative cases and proceedings (whether civil or criminal),
settlements and investigations are indeterminate. The costs and effects of any
such legal proceeding could be material to Realty's operations. For further
discussion of these issues see Item 3, "Legal Proceedings."
GENERAL REAL ESTATE INVESTMENT RISKS
Realty's ownership of real property is substantial. Realty's investments are
subject to varying degrees of risk generally incident to the ownership of real
property. Real estate values and income from Realty's properties may be
adversely affected by changes in national economic conditions, changes in local
market conditions due to changes in general or local economic conditions and
neighborhood characteristics, changes in interest rates and in the availability,
cost and terms of mortgage funds, the impact of present or future environmental
legislation and compliance with environmental laws, the ongoing need for capital
improvements, changes in real estate tax rates and other operating expenses,
adverse changes in governmental rules and fiscal policies, civil unrest, acts of
God, including earthquakes and other natural disasters (which may result in
uninsured losses), acts of war, adverse changes in zoning laws and other factors
which are beyond the control of Realty. A significant portion of revenue for
third-party operators of Realty's healthcare portfolio arises from government
reimbursement of various healthcare services. Changes in reimbursement rates,
the timing of reimbursement or other reimbursement policies could adversely
affect third-party operators' cash flow, thus impacting their ability to make
mortgage, lease or other payments to Realty.
VALUE AND LIQUIDITY OF REAL ESTATE
Real estate investments are relatively illiquid. The ability of Realty to
vary its portfolio in response to changes in economic and other conditions is
limited. If Realty must sell an investment, there is no assurance that Realty
will be able to dispose of it in the time period it desires or that the sales
price of any investment will recoup or exceed the amount of Realty's investment.
PROPERTY TAXES
Each of Realty's hotels is subject to real property taxes. The real property
taxes on the hotels may increase or decrease as property tax rates change and as
the properties are assessed or reassessed by taxing authorities. If property
taxes increase, Realty's operations could be adversely affected and, to the
extent such increases are not recovered through additional lodging revenue,
Realty's operating cash flow will be adversely affected.
INCOME TAX MATTERS
Realty currently intends to continue to manage its investments, including
the sale or disposition of property or other investments and to operate
(including through its business relationships with Operating) in a manner
consistent with the requirements of the Code and the regulations thereunder in
order to qualify as a REIT. As long as Realty complies with the Code and its
regulations regarding REIT qualification requirements, Realty will not be taxed,
except in limited circumstances, under the federal income tax laws on that
portion of its taxable income that it distributes to its shareholders. In
certain
17
instances, Realty may find it necessary or advisable to utilize one or more
taxable REIT subsidiaries and will be required to accrue and pay federal and
state income taxes on the earnings of such subsidiaries. In order to continue to
qualify as a REIT in 2001 (among other factors), Realty must distribute at least
90% of its REIT taxable income. As of December 31, 2000, Realty had a net
operating loss ("NOL") carryforward of approximately $100 million that could be
used to reduce Realty's REIT taxable income.
MEDITRUST OPERATING COMPANY ("OPERATING")
GENERAL
Operating is a Delaware corporation, which currently operates the business
conducted on Realty's lodging related real estate. Operating does not operate
any businesses conducted on, or related to, Realty's healthcare related real
estate. As of December 31, 2000, Operating leased 295 properties from Realty and
managed a total of 299 hotels. Operating's activities are conducted primarily on
real estate either leased or subleased from Realty. Operating neither leases
real estate from, nor manages real estate on behalf of, any third-party with the
exception of one hotel facility and certain land parcels.
As previously described, the Companies announced a comprehensive
restructuring plan during November 1998 that was designed to clarify the
Companies' investment and operating strategy by focusing on the healthcare and
lodging business segments. As a result, Operating, together with Realty, sold
all of its subsidiaries that operated the businesses conducted on Realty's golf
course properties. Accordingly, Operating's business is now focused on the
lodging business. A complete discussion of the lodging business is presented in
the Companies portion of the Business section of this Joint Annual Report on
Form 10-K.
Operating's principal executive offices are based at 909 Hidden Ridge,
Suite 600, Irving, TX, 75038 and its telephone number is (214) 492-6600.
For a discussion of certain factors that could impact the financial
condition, results of operations and/or business of Operating or the successful
implementation of the Five Point Plan and each of the respective component
parts, you are encouraged to read the section entitled "Certain Factors You
Should Consider" beginning on page 63 of this Joint Annual Report on Form 10-K.
INCOME TAX MATTERS
Operating pays ordinary corporate income taxes on its taxable income. Any
income, net of taxes, will be available for retention in Operating's business or
for distribution to shareholders as dividends. Any dividends distributed by
Operating will be subject to tax at ordinary rates and generally will be
eligible for the dividends received deduction for corporate shareholders to the
extent of Operating's current or accumulated earnings and profits. However,
there is no tax provision which requires Operating to distribute any of its
after-tax earnings and Operating does not expect to pay cash dividends in the
foreseeable future. Currently, Operating is not paying any federal income taxes
due to the operating losses being generated. As of December 31, 2000, Operating
had an NOL carryforward of approximately $120 million that can be used to reduce
future taxable income.
LEGAL PROCEEDINGS
Operating is and is likely in the future to be, subject to certain types of
litigation, including negligence and other tort claims. The costs and effects of
such legal and administrative cases and proceedings (whether civil or criminal),
settlements and investigations are indeterminate. The costs and effects of any
such legal proceeding could be material to Operating's operations. For further
discussion of these issues see Item 3, "Legal Proceedings".
18
ITEM 2. PROPERTIES
The following table sets forth certain information as of December 31, 2000
regarding the Companies' healthcare and lodging properties. A description of
each type of property follows the table:
ANNUAL
NUMBER PURCHASE BASE RENT
NUMBER OF PRICE SEE OR
OF BEDS/ OR MORTGAGE REFERENCES INTEREST
LOCATION FACILITIES ROOMS(1) AMOUNT(2) BELOW PAYMENT(3)
- -------- ---------- -------- ----------- ---------- ----------
(000'S) (000'S)
HOTELS
Alabama............................... 8 1,005 $ 61,921
Arkansas.............................. 5 606 31,295 (4)
Arizona............................... 12 1,537 118,680
California............................ 17 2,441 196,699 (4)
Colorado.............................. 15 1,868 159,733
Florida............................... 34 4,505 350,001 (4)
Georgia............................... 17 2,200 117,494
Illinois.............................. 7 919 58,727
Indiana............................... 3 368 20,063
Kansas................................ 2 229 12,684 (4)
Kentucky.............................. 1 129 6,335
Louisiana............................. 15 2,033 162,533 (4)
Missouri.............................. 2 235 13,022
Mississippi........................... 2 245 8,621
North Carolina........................ 10 1,307 100,562
Nebraska.............................. 1 129 4,939
New Mexico............................ 7 834 60,516
Nevada................................ 4 623 34,004 (4)
Ohio.................................. 1 122 5,118
Oklahoma.............................. 8 962 63,678
Pennsylvania.......................... 1 128 6,773
South Carolina........................ 6 717 41,081
Tennessee............................. 11 1,402 78,147
Texas................................. 98 12,698 863,565 (4)
Utah.................................. 4 466 38,102
Virginia.............................. 4 508 18,435
Washington............................ 3 419 33,323
Wyoming............................... 1 105 3,526
--- ------ ----------
TOTAL HOTELS........................ 299 38,740 $2,669,577
--- ------ ----------
LONG-TERM CARE FACILITIES
Alabama............................... 1 230 $ 7,759 $ 941
California............................ 4 239 51,282 (5) 5,066
Colorado.............................. 1 117 9,135 (15) 1,441
Connecticut........................... 12 1,740 95,525 (6) 13,746
Florida............................... 8 840 65,706 (7) 7,730
Indiana............................... 3 343 7,327 715
Kentucky.............................. 1 55 10,000 1,205
Maryland.............................. 1 170 18,188 2,121
Massachusetts......................... 20 3,248 217,298 (8) 26,648
Michigan.............................. 2 212 15,305 921
Missouri.............................. 8 1,168 45,493 (9) 5,041
New Hampshire......................... 7 642 46,599 3,278
19
ANNUAL
NUMBER PURCHASE BASE RENT
NUMBER OF PRICE SEE OR
OF BEDS/ OR MORTGAGE REFERENCES INTEREST
LOCATION FACILITIES ROOMS(1) AMOUNT(2) BELOW PAYMENT(3)
- -------- ---------- -------- ----------- ---------- ----------
(000'S) (000'S)
New Jersey............................ 6 810 $ 68,657 $ 8,578
New York.............................. 1 0 110 (15) 41
Ohio.................................. 6 623 24,867 2,811
Pennsylvania.......................... 3 381 18,057 (10) 2,268
Washington............................ 1 52 5,861 --
Wisconsin............................. 1 119 13,888 1,011
West Virginia......................... 7 615 29,100 (11) 2,854
--- ------ ---------- --------
TOTAL LONG-TERM CARE................ 93 11,604 $ 750,157 $ 86,416
--- ------ ---------- --------
ASSISTED LIVING
Arkansas.............................. 2 102 $ 7,638 $ 741
Arizona............................... 1 48 4,275 335
California............................ 2 196 16,100 1,504
Florida............................... 7 498 48,671 (12) 4,561
Kansas................................ 2 52 -- --
Michigan.............................. 14 774 70,357 (13) 6,360
Minnesota............................. 5 99 5,927 540
North Carolina........................ 4 232 22,945 2,098
New York.............................. 1 80 9,120 830
Ohio.................................. 6 471 26,661 2,360
Oklahoma.............................. 2 59 6,266 624
Pennsylvania.......................... 4 253 16,954 1,464
South Carolina........................ 2 76 7,870 719
Tennessee............................. 3 226 16,479 1,508
Texas................................. 20 793 39,972 4,181
Virginia.............................. 2 134 9,193 938
Wisconsin............................. 17 364 20,546 1,899
--- ------ ---------- --------
TOTAL ASSISTED LIVING............... 94 4,457 $ 328,974 $ 30,662
--- ------ ---------- --------
MEDICAL OFFICE BUILDINGS
Massachusetts......................... 2 $ 1,850 $ 268
Tennessee............................. 2 26,212 (15) 2,386
Texas................................. 1 9,756 810
--- ------ ---------- --------
TOTAL MEDICAL OFFICE BUILDING....... 5 $ 37,818 $ 3,464
--- ------ ---------- --------
ACUTE CARE HOSPITAL
Arizona............................... 1 492 $ 65,650 $ 7,222
--- ------ ---------- --------
PSYCHIATRIC HOSPITALS AND ALCOHOL AND
SUBSTANCE ABUSE
California............................ 1 61 $ 5,750 $ --
Florida, New York and Oklahoma........ 5 564 31,582 (15) 3,492
--- ------ ---------- --------
TOTAL PSYCHIATRIC AND ALCOHOL AND
SUBSTANCE ABUSE................... 6 625 $ 37,332 $ 3,492
--- ------ ---------- --------
20
ANNUAL
NUMBER PURCHASE BASE RENT
NUMBER OF PRICE SEE OR
OF BEDS/ OR MORTGAGE REFERENCES INTEREST
LOCATION FACILITIES ROOMS(1) AMOUNT(2) BELOW PAYMENT(3)
- -------- ---------- -------- ----------- ---------- ----------
(000'S) (000'S)
TOTAL HEALTHCARE.................... 199 17,178 $1,219,931 $131,256
--- ------ ---------- --------
LAND UNDER DEVELOPMENT
California............................ $ 330
Florida............................... 10,086 (15) $ 1,187
---------- --------
TOTAL LAND UNDER DEVELOPMENT........ $ 10,416 $ 1,187
---------- --------
OTHER
California............................ $ 3,568 (15) $ 462
--- ------ ---------- --------
TOTAL ALL FACILITIES (14)........... 498 55,918 $3,903,492 $132,905
=== ====== ========== ========
- ------------------------
(1) Includes 17,178 total beds for healthcare facilities and 38,740 rooms for
hotels. The La Quinta hotels had an average occupancy of 63.4% for the year
ended December 31, 2000. Based upon information provided by the operators of
the healthcare facilities, the average occupancy of Realty's portfolio of
operating healthcare facilities, including start-up facilities, for the year
ended December 31, 2000, was as follows: 88% long-term care facilities, 78%
alcohol and substance abuse treatment facilities, 81% assisted living and
58% acute care hospitals. Generally, average occupancy rates are determined
by dividing the number of days or occupied rooms in each period by the
average number of licensed bed days or available rooms during such period.
(2) Represents purchase price or mortgage amount at December 31, 2000 for
operating facilities and the funded amounts for facilities under
construction.
(3) The annual base rent/interest payments under the healthcare leases or
mortgages are generally projected to be approximately 9%-13% of the purchase
price or mortgage amount, in accordance with the terms of the respective
agreements. Base rent excludes additional and percentage rent and interest.
Additional and percentage rent, interest and other fees earned by the
facilities listed above for the year ended December 31, 2000 was an
aggregate of $7,050,000. Additional and percentage rent and interest are
calculated based upon a percentage of a facility's revenues over an agreed
upon base amount or an automatic annual escalation. Amounts listed in the
table above represent contractual base rent or interest. See page 58 for a
detail on actual payments received from operators in bankruptcy during the
year ended December 31, 2000.
(4) The total amount of annual base rent paid to third-parties related to
lodging facilities in these states for the year ended December 31, 2000 was
$1,150,000.
(5) Includes permanent mortgage loans of $24,724,000.
(6) Includes permanent mortgage loans of $16,316,000.
(7) Includes permanent mortgage loans of $15,921,000.
(8) Includes permanent mortgage loans of $47,621,000.
(9) Includes permanent mortgage loans of $36,696,000.
(10) Includes a permanent mortgage loan of $6,525,000.
(11) Includes permanent mortgage loans of $11,900,000.
(12) Includes a permanent mortgage loan of $25,867,000.
(13) Includes permanent mortgage loans of $9,948,000.
21
(14) Investments by Realty in facilities operated by Sun, Alterra and Harborside
represented 9%, 4% and 3%, respectively, of Realty's total portfolio as of
December 31, 2000.
(15) Permanent mortgage loans.
DESCRIPTION OF TYPES OF PROPERTIES
HOTELS
La Quinta hotels appeal to guests who desire high-quality rooms, convenient
locations and attractive prices, but who do not require banquet and convention
facilities, in-house restaurants, cocktail lounges or room service.
The Inn & Suites hotels offer rooms designed to accommodate the needs of the
guest, irrespective of the purpose or length of the stay. The King Plus Extra
rooms and deluxe two-room suites include features that may be desirable for
longer stays. In addition, the Inn & Suites hotels offer fitness centers and
courtyards with gazebos and spas. Typically, food service for La Quinta guests
is provided by adjacent, freestanding restaurants.
To maintain the overall quality of La Quinta's hotels, each hotel undergoes
refurbishments and capital improvements as needed. Historically, refurbishing
has been provided at intervals of five to seven years, based on an annual review
of the condition of each hotel. La Quinta spent approximately $36,304,000 in
capital improvements to existing hotels during the fiscal year 2000. La Quinta
has invested approximately $305,660,000 in maintenance and renovation
improvements to existing La Quinta Inns and Inn & Suites during the period
1996-2000. As a result of these expenditures, La Quinta believes it has been
able to maintain a chain-wide quality of rooms and common areas at its hotels
superior to other mid-priced hotel chains.
LONG-TERM CARE (SKILLED NURSING) FACILITIES
The long-term care facilities offer restorative, rehabilitative and
custodial nursing care for patients not requiring the more extensive and
sophisticated treatment available at acute care hospitals. The facilities are
designed to provide custodial care and to supplement hospital care and many have
transfer agreements with one or more acute care hospitals.
ASSISTED LIVING FACILITIES
The assisted living facilities provide a combination of housing, supportive
services, personalized assistance and healthcare designed to respond to
individual needs for daily living activities. Support services are generally
available 24 hours a day to meet scheduled and unscheduled needs.
MEDICAL OFFICE BUILDINGS
Medical office building facilities contain individual physician, physician
group and other healthcare provider offices for the administration and treatment
of patients, usually in close proximity to the general service acute care
hospital to which the physicians are affiliated. The types of services provided
in a medical office building may include outpatient therapy, clinics,
examination facilities and the provision of other medical services in a
non-hospital setting.
ACUTE CARE HOSPITALS
Acute care hospitals provide services that include, among others, general
surgery, internal medicine, obstetrics, emergency room care, radiology,
diagnostic services, coronary care, pediatric services and psychiatric services.
On an outpatient basis, the services include, among others, same day surgery,
diagnostic radiology (e.g. magnetic resonance imaging, CT scanning, X-ray),
rehabilitative therapy, clinical laboratory services, pharmaceutical services
and psychiatric services.
22
ALCOHOL AND SUBSTANCE ABUSE TREATMENT FACILITIES
These facilities provide inpatient treatment for alcohol and substance
abuse, including medical evaluation, detoxification and rehabilitation.
Specialized programs offer treatment for adults, adolescents, families and
chronic abusers.
PSYCHIATRIC HOSPITALS
The psychiatric hospitals offer comprehensive, multidisciplinary adult,
adolescent and substance abuse psychiatric programs. Patients are evaluated upon
admission and an individualized treatment plan is developed. Elements of the
treatment plan include individual, group and family therapy, activity therapy,
educational programs and career and vocational planning.
OTHER HEALTHCARE INVESTMENTS
At various dates between July 1996 and August 1998, Realty invested
approximately $57,204,000 in exchange for 26,606,000 shares of common stock,
representing 19.99% of NHP Plc, a property investment group that specializes in
the financing, through sale/leaseback transactions, of nursing homes located in
the United Kingdom. Realty does not have the right to vote more than 9.99% of
the shares of common stock of NHP Plc. As of September 30, 2000 (NHP Plc's
year-end), NHP Plc had invested approximately L669,200,000 in 378 nursing homes
with a total of approximately 18,960 beds. The facilities are leased to 25
different nursing home operators in the United Kingdom with terms and conditions
similar to those contained in Realty's leases. At December 31, 2000, the book
value of this investment was $7,759,000. A charge to earnings of $49,445,000 was
recorded during 2000 to reflect the other-than-temporary decline in the market
value of this security (See Note 7 to the Combined Financial Statements). On
January 22, 2001, the Companies sold their investment in NHP Plc for net
proceeds of $7,737,000 and recorded a charge to earnings of $22,000 in the 2001
financial statements.
Realty also has an investment of 1,081,000 shares of capital stock in
Balanced Care Corporation, a healthcare operator. This investment had a market
value of $271,000 at December 31, 2000. A charge to earnings of $834,000 was
recorded in 2000 to reflect the difference between the initial cost of this
investment of $1,105,000 and the current market price.
LEASES
HOTEL FACILITIES
Generally, each hotel facility, which includes the land, related easements
and rights, buildings, improvements, furniture, fixtures and equipment (the
"Leased Hotel Properties") that is owned by Realty is leased to Operating
pursuant to long-term lease arrangements.
The lease agreements have fixed terms of five years. Realty's gross real
estate investment in the Leased Hotel Properties aggregates approximately
$2,648,535,000 at December 31, 2000. The base rents range from 3.5% to 15.5% per
annum of Realty's equity investment in the Leased Hotel Properties. The hotel
facility lease arrangements between Realty and Operating include quarterly base
or minimum rents plus contingent or percentage rents based on quarterly gross
revenue thresholds for each of the Leased Hotel Properties. Rent in the
aggregate was $278,379,000 for the year ended December 31, 2000, of which
$58,567,000 was payable to Realty at December 31, 2000.
Operating is required to pay rent and all operating expenses of the Leased
Hotel Properties while Realty assumes costs attributable to real estate taxes
and insurance. Operating is required to provide for all repairs, replacements
and alterations to the Leased Hotel Properties that are not considered capital
additions or material structural work, as defined in the lease agreements.
Realty provides for all capital additions and material structural work.
23
HEALTHCARE FACILITIES
Generally, each healthcare facility, which includes the land, related
easements and rights, buildings, improvements and fixtures, (the "Leased
Healthcare Properties") that is owned by Realty is leased pursuant to a
long-term triple net lease (collectively, the "Leases"), which typically
contains terms as outlined below. Leased Healthcare Properties usually do not
include major movable equipment.
The Leases generally have a fixed term of approximately 10 years and contain
multiple renewal options. Some Leases are subject to earlier termination upon
the occurrence of certain contingencies as described in the Lease.
Realty's Leased Healthcare Properties before valuation allowance aggregated
approximately $805,236,000 as of December 31, 2000. The base rents range from
approximately 8% to 20% per annum of Realty's equity investment in the Leased
Healthcare Properties. The base rents for the renewal periods are generally
fixed rents for the initial renewal periods and market rates for later renewal
periods. All Leases provide for either an automatic fixed annual rent escalation
or additional variable rents in addition to the base rent, based on revenues
exceeding specified base revenues.
Each Lease is a triple net lease requiring the lessee to pay rent and all
additional charges incurred in the operation of the Leased Healthcare Property.
The lessees are required to repair, rebuild and maintain the Leased Healthcare
Properties as well as pay insurance and taxes on the facility.
The obligations under the Leases are generally guaranteed by the parent
corporation of the lessee, if any, or affiliates or individual principals of the
lessee. Some obligations are further backed by letters of credit, cash
collateral or pledges of certificates of deposit from various financial
institutions which may cover up to one full year's lease payments and which
remain in effect until the expiration of a fixed time period or the fulfillment
of certain performance criteria. Generally, multiple leases with one operator
are cross-collateralized and contain cross-default positions tied to each of the
operator's other leases with Realty.
Realty also obtains other credit enhancement devices similar to those it may
obtain with respect to mortgage loans. See "Mortgage Loans" below for a
description.
With respect to two of the Leased Healthcare Properties, Realty leases the
land pursuant to ground leases and subleases the land to the operator of the
Leased Healthcare Property. Such subleases contain terms substantially similar
to those found in the Leases.
MORTGAGE LOANS
Realty's mortgage loan program is comprised of secured loans which are
structured to provide Realty with interest income, additional interest based
upon the revenue growth of the operating facility or a fixed rate increase,
principal amortization and commitment fees. Virtually all of the approximately
$276,211,000 mortgage loans at face value before valuation allowance as of
December 31, 2000 are first mortgage loans.
The interest rates on Realty's investments in mortgage loans for operating
facilities range from approximately LIBOR plus 1% to 12% per annum on the
outstanding balances. The yield to Realty on mortgage loans depends upon a
number of factors, including the stated interest rate, average principal amount
outstanding during the term of the loan, the amount of the commitment fee
charged at the inception of the loan, the interest rate adjustments and the
additional interest earned.
The mortgage loans for operating facilities made through December 31, 2000
are generally subject to 10-year terms with up to 20 to 30-year amortization
schedules that provide for a balloon payment of the outstanding principal
balance at the end of the tenth year. Some of the mortgages include an interest
adjustment in the fifth year which generally provides for interest to be charged
at the greater of the current interest rate or 300 to 400 basis points over the
five-year United States Treasury securities' yield at the time of adjustment.
24
Realty requires a variety of additional forms of security and collateral
beyond that which is provided by the lien of the mortgage, including one or more
of the following items: (a) a guaranty of the complete payment and performance
of all obligations associated with each mortgage loan from the borrower's parent
corporation, if any, other affiliates of the borrower and/or one or more of the
individual principals controlling such borrower; (b) a collateral assignment
from the borrower of the leases and the rents relating to the mortgaged
property; (c) a collateral assignment from the borrower of all permits,
licenses, approvals and contracts relating to the operation of the mortgaged
property; (d) a pledge of all, or substantially all, of the equity interest held
in the borrower; (e) cash collateral or a pledge of a certificate of deposit,
for a negotiated dollar amount typically equal to three months to one year's
principal and interest on the loan (which cash collateral or pledge of
certificate of deposit typically remains in effect until the later to occur of
(i) three years after the closing of the mortgage loan or (ii) the achievement
by the facility of an agreed-upon cash flow debt coverage ratio for three
consecutive fiscal quarters and, in the event that after the expiration of the
letter of credit or pledge of certificate of deposit, the agreed-upon financial
covenants are not maintained throughout the loan term, the borrower is often
required to reinstate the cash collateral or pledge of certificate of deposit);
(f) an agreement by any affiliate of the borrower or operator of the facility to
subordinate all payments due to it from the borrower to all payments due to
Realty under the mortgage loan and (g) a security interest in all of the
borrower's personal property, including, in some instances, the borrower's
accounts receivable. In addition, the mortgage loans are generally
cross-defaulted and cross-collateralized with any other mortgage loans, leases
or other agreements between the borrower or any affiliate of the borrower and
Realty.
ENVIRONMENTAL MATTERS
Under various federal, state and local laws, ordinances and regulations, an
owner of real estate is liable for the costs of removal or remediation of
certain hazardous or toxic substances on or in such property. Such laws often
impose such liability without regard to whether the owner knew of, or was
responsible for, the presence of such hazardous or toxic substances. The costs
of investigation, removal or remediation of such substances may be substantial
and the presence of such substances, or the failure to properly remediate such
substances, may adversely affect the owner's ability to sell or rent such
property or to borrow using such property as collateral. Persons who arrange for
the disposal or treatment of hazardous or toxic substances may also be liable
for the costs of removal or remediation of a release of such substances at a
disposal treatment facility, whether or not such facility is owned or operated
by such person. Certain environmental laws impose liability for release of
asbestos-containing materials ("ACMs") into the air and third-parties may seek
recovery from owners or operators of real properties for personal injury
associated with ACMs. In connection with the ownership (direct or indirect),
operation, management and development of real properties, the Companies may be
considered an owner or operator of such properties or as having arranged for the
disposal or treatment of hazardous or toxic substances and, therefore, be
potentially liable for removal or remediation costs, as well as certain other
related costs, including governmental fines and injuries to persons and
property.
25
ITEM 3. LEGAL PROCEEDINGS
The Companies are party to a number of other claims and lawsuits arising out
of the normal course of business. The Companies believe that none of these
claims or pending lawsuits, either individually or in the aggregate, will have a
material adverse affect on its businesses or on its consolidated financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Companies' shareholders during the fourth
quarter of the year ended December 31, 2000.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANTS
The following information relative to Realty's executive officers is given
as of March 28, 2001:
NAME AGE POSITION WITH REALTY
- ----------------------------- -------- ---------------------------------------------------------
Clive D. Bode................ 57 Chairman
Francis W. Cash.............. 59 President, Chief Executive Officer and Director
David L. Rea................. 40 Executive Vice President, Chief Financial Officer and
Treasurer
Michael F. Bushee............ 43 Chief Operating Officer
John F. Schmutz.............. 53 Senior Vice President and General Counsel
Debora A. Pfaff.............. 38 Vice President of Operations
Richard W. Pomroy............ 43 Vice President of Development
CLIVE D. BODE has been Chairman of the Board of Realty since October 1999.
Mr. Bode has been a special advisor to certain members of the Bass family of
Fort Worth, Texas for the past 10 years. Mr. Bode is also a director of Kelly,
Hart & Hallman, a Fort Worth based law firm.
FRANCIS W. CASH has been President and Chief Executive Officer of Realty
since April 2000. Prior to that, he served as Chairman, President and CEO of
Mariner Post-Acute Network, the nation's second-largest nursing home company,
which operates more than 400 nursing homes nationwide. From 1995 through 1999,
Mr. Cash served as Chairman, President and CEO of Red Roof Inns, Inc., one of
the leading economy lodging chains in the United States. From 1992 through 1995,
he served as President, Chief Operating Officer and Director of NovaCare Inc.,
the nation's largest rehabilitation management services company. Prior to 1992,
Mr. Cash served for 18 years in a variety of senior management positions with
the Marriott Corporation.
DAVID L. REA has been Executive Vice President, Chief Financial Officer and
Treasurer of Realty since December 2000. Most recently, Mr. Rea served as CFO of
the start-up business to business e-commerce company, SingleSourceIT.com. Prior
to that he was with Red Roof Inns, Inc. from 1996 through 1999, where he served
in various roles including Executive Vice President, CFO and Treasurer. From
1995 through 1996, he served as Vice President of Finance at DeBartolo Realty
Corporation and held various investment management related positions with T.
Rowe Price Associates from 1986 through 1995.
MICHAEL F. BUSHEE has been Chief Operating Officer of Realty since
September 1994. He was Senior Vice President of Operations of Realty from
November 1993 through August 1994, Vice President from December 1989 to
October 1993, Director of Development from January 1988 to December 1989 and has
been associated with Realty since April 1987. Mr. Bushee was previously
associated with The Stop & Shop Companies, Inc., a retailer of food products and
general merchandise, for three years and Wolf & Company, P.C., independent
accountants, for four years.
26
JOHN F. SCHMUTZ has been Senior Vice President, General Counsel and
Secretary of Realty since July 2000. Prior to that, he was Senior Vice
President, General Counsel and Secretary of Operating and La Quinta since
January 1999. From 1992 to 1999, he was Vice President-General Counsel and
Secretary of La Quinta. Mr. Schmutz served as Vice President-General Counsel of
Sbarro, Inc. from May 1991 to June 1992 and as Vice President-Legal of Hardee's
Food Systems, Inc. from April 1983 to May 1991.
DEBORA A. PFAFF, a Certified Public Accountant, has been Vice President of
Operations of Realty since October 1995 and has been Realty's Director of
Operations since September 1992. Ms. Pfaff was previously a Senior Manager with
KPMG Peat Marwick where she was employed from 1985 to 1992.
RICHARD W. POMROY has been Vice President of Development of Realty since
October 1997 and has been Director of Development of Realty since 1994. Prior to
joining Realty, he was a project manager at Continuum Care Corporation, an
operator of healthcare facilities. Mr. Pomroy began his career in the real
estate industry as an architectural project manager and gained additional
property management experience as senior project manager and later as Vice
President of Construction for several Boston area general contracting firms.
The following information relative to Operating's executive officers is
given as of March 28, 2001:
NAME AGE POSITION WITH OPERATING
- ----------------------------- -------- ---------------------------------------------------------
Clive D. Bode................ 57 Chairman
Francis W. Cash.............. 59 President, Chief Executive Officer and Director
David L. Rea................. Executive Vice President, Chief Financial Officer and
40 Treasurer
Alan L. Tallis............... 54 Executive Vice President and Chief Development Officer
A. John Novak................ 48 Senior Vice President and Chief Information Officer
John F. Schmutz.............. 53 Senior Vice President, General Counsel and Secretary
Vito J. Stellato............. 48 Senior Vice President-Human Resources
Brent A. Spaeth.............. 50 Group Vice President-Operations
Wayne B. Goldberg............ 40 Group Vice President-Operations
Stephen T. Parker............ 55 Senior Vice President-Sales and Marketing
CLIVE D. BODE has been Chairman of the Board of Operating since
October 1999. Mr. Bode has been a special advisor to certain members of the Bass
family of Fort Worth, Texas for the past 10 years. Mr. Bode is also a director
of Kelly, Hart & Hallman, a Fort Worth based law firm.
FRANCIS W. CASH has been President and Chief Executive Officer of Operating
since April 2000. Prior to that, he served as Chairman, President and CEO of
Mariner Post-Acute Network, the nation's second-largest nursing home company,
which operates more than 400 nursing homes nationwide. From 1995 through 1999,
Mr. Cash served as Chairman, President and CEO of Red Roof Inns, Inc., one of
the leading economy lodging chains in the United States. From 1992 through 1995,
he served as President, Chief Operating Officer and Director of NovaCare Inc.,
the nation's largest rehabilitation management services company. Prior to 1992,
Mr. Cash served for 18 years in a variety of senior management positions with
the Marriott Corporation.
DAVID L. REA has been Executive Vice President, Chief Financial Officer and
Treasurer of Operating since June 2000. Most recently, Mr. Rea served as CFO of
the start-up business to business e-commerce Company, SingleSourceIT.com. Prior
to that he was with Red Roof Inns, Inc. from 1996 through 1999, where he served
in various roles including Executive Vice President, CFO and Treasurer. From
1995
27
through 1996, he served as Vice President of Finance at DeBartolo Realty
Corporation and held various investment management related positions with T.
Rowe Price Associates from 1986 through 1995.
ALAN L. TALLIS has been Executive Vice President-Chief Development Officer
of La Quinta Inns, Inc. since July 2000. He is a 24-year veteran of the lodging
industry and previously served in various executive positions with La Quinta
from 1980 to 1992. Prior to returning to La Quinta in 2000, Mr. Tallis served as
Executive Vice President-Development and General Counsel of Red Roof Inns, Inc.
and Managing Director of Tallis & Associates.
A. JOHN NOVAK has served as Senior Vice President and Chief Information
Officer of La Quinta since January 2001. Prior to joining La Quinta, Mr. Novak
was Senior Vice President and Chief Information Officer for Resort Condominiums
International (RCI), a division of Cendant Corporation, beginning in
April 1999. He served as Vice President of Lodging Property Systems for Marriott
International from 1996 to 1999. Mr. Novak also served as Vice President of
Resorts and Sales Systems for Walt Disney World Company from 1990 until 1996.
JOHN F. SCHMUTZ has been Senior Vice President, General Counsel and
Secretary of Operating since July 2000. Prior to that, he was Senior Vice
President, General Counsel and Secretary of Operating and La Quinta since
January 1999. From 1992 to 1999, he was Vice President-General Counsel and
Secretary of La Quinta. Mr. Schmutz served as Vice President-General Counsel of
Sbarro, Inc. from May 1991 to June 1992 and as Vice President-Legal of Hardee's
Food Systems, Inc. from April 1983 to May 1991.
VITO J. STELLATO has been the Senior Vice President of Human Resources of
the lodging division of Operating since December 1998. Prior to that, he was
Vice President of Human Resources for Harrah's Entertainment, Inc. at their Las
Vegas and New Orleans properties. Mr. Stellato was Vice President of Human
Resources for Embassy Suites Hotels and has also held positions with Holiday Inn
and the U.S. Office of Personnel Management.
BRENT A. SPAETH has been Group Vice President of Operations since
August 2000. Prior to that he was Regional Vice President of the Inn & Suites in
the Western Regions and Divisional Vice President for the Central Division of La
Quinta Inns from May 1997 through July 2000. Mr. Spaeth has been with La Quinta
Inns since February of 1989. He formerly held various regional operations
positions with the Drury and Holiday Inn corporations and has been in the hotel
industry since 1972.
WAYNE B. GOLDBERG has been Group Vice President of Operations for La Quinta
Inns since July 2000 and has 21 years of experience in the hospitality industry.
Prior to joining La Quinta Inns, Mr. Goldberg was Chief Operating Officer for
BridgeStreet Accommodations, one of the leading corporate housing providers
worldwide. Prior to BridgeStreet, Mr. Goldberg spent over 20 years at Red Roof
Inns Inc., one of the leading economy lodging chains in the United States.
Mr. Goldberg served in various roles at Red Roof Inns, including: Group Vice
President, District Vice President, Regional Manager, Area Manager and General
Manager.
STEPHEN T. PARKER has served as Senior Vice President of Sales and Marketing
since May 2000. From August 1999 to May 2000, he was a hospitality/marketing
consultant in Phoenix, Arizona. From March 1997 until August 1999, Mr. Parker
served as Senior Vice President, Sales and Marketing for Red Roof Inns, Inc. He
served as Vice President, Marketing for North America for Choice Hotels
International, Inc. in Silver Spring, Maryland from October 1986 until
March 1997.
28
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PAIRED SHARES OF COMMON STOCK
MARKET INFORMATION
The Companies' common shares are paired and trade together on the New York
Stock Exchange under the symbol "MT." The following table sets forth, for the
periods shown, the high and low sales prices for the common shares (as reported
on the New York Stock Exchange Composite Tape) as adjusted for the La Quinta and
Cobblestone Golf Group Mergers:
2000 1999
------------------- -------------------
QUARTER HIGH LOW QUARTER HIGH LOW
- ------- -------- -------- ------- -------- --------
First................... $6.88 $1.88 First................... $16.25 $11.56
Second.................. $3.75 $1.88 Second.................. $14.19 $11.38
Third................... $3.56 $2.06 Third................... $13.00 $ 8.00
Fourth.................. $3.69 $2.31 Fourth.................. $ 8.50 $ 5.44
HOLDERS OF RECORD
There were approximately 11,984 holders of record of the Companies' paired
common shares as of March 28, 2001. Included in the number of shareholders of
record are paired common shares held in "nominee" or "street" name.
DIVIDENDS
Realty did not make any distributions on the paired common shares during the
fiscal year ended December 31, 2000.
Pursuant to the Code Section 857(b)(3)(C), for the year ended December 31,
1999, Realty designated the following cash distributions to holders of Realty
common shares as capital gains dividends, in the amounts set forth below:
NON-TAXABLE
DATE DATE OF PER SHARE ORDINARY 25% CAPITAL RETURN OF
DECLARED RECORD PAY DATE AMOUNT INCOME GAIN CAPITAL
- -------- --------- ---------- ---------- --------- ------------ ------------
14-Jan-99 29-Jan-99 16-Feb-99 $0.46000 $0.41544 $0.00130 $0.04326
14-Apr-99 30-Apr-99 14-May-99 0.46000 0.41544 0.00130 0.04326
12-Jul-99 30-Jul-99 16-Aug-99 0.46000 0.41544 0.00130 0.04326
15-Oct-99 29-Oct-99 15-Nov-99 0.46000 0.41544 0.00130 0.04326
-------- -------- -------- --------
Total $1.84000 $1.66176 $0.00520 $0.17304
======== ======== ======== ========
Percentage.... 100% 90.31% 0.28% 9.41%
Cash flows from operating activities available for distribution to
shareholders of Realty are derived primarily from the rental payments and
interest payments derived from its real estate investments. All distributions
are made by Realty at the discretion of the Board of Directors and will depend
on the earnings of Realty, its financial condition and such other factors as the
Directors deem relevant. In order to qualify for the beneficial tax treatment
accorded to REITs by Sections 856 to 860 of the Code, Realty is generally
required each year to distribute to its preferred and common shareholders at
least 95% (90% commencing in 2001) of its taxable income, excluding any net
capital gain.
29
SERIES A PREFERRED STOCK
MARKET INFORMATION
On June 10, 1998, Realty issued 7,000,000 depositary shares (the "Series A
Depositary Shares"). Each Series A Depositary Share represents one-tenth of a
share of 9% Series A Cumulative Redeemable Preferred Stock with a par value of
$0.10 per share ("Series A Preferred Stock"). The following table sets forth,
for the periods shown, the high and low sales prices for the shares:
2000 1999
------------------- -------------------
QUARTER HIGH LOW QUARTER HIGH LOW
- ------- -------- -------- ------- -------- --------
First.................. $14.69 $ 9.92 First.................. $22.31 $19.44
Second................. $13.63 $10.13 Second................. $22.25 $19.13
Third.................. $16.50 $12.88 Third.................. $21.44 $14.88
Fourth................. $15.88 $14.00 Fourth................. $15.63 $11.81
HOLDERS OF RECORD
There were approximately 225 holders of record of Realty's Series A
Depositary Shares as of March 28, 2001. Included in the number of holders of
record are Series A Depositary Shares held in "nominee" or "street" name.
DIVIDENDS
Pursuant to the Code Section 857(b)(3)(C), for the year ended December 31,
2000, Realty designates that the following cash distributions to its holders of
Series A Depositary Shares represent non-taxable returns of capital:
DATE OF PER SHARE NON-TAXABLE
DATE DECLARED RECORD PAY DATE AMOUNT RETURN OF CAPITAL
- ------------- ---------- ---------- ---------- -----------------
03-Mar-00 15-Mar-00 31-Mar-00 $ 0.56250 $ 0.56250
01-Jun-00 15-Jun-00 30-Jun-00 0.56250 0.56250
05-Sep-00 15-Sep-00 30-Sep-00 0.56250 0.56250
--------- ---------
Total $ 1.68750 $ 1.68750
========= =========
Percentage 100% 100%
On January 2, 2001, Realty paid dividends to holders of record on
December 15, 2000 on the 9% Series A Cumulative Redeemable Preferred Stock of
$0.5625 per share. Realty will designate the distributions depending on the
earnings of Realty for the year ended December 31, 2001.
Pursuant to the Code Section 857(b)(3)(C), for the year ended December 31,
1999, Realty designated the following cash distributions to its holders of
Series A Depositary Shares as capital gains dividends, in the amount set forth
below:
DATE DATE OF PER SHARE ORDINARY 25% CAPITAL
DECLARED RECORD PAY DATE AMOUNT INCOME GAIN
- -------- ---------- ---------- ---------- --------- ------------
05-Mar-99 15-Mar-99 31-Mar-99 $0.56250 $0.56075 $0.00175
01-Jun-99 15-Jun-99 30-Jun-99 0.56250 0.56075 0.00175
01-Sep-99 15-Sep-99 30-Sep-99 0.56250 0.56075 0.00175
03-Dec-99 15-Dec-99 31-Dec-99 0.56250 0.56075 0.00175
-------- -------- --------
Total $2.25000 $2.24300 $0.00700
======== ======== ========
Percentage 100% 99.69% 0.31%
30
ITEM 6. SELECTED FINANCIAL INFORMATION
The following data sets forth certain financial information for the
Companies, Realty and Operating. This information is based on and should be read
in conjunction with the information set forth under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and the notes thereto appearing elsewhere in this Joint Annual Report
on Form 10-K.
FOR THE MEDITRUST COMPANIES
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
2000 1999 1998 1997 1996
---------- --------- --------- --------- ---------
(IN THOUSANDS)
OPERATING DATA:
Revenue................................................. $ 822,838 $911,981 $ 639,377 $289,038 $254,024
Expenses:
Hotel operations...................................... 321,630 283,988 119,584 -- --
Depreciation and amortization......................... 150,138 135,853 87,228 26,838 21,651
Amortization of goodwill.............................. 22,755 21,470 13,265 2,349 1,556
Interest.............................................. 186,951 244,973 178,458 87,412 64,216
Rental property operations............................ 28,895 36,517 15,638 210
General and administrative............................ 49,985 32,826 27,098 10,257 8,625
Impairment of real estate assets...................... 183,698 63,170 63,954 -- --
Provision for loss on equity securities............... 50,279 -- -- -- --
Other................................................. 32,901 45,814 46,355 10 --
Loss (gain) on sale of assets and securities, net..... 130,536 (12,042) (48,483) -- --
---------- -------- --------- -------- --------
Total operating expenses............................ 1,157,768 852,569 503,097 127,076 96,048
---------- -------- --------- -------- --------
(Loss) income from continuing operations before income
taxes and extraordinary income........................ (334,930) 59,412 136,280 161,962 157,976
Income tax expense (benefit)............................ 629 -- (4,800) -- --
---------- -------- --------- -------- --------
(Loss) income from continuing operations................ (335,559) 59,412 141,080 161,962 157,976
Discontinued operations, net............................ -- 30,413 (294,227) 450 --
---------- -------- --------- -------- --------
Net (loss) income before extraordinary item............. (335,559) 89,825 (153,147) 162,412 157,976
Gain on early extinguishments of debt................... 1,403 -- -- -- --
---------- -------- --------- -------- --------
Net (loss) income....................................... (334,156) 89,825 (153,147) 162,412 157,976
Preferred stock dividends............................... (18,000) (16,283) (8,444) -- --
---------- -------- --------- -------- --------
Net (loss) income available to Paired Common
Shareholders.......................................... $ (352,156) $ 73,542 $(161,591) $162,412 $157,976
========== ======== ========= ======== ========
PER SHARE DATA:
Basic (loss) earnings per Paired Common Share:
(Loss) income from continuing operations................ $ (2.36) $ 0.41 $ 1.17 $ 2.13 $ 2.21
Discontinued operations, net............................ -- 0.22 (2.44) 0.01 --
---------- -------- --------- -------- --------
Net (loss) income before extraordinary item............. (2.36) 0.63 (1.27) 2.14 2.21
Gain on early extinguishments of debt................... 0.01 -- -- -- --
---------- -------- --------- -------- --------
Net (loss) income....................................... (2.35) 0.63 (1.27) 2.14 2.21
Preferred stock dividends............................... (0.13) (0.11) (0.07) -- --
---------- -------- --------- -------- --------
Net (loss) income available to Paired Common
Shareholders.......................................... $ (2.48) $ 0.52 $ (1.34) $ 2.14 $ 2.21
========== ======== ========= ======== ========
31
FOR THE MEDITRUST COMPANIES
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Diluted (loss) earnings per Paired Common Share:
(Loss) income from continuing operations.......... $ (2.36) $ 0.41 $ 1.12 $ 2.12 $ 2.20
Discontinued operations, net...................... -- 0.21 (2.35) -- --
----------- ----------- ----------- --------- ---------
Net (loss) income before extraordinary item....... (2.36) 0.62 (1.23) 2.12 2.20
Gain on early extinguishments of debt............. 0.01 -- -- -- --
----------- ----------- ----------- --------- ---------
Net (loss) income................................. (2.35) 0.62 (1.23) 2.12 2.20
Preferred stock dividends......................... (0.13) (0.11) (0.06) -- --
----------- ----------- ----------- --------- ---------
Net (loss) income available to Paired Common
shareholders.................................... $ (2.48) $ 0.51 $ (1.29) $ 2.12 $ 2.20
=========== =========== =========== ========= =========
Weighted average shares outstanding:
Basic............................................. 141,854 142,783 120,515 76,070 71,445
Diluted........................................... 141,854 142,907 125,508 76,524 71,751
Distributions paid................................ $ -- $ 1.84 $ 3.34 $ 2.38 $ 2.31
Cash Flow Data:
Cash provided by operating activities............. $ 220,711 $ 230,178 $ 176,171 $ 184,412 $ 188,551
Cash provided by (used in) investing activities... 832,534 575,948 (1,104,060) (571,325) (437,150)
Cash (used in) provided by financing activities... (1,021,472) (1,104,362) 1,189,613 387,919 247,077
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
2000 1999 1998 (B) 1997 (B) 1996 (B)
----------- ----------- ----------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
EBITDA by Segment (a)
Lodging........................................... 222,022 274,549 122,888 -- --
Healthcare........................................ 197,881 281,388 318,182 278,571 245,399
Other............................................. 2,425 963 -- -- --
----------- ----------- ----------- --------- ---------
Total EBITDA...................................... $ 422,328 $ 556,900 $ 441,070 $ 278,571 $ 245,399
=========== =========== =========== ========= =========
- ------------------------------
(a) EBITDA is defined as income from continuing operations plus interest, income
taxes, depreciation and amortization; adjusted for loss or gain on sale of
assets, other income, impairment provisions, provision for loss on equity
securities and other expenses.
(b) Financial results for 1996 and 1997 do not include results from La Quinta.
Financial results for 1998 include La Quinta results for the period from the
date of the La Quinta Merger, July 17, through December 31.
DECEMBER 31,
--------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Real estate investments, net...................... $3,352,676 $4,672,659 $5,086,736 $2,935,772 $2,188,078
Total assets...................................... 4,093,147 5,467,757 6,459,551 3,280,283 2,316,875
Indebtedness...................................... 1,590,459 2,597,438 3,301,722 1,377,438 858,760
Total liabilities................................. 1,770,336 2,794,544 3,508,623 1,454,544 931,934
Total shareholders' equity........................ 2,322,811 2,673,213 2,950,928 1,825,739 1,384,941
32
FOR MEDITRUST CORPORATION
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
OPERATING DATA:
Revenue.................................................. $ 522,089 $608,166 $ 518,872 $289,119 $254,024
Expenses:
Hotel operations....................................... 5,377 4,723 2,060 -- --
Depreciation and amortization.......................... 135,414 128,642 84,327 26,838 21,651
Amortization of goodwill............................... 21,977 20,723 12,505 2,214 1,556
Interest............................................... 186,457 246,413 178,374 87,412 64,216
Rental property operations............................. 28,895 36,517 15,638 210 --
General and administrative............................. 19,017 13,968 18,374 10,111 8,625
Impairment of real estate assets....................... 183,698 63,170 63,954 -- --
Provision for loss on equity securities................ 50,279 -- -- -- --
Other.................................................. 32,901 16,138 31,192 10 --
Loss (gain) on sale of assets and securities, net...... 131,513 (12,042) (48,483) -- --
--------- -------- --------- -------- --------
Total operating expenses............................. 795,528 518,252 357,941 126,795 96,048
--------- -------- --------- -------- --------
(Loss) income from continuing operations before income
taxes and discontinued operations...................... (273,439) 89,914 160,931 162,324 157,976
Income tax expense....................................... 629 -- -- -- --
--------- -------- --------- -------- --------
(Loss) income from continuing operations................. (274,068) 89,914 160,931 162,324 157,976
Discontinued operations, net............................. -- 40,216 (295,875) 688 --
--------- -------- --------- -------- --------
Net (loss) income before extraordinary item.............. (274,068) 130,130 (134,944) 163,012 157,976
Gain on early extinguishments of debt.................... 1,403 -- -- -- --
--------- -------- --------- -------- --------
Net (loss) income........................................ (272,665) 130,130 (134,944) 163,012 157,976
Preferred stock dividends................................ (18,000) (16,283) (8,444) -- --
--------- -------- --------- -------- --------
Net (loss) income available to Paired Common
Shareholders........................................... $(290,665) $113,847 $(143,388) $163,012 $157,976
========= ======== ========= ======== ========
PER SHARE DATA:
Basic (loss) earnings per Paired Common Share:
(Loss) income from continuing operations................. $ (1.91) $ 0.62 $ 1.32 $ 2.13 $ 2.21
Discontinued operations, net............................. -- 0.28 (2.43) 0.01 --
--------- -------- --------- -------- --------
Net (loss) income before extraordinary item.............. (1.91) 0.90 (1.11) 2.14 2.21
Gain on early extinguishments of debt.................... 0.01 -- -- -- --
--------- -------- --------- -------- --------
Net (loss) income........................................ (1.90) 0.90 (1.11) 2.14 2.21
Preferred stock dividends................................ (0.13) (0.11) (0.07) -- --
--------- -------- --------- -------- --------
Net (loss) income available to Paired Common
Shareholders........................................... $ (2.03) $ 0.79 $ (1.18) $ 2.14 $ 2.21
========= ======== ========= ======== ========
33
FOR MEDITRUST CORPORATION
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Diluted (loss) earnings per Paired Common Share
(Loss) income from continuing operations.......... $ (1.91) $ 0.62 $ 1.27 $ 2.11 $ 2.20
Discontinued operations, net...................... -- 0.28 (2.33) 0.01 --
----------- ----------- ----------- --------- ---------
Net (loss) income before extraordinary item....... (1.91) 0.90 (1.06) 2.12 2.20
Gain on early extinguishments of debt............. 0.01 -- -- -- --
----------- ----------- ----------- --------- ---------
Net (loss) income................................. (1.90) 0.90 (1.06) 2.12 2.20
Preferred stock dividends......................... (0.13) (0.11) (0.07) -- --
----------- ----------- ----------- --------- ---------
Net (loss) income available to Paired Common
shareholders.................................... $ (2.03) $ 0.79 $ (1.13) $ 2.12 $ 2.20
=========== =========== =========== ========= =========
Weighted average shares outstanding:
Basic............................................. 143,159 144,088 121,820 76,274 71,445
Diluted........................................... 143,159 144,212 126,813 77,007 71,751
Distributions paid................................ $ -- $ 1.84 $ 3.34 $ 2.38 $ 2.31
Cash Flow Data:
Cash provided by operating activities............. $ 232,329 $ 260,414 $ 187,606 $ 185,195 $ 188,551
Cash provided by (used in) investing activities... 832,695 550,858 (1,128,412) (580,560) (437,150)
Cash (used in) provided by financing activities... (1,031,812) (1,098,187) 1,209,441 376,698 247,077
DECEMBER 31,
--------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Real estate investments, net...................... $3,333,168 $4,652,631 $5,067,217 $2,935,772 $2,188,078
Total assets...................................... 4,066,592 5,375,049 6,320,985 3,215,928 2,316,875
Indebtedness...................................... 1,590,459 2,597,438 3,301,722 1,377,438 858,760
Total liabilities................................. 1,701,004 2,737,271 3,447,632 1,423,688 931,934
Total shareholders' equity........................ 2,365,588 2,637,778 2,873,353 1,792,240 1,384,941
34
FOR MEDITRUST OPERATING COMPANY
INITIAL PERIOD
ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31,
--------------------------------- --------------
2000 1999 1998 1997
--------- --------- --------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
OPERATING DATA:
Revenue........................................ $600,410 $595,896 $253,249 $ 48
Expenses:
Hotel operations............................. 316,253 279,265 117,524 --
Depreciation and amortization................ 14,724 7,211 2,901 --
Amortization of goodwill..................... 778 747 760 135
Interest..................................... 494 273 84 129
Interest to Meditrust Corporation............ 616 -- 712 --
General and administrative................... 30,968 18,858 8,724 146
Royalty to Meditrust Corporation............. 20,666 16,350 6,326 --
Rent to Meditrust Corporation................ 278,379 274,018 125,706 --
Other........................................ -- 29,676 15,163 --
Gain on sale of assets....................... (977) -- -- --
-------- -------- -------- --------
Total operating expenses....................... 661,901 626,398 277,900 410
-------- -------- -------- --------
Loss from continuing operations before benefit
of income taxes.............................. (61,491) (30,502) (24,651) (362)
Income tax benefit............................. -- -- (4,800) --
-------- -------- -------- --------
Loss from continuing operations................ (61,491) (30,502) (19,851) (362)
Discontinued operations........................ -- (9,803) 1,648 (238)
-------- -------- -------- --------
Net loss....................................... $(61,491) $(40,305) $(18,203) $ (600)
======== ======== ======== ========
PER SHARE DATA:
Basic loss per common share:
Loss from continuing operations................ $ (0.43) $ (0.21) $ (0.16) $ (0.01)
Discontinued operations, net................... -- (0.07) 0.01 --
-------- -------- -------- --------
Net loss....................................... $ (0.43) $ (0.28) $ (0.15) $ (0.01)
======== ======== ======== ========
Diluted loss per common share:
Loss from continuing operations................ $ (0.43) $ (0.21) $ (0.16) $ (0.01)
Discontinued operations, net................... -- (0.07) 0.01 --
-------- -------- -------- --------
Net loss....................................... $ (0.43) $ (0.28) $ (0.15) $ (0.01)
======== ======== ======== ========
Weighted average shares outstanding
Basic.......................................... 141,854 142,783 120,515 82,490
Diluted........................................ 141,854 142,907 120,515 82,490
-------- -------- -------- --------
Cash Flow Data:
Cash used in operating activities.............. $(11,618) $(30,236) $(11,435) $ (783)
Cash (used in) provided by investing
activities................................... (161) 25,090 24,352 (34,427)
Cash provided by (used in) financing
activities................................... 10,340 (6,175) (19,828) 54,883
DECEMBER 31,
---------------------------------------------
2000 1999 1998 1997
--------- --------- --------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
Total assets..................................... $155,582 $160,814 $198,190 $120,426
Total liabilities................................ 160,527 125,221 119,683 63,338
Total shareholders' equity....................... (4,945) 35,593 78,507 57,088
35
ITEM 7. 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 ABILITY OF THE COMPANIES TO REFINANCE AND/OR PAY
OFF NEAR TERM DEBT MATURITIES, 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, IF ANY, DESCRIBED IN THIS JOINT
ANNUAL REPORT ON FORM 10-K, 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 SECURITIES AND EXCHANGE
COMMISSION ("SEC"), INCLUDING, WITHOUT LIMITATION, THOSE RISKS DESCRIBED IN THE
SECTION OF THIS JOINT ANNUAL REPORT ON FORM 10-K ENTITLED "CERTAIN FACTORS YOU
SHOULD CONSIDER" BEGINNING ON PAGE 63 HEREOF.
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.
GENERAL
In 1997, Meditrust, a Massachusetts business trust ("Meditrust's
Predecessor"), merged with Santa Anita Realty Enterprises, Inc., with Santa
Anita Realty Enterprises, Inc. as the surviving corporation and Meditrust
Acquisition Company merged with Santa Anita Operating Company, with Santa Anita
Operating Company as the surviving corporation (hereafter referred to as the
"Santa Anita Merger"). Upon completion of these mergers, Santa Anita Realty
Enterprises, Inc. changed its corporate name to "Meditrust Corporation" and
Santa Anita Operating Company changed its corporate name to "Meditrust Operating
Company". During early 1998 and after completion of the Santa Anita Merger, the
Companies began pursuing a strategy of diversification into additional new
businesses which culminated in mergers with La Quinta Inns, Inc. (the "La Quinta
Merger"), a lodging company and Cobblestone Holdings, Inc., a golf course
company (the "Cobblestone Merger").
Federal legislation adopted in July 1998 limited benefits attributable to
future use of the paired share structure. In addition, during the summer of 1998
and thereafter, the debt and equity markets available to REITs generally and
healthcare and lodging REITs specifically, deteriorated, thus limiting the
Companies' access to cost efficient capital. As a result, during the latter part
of 1998 and throughout 1999 the Companies implemented a comprehensive
restructuring plan (the "1998 Plan") designed to strengthen the Companies'
financial position and clarify its investment and operating strategy whereby the
Companies sold over $1.4 billion in assets (including the Cobblestone Golf
Group, the Santa Anita
36
Racetrack) and $820 million of healthcare properties as well as repaid over
$625 million in debt and fully settled the Companies' forward equity issuance
transaction ("FEIT") with certain affiliates of Merrill Lynch & Co.
During 2000, the Companies implemented a five point plan of reorganization
(the "Five Point Plan") intended to further strengthen the position of the
Companies and focus on the lodging division. Consistent with certain components
of the Five Point Plan which called for, among other things, an orderly
disposition of a significant portion of healthcare assets and substantial
reduction in debt, the Companies completed healthcare asset sales and received
mortgage repayments totaling approximately $1.0 billion during 2000 and have
applied substantially all of the proceeds toward reduction of total indebtedness
of $2.6 billion as of December 31, 1999 to $1.6 billion as of December 31, 2000.
After transactions completed through December 31, 2000, the net book value of
the Companies' remaining healthcare assets is $904,285,000.
Also, consistent with the Companies' plan to focus on the lodging division,
the Companies have made certain changes in its executive management team and
have transitioned the financial and legal functions of its healthcare operations
from the Needham, Massachusetts office and intend to consolidate the remaining
healthcare operations in Irving, Texas by December 31, 2002.
On April 17, 2000, Francis W. ("Butch") Cash joined the Companies as
President and Chief Executive Officer. In addition, in June 2000 the Companies
appointed David L. Rea as Chief Financial Officer of Operating and in May 2000
Stephen L. Parker was appointed as Senior Vice President of Marketing. As part
of the initiation of a franchise program for the La Quinta brand, the Companies
appointed Allan L. Tallis as Executive Vice President and Chief Development
Officer.
In 2001, the Companies will continue to focus on selling healthcare assets,
deleveraging the balance sheet and improving lodging results. Part of the
Companies' strategy for improving lodging results will be growth of fee-based
income through implementation of a franchising program. At March 28, 2001, the
Companies had 29 approved franchise contracts.
THE MEDITRUST COMPANIES--COMBINED RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000 AND 1999
The Companies earn revenue by (i) owning and operating 229 La Quinta Inns
and 70 La Quinta Inn & Suites; (ii) leasing 163 healthcare facilities under
long-term triple net leases in which the rental rate is generally fixed with
annual escalators and (iii) providing mortgage financing for 36 healthcare
facilities in which the interest is generally fixed with annual escalators
subject to certain conditions. For the year ended December 31, 2000, the
Companies reported a net loss available to paired common shareholders of
$352,156,000 or $2.48 per diluted share compared to net income of $73,542,000 or
$0.51 per diluted common share for 1999.
COMBINED RESULTS OF SEGMENT OPERATIONS
The Companies' operations are managed as two major segments: lodging and
healthcare. The following table summarizes contribution by operating segment for
the years ended December 31, 2000 and 1999. The Companies consider contributions
from each operating segment to include revenue from each business, less
operating expenses, rental property operating expenses and general and
37
administrative expenses. Certain income or expenses of a non-recurring or
unusual nature are not included in the operating segment contribution.
SUMMARY OF OPERATIONS
YEAR ENDED
DECEMBER 31,
---------------------
2000 1999
--------- ---------
(IN THOUSANDS)
Revenue:
Lodging......................................... $594,967 $602,045
Healthcare...................................... 211,293 303,654
Other........................................... 16,578 4,532
-------- --------
Total revenue..................................... 822,838 910,231
-------- --------
Operating expenses:
Lodging......................................... 372,945 327,496
Healthcare...................................... 13,412 22,266
Other........................................... 14,153 3,569
-------- --------
Total operating expenses.......................... 400,510 353,331
-------- --------
Contributions:
Lodging, net.................................... 222,022 274,549
Healthcare, net................................. 197,881 281,388
Other........................................... 2,425 963
-------- --------
Total contributions............................... $422,328 $556,900
======== ========
The combined contribution from operating segments for the year ended
December 31, 2000 was $422,328,000, compared to $556,900,000 for the year ended
December 31, 1999. This represents a decrease of $134,572,000 or 24.2%. The
decline in the combined contribution is the result of the sale of certain
healthcare assets and weak operating performance in the lodging segment. The
contribution is comprised of revenues of $822,838,000 and $910,231,000 combined
with operating expenses of $400,510,000 and $353,331,000 for the years ended
December 31, 2000 and 1999, respectively.
Lodging provided a contribution of $222,022,000 for the year ended
December 31, 2000, a decrease of $52,527,000 or 19.1% from the prior year.
Lodging operations were negatively impacted during the year ended December 31,
2000 by a number of company-specific issues as well as industry conditions (as
noted below). Management has and is continuing to address many of the company-
specific issues in an effort to improve future results. These actions include
the hiring of a new management team, changing operating and pricing policies,
reviewing information system capabilities and expanding business strategies to
encompass a franchise program. Lodging contribution was comprised of revenues of
$594,967,000 and $602,045,000 offset by operating expenses of $372,945,000 and
$327,496,000 for the years ended December 31, 2000 and 1999, respectively. The
decrease in lodging contribution is primarily due to a decline in occupancy
which resulted in a decrease in inn revenues and an increase in incremental
hotel operating and general and administrative expenses, as more fully described
below, as well as the impact of an oversupply of available rooms within the
Companies' markets.
38
The following table summarizes statistical lodging data for the years ended
December 31, 2000 and 1999 for Inns, Inn & Suites, Total Company and Inn &
Suites (Comparable Hotels):
INNS INN & SUITES TOTAL COMPANY
------------------- ------------------- -------------------
2000 1999 2000 1999 2000 1999
-------- -------- -------- -------- -------- --------
Number of Hotels................. 229 232 70 70 299 302
Occupancy Percentage............. 62.6% 66.3% 66.2% 67.7% 63.4% 66.6%
ADR(1)........................... $ 58.78 $ 58.14 $74.40 $70.95 $ 62.62 $ 61.02
RevPAR(2)........................ $ 36.78 $ 38.54 $49.29 $48.01 $ 39.73 $ 40.64
Available Rooms(4)............... 10,898 10,941 3,358 3,118 14,256 14,059
Comparable Hotels(3)
Inn & Suites
Number of Hotels................. 69 69
Occupancy Percentage............. 66.5% 68.0%
ADR(1)........................... $73.27 $70.84
RevPAR(2)........................ $48.69 $48.21
Available Rooms(4)............... 2,934 2,929
- ------------------------
(1) Represents average daily rate
(2) Represents revenue per available room
(3) Represents Inn & Suites open for more than one year
(4) Available room count in thousands
Hotel operating revenues are generally measured as a function of average
daily rate ("ADR") and occupancy. The ADR increased to $62.62 in 2000 from
$61.02 in 1999, an increase of $1.60 or 2.6%. The occupancy percentage decreased
3.2 percentage points to 63.4% in 2000 from 66.6% for 1999. Revenue per
available room ("RevPAR"), which is the product of occupancy percentage and ADR,
decreased 2.2% to $39.73 in 2000 from $40.64 in 1999. The decrease in RevPAR is
partially due to a greater increase in the supply of available rooms than in
demand in the region and segment of the lodging industry in which La Quinta
operates. Other factors that significantly impacted La Quinta's operations
during the year include certain decisions made by La Quinta in 1999 related to
pricing, the centralization of senior field operations personnel, the relocation
of its headquarters from San Antonio, Texas to Irving, Texas coupled with the
continuing disruptive impact of the new property management system and vacancies
in several senior management positions for the first half of 2000. Hotel segment
expenses increased $45,449,000 and included increases in operating expenses of
$30,200,000, rental property operating expenses of $1,054,000 and general &
administrative expenses of $14,195,000. These increases were caused by increases
in salary and wage rates and related benefits, an increase in sales expenses, an
increase in hotel repair and maintenance expense, expenses associated with the
implementation of the new property management system, increase in bad debt
expense, severance and employment related expenses, increase in franchise tax
expense and certain other incremental expense. Rental property operating costs
attributed to the lodging segment principally consist of property taxes on hotel
facilities. 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 certain
allocated corporate expenses, such as the costs of general management, training
and field supervision of hotel managers and other sales, marketing and
administrative expenses.
Healthcare provided a contribution of $197,881,000, a decrease of
$83,507,000 or 29.7% from the prior year. The decrease in contribution was the
result of the sale of certain healthcare assets and repayment of healthcare
mortgages made during fiscal year 2000. The healthcare contribution was
comprised of revenues of $211,293,000 and $303,654,000 and operating expenses of
$13,412,000 and
39
$22,266,000 for the year ended December 31, 2000 and 1999, respectively. Of
these amounts, revenues of $132,433,000 pertain to healthcare assets remaining
in the Companies' portfolio at December 31, 2000.
The following table summarizes the healthcare portfolio by type of facility
as of December 31, 2000 and 1999:
AS OF DECEMBER 31,
--------------------------------------------------
2000 1999
----------------------- -----------------------
TYPE OF FACILITY FACILITIES BEDS/UNITS FACILITIES BEDS/UNITS
- ---------------- ---------- ---------- ---------- ----------
Assisted Living.................................. 94 4,457 117 6,355
Long-Term Care................................... 93 11,604 198 25,726
Medical Office Buildings......................... 5 -- 34 --
Acute Care Hospital.............................. 1 492 1 492
Other Healthcare................................. 6 625 6 625
--- ------ --- ------
199 17,178 356 33,198
=== ====== === ======
The Companies had a remaining net investment of $222,571,000 and
$1,059,920,000 in the form of mortgages outstanding to operators of 36 and 151
of the facilities listed above as of December 31, 2000 and 1999, respectively.
The Companies had a remaining net investment of $681,714,000 and $1,090,586,000
in the form of leases with operators of 163 and 205 of the facilities listed
above at December 31, 2000 and 1999, respectively.
The decreases in healthcare revenues and operating expenses are 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. Healthcare segment expenses decreased $8,854,000 and included
decreases in rental property operating expenses of $8,676,000 and decreases in
general & administrative expenses of $178,000. Rental property operating
expenses consist principally of expenses for the management and operation of
medical office buildings. The decrease in rental property operating expense was
primarily due to the sale of substantially all of the Companies' medical office
buildings in January 2000.
TeleMatrix, a provider of telephones, software and equipment for the lodging
industry, contributed $2,425,000 for the year ended December 31, 2000. This
contribution was comprised of revenues of $16,578,000 and expenses of
$14,153,000 for the year ended December 31, 2000. TeleMatrix expenses include
operating expenses of $10,006,000 and general and administrative expenses of
$4,147,000. Operations of TeleMatrix have been included in lodging revenue and
expense categories of the combined and consolidated statements since
consummation of the acquisition in October 1999 and are separately disclosed as
"Other contribution" in Note 21 "Segment Reporting" of the combined and
consolidated statements.
INTEREST EXPENSE
For the year ended December 31, 2000, interest expense was $186,951,000,
compared to $244,973,000 for the year ended December 31, 1999. The $58,022,000
decrease in interest expense is primarily attributable to the reduction of total
indebtedness of the Companies as a result of application of substantially all
proceeds generated from various healthcare asset sales and mortgage repayments
over the past year.
40
REAL ESTATE INVESTMENTS, DEPRECIATION, ASSET SALES AND PROVISION FOR IMPAIRMENT
OF REAL ESTATE ASSETS
As of December 31, 2000 and 1999, the Companies had net investments in real
estate as summarized in the table below:
YEAR ENDED DECEMBER 31,
-------------------------
2000 1999
----------- -----------
(IN THOUSANDS)
INVESTMENT IN REAL ESTATE ASSETS, NET
LODGING
Lodging assets net book value, beginning of period.......... $2,522,153 $2,556,009
Capital improvements...................................... 36,092 65,888
Other..................................................... -- (8,059)
Write-offs................................................ (13,399) (8)
Net book value of assets sold............................. (3,610) (3,504)
Depreciation expense and loss on early retirement......... (92,845) (88,173)
---------- ----------
TOTAL INVESTMENT IN LODGING ASSETS, NET..................... 2,448,391 2,522,153
---------- ----------
HEALTHCARE
Mortgage assets net book value, beginning of period......... 1,059,920 1,197,634
Principal payments........................................ (6,795) (9,777)
Construction loan funding................................. 161 33,321
Partial principal prepayments............................. (1,586) (5,869)
Provisions for loss on mortgages.......................... (83,633) (14,826)
Net book value of mortgages repaid........................ (761,902) (142,396)
Other adjustments to mortgages............................ 16,406 1,833
---------- ----------
Mortgage assets net book value, end of period............... 222,571 1,059,920
---------- ----------
Sale/lease-back assets net book value, beginning of
period.................................................... 1,090,586 1,333,093
Construction funding...................................... 4,039 38,312
Depreciation expense...................................... (24,117) (35,779)
Provisions for loss on assets held for sale............... (75,479) (48,344)
Provisions for loss on assets held for use................ (24,586) --
Net book value of real estate assets sold................. (285,751) (206,174)
Other adjustments to real estate investments.............. (2,978) 9,478
---------- ----------
Sale/lease back assets net book value, end of period........ 681,714 1,090,586
---------- ----------
TOTAL INVESTMENT IN HEALTHCARE REAL ESTATE ASSETS, NET...... 904,285 2,150,506
---------- ----------
TOTAL REAL ESTATE INVESTMENT, NET BOOK VALUE................ $3,352,676 $4,672,659
========== ==========
DEPRECIATION AND AMORTIZATION
Depreciation and amortization for the years ended December 31, 2000 and 1999
were $172,893,000 and $157,323,000, respectively. The increase of $15,570,000
was primarily the result of incremental depreciation on the new lodging property
management systems, accelerated depreciation and amortization related to the
existing hotel reservation system, hotel properties put into service during the
year ended December 31, 1999 and the write-off and write-down of certain hotel
buildings. These increases were partially offset by a decrease in depreciation
from the sale of certain healthcare assets.
ASSET SALES
During the year ended December 31, 2000, the Companies realized a loss of
$130,536,000 related to the sale of certain healthcare assets and mortgage
repayments which yielded net proceeds of $947,973,000. The losses relate
primarily to the early repayment of mortgages by one operator who
41
offered in August to prepay substantially all of its mortgages at a discount. In
addition, the Companies had previously recorded a loss provision for mortgages
of $46,149,000 and a loss provision for assets held for sale of $63,149,000,
related to asset sales and mortgage repayments completed during the year ended
December 31, 2000. During the year ended December 31, 1999, the Companies
realized gains on the sale of assets of $12,042,000.
PROVISION FOR IMPAIRMENT OF REAL ESTATE ASSETS
During the year ended December 31, 2000, the Companies recorded charges of
$183,698,000 related to provisions for anticipated losses on properties
classified as assets held for sale, provisions on assets held for use and
provisions for losses on mortgage loan receivables.
PROVISION FOR LOSS ON EQUITY SECURITIES
The Companies had investments in certain equity securities as described
below. During the year ended December 31, 2000, the market value of those
investments significantly decreased below the Companies' initial cost. In
accordance with Financial Accounting Standard Board Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
No. 115"), the Companies are 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 of over six months
and the decline is in excess of 20% of cost.
The Companies had an investment in Nursing Home Properties Plc ("NHP Plc"),
a property investment group that specializes in the financing, through
sale/leaseback transactions, of nursing homes located in the United Kingdom. The
investment included approximately 26,606,000 shares of NHP Plc, representing an
ownership interest in NHP Plc of 19.99% of which Realty had voting rights with
respect to 9.99%. During 2000, the Companies determined the decline in value of
these investments was other-than-temporary and, therefore, adjusted their cost
basis to current market value at December 31, 2000. For reasons described above,
the Companies adjusted the cost basis of its investment in NHP Plc to fair value
by recording a charge to earnings of $49,445,000 based on the difference between
the Companies' cost of $57,204,000 and the market value as of December 31, 2000
of $7,759,000. On January 22, 2001, the Companies sold their investment in
NHP Plc for net proceeds of $7,737,000 and recorded a charge to earnings of
$22,000 in the 2001 financial statements.
As of December 31, 2000, Realty owned 1,081,000 shares of stock in Balanced
Care Corporation ("BCC"), a healthcare operator. The stock had a market value of
$271,000 at December 31, 2000. The difference between current market value and
$1,105,000, the cost of the BCC investment, was recorded as a charge to earnings
of $834,000 during 2000 because the decrease was determined to be
other-than-temporary.
OTHER EXPENSES
During the year ended December 31, 2000, the Companies recorded
approximately $32,901,000 in other expenses related to the items described
below.
In January 2000, the Companies executed a separation and consulting
agreement with the former Chief Executive Officer, President and Treasurer of
Realty, pursuant to which Realty made a cash payment of approximately $9,460,000
(including consulting fees), converted 155,000 restricted paired common shares
into unrestricted paired common shares (which resulted in approximately
$2,461,000 of accelerated amortization of unearned compensation) and continued
certain medical, dental and other benefits.
Also in January 2000, the Companies announced that the Meditrust corporate
headquarters would be moved to Irving, Texas and that changes would be made to
the management team. As a result, in June 2000, the Boards approved a plan to
reduce the number of employees (including four officers) by
42
14 as of December 31, 2000. The reduction was primarily in the financial and
legal groups of the Companies' Needham, Massachusetts offices. Accordingly,
during the year ended December 31, 2000, the Companies recorded $14,451,000 for
severance related expenses 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 Irving, Texas by
December 31, 2002. As part of the plan to close the Needham office, additional
severance and other payments are expected in the future.
During the year ended December 31, 2000, the Companies recorded provisions
and other expenses of approximately $5,146,000 on receivables related to working
capital and other receivables management considers uncollectable. The Companies
also recorded approximately $2,060,000 of bad debt recoveries during the year
ended December 31, 2000 related to receivables written off in prior years.
During the year ended December 31, 2000, the Companies recorded a charge of
approximately $3,142,000 related to accelerated amortization of debt issuance
costs and certain other expenses associated with the early repayment of debt and
the reduction of the Companies' Credit Facility.
The Companies also incurred approximately $301,000 of professional fees
during the year ended December 31, 2000 related to implementation of the Five
Point Plan.
During the year ended December 31, 1999, the Companies recorded provisions
and other expenses of approximately $45,814,000 comprised of $25,000,000 in
severance payments related to a separation agreement with the former Director
and Chairman of the Companies and the Chief Executive Officer and Treasurer of
Operating, certain non-recurring costs of $12,210,000 associated with
development and implementation of the 1998 Plan (including costs related to the
early repayment and modification of certain debt, employee severance and other
advisory fees), provisions for rent receivables of approximately $4,606,000 and
a charge related to the abandonment of an information system under development
within the Companies' lodging division of approximately $3,998,000.
DISCONTINUED OPERATIONS
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 have reflected the financial results for
1999 and 1998 of Santa Anita and Cobblestone as discontinued operations. During
1999, the Companies adjusted the provision for loss on disposal of the
Cobblestone Golf Group by recording a gain of approximately $27,452,000, which
included the final working capital purchase price adjustment, cost of sale
adjustments and a revision of the estimated income tax provision for the
disposal. In addition, the Companies recorded $2,961,000 as final working
capital purchase price adjustments and differences to estimated costs of sale of
the Santa Anita Racetrack.
EXTRAORDINARY ITEM
During the year ended December 31, 2000, the Companies retired $58,496,000
of debt prior to its maturity (excluding bank related debt) 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.
THE MEDITRUST COMPANIES--COMBINED RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
COMBINED RESULTS OF SEGMENT OPERATIONS
The following table summarizes contribution by operating segment for the
years ended December 31, 1999 and 1998. The Companies consider contributions
from each operating segment to include revenue from each business, less
operating expenses, rental property operating expenses and
43
general and administrative expenses. Certain income or expenses of a
non-recurring or unusual nature are not included in the operating segment
contribution.
SUMMARY OF OPERATIONS
YEAR ENDED
DECEMBER 31,
---------------------
1999 1998
--------- ---------
(IN THOUSANDS)
Revenue:
Lodging......................................... $602,045 $258,423
Healthcare...................................... 303,654 344,967
Other........................................... 4,532 --
-------- --------
Total revenue..................................... 910,231 603,390
-------- --------
Operating expenses:
Lodging......................................... 327,496 135,535
Healthcare...................................... 22,266 26,785
Other........................................... 3,569 --
-------- --------
Total operating expenses.......................... 353,331 162,320
-------- --------
Contributions:
Lodging, net.................................... 274,549 122,888
Healthcare, net................................. 281,388 318,182
Other, net...................................... 963 --
-------- --------
Total contributions............................... $556,900 $441,070
======== ========
The combined contribution from operating segments for the year ended
December 31, 1999 was $556,900,000, compared to $441,070,000 for the year ended
December 31, 1998. This represents an increase of $115,830,000 or 26.3%. The
contribution is comprised of revenues of $910,231,000 and $603,390,000 combined
with operating expenses of $353,331,000 and $162,320,000 for the years ended
December 31, 1999 and 1998, respectively.
Lodging provided a contribution of $274,549,000, an increase of $151,661,000
or 123.4% from the comparable prior year period. The lodging contribution
increase was attributable to the increase in hotel operating revenues resulting
from twelve months of hotel operations in 1999 compared to the five and one-half
month post-acquisition period ended December 31, 1998. Lodging contribution was
comprised of revenues of $602,045,000 and $258,423,000 offset by operating
expenses of $327,496,000 and $135,535,000 for the years ended December 31, 1999
and 1998, respectively.
44
The following table summarizes statistical data for the years ended
December 31, 1999 and 1998 for Inns, Inn & Suites, Total Company and Inn &
Suites (Comparable Hotels):
INNS INN & SUITES TOTAL COMPANY
------------------- ------------------- -------------------
1999 1998 1999 1998 1999 1998
-------- -------- -------- -------- -------- --------
Number of Hotels...................... 232 233 70 57 302 290
Occupancy Percentage.................. 66.3% 69.0% 67.7% 67.1% 66.6% 68.7%
ADR(1)................................ $58.14 $58.45 $70.95 $70.00 $61.02 $60.25
RevPAR(2)............................. $38.54 $40.30 $48.01 $46.95 $40.64 $41.36
Available Rooms(4).................... 10,941 10,984 3,118 2,088 14,059 13,072
Comparable Hotels(3)
Inn & Suites
Number of Hotels...................... 50 50
Occupancy Percentage.................. 67.8% 68.1%
ADR(1)................................ $70.00 $69.80
RevPAR(2)............................. $47.49 $47.55
Available Rooms(4).................... 1,863 1,862
- ------------------------
(1) Represents average daily rate
(2) Represents revenue per available room
(3) Represents Inn & Suites open for more than one year
(4) Average room count in thousands
Hotel operating revenues generally are measured as a function of ADR and
occupancy. The ADR increased to $61.02 in 1999 from $60.25 in the calendar year
1998, an increase of $0.77 or 1.3%. Occupancy decreased 2.1 percentage points to
66.6% in 1999 from 68.7% for the twelve months ended 1998. RevPAR, which is the
product of occupancy percentage and ADR, decreased 1.7% when compared to the
year 1998. The decrease in RevPAR is in part due to a greater increase in the
supply of available rooms than in demand in the region and segment of the
lodging industry in which La Quinta operates. The relationship between supply
and demand varies by region and it affected La Quinta to a greater extent than
its competitors due to its concentration of hotels in the southwest. 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. Other factors contributing to the decrease in RevPAR included the
disruptive impact of the property management system introduced in 1999, the
reorganization of the operations and the sales organizations during the third
quarter and certain pricing decisions that adversely impacted RevPAR.
Healthcare provided a contribution of $281,388,000 for the year ended
December 31, 1999, a decrease of $36,794,000 or 11.6% compared to the year ended
December 31, 1998. The decrease in contribution was the result of the sale of
healthcare assets and repayment of healthcare mortgages made during the twelve
months ended December 31, 1999. The healthcare contribution was comprised of
revenues of $303,654,000 and $344,967,000 and operating expenses of $22,266,000
and $26,785,000 for the year ended December 31, 1999 and 1998, respectively.
In October 1999, the lodging segment acquired TeleMatrix, a provider of
telephone software and equipment for the lodging industry. TeleMatrix provided
revenues and a contribution of $4,532,000 and $963,000, respectively, for the
three-month post-acquisition period ended December 31, 1999.
45
INTEREST EXPENSE
Interest expense increased by $66,515,000 as a result of increases in the
borrowing rate and debt arising from the acquisitions of La Quinta and
Cobblestone, net of amounts repaid from various asset sales made during 1999.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization for the years ended December 31, 1999 and 1998
were $157,323,000 and $100,493,000, respectively. The increase of $56,830,000
was attributable to the twelve months of hotel operations in 1999 compared to
the five and one-half month post-acquisition period ended December 31, 1998.
ASSET SALES
During the year ended December 31, 1999, the Companies realized gains on the
sale of healthcare related real estate assets of $12,042,000. Sales of
healthcare properties included 40 assisted living facilities, three long-term
care facilities, one rehabilitation facility and one alcohol and substance abuse
treatment facility. The Companies also sold a hotel and land held for
development on which there was no realized gain or loss.
During the year ended December 31, 1998, the Companies realized gains on the
sale of real estate assets of $52,642,000. Sales of healthcare properties
accounted for $52,096,000 of the total and included three long-term care
facilities, 32 assisted living facilities and nine rehabilitation facilities.
The Companies sold a 50% interest in a joint venture holding a fashion mall, as
well as the land where the fashion mall is located, resulting in a net gain of
$546,000. The Companies also sold securities resulting in a loss of $4,159,000.
PROVISION FOR IMPAIRMENT OF REAL ESTATE ASSETS
During the year ended December 31, 1999, the Companies recorded a provision
for loss on assets held for sale of $48,344,000 and real estate mortgages and
loans receivable of $14,826,000. The provision reduced the carrying value of 23
medical office buildings, 12 assisted living facilities and one long-term care
facility to the estimated net sales proceeds less costs to sell.
In 1998, the Companies recorded provisions for loss on assets held for sale
of $33,218,000 and real estate mortgages and loans receivable of $16,036,000.
The Companies also recorded provisions on assets held for use of $14,700,000 in
1998.
OTHER EXPENSES
During the year ended December 31, 1999, the Companies recorded
approximately $45,814,000 in other expenses related to the items described
below.
On May 10, 1999, the Companies entered into a separation agreement with the
former Director and Chairman of the Companies and the Chief Executive Officer
and Treasurer of Operating. Under the terms of the separation agreement, the
Companies paid severance payments totaling $25,000,000 in cash and 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 the 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 concluded that the
separation agreement was in the long-term best interest of the shareholders of
the Companies and approved the separation agreement.
For the year ended December 31, 1999, the Companies incurred approximately
$12,210,000 of costs associated with the development and implementation of the
1998 Plan as well as a reorganization of the lodging division. These costs
primarily relate to the early repayment and modification of certain
46
debt, employee severance, advisory fees related to the restructuring plan and
other professional fees related to the separation agreement described above.
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 hotels 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 year ended December 31, 1999.
During the years ended December 31, 1999 and 1998, the Companies recorded
provisions included in other expenses of approximately $4,606,000 and
$16,400,000, respectively, on receivables related to working capital and other
receivables.
During the year ended December 31, 1998, the Companies recorded
approximately $27,751,000 in other expenses related to capitalized lodging
development costs written off and severance related costs and external
consulting fees incurred in connection with the 1998 Plan.
In 1998, the Companies incurred approximately $3,110,000 in costs related to
the evaluation of certain acquisitions not completed by the Companies.
DISCONTINUED OPERATIONS
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 have reflected the financial results for
1999 and 1998 of Santa Anita and Cobblestone as discontinued operations. During
1999, the Companies adjusted the provision for loss on disposal of the
Cobblestone Golf Group by recording a gain of approximately $27,452,000, which
includes the final working capital purchase price adjustment, cost of sale
adjustments and a revision of the estimated income tax provision for the
disposal. In addition, the Companies recorded $2,961,000 as final working
capital purchase price adjustments and differences to estimated costs of sale of
the Santa Anita Racetrack. For the year ended December 31, 1998, the Companies
have presented income from discontinued operations of $10,721,000, a loss on
disposal of Santa Anita of $67,913,000 and a provision for loss on disposal of
Cobblestone Golf Group of $237,035,000.
REALTY--RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000 AND 1999
Realty reported a net loss available to Common Paired Shareholders of
$290,665,000 or $2.03 per diluted common share for the year ended December 31,
2000, compared to net income of $113,847,000 or $0.79 per diluted common share
for the year ended December 31, 1999.
REVENUES AND EXPENSES
Revenue for the year ended December 31, 2000 was $522,089,000, compared to
$608,166,000 for the year ended December 31, 1999, a decrease of $86,077,000.
The revenue decrease was primarily attributable to a decrease in rental revenue
of $49,391,000 and interest revenue of $43,008,000. 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 year ended December 31, 2000 consisted primarily of licensing fees of
$6,134,000.
47
For the year ended December 31, 2000, total recurring expenses were
$397,137,000, compared to $450,986,000 for the year ended December 31, 1999, a
decrease of $53,849,000. This decrease was primarily attributable to a decrease
in interest expense of $59,956,000 due to reductions in debt from amounts paid
as a result of various asset sales and mortgage repayments over the past year.
This decrease was also offset by a net increase of $6,772,000 in depreciation
and amortization related to certain lodging asset write-offs and decreases in
healthcare asset depreciation.
ASSET SALES
During the year ended December 31, 2000, Realty realized losses on the sale
of certain healthcare assets and the repayment of mortgage loans of $131,513,000
compared to gains of $12,042,000 recorded during 1999. Provisions of
$109,298,000 had previously been taken related to the asset sales completed
during the year ended December 31, 2000, compared to $6,577,000 of provisions
taken related to asset sales in fiscal year 1999.
PROVISION FOR IMPAIRMENT OF REAL ESTATE ASSETS
During the year ended December 31, 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 provisions for
loss on assets held for sale of $75,479,000 and $48,344,000 during the years
ended December 31, 2000 and 1999, respectively. During the years ended
December 31, 2000 and 1999, Realty recorded a provision for the mortgage
portfolio of $83,633,000 and $14,826,000, respectively. In addition, during the
year ended December 31, 2000, Realty recorded an impairment provision of
$24,586,000 on real estate assets held for use where current facts,
circumstances and analysis indicate that the assets might be impaired.
PROVISION FOR LOSS ON EQUITY SECURITIES
Realty had investments in certain equity securities as described below.
During the year ended December 31, 2000, the market value of these investments
decreased below Realty's initial cost. Realty applied accounting guidance
provided by SFAS No. 115 and adjusted the cost basis of its investment in
NHP Plc to fair value by recording a charge to earnings of $49,445,000 based on
the difference between the investment's cost of $57,204,000 and its market value
as of December 31, 2000 of $7,759,000. In addition, during the year ended
December 31, 2000, Realty adjusted the cost basis of its investment in BCC to
fair value by recording a charge to earnings of $834,000 to reflect the
difference in the cost of the investment of $1,105,000 and the market value at
December 31, 2000 of $271,000. On January 22, 2001, the Companies sold their
investment in NHP Plc for net proceeds of $7,737,000 and recorded a charge to
earnings of $22,000 in the 2001 financial statements.
OTHER EXPENSES
During the year ended December 31, 2000, Realty recorded approximately
$32,901,000 in other expenses related to the items described below.
In January 2000, Realty executed a separation and consulting agreement with
the Chief Executive Officer, President and Treasurer of Realty, pursuant to
which Realty made a cash payment of approximately $9,460,000 (including
consulting fees), converted 155,000 restricted paired common shares into
unrestricted paired common shares (which resulted in approximately $2,461,000 of
accelerated amortization of unearned compensation) and continued certain
medical, dental and other benefits.
Also in January 2000, Realty announced that the Meditrust corporate
headquarters would be moved to Irving, Texas and that changes would be made to
the management team. As a result, in June 2000, the Boards approved a plan to
reduce the number of employees (including four officers) by 14 as of
December 31, 2000. The reduction was primarily in the financial and legal groups
of the Companies'
48
Needham, Massachusetts offices. Accordingly, during the year ended December 31,
2000, Realty recorded $14,451,000 for severance related expenses incurred to
terminate those employees. Realty plans to further reduce staff over the next
two years with the intention of consolidating the remaining healthcare
operations in Irving, Texas by December 31, 2002. As part of the plan to close
the Needham office, additional severance and other payments are expected in the
future.
During the year ended December 31, 2000, Realty recorded provisions and
other expenses of approximately $5,146,000 on receivables related to real estate
assets and other receivables management considers uncollectable. Realty also
recorded approximately $2,060,000 of bad debt recoveries during the year ended
December 31, 2000 related to receivables written off in prior years.
During the year ended December 31, 2000, Realty recorded a charge of
approximately $3,142,000 related to the accelerated amortization of debt
issuance cost and certain other expenses associated with early repayment of debt
and the reduction of the Companies' Credit Facility.
Realty also incurred approximately $301,000 of professional fees during the
year ended December 31, 2000 related to implementation of the Five Point Plan.
During the year ended December 31, 1999, other expenses of $16,138,000 were
incurred which related to the 1998 Plan as described below.
For the year ended December 31, 1999, other expenses included approximately
$4,606,000 of provisions related to working capital and other receivables,
$4,907,000 related to the write-off of capitalized debt costs and $1,119,000 of
breakage fees associated with repayment of debt and related terminations of swap
contracts. Other expenses also included approximately $5,506,000 in professional
and advisory fees incurred related to the 1998 Plan.
EXTRAORDINARY ITEM
During year ended December 31, 2000, Realty retired $58,496,000 of debt
prior to its maturity (excluding bank related debt) 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.
REALTY--RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
Realty reported net income available to common paired shareholders of
$113,847,000 or $0.79 per diluted common share for the year ended December 31,
1999, compared to a net loss of $143,388,000 or $1.13 per diluted common share
for the year ended December 31, 1998.
REVENUES AND EXPENSES
Revenue for the year ended December 31, 1999 was $608,166,000, compared to
$518,872,000 for the year ended December 31, 1998, an increase of $89,294,000.
Revenue growth was primarily attributable to increases in rent and royalty
income of $158,336,000 from Operating, related to hotel facilities acquired in
the La Quinta Merger and the increase in revenue of $6,656,000 from hotels
operated by Realty. These increases are attributable to the inclusion of hotel
operations for the year ended December 31, 1999 compared to the five and
one-half month post-acquisition period ended December 31, 1998. These increases
were partially offset by a decrease in rental and interest income of
$41,461,000. The decrease resulted primarily from asset sales and mortgage
repayments over the last year net of the affect of additions to real estate
investments made during the same period. Other income was $1,750,000 for the
year ended December 31, 1999, compared to $35,987,000 for the same period in
1998. This non-recurring income arose from lease breakage fees and prepayment
and make-whole gains received from the sale of healthcare owned properties and
the repayment of mortgages.
49
For the year ended December 31, 1999, total recurring expenses increased by
$139,708,000 to $450,986,000 from $311,278,000 in 1998. Interest expense
increased by $68,039,000 as a result of increases in the borrowing rate and in
debt arising from the acquisitions of La Quinta and Cobblestone, net of amounts
repaid from various asset sales made over the same period. Depreciation and
amortization increased by $52,533,000 primarily due to an increase in lodging
real estate depreciation and amortization of goodwill resulting from the La
Quinta Merger completed on July 17, 1998. General and administrative expenses
decreased by $4,406,000 primarily due to state tax savings associated with the
legal reformation of certain healthcare subsidiaries and reductions in legal and
other overhead expenses compared to 1998.
Rental and hotel property operating expenses increased by $23,542,000
primarily due to the inclusion of twelve months of hotel activity in 1999
compared to the five and one-half month post-acquisition period ended
December 31, 1998 and, to a lesser extent, the management of additional medical
office buildings in 1999 compared to 1998.
ASSET SALES
During the year ended December 31, 1999, Realty realized gains on the sale
of healthcare related real estate assets of $12,042,000. Sales of healthcare
properties included 40 assisted living facilities, three long-term care
facilities, three rehabilitation facilities and one alcohol and substance abuse
treatment facility. Realty also sold a hotel and land held for development on
which there was no realized gain or loss.
During the year ended December 31, 1998, Realty realized gains on the sale
of real estate assets of $52,642,000. Sales of healthcare properties accounted
for $52,096,000 of the total and included 32 assisted living facilities, one
long-term care facility and nine rehabilitation facilities. Realty also sold
securities resulting in a loss of $4,159,000.
PROVISION FOR IMPAIRMENT OF REAL ESTATE ASSETS
In accordance with the Five Point Plan, Realty classified certain assets as
held for sale as of December 31, 1999, based on commitments for transactions
expected to close in 2000. Based on estimated net sales proceeds, Realty
recorded a provision for loss on assets held for sale of $48,344,000 and real
estate mortgage and loans receivable of $14,826,000. The provision reduces the
carrying value of 23 medical office buildings, 12 assisted living facilities and
one long-term care facility to the estimated net sales proceeds less costs to
sell.
In 1998, Realty recorded provisions for loss on assets held for sale of
$33,218,000 and real estate mortgages and loans receivable of $16,036,000.
Realty also recorded provisions on assets held for use of approximately
$14,700,000 in fiscal year 1998.
OTHER EXPENSES
During the year ended December 31, 1999, other expenses of $16,138,000 were
incurred. During 1999 and 1998 Realty recorded provisions related to working
capital and other receivables of $4,606,000 and $16,400,000, respectively. Other
expenses in 1999 also included approximately $4,907,000 of capitalized debt
costs and $1,119,000 of breakage fees associated with repayment of debt and the
related termination of swap contracts. Also, in 1999, Realty incurred $5,506,000
in professional and advisory fees related to the 1998 Plan. In 1998, Realty
incurred expenses of $12,588,000 related to severance related costs and
consulting fees related to the 1998 Plan. Additionally, Realty incurred
$3,110,000 in costs during fiscal year 1998 related to the evaluation of
acquisitions not completed.
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
50
approximately $40,216,000 of gains on disposal of the golf and horseracing
segments during the year ended December 31, 1999. Realty recorded a gain of
$33,561,000 related to the sale of the Cobblestone Golf Group, which was sold on
March 31, 1999. The horseracing segment was sold on December 10, 1998. During
the year ended December 31, 1999, a gain of $6,655,000 was recorded which
related to an adjustment of the selling price between Realty and Operating. For
the year ended December 31, 1998, Realty presented income from discontinued
operations of $14,635,000, a loss on disposal of Santa Anita of $82,953,000 and
a provision for loss on disposal of Cobblestone Golf Group of $227,557,000.
OPERATING--RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000 AND 1999
For the year ended December 31, 2000, Operating incurred a net loss
available to common paired shareholders of $61,491,000 compared to $40,305,000
for 1999. The net loss per common share for year ended December 31, 2000 was
$0.43 compared to $0.28 for the year ended December 31, 1999. The loss per
common share amount increased primarily as a result of operating expenses
incurred in 2000 compared to 1999.
REVENUES AND EXPENSES
Hotel revenues for the year ended December 31, 2000 were $600,329,000,
compared to $594,140,000 for the year ended December 31, 1999, an increase of
$6,189,000. Approximately $558,427,000 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 $62.62 during year ended
December 31, 2000 from $61.02 in 1999, an increase of $1.60 or 2.6%. Occupancy
percentage decreased 3.2 percentage points to 63.4% in 2000 from 66.6% for 1999.
RevPAR decreased 2.2% below RevPAR for 1999. The decrease in RevPAR is partially
due to an increase in the supply of available rooms in the region and segment of
the lodging industry in which La Quinta competes. Certain decisions made by La
Quinta in 1999 related to pricing, centralization of senior field operations
personnel and the relocation of its headquarters from San Antonio, Texas to
Irving, Texas coupled with the continuing disruptive impact of the new property
management system have contributed to the decrease in RevPAR. The hotel revenue
decrease was partially offset by the addition of revenues from the acquisition
of TeleMatrix in October 1999. Revenue related to TeleMatrix for the year ended
December 31, 2000 was $16,578,000 compared to $4,532,000 in the three-month
post-acquisition period ended December 31, 1999.
Total recurring expenses for the year ended December 31, 2000 were
$662,878,000 compared to $596,722,000 for the same period in 1999, an increase
of $66,156,000. The increase in hotel operating expenses and general and
administrative expenses is primarily attributable to increases in salary and
wage rates and related benefits, expenses associated with implementation of the
new property management system, increased sales expenses, increased hotel repair
and maintenance expenses, expenses associated with the realignment of field
operations personnel, an increase in bad debt expense, severance and employment
related expenses, the relocation of its headquarters from San Antonio, Texas to
Irving, Texas, an increase in franchise taxes and certain other incremental
expenses. The increase to hotel operating expenses also includes operating costs
incurred related to the operations of TeleMatrix of $10,006,000 for the year
ended December 31, 2000, compared to $2,564,000 for 1999. The $7,442,000
increase occurred because TeleMatrix was acquired in October 1999. Additional
general and administrative expenses of $3,142,000 were incurred in fiscal year
2000 due to the acquisition of TeleMatrix in the fourth quarter of 1999. 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, training and field supervision of hotel managers
and other sales, marketing and administrative expenses. Depreciation and
amortization for the year ended December 31, 2000 was $15,502,000 compared to
$7,958,000 for 1999, or an increase of $7,544,000. The increase in depreciation
and amortization expense is due to depreciation associated with the new property
51
management system, the write-off of the costs of certain internally developed
software and depreciation associated with TeleMatrix operations.
OTHER EXPENSES
During the year ended December 31, 1999, Operating recorded other expenses
of approximately $29,676,000 related to a separation agreement with the former
Director and Chairman of the Companies and Chief Executive Officer and Treasurer
of Operating, certain advisory fees related to this separation agreement and a
charge related to the abandonment of an information system under development
within the Companies' lodging division.
OPERATING--RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
Operating reported a net loss available to common paired shareholders of
$40,305,000 or $0.28 per diluted common share for the year ended December 31,
1999, compared to a net loss of $18,203,000 or $0.15 per diluted common share
for the year ended December 31, 1998.
REVENUES AND EXPENSES
Operating derived its revenue primarily from hotel operations after the La
Quinta Merger on July 17, 1998. Hotel revenues for the year ended December 31,
1999 were $594,140,000, compared to $252,642,000 for the year ended
December 31, 1998, an increase of $341,498,000. Revenue growth was primarily
attributable to the increase in hotel operating revenues because there were
twelve months of hotel operations in 1999 compared to the five and one-half
month post-acquisition period ended December 31, 1998. Approximately
$566,484,000 or 96% of hotel revenues were derived from room rentals during the
year ended December 31, 1999, compared to $241,868,000 and 96% during the year
ended December 31, 1998. Hotel operating revenues generally are measured as a
function of ADR and occupancy. The ADR increased to $61.02 in 1999 from $60.25
in 1998, an increase of $0.77 or 1.3%. Occupancy percentage decreased
2.1 percentage points to 66.6% in 1999 from 68.7% in 1998. RevPAR, which is the
product of occupancy percentage and ADR, decreased 1.7% when compared to 1998.
The decrease in RevPAR in part due to a greater increase in the supply of
available rooms than in demand in the region and segment of the lodging industry
in which La Quinta operates. The relationship between supply and demand varies
by region and it has impacted La Quinta to a greater extent than its competitors
due to its concentration of hotels in the southwest. 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 compared to the Inns.
Other factors contributing to the decrease in RevPAR include the disruptive
impact of the introduction of the new property management system, the
reorganization of the operations and the sales organizations during the third
quarter of 1999 and certain pricing decisions, which adversely impacted RevPAR.
TeleMatrix revenues for the year ended December 31, 1999 were $4,532,000.
For the year ended December 31, 1999, total recurring expenses were
$596,722,000, compared to $262,737,000 for the year ended December 31, 1998, an
increase of $333,985,000. This increase was primarily attributable to increases
in lodging related expenses, which include an increase in operating expenses of
$161,741,000, increases to rent, royalty and interest due to Realty of
$157,624,000 and an increase to general and administrative expenses of
$10,134,000. The increase in operating expenses, net rent, royalty and interest
due to Realty as well as overhead for the lodging segment is attributable to the
inclusion of twelve months of activity in 1999 compared to the five and one-half
month post-acquisition period in 1998 and, to a lesser extent, inclusion of
$2,564,000 of operating costs incurred related to the TeleMatrix acquisition.
Hotel operating expenses and overhead primarily includes 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
52
management, office rent, training and field supervision of hotel managers and
other marketing and administrative expenses. The increase in general and
administrative expenses of $10,134,000 includes an increase of $9,129,000 in
overhead for the lodging segment and $1,005,000 related to TeleMatrix.
Depreciation and amortization expense for the year ended December 31, 1999 was
$7,958,000, compared to $3,661,000 for the same period in 1998. The increase is
due to the depreciation and amortization associated with furniture and fixtures
and intangible assets acquired in the La Quinta Merger. Interest due to
third-parties of $273,000 was incurred during the year ended December 31, 1999,
compared to $84,000 for the same period in 1998.
At December 31, 1999, La Quinta operated 302 hotels (including 232 Inns and
70 Inn & Suites) with approximately 39,000 rooms, compared to 280 hotels
(including 233 Inns and 47 Inn & Suites) with approximately 36,000 rooms at the
merger date of July 17, 1998.
OTHER EXPENSES
During the year ended December 31, 1999, Operating recorded approximately
$29,676,000 in other expenses.
On May 10, 1999, the Companies entered into a separation agreement with the
former Director and Chairman of the Companies and Chief Executive Officer and
Treasurer of Operating. Under the terms of the separation agreement, Operating
made severance payments totaling $25,000,000 in cash and the continuation of
certain life insurance benefits. The Companies established a Special Committee
to evaluate the 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 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, 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
$678,000 associated with the reorganization of the lodging division including
employee severance and other expenses.
Operating began to refocus its capital investment program in connection with
the 1998 Plan by reducing healthcare related investments and ceasing development
of any new hotels other than the completion of those La
Quinta-Registered Trademark- Inn & Suites currently under construction.
Accordingly, Operating recorded a charge to earnings in fiscal year 1998 of
$6,443,000 for severance related costs attributable to workforce reductions of
87 employees in the lodging and healthcare divisions and a charge to earnings of
$8,720,000 for the write-off of certain previously capitalized costs associated
with lodging development.
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
$9,803,000 of losses on disposal from the golf and horseracing segments during
the year ended December 31, 1999. Operating recorded a loss of $6,109,000
related to the March 31, 1999 sale of the Cobblestone Golf Group. The loss
includes a final accounting of working capital balances at the sale date. The
horseracing segment was sold on December 10, 1998. During the year ended
December 31, 1999, a loss of $6,655,000 was recorded which related to an
adjustment of the
53
selling price between Realty and Operating. This loss was partially offset by a
gain of $2,961,000 arising from a final adjustment relating to working capital
balances at the sale date.
THE MEDITRUST COMPANIES, REALTY AND OPERATING--COMBINED LIQUIDITY AND CAPITAL
RESOURCES
The Companies earn revenue by (i) owning and operating 229 La Quinta Inns
and 70 La Quinta Inn & Suites; (ii) leasing 163 healthcare facilities under
long-term triple net leases in which the rental rate is generally fixed with
annual escalators and (iii) providing mortgage financing for 36 healthcare
facilities in which the interest is generally fixed with annual escalators
subject to certain conditions. Approximately $400,000,000 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 mitigate this risk, the Companies have entered into interest rate
swaps to convert some of its 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
December 31, 2000, the Companies had $400,000,000 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 December 31, 2000, the
Companies have no variable debt outstanding with interest rates that fluctuate
with changes in LIBOR.
Operating does not have independent access to financing and is a guarantor
on Realty's debt. As a result, the liquidity and capital resources discussion
related to Realty is relevant to Operating.
CASH FLOWS FROM OPERATING ACTIVITIES
The principal source of cash to be used to fund the Companies', Realty's and
Operating's future operating expenses and recurring capital expenditures will be
cash flow provided by operating activities and in the case of Operating the
deferral of rent and royalty payable to Realty. The Companies, Realty and
Operating 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 (i.e., exclusive of debt maturities). Future interest expense
and distribution payments, if any, for the Companies and Realty will also be
funded with cash flow provided by operating activities.
CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES
The Companies, Realty and Operating 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. The Companies and Realty
also provide funding for new investments and costs associated with restructuring
through the previously announced sale of certain healthcare related assets. As
part of the Five Point Plan, the Companies and Realty have decided to sell
additional healthcare related assets to meet their commitments and to provide
additional liquidity. The Companies and Realty obtain long-term financing
through the issuance of shares, long-term secured or unsecured notes,
convertible debentures and the assumption of mortgage notes. Operating obtains
long-term financing through the issuance of shares and unsecured notes. The
Companies and Realty obtain short-term financing through the use of bank lines
of credit, which are replaced with long-term financing as appropriate, while
Operating obtains short-term financing through rent and royalty deferrals and
borrowings from Realty. From time to time, the Companies and Realty utilize
interest rate caps or swaps to attempt to hedge interest rate volatility. It is
the Companies' and Realty's objective to match healthcare mortgage and lease
terms with the terms of their borrowings. The Companies and Realty 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.
54
In July 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 that was exercised in June 1999
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, among
other things, 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 of
approximately 125 basis points and the pledge of stock of the Companies'
subsidiaries. This pledge of subsidiary stock will also extend 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. Realty repaid the remaining
$250,000,000 of its Tranche B term loan on April 8, 1999. 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 March 10, 1999, Realty reached a second agreement with its bank group to
further amend the Credit Agreement. The second amendment provided for a portion
of the proceeds from the sale of the Cobblestone Golf Group to be applied to
settle a portion of the FEIT. The second amendment also provided for, among
other things, deletion of limitations on certain healthcare investments and
lowering the Tranche A loan commitment to $850,000,000.
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.
Effective September 5, 2000, the Companies reached a fourth agreement with
its bank group to further amend the Credit Agreement. The fourth amendment
provided for, among other things, changes to the definition of the minimum
tangible net worth covenant, limitations on cash and cash equivalents held and
limitations on capital expenditures, a reduction of the Tranche A revolving loan
commitment from $850,000,000 to $400,000,000 and the prepayment of $50,000,000
on the Tranche D term loan. In addition, the fourth agreement specifies when and
how the proceeds of future asset sales are required to be applied against any
outstanding balances on Tranches A and D.
Realty borrowed $252,000,000 from the Tranche A revolving loan, repaid
approximately $917,359,000 of the balance during the year ended December 31,
2000 and had no borrowings outstanding on the Tranche A revolving loan at
December 31, 2000. Additionally, during 2000, Realty repaid $100,000,000 of its
Tranche D term loan, resulting in a balance of $397,827,000 (net of unamortized
debt issuance costs of $2,173,000) at December 31, 2000.
Total debt maturing in the year 2001 is $628 million, including
approximately $90 million that was due on March 1, 2001 and which has been paid
off through borrowings under the line of credit. In
55
addition, on July 15, 2001, the Companies have approximately $75 million of debt
maturing. The $400 million outstanding bank term loan and the $400 million
commitment on the line of credit mature on July 17, 2001. Meditrust is reviewing
various alternatives with respect to the bank term loan and line of credit,
however, there can be no assurances that the Companies will be able to refinance
or pay down this debt prior to its maturity. The remaining $63 million of 2001
debt maturities are primarily in October 2001. 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 certain healthcare assets.
The following is a summary of the Companies' future debt maturities:
BONDS
NOTES CONVERTIBLE BANK AND
YEAR PAYABLE DEBENTURES NOTES MORTGAGES TOTAL
- ---- -------- ----------- -------- --------- --------
(IN MILLIONS)
2001.......................................... $ 123 $ 83 $400 $22 $ 628
2002.......................................... 36 54 -- 2 92
2003.......................................... 205(1) -- -- 2 207
2004.......................................... 250 -- -- 2 252
2005.......................................... 116 -- -- -- 116
2006 and thereafter........................... 287 -- -- 14 301
------ ---- ---- --- ------
Total debt.................................... 1,017 137 400 42 1,596
Unamortized debt issuance costs............... (4) -- (2) -- (6)
------ ---- ---- --- ------
Debt, net of unamortized debt issuance
costs....................................... $1,013 $137 $398 $42 $1,590
====== ==== ==== === ======
- ------------------------
(1) Assumes that $175 of notes due in 2026 are put to the Companies.
At December 31, 2000, the Companies' and Realty's gross real estate
investments totaled approximately $3,903,492,000 consisting of 299 hotel
facilities in service, 93 long-term care facilities, 94 assisted living
facilities, five medical office buildings, one acute care hospital campus and
six other healthcare facilities.
The Companies had shareholders' equity of $2,322,811,000 and debt
constituted 40% of the Companies' total capitalization as of December 31, 2000.
Realty had shareholders' equity of $2,365,588,000 and Operating had a
shareholders' deficit of $4,945,000.
The Companies and Realty 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 common stock, preferred stock, 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 for both Realty
and Operating, proceeds from the sale of certain healthcare assets as
contemplated under the Five Point Plan and Operating's borrowings from Realty
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.
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
56
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 63 of
this Joint Annual Report on Form 10-K for the year ending December 31, 2000
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 "Certain Factors
You Should Consider" commencing on page 63 of this 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 guarantee that their efforts to sell
healthcare assets, or to pursue the refinancing of the senior credit facility,
will be successful.
INFORMATION REGARDING OPERATORS OF HEALTHCARE ASSETS
As of December 31, 2000, the healthcare portfolio comprised approximately
27.0% of the net book value of the Companies' total real estate investments. Sun
and Alterra currently operate approximately 13.7% of the total real estate
investments, or 42.6% of the healthcare portfolio before the valuation
allowance. A schedule of significant healthcare operators follows:
PORTFOLIO BY OPERATOR
GROSS NET BOOK # OF % OF # OF # OF
INVESTMENT VALUE PROPERTIES PORTFOLIO MORTGAGES PROPERTIES LEASES LEASES
----------- ---------- ---------- --------- --------- ---------- --------- --------
(IN THOUSANDS, EXCEPT NUMBER OF PROPERTIES AND PERCENTAGES)
LODGING:
La Quinta Companies........... $ 2,669,577 $2,448,391 299
HEALTHCARE PORTFOLIO:
Sun Healthcare Group, Inc..... 393,377 311,151 39 29% $ 30,410 4 $ 280,741 35
Alterra....................... 161,592 149,190 57 14% -- -- 149,190 57
Other Non-Public Operators.... 108,842 102,892 11 9% 81,160 9 21,732 2
Harborside.................... 103,307 92,372 18 9% 15,922 4 76,450 14
Balanced Care Corporation..... 93,618 91,974 19 9% 36,695 7 55,279 12
Tenet Healthcare/Iasis........ 65,650 56,189 1 5% -- -- 56,189 1
CareMatrix Corporation........ 50,606 49,446 4 5% 35,606 3 13,840 1
Other Public Operators........ 49,164 42,794 7 4% 7,057 1 35,737 6
Integrated Health
Services, Inc............... 50,973 37,066 10 3% -- -- 37,066 10
Genesis Health
Ventures, Inc............... 35,625 33,552 8 3% 18,425 4 15,127 4
Assisted Living Concepts...... 31,487 28,400 16 3% -- -- 28,400 16
ARV Assisted Living, Inc...... 28,982 26,461 4 2% -- -- 26,461 4
Life Care Centers of
America, Inc................ 26,212 26,212 2 2% 26,212 2 -- --
HealthSouth................... 24,724 24,724 2 2% 24,724 2 -- --
Paramount Real Estate
Services.................... 9,756 9,024 1 1% -- -- 9,024 1
----------- ---------- --- ---- -------- -- --------- ---
1,233,915 1,081,447 199 100% 276,211 36 805,236 163
Valuation Allowance........... -- (177,162) -- (53,640) (123,522)
----------- ---------- --- -------- ---------
1,233,915 904,285 199 $222,571 $ 681,714
----------- ---------- --- ======== =========
Total Real Estate Portfolio... $ 3,903,492 $3,352,676 498
=========== ========== ===
57
Companies in the assisted living sector of the healthcare industry operate
approximately 9.2% of the net book value of the Companies' total real estate
investments (and approximately 28.5% of the healthcare portfolio before the
valuation allowance), while companies in the long-term care sector approximate
18.8% of the net book value of the Companies' total real estate investments (and
approximately 58.3% of the healthcare portfolio before the valuation allowance).
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, its
ability to make distributions to its shareholders and meet debt obligations. 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 slowed their growth plans and may
have a negative effect on their operating cash flows.
OPERATORS IN BANKRUPTCY
As of December 31, 2000, the Companies have exposure to five operators who
have filed for protection under Chapter 11: Sun Healthcare Group, Inc. ("Sun"),
Mariner Health Group ("Mariner"), Integrated Health Services, Inc.
("Integrated"), Genesis Health Ventures, Inc. ("Genesis") and CareMatrix
Corporation ("CareMatrix"). The following table describes the number of
facilities, net assets before valuation allowance by lease/mortgage and the
lease/mortgage income of each of the five operators that have filed for
Chapter 11:
YEAR ENDED
DECEMBER 31, 2000
LEASES MORTGAGES -------------------
TOTAL ----------------------- ----------------------- RENTAL INTEREST
OPERATOR DATE FILED FACILITIES FACILITIES NET ASSETS FACILITIES NET ASSETS INCOME INCOME
- -------- ---------- ---------- ---------- ---------- ---------- ---------- -------- --------
(IN THOUSANDS, EXCEPT FOR NUMBER OF FACILITIES)
Sun(5)............... 10/14/99 39 35 $285,130 4 $30,410 $46,650 $ --(1)
Mariner.............. 1/18/00 2 1 6,789 1 7,057 977 --(2)
Integrated........... 2/2/00 10 10 37,066 -- -- 6,288 N/A
Genesis.............. 6/26/00 8 4 15,127 4 18,425 1,653 1,019(3)
CareMatrix........... 11/9/00 4 1 13,840 3 35,606 1,648 1,691(4)
-- -- -------- -- ------- ------- ------
Totals............... 63 51 $357,952 12 $91,498 $57,216 $2,710
== == ======== == ======= ======= ======
- ------------------------
(1) No interest payments related to the Sun mortgages have been received since
October 14, 1999 and, accordingly, these mortgages were placed on
non-accrual status.
(2) No interest payments related to the Mariner mortgage were received and,
accordingly, this mortgage was placed on non-accrual status.
(3) Mortgages related to Genesis have been placed on non-accrual status and
interest income is recorded as payments are received.
(4) Mortgages related to CareMatrix have been placed on non-accrual status and
interest income is recorded as payments are received.
58
(5) Net lease assets operated by Sun include straight-line rent receivables of
$4,389,000.
The Companies continue to monitor its operators that have filed for
Chapter 11. To date, the Companies have not come to any definitive agreement
with any of these operators. In the event any of its leases are successfully
rejected through the course of the bankruptcy proceedings, the Companies intend
to transition the operations of these facilities to other operators.
Management has initiated various actions to protect the Companies' interests
under its leases and mortgages including the draw down 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.
59
COMBINED FUNDS FROM OPERATIONS
Combined Funds from Operations ("FFO") of the Companies was $162,639,000 and
$241,441,000 for the years ended December 31, 2000 and 1999, respectively.
Effective January 1, 2000 the National Association of Real Estate Investment
Trusts ("NAREIT") adopted a new definition of FFO. Presentation of FFO for 1999
has been restated to conform to 2000 presentation.
Management considers FFO to be a key external measurement of REIT
performance. FFO 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, income taxes
and extraordinary items.
FFO 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. FFO 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 FFO illustrates the difference between the two measures of
operating performance for the years ended December 31, 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.
YEAR ENDED
DECEMBER 31,
---------------------
2000 1999
--------- ---------
(IN THOUSANDS)
Net income (loss) available to common shareholders.......... $(352,156) $ 73,542
Depreciation of real estate and intangible amortization... 153,116 147,184
Other capital gains and losses............................ 130,536 (12,042)
Other expenses (a)........................................ 231,917 63,170
Discontinued operations................................... -- (30,413)
Income tax expense........................................ 629 --
Extraordinary item........................................ (1,403) --
--------- --------
Funds from Operations....................................... $ 162,639 $241,441
========= ========
- ------------------------
(a) Other expenses include provisions for assets and mortgages of $183,698,000
and $63,170,000 (includes $1,603,000 for provision for working capital
receivables) for the years ended December 31, 2000 and 1999, respectively.
Other expenses also include impairment of real estate securities of
$50,279,000 and were offset by recoveries on prior impairments of $2,060,000
for the year ended December 31, 2000.
Weighted average paired common shares outstanding:
Basic..................................................... 141,854 142,783
Diluted................................................... 141,854 142,907
Options to purchase 618,000 Paired Common Shares (weighted average effect of
95,000 shares for the year ended December 31, 2000) at prices ranging from $1.81
to $2.81 were outstanding during fiscal year 2000 and were not included in the
computation of EPS because their inclusion would result in an antidilutive
per-share amount as the Companies reported a loss from continuing operations
available to Common Shareholders for the year ended December 31, 2000.
60
REIT QUALIFICATION ISSUES
The Ticket to Work and Work Incentives Improvement Act of 1999 (the "Ticket
to Work Act") modified certain provisions of federal income tax law applicable
to REITs. All of the changes described below became effective with respect to
the Companies after 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, a taxable REIT subsidiary cannot directly or indirectly
operate or manage a lodging or healthcare facility. A taxable REIT subsidiary
may own a lodging facility (i.e., a hotel) or lease one from the REIT (provided
no gambling revenues are derived from the hotel or its premises), provided that
the lodging facility is operated by an "eligible independent contractor." An
eligible independent contractor is an independent contractor that is actively
engaged in the trade or business of operating lodging facilities for persons or
entities unrelated to the REIT. Due to 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 is limited.
The Ticket to Work 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 and certain other limited exceptions.
Accordingly, taking into account the Companies' general inability to utilize
taxable REIT subsidiaries in the conduct of its lodging and healthcare
operations, the Ticket to Work 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 substantial taxable income or jeopardizing the
Companies' current grandfather status under the 1998 anti-paired share
legislation enacted as part of the Internal Revenue Service Restructuring and
Reform Act of 1998 (the "Reform Act"). In combination with the restrictions on
activities of a grandfathered paired share REIT provided for in the Reform Act,
the Ticket to Work Act limits the ability of Realty to grow through construction
or acquisition of new hotels or the acquisition of other lodging brands or
companies.
Compliance with the tax rules applicable to REITs generally and to paired
share REITs in particular, has become increasingly difficult due to additional
limitations imposed by the Reform Act and the Ticket to Work Act as well as
other developments in the Companies' businesses, including its recent sales of
healthcare assets and consequent loss of related qualifying rental and interest
income. Due to recent sales of healthcare assets and the resulting loss of
qualifying rental and interest income, disqualifying income has increased as a
percentage of Realty's gross income. Disqualifying income cannot exceed 5% of
Realty's gross income. Although Realty currently satisfies this requirement,
additional asset sales (which will result in further reductions of qualifying
rental and interest income) as well as increases in royalty income (which is
considered nonqualifying income) could cause Realty to exceed the 5% gross
income limit for non-qualifying income, resulting in REIT disqualification
and/or substantial costs to avoid such disqualification. Based on the Five Point
Plan and the Companies' announced intention to increase its focus on its lodging
business (including franchising, which will generate royalty income) and sell a
significant portion of its healthcare assets, the Companies intend to continue
to reevaluate its financial, legal and tax structure to determine the best
platform for growing La Quinta and enhancing shareholder value going forward.
Other provisions in the Ticket to Work Act include a reduction in the annual
minimum distribution requirement for a REIT from 95% to 90% of its taxable
income (excluding net capital gain) and a provision
61
which allows a REIT to own and operate a healthcare facility for a 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.
Restructuring the operations of Realty and Operating to comply with the
Ticket to Work Act and the Reform Act may cause one or both of the Companies to
incur substantial tax liabilities and other costs, to recognize an impairment
loss on their goodwill asset related to the acquisition of the paired share
structure or to take other actions that may otherwise adversely affect one or
both of the Companies.
NEWLY ISSUED ACCOUNTING STANDARDS
In September 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
which replaced SFAS No. 125 of the same name. The Statement provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. The Statement is effective for transfers
and servicing of financial assets and extinguishments of liabilities occurring
after March 31, 2001. The Statement is also effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000.
Disclosures for prior years' comparative financial statements are not required.
The Companies are currently not affected by the Statement's requirements.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities", an amendment to SFAS
No. 133. SFAS No. 133 required that all derivative investments be recorded on
the balance sheet at fair value. Changes in the fair value of derivatives are
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 No. 138 will not have a material
effect on their financial statements.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation," an interpretation of APB
Opinion No. 25, "Accounting for Stock Issued to Employees". This Interpretation
clarified the application of Opinion 25, including among other issues: (a) the
definition of an employee for purposes of applying Opinion 25, (b) the criteria
for determining whether a stock ownership plan qualifies as non-compensatory,
(c) the accounting implications of various modifications to the terms of a
previously fixed stock option or award and (d) the accounting for the exchange
of stock compensation awards in a business combination. The Interpretation was
effective July 1, 2000 and the effects of applying the Interpretation are
recognized on a prospective basis. The adoption did not have a material impact
on the Companies' financial condition or results of operations.
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.
62
CERTAIN FACTORS YOU SHOULD CONSIDER
UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL REFERENCES TO "WE," "US," OR "OUR"
REFER GENERALLY TO THE COMPANIES, THEIR SUBSIDIARIES AND RESPECTIVE PREDECESSOR
ENTITIES FOR THE APPLICABLE PERIODS, ALTHOUGH THE CONTEXT MAY, IN CERTAIN
SITUATIONS, REQUIRE THAT THESE WORDS REFER TO EITHER REALTY OR OPERATING
INDIVIDUALLY.
PRESENTED BELOW ARE CERTAIN FACTORS THAT YOU SHOULD CONSIDER WITH RESPECT TO
AN INVESTMENT IN OUR SECURITIES. YOU SHOULD BE AWARE THAT THERE ARE VARIOUS
RISKS, INCLUDING THOSE DESCRIBED BELOW, WHICH MAY MATERIALLY IMPACT YOUR
INVESTMENT IN OUR SECURITIES OR MAY IN THE FUTURE AND, IN SOME CASES, ALREADY
DO, MATERIALLY AFFECT US AND OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS. YOU SHOULD CAREFULLY CONSIDER THESE FACTORS. THIS SECTION INCLUDES
OR REFERS TO CERTAIN FORWARD-LOOKING STATEMENTS; YOU SHOULD READ THE EXPLANATION
OF THE QUALIFICATIONS AND LIMITATIONS ON SUCH FORWARD-LOOKING STATEMENTS
DISCUSSED ON PAGE 1.
OUR STRATEGIC FOCUS ON LODGING RELATED PROPERTIES EXPOSES INVESTORS TO RISKS
COMMON IN THAT INDUSTRY THAT MAY ADVERSELY AFFECT AN INVESTMENT IN OUR
SECURITIES.
THERE ARE A NUMBER OF OPERATING RISKS THAT COULD HAVE AN ADVERSE EFFECT ON THE
COMPANIES' LODGING RELATED BUSINESS.
We have made a significant investment in lodging related facilities through
our acquisition of La Quinta. La Quinta is operated by a subsidiary of Operating
and its real estate assets are owned by Realty or a subsidiary of Realty. The
results of operations of La Quinta hotels are subject to many factors,
including:
- changes in the national, regional and local general economic climate;
- competition from comparable hotels;
- the desirability of particular locations;
- the quality, philosophy and performance of the lodging facility managers
and supervisors;
- availability of qualified labor;
- changes in room rates and increases in operating costs due to inflation;
- capability of management information systems;
- the need to reinvest capital to periodically repair and upgrade the
lodging facilities;
- increases in travel expenses that reduce business and leisure travel;
- increases in expenses such as real estate tax and utilities; and
- the relationship between supply of and demand for hotel rooms (an
oversupply of hotel properties or a reduction in demand for hotel rooms).
LA QUINTA OPERATES IN A VERY COMPETITIVE MARKET.
La Quinta hotels generally operate in markets that contain numerous
competitors, including a wide range of lodging facilities offering full-service,
limited-service and all-suite lodging options to the public. The continued
success of our hotels will be substantially dependent upon our ability to
compete in such areas as affordable and competitive room rates, quality of
accommodations, name recognition, service level and convenience of locations.
Additionally, an increasing supply of hotel rooms in La Quinta's market segment
and recent consolidations in the lodging industry generally, have resulted in
the creation of several large, multi-branded hotel chains with diversified
operations and may adversely impact our business, financial condition and
results of operations. We cannot assure you that demographic, geographic or
other changes in markets will not adversely affect the convenience or
desirability of the locations of our hotels. Furthermore, we cannot assure you
that competing hotels will not provide greater competition for guests than
currently exists in the markets in which our hotels operate or that new hotels
will not enter such markets.
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OUR LODGING RELATED PROPERTIES ARE GEOGRAPHICALLY CONCENTRATED.
La Quinta's hotels are concentrated in the western and southern regions of
the United States. As a result, our lodging properties are particularly
sensitive to adverse economic and competitive conditions and trends in those
regions and such conditions may specifically affect our cash available for
distribution to shareholders. The concentration of lodging properties in one
region may expose us to risks of adverse economic developments, which are
greater than if our portfolio were more geographically diverse.
OUR LODGING RELATED BUSINESS AND OPERATIONS ARE SUBJECT TO EXTENSIVE EMPLOYMENT
AND OTHER GOVERNMENTAL REGULATION.
The lodging business is subject to extensive federal, state and local
regulation, including building and zoning requirements, all of which can
prevent, delay, make uneconomical or significantly increase the cost of
developing additional lodging facilities. In addition, La Quinta's hotels and
Operating are subject to laws governing their relationship with employees,
including minimum wage requirements, overtime, working conditions, work permit
requirements and discrimination claims. An increase in the minimum wage rate,
employee benefit costs or other costs associated with employees could adversely
affect our financial results.
FLUCTUATIONS IN OPERATING RESULTS ARE COMMON IN THE LODGING INDUSTRY.
Operating results in the lodging industry may be adversely affected by
factors such as:
- changes in economic conditions;
- changes in local market conditions;
- an oversupply of hotel rooms;
- a reduction in demand for hotel space in specific areas;
- changes in travel patterns;
- weather conditions;
- changes in governmental regulations that influence or determine wages;
- prices or construction costs;
- changes in interest rates;
- the availability of financing for operating or capital needs; and
- changes in real estate tax rates and other operating expenses.
Room supply and demand historically have been sensitive to shifts in gross
domestic product growth, which has resulted in cyclical changes in ADR and
occupancy rates. Due in part to the strong correlation between the lodging
industry's performance and economic conditions, the lodging industry is subject
to cyclical changes in revenues. In that regard, we cannot provide assurance
that current conditions in the lodging industry, or in the segment of the
industry in which we operate, will not decline in the future. Furthermore, the
lodging industry is seasonal in nature, with revenues typically higher in summer
months than in winter months.
FLUCTUATIONS IN AND DIFFICULTY WITH LODGING CONSTRUCTION MAY HAVE AN ADVERSE
EFFECT ON US.
We may from time to time experience shortages of materials or qualified
trades people or volatile increases in the cost of certain construction
materials or labor, resulting in longer than normal construction and remodeling
periods, loss of revenue and increased costs. We will rely heavily on local
contractors, who may be inadequately capitalized or understaffed. The inability
or failure of one or more local contractors to perform may result in
construction or remodeling delays, increased cost and loss of revenue. The
foregoing factors could adversely affect La Quinta's operations, which, in turn,
could materially adversely affect us and our ability to pay amounts due on our
indebtedness and to make distributions to shareholders.
64
THE SEASONALITY OF THE LODGING INDUSTRY MAY AFFECT THE ABILITY OF REALTY'S
LESSEES AND OPERATORS TO MAKE TIMELY RENT PAYMENTS.
The seasonality of the lodging industry causes fluctuations in hotel
revenues and may, from time to time, affect either the amount of rent that
accrues under Realty's hotel leases or the ability of Realty's lessees and
operators to make timely rent payments under the leases. A lessee's or
operator's inability to make timely rent payments to Realty could adversely
affect our financial condition and ability to service debt and make
distributions to our stockholders. Operating and/or its subsidiaries currently
are the only entities that lease Realty's lodging properties.
We have recently implemented a franchising program for our various La
Quinta-Registered Trademark- brands and the success of this program may be
impacted by risks inherent in third-party use of our brands, as well as other
factors.
THE COMPANIES' OWNERSHIP OF HEALTHCARE RELATED PROPERTIES EXPOSES INVESTORS TO
RISKS COMMON IN THAT INDUSTRY THAT MAY ADVERSELY AFFECT AN INVESTMENT IN OUR
SECURITIES.
THERE ARE A NUMBER OF OPERATING RISKS THAT COULD HAVE AN ADVERSE EFFECT ON THE
COMPANIES' HEALTHCARE RELATED BUSINESS.
One of the Companies' businesses is that of financing and leasing healthcare
related properties. Operating risks in this business include, among other
things:
- competition for tenants;
- changes in the financial condition of third-party operators of our
healthcare facilities;
- competition from other healthcare financing providers, a number of which
may have greater marketing, financial and other resources and experience
than us;
- changes in government regulation of healthcare;
- changes in the availability and cost of insurance coverage;
- increases in operating costs due to inflation and other factors;
- changes in interest rates;
- the availability of financing;
- the ability of the Companies to sell off its investments when it chooses
at prices that are reasonable; and
- adverse effects on general and local economic conditions.
The foregoing factors could adversely affect the ability of the operators of
the Companies' healthcare facilities to generate revenues and make payments to
it. This, in turn, could materially adversely affect our earnings, our ability
to make distributions to stockholders and to pay amounts due on our
indebtedness.
EXTENSIVE FEDERAL, STATE AND LOCAL REGULATION OF THE HEALTHCARE INDUSTRY MAY
ADVERSELY AFFECT THE ABILITY OF THIRD-PARTY OPERATORS OF THE COMPANIES'
HEALTHCARE PROPERTIES TO MAKE THEIR PAYMENTS.
The healthcare businesses of the third-party operators of the Companies'
healthcare related real estate are subject to extensive federal, state and local
regulation governing the licensing and conduct of operations at healthcare
facilities, certain capital expenditures, the quality of services provided, the
manner in which the services are provided, financial and other arrangements
between healthcare providers and reimbursement for services rendered. The
failure of any third-party operator to comply with such laws, requirements and
regulations could adversely affect its effectiveness in operating the facility
or facilities. Any such ineffectiveness could impair such operator's ability to
make payments to Realty and thereby adversely affect our business, financial
condition or results of operations.
65
A CONCENTRATION OF INVESTMENT IN THE SKILLED NURSING INDUSTRY COMPOUNDS THE
RISKS ASSOCIATED WITH THIS INDUSTRY.
As of December 31, 2000, skilled nursing facilities comprised 18.7% of the
Companies' real estate investments. For the reasons mentioned in the risk factor
above, such a concentration in this type of facility could have a material
adverse effect on our business, financial condition or results of operations.
WE RELY HEAVILY ON THIRD-PARTY OPERATORS ASSOCIATED WITH MANY OF OUR PROPERTIES.
Third-party operators manage healthcare facilities on each of our healthcare
related properties. Our financial position may be adversely affected by
financial difficulties experienced by any such operators, including the
bankruptcy, insolvency or general downturn in the business of any such operator,
or in the event any such operator does not renew its leases as they expire and
Realty cannot lease these facilities to other operators on comparable terms. In
particular, the net book value of the Companies' investments in the facilities
operated by its four largest healthcare operators at December 31, 2000 amounts
to approximately 20% of its total real estate investments. Such a concentration
in these operators could have a material adverse effect on our business,
financial condition or results of operations.
WE HAVE NO CONTROL OVER INCREASED GOVERNMENT REGULATION IN THE HEALTHCARE
INDUSTRY.
The healthcare industry is subject to changing political, economic,
regulatory and demographic influences that may affect the operations of
healthcare facilities and providers. During the past several years, the
healthcare industry has been subject to changes in government regulation of many
aspects of the industry (for example, reimbursement rates and certain capital
expenditures). Some elected officials have announced that they intend to examine
certain aspects of the United States healthcare system, including proposals
which may further increase governmental involvement in healthcare. For example,
the President and Congress have in the past and may in the future, propose
healthcare reforms which could impose additional regulations on the Companies
and its operators or limit the amounts that operators may charge for services.
The Companies' healthcare facility operators are and will continue to be,
subject to varying degrees of regulation and licensing by health or social
service agencies and other regulatory authorities in the various states and
localities in which they operate or in which they will operate.
SIGNIFICANT HEALTHCARE REFORM HAS AND MAY CONTINUE TO ADVERSELY AFFECT OUR
OPERATIONS IN THE HEALTHCARE INDUSTRY.
The Balanced Budget Act of 1997, which was signed into law on August 5,
1997, enacted significant changes to the Medicare and Medicaid programs designed
to modernize payment and healthcare delivery systems while achieving substantial
budgetary savings. In seeking to limit Medicare reimbursement for certain
healthcare services, the Balanced Budget Act of 1997 mandated the establishment
of a prospective payment system for healthcare facilities to replace the current
cost-based reimbursement system. The cost-based system reimburses healthcare
facilities for reasonable direct and indirect allowable costs incurred in
providing "routine services" as well as capital costs and ancillary costs,
subject to limits fixed for the particular geographic area served by the
healthcare facility. Under the prospective payment system, healthcare facilities
will be paid a federal per diem rate for covered services. The per diem payment
will cover routine service, ancillary and capital-related costs. The prospective
payment system is being phased in over a four-year period beginning on or after
July 1, 1998. Under provisions of the Balanced Budget Act of 1997, states will
be provided additional flexibility in managing their Medicaid program. Among
other things, the Balanced Budget Act of 1997 repealed a federal payment
standard, which had required states to pay "reasonable and adequate" payments to
cover the costs of efficiently and economically operated hospitals, nursing
facilities and certain intermediate care facilities. We have no control over
these federal reimbursement rates, which may change periodically. Additionally,
these healthcare reforms may reduce reimbursement to levels that are
insufficient to cover the cost of providing patient care, which could adversely
affect the revenues of Realty's third-party borrowers and lessees. Such adverse
effects on Realty's third-party borrowers may negatively impact those borrowers'
and lessees' abilities to make their loan or lease payments to Realty. Five of
Realty's third-party operators have cited these healthcare reforms as the
precipitating factor in
66
filing for bankruptcy protection. Failure of the borrowers or lessees to make
their loan or lease payments would have a direct and material adverse effect on
our business, financial condition or results of operations.
FIVE OF THE COMPANIES' HEALTHCARE FACILITY OPERATORS HAVE FILED FOR BANKRUPTCY.
As of December 31, 2000, the Companies have exposure to five operators who
have filed for protection under Chapter 11: Sun Healthcare Group, Inc. ("Sun"),
Mariner Health Group ("Mariner"), Integrated Health Services, Inc.
("Integrated"), Genesis Health Ventures, Inc. ("Genesis") and CareMatrix
Corporation ("CareMatrix"). The following table describes the number of
facilities, net assets before valuation allowance by lease/mortgage and the
lease/mortgage income by each of the five operators that have filed for
Chapter 11:
YEAR ENDED
DECEMBER 31,
LEASES MORTGAGES 2000
---------------------- --------------------- -------------------
TOTAL NET NET RENTAL INTEREST
OPERATOR DATE FILED FACILITIES FACILITIES ASSETS FACILITIES ASSETS INCOME INCOME
- --------------------- ---------- ---------- ---------- --------- ---------- -------- -------- --------
(IN THOUSANDS, EXCEPT FOR NUMBER OF FACILITIES)
Sun(5)............... 10/14/99 39 35 $285,130 4 $30,410 $46,650 $ --(1)
Mariner.............. 1/18/00 2 1 6,789 1 7,057 977 --(2)
Integrated........... 2/2/00 10 10 37,066 -- -- 6,288 N/A
Genesis.............. 6/26/00 8 4 15,127 4 18,425 1,653 1,019(3)
CareMatrix........... 11/9/00 4 1 13,840 3 35,606 1,648 1,691(4)
-- -- -------- -- ------- ------- ------
Totals............... 63 51 $357,952 12 $91,498 $57,216 $2,710
== == ======== == ======= ======= ======
- --------------------------
(1) No interest payments related to the Sun mortgages have been received since
October 14, 1999 and, accordingly, these mortgages were placed on
non-accrual status.
(2) No interest payments related to the Mariner mortgage were received and,
accordingly, this mortgage was placed on non-accrual status.
(3) Mortgages related to Genesis have been placed on non-accrual status and
interest income is recorded as payments are received.
(4) Mortgages related to CareMatrix have been placed on non-accrual status and
interest income is recorded as payments are received.
(5) Net lease assets operated by Sun include straight-line rent receivables of
$4,389,000.
The Companies continue to monitor its operators that have filed for
Chapter 11. To date, the Companies have not come to any definitive agreement
with any of these operators. In the event any of its leases are successfully
rejected through the course of the bankruptcy proceedings, the Companies intend
to transition the operations of these facilities to other operators.
Management has initiated various actions to protect the Companies' interests
under its leases and mortgages including the draw down 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.
WE CANNOT PROVIDE ASSURANCE THAT THIRD-PARTY REIMBURSEMENT FOR REALTY'S
OPERATORS WILL CONTINUE TO BE AVAILABLE.
The cost of many of the services offered by the current operators of
Realty's healthcare facilities are reimbursed or paid for by third-party payors
such as Medicare and Medicaid programs for elderly, low income and disabled
patients and state Medicaid programs for managed care organizations. No
67
assurance can be given that such third-party reimbursement to Realty's operators
will continue to be available or when reimbursement will be offered or that
reimbursement rates will not be reduced. The increase in the number of providers
contracting to provide per person fixed cost healthcare to a patient population
has increased pressure on third-party payers to lower costs.
A significant portion of the revenue from the third-party operators who
lease or receive financing from Realty is derived from governmentally funded
reimbursement programs, such as Medicare and Medicaid. These programs are highly
regulated and subject to frequent and substantial changes resulting from
legislation, adoption of rules and regulations and administrative and judicial
interpretations of existing law. In recent years, there have been fundamental
changes in the Medicare program resulting in reduced levels of payment for a
substantial portion of healthcare services over which Realty has no control.
Moreover, healthcare facilities have experienced increasing pressure from
private payors, such as health maintenance organizations, attempting to control
healthcare costs. Reimbursement from private payors has, in many cases, been
reduced to levels approaching those of government payors. Concern regarding
healthcare costs may result in significant reductions in payment to healthcare
facilities and there can be no assurance that future payment rates from either
governmental or private healthcare plans will be sufficient to cover cost
increases in providing services to patients. In many instances, revenues from
Medicaid programs are already insufficient to cover the actual costs incurred in
providing care to those patients. Any changes in reimbursement policies which
reduce reimbursement to levels that are insufficient to cover the cost of
providing patient care could adversely affect revenues from the third-party
operators who lease or receive financing from Realty and thereby adversely
affect those entities' ability to make their lease or loan payments to Realty.
Failure of these entities to make their lease or loan payments would have a
direct and material adverse impact on our business, financial condition or
results of operations.
FAILURE TO COMPLY WITH FRAUD AND ABUSE LAWS AND GOVERNMENTAL PROGRAM INTEGRITY
REGULATIONS MAY HAVE A MATERIAL ADVERSE EFFECT ON US.
In the past several years, due to rising healthcare costs, there has been an
increased emphasis on detecting and eliminating fraud and abuse in the Medicare
and Medicaid programs. Federal and state statutes generally prohibit payment of
any remuneration to induce the referral of Medicare and Medicaid patients. Both
federal and state self-referral statutes severely restrict the ability of
physicians to refer patients to entities in which they have a financial
interest. The Balanced Budget Act of 1997 provided the federal government with
expanded enforcement powers to combat waste, fraud and abuse in the delivery of
healthcare services. In addition, the Office of Inspector General and the
Healthcare Financing Administration have increased investigation and enforcement
activity of fraud and abuse, specifically targeting nursing homes, home health
providers and medical equipment suppliers. Failure to comply with the foregoing
fraud and abuse laws or government program integrity regulations may result in
sanctions, including the loss of licensure or eligibility to participate in
reimbursement programs (including Medicare and Medicaid), asset forfeitures and
civil and criminal penalties.
It is anticipated that the trend toward increased investigation and
informant activity in the area of fraud and abuse, as well as self-referral,
will continue in future years. In the event that any borrower or lessee of the
Companies' were to be found in violation of the applicable laws regarding fraud,
abuse or self-referral, that borrower's or lessee's license or certification to
participate in government reimbursement programs could be jeopardized, or that
borrower or lessee could be subject to civil and criminal fines and penalties.
Either of these occurrences could have a material adverse effect on us by
adversely affecting the borrower's or lessee's ability to make debt or lease
payments to Realty.
IT IS DIFFICULT TO BE CONTINUOUSLY UP-TO-DATE WITH CURRENT INFORMATION REGARDING
THIRD-PARTY OPERATORS OF OUR HEALTHCARE PROPERTIES.
As of December 31, 2000, our healthcare portfolio comprised approximately
27% of our total real estate investments. Approximately 19% of our total real
estate investments (approximately 58% of the healthcare portfolio before the
valuation allowance) are operated by companies in the skilled nursing sector of
the healthcare industry and 9% of our total real estate investments
(approximately 29% of the
68
healthcare portfolio before the valuation allowance) are operated by companies
in the assisted living sector of the healthcare industry.
We monitor credit risk for our healthcare portfolio by evaluating a
combination of publicly available financial information, information provided by
the operators themselves and information otherwise available to us. The
financial condition and ability of these healthcare operators to meet their
rental and other obligations will, among other things, have an impact on our
revenues, net income or loss, funds available from operations, our ability to
make distributions to our shareholders and our ability to obtain financing. The
operations of the skilled nursing companies have been negatively impacted by
changes in Medicare reimbursement rates, increases in labor costs, increases in
their leverage and various 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 and skilled nursing facilities are experiencing
longer fill-up periods and are being affected by concerns regarding the
potential of over-building, increased regulation and the use of certain
accounting practices. Accordingly, many of these operators have pre-announced
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 slowed or halted their growth plans
and may have a negative effect on their operating cash flows.
OUR SUBSTANTIAL DEBT, AS WELL AS THE VARIOUS OTHER RISKS ASSOCIATED WITH DEBT
AND PREFERRED STOCK FINANCING, COULD RESULT IN ADVERSE CONSEQUENCES FOR US.
WE ARE DEPENDENT ON EXTERNAL SOURCES OF CAPITAL.
To qualify as a REIT, Realty must distribute to its stockholders each year
at least 95% of its net taxable income (90% commencing in 2001), excluding any
net capital gain. Because of these distribution requirements, it is not likely
that Realty will be able to fund all future capital needs, including capital
required for potential acquisitions, from income from operations. Realty,
therefore, will have to rely on third-party sources of capital, which may or may
not be available on favorable terms or at all. Our access to third-party sources
of capital depends upon a number of factors, including general market
conditions, the market's perception of our growth potential and risk
characteristics of our underlying business operations, our current and potential
future earnings and cash distributions and the market price of our common stock.
Moreover, additional equity offerings may result in substantial dilution of
stockholders' interests and additional debt financing may further leverage the
Companies.
REALTY IS SUBSTANTIALLY LEVERAGED.
Our debt-to-total market capitalization ratio was approximately 40% as of
December 31, 2000. Operating, as a guarantor under Realty's credit facility, is
also substantially leveraged. This amount of debt could have important
consequences for investors and for us, some of which include:
- our ability to obtain additional financing may be impaired, both currently
and in the future;
- a substantial portion of our cash flow from operations must be dedicated
to the payment of principal and interest on this indebtedness, thereby
reducing the funds available for other purposes;
- our cash flow may be insufficient to meet required payments of principal,
interest or dividends;
- we may be substantially more leveraged than our competitors, putting us at
a competitive disadvantage; and
- our flexibility to adjust to market conditions is limited, leaving us
vulnerable in a downturn in general economic conditions or in our
business.
Despite our plan to decrease the amount of our debt as announced in the Five
Point Plan and our continuing efforts to do so, we cannot provide assurance that
we will be able to repay enough debt to successfully deleverage.
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WE HAVE RELIED, AND CONTINUE TO RELY, ON THE SALE OF HEALTHCARE ASSETS IN ORDER
TO DELEVERAGE REALTY AND A LACK OF CONTINUED SUCCESS IN THESE SALES EFFORTS MAY
IMPAIR OUR ABILITY TO SERVICE OR REFINANCE OUR DEBT OBLIGATIONS.
Since the announcement of the Five Point Plan, Realty has relied, and will
continue to rely, significantly on the sale of healthcare assets to repay its
indebtedness, including indebtedness under its Credit Facility which matures in
July 2001. The sale of significant portions of healthcare assets is subject to a
number of risks including the ability to identify satisfactory potential buyers,
the availability of financing to potential buyers, the satisfactory completion
of regulatory approvals and other factors which are outside of Realty's control.
During the past several years, participants in the healthcare real estate
industry have endured capital markets that have offered limited access to
traditional financing vehicles. Regulatory changes, uncertainty in the industry
and other factors have contributed to this reduction in available capital
financing sources. Continuing limitations in the amount and type of capital
which is available to the healthcare real estate industry may reduce the number
of qualified buyers, impact the timing of asset sales or reduce the purchase
prices at which prospective buyers are willing to acquire healthcare related
real estate. In the event Realty is unable to continue to successfully sell
healthcare assets on a timely basis and at prices which are acceptable to
Realty, its ability to satisfactorily service or refinance its debt obligations
could be impaired.
REALTY MAY NOT BE ABLE TO RENEW, REPAY OR REFINANCE WHEN DUE THE INDEBTEDNESS ON
OUR PROPERTIES OR UNSECURED INDEBTEDNESS OR THE TERMS OF ANY RENEWAL OR
REFINANCING WILL NOT BE AS FAVORABLE AS THE TERMS OF SUCH ORIGINAL INDEBTEDNESS.
If Realty were unable to refinance the indebtedness on acceptable terms, or
at all, we may be forced to dispose of one or more of our properties on
disadvantageous terms, which might result in losses which could have a material
adverse effect on us and our ability to make distributions to stockholders and
to pay amounts due on such indebtedness. Realty has $628 million in debt that
matures in 2001. If a property is mortgaged to secure payment of indebtedness
and Realty is unable to meet mortgage payments, the mortgagee could foreclose
upon the property, appoint a receiver and receive an assignment of rents and
leases or pursue other remedies, all with a consequent loss of revenues and
asset value to us. Foreclosures could also create taxable income without
accompanying cash proceeds, thereby hindering Realty's ability to meet the REIT
distribution requirements of the Code.
WE ARE SUBJECT TO THE RISKS ASSOCIATED WITH INDEBTEDNESS THAT BEARS INTEREST AT
VARIABLE RATES.
We have incurred and expect in the future to incur, indebtedness which bears
interest at variable rates. Accordingly, increases in interest rates would
increase our interest costs (to the extent that the related indebtedness was not
protected by interest rate protection arrangements), which could have a material
adverse effect on us and our ability to make distributions to stockholders and
to pay amounts due on our indebtedness or cause us to be in default under
certain debt instruments. In addition, an increase in market interest rates may
lead our stockholders to demand a higher yield on their paired shares from our
distributions, if any, which could adversely affect the market price for the
paired shares and could also adversely affect the market price of any preferred
stock issued by either or both of the Companies.
REALTY'S REAL PROPERTY INVESTMENTS ARE SUBJECT TO THE MANY VARYING TYPES AND
DEGREES OF RISK INHERENT IN OWNING REAL ESTATE AND THAT MAY AFFECT THE VALUE OF
OUR ASSETS AND OUR ABILITY TO GENERATE REVENUE, NET INCOME AND CASH AVAILABLE
FOR DISTRIBUTION TO OUR STOCKHOLDERS.
THE ILLIQUIDITY OF REAL ESTATE AS AN INVESTMENT LIMITS REALTY'S ABILITY TO SELL
PROPERTIES QUICKLY IN RESPONSE TO MARKET CONDITIONS.
Real estate investments are relatively illiquid and, therefore, cannot be
purchased or sold rapidly in response to changes in economic or other
conditions. Buyers may not be identified quickly or such buyers may not be able
to secure suitable financing to consummate a transaction. Furthermore, sales of
certain appreciated property could generate material adverse tax consequences,
which may affect Realty's ability to sell properties in response to market
conditions and adversely affect returns to stockholders.
70
REALTY DEPENDS AND RELIES ON THE ABILITY AND SUCCESS OF THOSE WHO OPERATE,
MANAGE, LEASE AND MAINTAIN OUR PROPERTIES.
Federal income tax law restricts REITs from deriving revenues directly from
operating their properties. Thus, the underlying value of Realty's real estate
investments, results of operations and ability to make distributions to
stockholders and pay amounts due on indebtedness depends on the ability of the
operators, managers, lessees and Operating to operate Realty's properties in a
manner sufficient to maintain or increase revenues and to generate sufficient
revenues in excess of operating expenses to make rent payments under their
leases or loan payments in respect to their loans from Realty.
THE RESULTS OF OPERATIONS OF REALTY'S PROPERTIES MAY BE ADVERSELY AFFECTED BY
MANY FACTORS OUTSIDE OF REALTY'S CONTROL.
Results of operations of Realty's properties may also be adversely affected
by, among other things:
- changes in national economic conditions, changes in local market
conditions due to changes in general or local economic conditions and
neighborhood characteristics;
- changes in interest rates and in the availability, cost and terms of
financing;
- the impact of present or future environmental legislation and compliance
with environmental laws and other regulatory requirements;
- the ongoing need for capital improvements, particularly in older
structures;
- changes in real estate tax rates and assessments and other operating
expenses;
- adverse changes in governmental rules and fiscal policies;
- adverse changes in zoning and other land use laws; and
- civil unrest, earthquakes and other natural disasters (which may result in
uninsured losses) and other factors, which are beyond our control.
WE DEPEND ON THE RENTAL INCOME FROM OUR REAL PROPERTY.
Realty's cash flow, results of operations and the value of our assets would
be adversely affected if a significant number of third-party operators of our
properties failed to meet their lease obligations. These lease payments are one
of Realty's principal sources of revenue.
The bankruptcy or insolvency of a major operator may have an adverse effect
on a property. At any time, an operator also may seek protection under the
bankruptcy laws, which could result in rejection and termination of such
operator's lease and thereby cause a reduction in the cash flow from the
property. We have no control over such reductions and cannot assure investors
that any of our third-party operators will have sufficient assets, income and
access to financing to enable them to satisfy their obligations under any such
lease. If an operator rejects its lease, the owner's claim for breach of the
lease would (absent collateral securing the claim) be treated as a general
unsecured claim. Generally, the amount of the claim would be capped at the
amount owed for unpaid pre-petition lease payments unrelated to the rejection,
plus the greater of one year's lease payments or 150% of the remaining lease
payments payable under the lease (but not to exceed the amount of three years'
lease payments).
OUR OPERATING COSTS MAY BE AFFECTED BY THE OBLIGATION TO PAY FOR THE COST OF
COMPLYING WITH EXISTING ENVIRONMENTAL LAWS, ORDINANCES AND REGULATIONS, AS WELL
AS THE COST OF COMPLYING WITH FUTURE LEGISLATION.
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on or under the property. Environmental laws often impose liability whether or
not the owner or operator knew of, or was responsible for, the presence of such
hazardous or toxic substances and whether or not such substances originated from
the property. In addition, the presence of hazardous or toxic substances, or the
failure to remediate such property properly, may adversely affect our ability to
use such real property as collateral in borrowing.
71
Persons who arrange for the transportation, disposal or treatment of
hazardous or toxic substances may also be liable for the costs of removal or
remediation of such substances at the disposal or treatment facility, whether or
not such facility is or ever was owned or operated by such person. Certain
environmental laws and common law principles could be used to impose liability
for releases of hazardous materials, including asbestos-containing materials,
into the environment. In addition, third-parties may seek recovery from owners
or operators of real properties for personal injury associated with exposure to
released asbestos-containing materials or other hazardous materials.
Environmental laws may also impose restrictions on the use or transfer of
property and these restrictions may require various expenditures by Realty. In
connection with the ownership and operation of any of Realty's properties, we
(and the other lessees or operators of these properties) may be liable for any
such costs. The cost of defending against claims of liability or remediating
contaminated property and the cost of complying with environmental laws could
materially adversely affect us and our ability to make distributions to
stockholders and to pay amounts due on our indebtedness.
OUR FAILURE TO COMPLY WITH THE REQUIREMENTS OF THE AMERICANS WITH DISABILITIES
ACT OF 1990 WOULD HAVE A MATERIAL ADVERSE EFFECT ON US AND OUR ABILITY TO MAKE
DISTRIBUTIONS TO OUR STOCKHOLDERS AND TO PAY AMOUNTS DUE ON OUR INDEBTEDNESS,
OUR BUSINESS AND OUR RESULTS OF OPERATIONS.
Under the Americans with Disabilities Act of 1990, all public accommodations
are required to meet certain federal requirements related to access and use by
disabled persons. A determination that we are not in compliance with the
Americans with Disabilities Act could result in the imposition of fines and/or
an award of damages to private litigants. If we were required to make
modifications to comply with the Americans with Disabilities Act, there could be
a material adverse effect on us and our ability to make distributions to
stockholders and to pay amounts due on our indebtedness.
OUR FAILURE TO OBTAIN AND MAINTAIN PROPER INSURANCE ON OUR PROPERTIES WOULD HAVE
A MATERIAL ADVERSE EFFECT ON US.
Realty is directly responsible for insuring our lodging related properties.
Additionally, each of Realty's leases and mortgage loans typically specifies
that comprehensive insurance be maintained on each of the applicable properties,
including liability, fire and extended coverage. Leases and loan documents for
new investments (including those leased to Operating) typically contain similar
provisions. There are certain types of losses, generally of a catastrophic
nature, such as earthquakes and floods, that may be uninsurable or not
economically insurable. We will use our discretion in determining amounts,
coverage limits and deductibility provisions of insurance, with a view to
maintaining appropriate insurance coverage on our investments at a reasonable
cost and on suitable terms. This may result in insurance coverage that, in the
event of a substantial loss, would not be sufficient to pay the full current
market value or current replacement cost of the lost investment and also may
result in certain losses being totally uninsured. Inflation, changes in building
codes, zoning or other land use ordinances, environmental considerations, lender
imposed restrictions and other factors also might make it infeasible to use
insurance proceeds to replace the property after such property has been damaged
or destroyed. Under such circumstances, the insurance proceeds, if any, received
by Realty might not be adequate to restore our economic position with respect to
such property.
AN INVESTMENT IN OUR SECURITIES MAY HAVE ADVERSE TAX CONSEQUENCES.
REALTY'S FAILURE TO QUALIFY AS A REIT COULD HAVE SERIOUS ADVERSE FINANCIAL
CONSEQUENCES.
Realty operates and intends to continue to operate in the future, so as to
qualify as a REIT for federal income tax purposes. Realty believes that it has
operated in a manner that permits it to qualify as a REIT under the Code.
Qualification as a REIT, however, involves the application of highly technical
and complex provisions of the Code for which there are only limited judicial or
administrative interpretations. The complexity of these provisions is greater in
the case of a paired share REIT. In addition, REIT qualification involves the
determination of factual matters and circumstances not entirely within our
control. For example, in order to qualify as a REIT, Realty must derive at least
95% of its gross income in
72
any year from qualifying sources and Realty must distribute annually to
shareholders 95% (90% commencing in 2001) of its REIT taxable income, excluding
net taxable gains.
Although we believe Realty is organized and operating in a manner that
permits it to remain qualified as a REIT, we cannot guarantee that Realty will
be able to continue to operate in such a manner. In addition, if we are ever
audited by the Internal Revenue Service ("IRS") with respect to any past year,
the IRS may challenge Realty's qualification as a REIT for such year.
If Realty were to fail to qualify as a REIT, it would be subject to federal
income tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. Such failure to qualify as a REIT would
result in additional tax liability for the year or years involved. This
additional tax could significantly reduce, or possibly eliminate, the amount of
cash Realty would have available for investment or distribution to stockholders.
In addition, the failure to qualify as a REIT would also:
- constitute a default under certain of our debt obligations, which would
generally allow the holders thereof to demand the immediate repayment of
such indebtedness and
- potentially reduce the market value of our stock.
Each of these possible outcomes could have a material adverse effect on our
business, financial condition or results of operations.
BUSINESS DEVELOPMENTS AND RECENT LEGISLATION COMPLICATE COMPLIANCE WITH REIT
QUALIFICATION RULES.
Due to recent sales of healthcare assets and the resulting loss of
qualifying rental and interest income disqualifying income as a percentage of
Realty's gross income has increased. Disqualifying income cannot exceed 5% of
Realty's gross income. Although Realty currently satisfies this requirement,
additional asset sales (which will result in further reductions of qualifying
rental and interest income) as well as increases in royalty income (which is
considered nonqualifying income) could cause Realty to exceed the 5% gross
income limit for non-qualifying income, resulting in REIT disqualification
and/or substantial costs to avoid such disqualification. In light of the Five
Point Plan and the Companies' announced intention to increase its focus on its
lodging business (including franchising, which will generate royalty income) and
sell a significant portion of its healthcare assets, the Companies intend to
continue to reevaluate its financial, legal and tax structure.
The Ticket to Work Act replaced the former rule permitting a REIT to own
more than 10% of the value of the securities of an issuer, provided the voting
power of the security did not exceed 10%, with a new rule prohibiting a REIT
from owning more than 10% of the vote or value of the securities of an issuer
unless such issuer qualifies as a taxable REIT subsidiary. Taxable REIT
subsidiaries cannot, however, directly or indirectly operate or manage lodging
or healthcare facilities and are limited in their ability to franchise or
license brand names used in the operation of a lodging or healthcare facility.
In order to comply with these new rules, the Companies may have to restructure
their operations or limit their future growth. Any restructuring of the
operations of Realty and Operating to comply with the above-described
legislation may cause one or both of the Companies to incur substantial tax
liabilities and other costs, to recognize an impairment loss on their goodwill
asset related to the acquisition of the paired share structure or to take other
actions that may otherwise adversely affect one or both of the Companies.
LEGISLATION HAS LIMITED THE USE OF THE PAIRED SHARE STRUCTURE.
Realty's ability to qualify as a REIT is further dependent upon its
continued exemption from the anti-pairing rules of Section 269B(a)(3) of the
Code, which would ordinarily prevent it from qualifying as a REIT. Subject to
the discussion below regarding recent legislation, the "grandfathering" rules
governing Section 269B generally provide that Section 269B(a)(3) does not apply
to a paired share REIT if the REIT and its paired operating company were paired
on June 30, 1983. On June 30, 1983, Realty (then known as Santa Anita
Enterprises, Inc.) was paired with Operating (which was then known as Santa
Anita Operating Company). There are, however, no judicial or administrative
authorities interpreting this
73
"grandfathering" rule. Moreover, if for any reason Realty failed to qualify as a
REIT in 1983, the benefit of the "grandfathering" rule would not be available to
it, in which case Realty would not qualify as a REIT for any taxable year from
and after 1983. Such failure to qualify as a REIT would have a material adverse
effect on us and our ability to make distributions to our stockholders and to
pay amounts due on our indebtedness.
On July 22, 1998, the President signed into law the Internal Revenue Service
Restructuring and Reform Act of 1998 (the "Reform Act"). Included in the Reform
Act is a freeze on the grandfathered status of paired share REITs. Under this
legislation, the anti-pairing rules provided in the Code apply to real property
interests we acquired after March 26, 1998 or acquired by a subsidiary or
partnership in which a 10% or greater interest we own, unless:
- the real property interests are acquired pursuant to a written agreement
that was binding on March 26, 1998 and at all times thereafter, or
- the acquisition of such real property interests was described in a public
announcement or in a filing with the SEC on or before March 26, 1998.
These restrictions on the activities of a grandfathered paired share REIT
provided for in the Reform Act may in the future make it impractical or
undesirable for us to continue to maintain our paired share structure.
Restructuring our operations to comply with the rules provided by the Reform Act
could cause us to incur tax liabilities, to recognize an impairment loss on
their goodwill assets, or otherwise materially adversely affect us and our
ability to make distributions to stockholders and to pay amounts due on our
indebtedness.
WE MAY BE LIMITED IN THE AMOUNT AND NATURE OF OUR FUTURE GROWTH UNDER OUR
PRESENT STRUCTURE.
We operate as a so-called "paired share" real estate investment trust and,
as a result, are limited in the extent and types of activities in which we may
engage. Realty operates and intends to continue to operate in the future so as
to qualify as a REIT for federal income tax purposes. Accordingly, Realty is
limited in both the extent and type of assets which it can own and the extent
and type of income which it can generate. Further, by restricting the activities
that a paired share REIT can engage in and by limiting the type of entities that
a REIT can own, the Reform Act and the Ticket to Work Act, federal laws which
were adopted in 1998 and 1999, respectively, operate in conjunction to limit the
ability of Realty to grow through construction or acquisition of new lodging
properties or the acquisition of other lodging brands or properties. These
restrictions will limit our ability to grow our overall business through the
construction of additional lodging properties, the franchising of our La
Quinta-Registered Trademark- brand and related products and services and the
acquisition of complementary brand names without significant restructuring
efforts. Accordingly, we will need to continue to reevaluate our financial,
legal and tax structure to determine the best platform for growing La Quinta and
enhancing shareholder value going forward.
WE HAVE NO CONTROL OVER CHANGES IN LEGISLATION, REGULATIONS, ADMINISTRATIVE
INTERPRETATIONS OR COURT DECISIONS.
We can give no assurances that new legislation, regulations, administrative
interpretations or court decisions will not change the tax law with respect to
qualification as a REIT and the federal income tax consequence of such
qualification. Such legislation, regulations, administrative interpretations or
court decisions could have a material adverse effect on us and our ability to
make distributions to stockholders and to pay amounts due on our indebtedness.
In addition, this type of legislation could prevent us from growing as
originally intended.
REALTY IS SUBJECT TO SOME TAXES EVEN IF IT QUALIFIES AS A REIT.
Even if Realty qualifies as a REIT, it is subject to some federal, state and
local taxes on its income and property. For example, Realty pays taxes on
certain income it does not distribute. Also, Realty's income derived from
properties located in some states is subject to local taxes and, if Realty
enters into
74
transactions that the Code labels as "prohibited transactions," Realty's net
income from such transactions would be subject to a 100% tax.
THE REIT MINIMUM DISTRIBUTION REQUIREMENTS MAY RESULT IN ADVERSE CONSEQUENCES TO
INVESTORS.
REALTY MAY BE SUBJECT TO TAXES IN CONNECTION WITH THE DISTRIBUTION OF ASSETS
ACQUIRED IN ACQUISITIONS.
In order to qualify as a REIT, Realty is generally required each year to
distribute to its shareholders at least 95% (90% commencing in 2001) of its
taxable income, excluding any net capital gain. In addition, if Realty was to
dispose of assets acquired in certain acquisitions during the ten-year period
following the acquisition, it would be required to distribute at least 95% (90%
commencing in 2001) of the amount of any "built-in gain" attributable to such
assets that Realty recognizes in the disposition, less the amount of any tax
paid with respect to such recognized built-in gain. Realty generally is subject
to a 4% nondeductible excise tax on the amount, if any, by which certain
distributions paid by Realty with respect to any calendar year are less than the
sum of:
- 85% of Realty's ordinary income for that year,
- 95% of Realty's capital gain net income for that year and
- 100% of Realty's undistributed income from prior years.
REALTY MAY NEED TO BORROW MONEY TO MEET ITS MINIMUM DISTRIBUTION REQUIREMENTS
AND TO CONTINUE TO QUALIFY AS A REIT.
Realty's ability to make distributions to shareholders could be adversely
affected by increased debt service obligations if it needs to borrow money in
order to maintain its REIT qualification. For example, differences in timing
between when Realty receives income and when it has to pay expenses could
require Realty to borrow money to meet the requirement that Realty distributes
to its shareholders at least 95% (90% commencing in 2001) of its net taxable
income each year excluding net capital gains. The incurrence of large expenses
also could cause Realty to need to borrow money to meet this requirement. Realty
might need to borrow money for these purposes even if we believe that market
conditions are not favorable for such borrowings and, therefore, we may borrow
money on unfavorable terms.
REALTY'S FUNDS FROM OPERATIONS AND CASH DISTRIBUTIONS MAY AFFECT THE MARKET
PRICE OF OUR PUBLICLY TRADED SECURITIES.
We believe that the market value of a REIT's equity securities is based upon
the market's perception of the REIT's earnings growth potential, the Companies'
debt levels and its current and potential future cash distributions and upon the
real estate market value of the underlying assets. For that reason, our common
stock may trade at prices that are higher or lower than the net asset value per
share. To the extent Realty retains operating cash flow for investment purposes,
working capital reserves or other purposes, these retained funds, while
increasing the value of our underlying assets, may not correspondingly increase
the market price of our common stock. Realty's failure to meet the market's
expectations with regard to future funds from operations, leverage ratios and
cash distributions would likely adversely affect the market price of our
publicly traded securities.
MARKET INTEREST RATES MAY HAVE AN EFFECT ON THE VALUE OF OUR PUBLICLY TRADED
SECURITIES.
One of the factors that investors consider important in deciding whether to
buy or sell shares of a REIT is the distribution rate on such shares, as a
percentage of the price of such shares relative to market interest rates. If
market interest rates go up, prospective purchasers of our equity securities may
expect a higher dividend yield. Higher interest rates would not, however, result
in more funds for Realty to distribute and, in fact, would likely increase our
borrowing costs and potentially decrease cash available for distribution to the
extent that our indebtedness has floating interest rates. Thus, higher market
interest rates could cause the market price of our publicly traded securities to
go down.
75
PROVISIONS OF OUR CHARTERS AND BYLAWS COULD INHIBIT CHANGES IN CONTROL THAT
COULD BE BENEFICIAL TO OUR SHAREHOLDERS.
Certain provisions of our charters and bylaws may delay or prevent a change
in control or other transaction that could provide our shareholders with a
premium over the then-prevailing market price of their paired shares or which
might otherwise be in their best interests. These include a staggered Board of
Directors as well as the ownership limitations in each of our respective Amended
and Restated Certificates of Incorporation.
WE DEPEND ON OUR KEY PERSONNEL.
We depend on the efforts of our executive officers and other key personnel.
While we believe that we could find replacements for these key personnel, the
loss of their services could have a significant adverse effect on our
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table below provides information about the Companies' derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates, including interest rate swaps and debt obligations.
For fixed rate debt obligations, the table presents principal cash flows and
related weighted average interest rates by expected maturity dates. For variable
rate debt obligations, the table presents principal cash flows by expected
maturity date and contracted interest rates as of the report date. For the
interest rate swap, the table presents notional amount and interest rate by the
expected (contractual) maturity date. Notional amounts are used to calculate the
contractual payments to be exchanged under the contract. The variable interest
rate represents the contractual LIBOR rate as of the reporting date.
2001 2002 2003 2004 2005 THEREAFTER FACE VALUE FAIR VALUE
-------- -------- -------- -------- -------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
Debt Obligations
Long Term Debt:
Fixed Rate.......................... $ 228 $ 92 $ 207 $ 252 $ 116 $301 $1,196 $1,022
Average interest rate............... 7.85% 9.19% 8.26% 7.46% 8.04% -- -- --
Variable rate....................... $ 400 -- -- -- -- -- $ 400 $ 400
Average interest rate............... 9.50% -- -- -- -- -- -- --
Interest rate derivatives
Interest rate swap:
Notional amount..................... $ 400 -- -- -- -- -- -- $ 1
Pay rate............................ 5.70%
Receive rate........................ (a)
- ------------------------------
(a) The receive rate is based on one month LIBOR rates at the time of each
trade.
REALTY
All indebtedness, including notes payable, convertible debentures, bank
notes payable and bonds and mortgages payable are liabilities of Realty. See
quantitative and qualitative disclosures about the Companies' market risk above.
OPERATING
Operating is a guarantor of all of the obligations of Realty under the
Credit Agreement.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THE MEDITRUST COMPANIES
COMBINED CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------
2000 1999
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
ASSETS
Real estate investments, net................................ $ 3,352,676 $ 4,672,659
Cash and cash equivalents................................... 38,993 7,220
Fees, interest and other receivables........................ 73,476 79,042
Goodwill, net............................................... 457,789 480,673
Other assets, net........................................... 170,213 228,163
----------- -----------
Total assets.......................................... $ 4,093,147 $ 5,467,757
=========== ===========
LIABILITIES
Indebtedness:
Notes payable, net........................................ $ 1,013,640 $ 1,144,406
Convertible debentures, net............................... 136,915 185,468
Bank notes payable, net................................... 397,827 1,154,182
Bonds and mortgages payable, net.......................... 42,077 113,382
----------- -----------
Total indebtedness...................................... 1,590,459 2,597,438
----------- -----------
Accounts payable, accrued expenses and other
liabilities............................................. 179,877 197,106
----------- -----------
Total liabilities..................................... 1,770,336 2,794,544
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Meditrust Corporation Preferred Stock, $0.10 par value;
6,000 shares authorized; 701 shares issued and
outstanding in 2000 and 1999............................ 70 70
Paired Common Stock, $0.20 combined par value; 500,000
shares authorized; 142,905 and 141,015 paired shares
issued and outstanding in 2000 and 1999, respectively... 28,580 28,203
Additional paid-in-capital................................ 3,659,339 3,654,358
Unearned compensation..................................... (4,911) (6,760)
Accumulated other comprehensive income.................... (985) 4,468
Distributions in excess of net income..................... (1,359,282) (1,007,126)
----------- -----------
Total shareholders' equity.............................. 2,322,811 2,673,213
----------- -----------
Total liabilities and shareholders' equity............ $ 4,093,147 $ 5,467,757
=========== ===========
The accompanying notes are an integral part of these financial statements.
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THE MEDITRUST COMPANIES
COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
2000 1999 1998
------------- ------------ ------------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
REVENUE:
Rental................................................. $ 116,040 $165,431 $ 191,874
Interest............................................... 95,253 138,223 153,093
Hotel.................................................. 611,545 606,577 258,423
Other.................................................. -- 1,750 35,987
---------- -------- ---------
822,838 911,981 639,377
---------- -------- ---------
EXPENSES:
Interest............................................... 186,951 244,973 178,458
Depreciation and amortization.......................... 150,138 135,853 87,228
Amortization of goodwill............................... 22,755 21,470 13,265
General and administrative............................. 49,985 32,826 27,098
Hotel operations....................................... 321,630 283,988 119,584
Rental property operations............................. 28,895 36,517 15,638
Loss on sale of securities............................. -- -- 4,159
Loss (gain) on sale of assets.......................... 130,536 (12,042) (52,642)
Income from unconsolidated joint venture............... -- -- (906)
Impairment of real estate assets....................... 183,698 63,170 63,954
Provision for loss on equity securities................ 50,279 -- --
Other.................................................. 32,901 45,814 47,261
---------- -------- ---------
1,157,768 852,569 503,097
---------- -------- ---------
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES AND EXTRAORDINARY ITEM........................... (334,930) 59,412 136,280
Income tax expense (benefit)............................. 629 -- (4,800)
---------- -------- ---------
(LOSS) INCOME FROM CONTINUING OPERATIONS................. (335,559) 59,412 141,080
DISCONTINUED OPERATIONS:
Income from operations, net............................ -- -- 10,721
Adjustment to loss on disposal of Santa Anita, net..... -- 2,961 (67,913)
Adjustment to loss on disposal of Cobblestone Golf
Group, net........................................... -- 27,452 (237,035)
---------- -------- ---------
NET (LOSS) INCOME BEFORE EXTRAORDINARY ITEM............ (335,559) 89,825 (153,147)
EXTRAORDINARY ITEM:
Gain on early extinguishments of debt................ 1,403 -- --
---------- -------- ---------
NET (LOSS) INCOME...................................... (334,156) 89,825 (153,147)
Preferred stock dividends............................ (18,000) (16,283) (8,444)
---------- -------- ---------
NET (LOSS) INCOME AVAILABLE TO COMMON SHAREHOLDERS....... $ (352,156) $ 73,542 $(161,591)
========== ======== =========
BASIC (LOSS) EARNINGS PER PAIRED COMMON SHARE:
(Loss) income available to common shareholders before
discontinued operations and extraordinary item....... $ (2.49) $ 0.30 $ 1.10
Discontinued operations, net........................... -- 0.22 (2.44)
Gain on early extinguishments of debt.................. 0.01 -- --
---------- -------- ---------
Net (loss) income...................................... $ (2.48) $ 0.52 $ (1.34)
========== ======== =========
DILUTED EARNINGS (LOSS) PER PAIRED COMMON SHARE:
(Loss) income available to common shareholders before
discontinued operations and extraordinary item....... $ (2.49) $ 0.30 $ 1.06
Discontinued operations, net........................... -- 0.21 (2.35)
Gain on early extinguishments of debt.................. 0.01 -- --
---------- -------- ---------
Net (loss) income...................................... $ (2.48) $ 0.51 $ (1.29)
========== ======== =========
The accompanying notes are an integral part of these financial statements.
78
THE MEDITRUST COMPANIES
COMBINED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AND OTHER COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
SHARES OF BENEFICIAL ACCUMULATED
INTEREST OR PAIRED OTHER
COMMON SHARES PRE- ADDITIONAL UNEARNED COMPRE-
---------------------- FERRED PAID-IN TREASURY COMPEN- HENSIVE
SHARES AMOUNT STOCK CAPITAL STOCK SATION INCOME
-------- ----------- -------- ---------- --------- ---------- -------------
(IN THOUSANDS)
BALANCE, DECEMBER 31, 1997........ 88,128 $ 17,626 $-- $1,997,517 $ -- $ -- $ 3,569
Proceeds from issuance of Paired
Common Shares, net of offering
costs of $5,874................. 8,500 1,700 269,738
Proceeds from issuance of
Preferred Stock, net of offering
costs of $6,334................. 70 168,596
Purchase of treasury stock........ (163,326)
Effect of merger with
Cobblestone..................... 8,177 1,636 239,510
Effect of merger with La Quinta... 43,280 8,656 1,163,980
Issuance of restricted stock
grants.......................... 315 63 7,026 (6,718)
Issuance of Paired Common Shares
for:
Conversion of debentures, net of
unamortized issue costs of
$1............................ 284 56 7,110
Employee compensation and
stock options............... 642 128 5,348
Dividends.........................
Property dividend................. 33,162
Net loss of the year ended
December 31, 1998...............
Change in market value of equity
investments in excess of cost... 13,402
------- ----------- --- ---------- --------- ------- --------
BALANCE, DECEMBER 31, 1998........ 149,326 29,865 70 3,891,987 (163,326) (6,718) 16,971
Issuance of Paired Common Shares
for: Employee compensation and
stock options................... 128 26 1,691
Purchase and retirement of
treasury stock.................. (8,501) (1,700) (265,345) 163,326
Issuance of restricted stock...... 230 46 3,241 (3,287)
Retirement of forfeited restricted
stock grants.................... (168) (34) (2,216) 2,109
Amortization of unearned
compensation.................... 1,136
Effect of TeleMatrix
Acquisition..................... 25,000
Dividends paid....................
Change in market value of equity
investments in excess of cost... (12,503)
Net income for the year ended
December 31, 1999...............
------- ----------- --- ---------- --------- ------- --------
BALANCE, DECEMBER 31, 1999........ 141,015 28,203 70 3,654,358 -- (6,760) 4,468
COMPRE-
DISTRIBUTIONS HENSIVE
IN EXCESS OF INCOME
EARNINGS TOTAL (LOSS)
------------- ---------- ---------
(IN THOUSANDS)
BALANCE, DECEMBER 31, 1997........ $ (192,973) $1,825,739
Proceeds from issuance of Paired
Common Shares, net of offering
costs of $5,874................. 271,438
Proceeds from issuance of
Preferred Stock, net of offering
costs of $6,334................. 168,666
Purchase of treasury stock........ (163,326)
Effect of merger with
Cobblestone..................... 241,146
Effect of merger with La Quinta... 1,172,636
Issuance of restricted stock
grants.......................... 371
Issuance of Paired Common Shares
for:
Conversion of debentures, net of
unamortized issue costs of
$1............................ 7,166
Employee compensation and
stock options............... 5,476
Dividends......................... (438,639) (438,639)
Property dividend................. (33,162)
Net loss of the year ended
December 31, 1998............... (153,147) (153,147) $(153,147)
Change in market value of equity
investments in excess of cost... 13,402 13,402
---------- ---------- ---------
BALANCE, DECEMBER 31, 1998........ (817,921) 2,950,928 $(139,745)
=========
Issuance of Paired Common Shares
for: Employee compensation and
stock options................... 1,717
Purchase and retirement of
treasury stock.................. (103,719)
Issuance of restricted stock......
Retirement of forfeited restricted
stock grants.................... (141)
Amortization of unearned
compensation.................... 1,136
Effect of TeleMatrix
Acquisition..................... 25,000
Dividends paid.................... (279,030) (279,030)
Change in market value of equity
investments in excess of cost... (12,503) $ (12,503)
Net income for the year ended
December 31, 1999............... 89,825 89,825 89,825
---------- ---------- ---------
BALANCE, DECEMBER 31, 1999........ (1,007,126) 2,673,213 $ 77,322
=========
The accompanying notes are an integral part of these financial statements.
79
THE MEDITRUST COMPANIES
COMBINED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AND OTHER COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
SHARES OF
BENEFICIAL
INTEREST OR ACCUMULATED
PAIRED OTHER
COMMON SHARES PRE- ADDITIONAL UNEARNED COMPRE-
------------------- FERRED PAID-IN TREASURY COMPEN- HENSIVE
SHARES AMOUNT STOCK CAPITAL STOCK SATION INCOME
-------- -------- -------- ---------- --------- ---------- -------------
(IN THOUSANDS)
Issuance of Paired Common Shares
for:
Employee compensation and stock
options....................... 180 36 924 (519)
Issuance of restricted stock...... 1,760 351 4,797 (4,841)
Accelerated amortization of
restricted shares............... 5,240
Retirement of forfeited restricted
stock grants.................... (50) (10) (740) 633
Amortization of unearned
compensation.................... 1,336
Dividends paid....................
Change in market value of equity
securities in excess of cost.... (54,749)
Other than temporary impairment of
equity securities............... 50,281
Minimum pension liability
adjustment...................... (985)
Net loss for the year ended
December 31, 2000...............
------- ------- --- ---------- -------- ------- --------
BALANCE, DECEMBER 31, 2000........ 142,905 $28,580 $70 $3,659,339 $ -- $(4,911) $ (985)
======= ======= === ========== ======== ======= ========
COMPRE-
DISTRIBUTIONS HENSIVE
IN EXCESS OF INCOME
EARNINGS TOTAL (LOSS)
------------- ---------- --------------
(IN THOUSANDS)
Issuance of Paired Common Shares
for:
Employee compensation and stock
options....................... 441
Issuance of restricted stock...... 307
Accelerated amortization of
restricted shares............... 5,240
Retirement of forfeited restricted
stock grants.................... (117)
Amortization of unearned
compensation.................... 1,336
Dividends paid.................... (18,000) (18,000)
Change in market value of equity
securities in excess of cost.... (54,749) $ (54,749)
Other than temporary impairment of
equity securities............... 50,281 50,281
Minimum pension liability
adjustment...................... (985) (985)
Net loss for the year ended
December 31, 2000............... (334,156) (334,156) (334,156)
----------- ---------- ---------
BALANCE, DECEMBER 31, 2000........ $(1,359,282) $2,322,811 $(339,609)
=========== ========== =========
The accompanying notes are an integral part of these financial statements.
80
THE MEDITRUST COMPANIES
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
2000 1999 1998
----------- ----------- -----------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income........................................... $ (334,156) $ 89,825 $ (153,147)
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation of real estate............................... 130,361 125,714 90,446
Goodwill amortization..................................... 22,755 21,470 15,826
Loss (gain) on sale of assets............................. 130,536 (42,455) 19,430
Shares issued for compensation............................ 449 159 438
Equity in income of joint venture, net of dividends
received................................................ -- -- 544
Gain on early extinguishments of debt..................... (2,183) --
Other depreciation, amortization and other items, net..... 27,552 35,781 27,384
Other non-cash items...................................... 242,370 70,900 318,457
----------- ----------- -----------
Cash flows from operating activities available for
distribution.............................................. 217,684 301,394 319,378
Net change in other assets and liabilities of discontinued
operations.............................................. -- (4,227) (18,331)
Net change in other assets and liabilities................ 3,027 (66,989) (124,876)
----------- ----------- -----------
Net cash provided by operating activities............. 220,711 230,178 176,171
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Paired Common and Realty Preferred
stock..................................................... -- -- 456,713
Purchase of treasury stock.................................. -- (103,269) (163,326)
Proceeds from borrowings on bank notes payable.............. 252,000 1,176,000 2,445,000
Repayment of bank notes payable............................. (1,017,359) (1,868,641) (767,000)
Repayment of notes payable.................................. (130,287) (12,500) (220,000)
Equity offering and debt issuance costs..................... -- (1,303) (47,393)
Repayment of convertible debentures......................... (48,115) -- (43,152)
Principal payments on bonds and mortgages payable........... (63,649) (15,937) (37,625)
Dividends/distributions to shareholders..................... (14,062) (279,030) (438,639)
Proceeds from exercise of stock options..................... -- 318 5,035
----------- ----------- -----------
Net cash (used in) provided by financing activities....... (1,021,472) (1,104,362) 1,189,613
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate capital expenditures and development funding.... (40,347) (129,492) (636,989)
Investment in real estate mortgages and development
funding................................................... (161) (33,321) (222,524)
Prepayment proceeds and principal payments received on real
estate mortgages.......................................... 673,121 154,828 407,241
Proceeds from sale of assets................................ 232,834 597,121 484,467
Proceeds from sale of securities............................ -- 3,606
Acquisition of Cobblestone.................................. -- -- (178,523)
Acquisition of La Quinta.................................... -- -- (956,054)
Cash acquired in Cobblestone merger......................... -- -- 723
Cash acquired in La Quinta merger........................... -- -- 18,004
Cash acquired in TeleMatrix acquisition..................... -- 1,433 --
Payment of costs related to prior year asset sales.......... (24,248) -- --
Working capital and notes receivable advances, net of
repayments and collections................................ (8,665) (14,621) 6,211
Investment in equity securities............................. -- -- (30,222)
----------- ----------- -----------
Net cash provided by (used in) investing activities..... 832,534 575,948 (1,104,060)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents.... 31,773 (298,236) 261,724
Cash and cash equivalents at:
Beginning of year........................................... 7,220 305,456 43,732
----------- ----------- -----------
End of year................................................. $ 38,993 $ 7,220 $ 305,456
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
81
MEDITRUST CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------
2000 1999
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
ASSETS
Real estate investments, net................................ $3,333,168 $4,652,631
Cash and cash equivalents................................... 38,991 5,779
Fees, interest and other receivables........................ 56,829 59,004
Goodwill, net............................................... 429,134 451,240
Due from Meditrust Operating Company........................ 91,195 30,525
Other assets, net........................................... 117,275 175,870
---------- ----------
Total assets.......................................... $4,066,592 $5,375,049
========== ==========
LIABILITIES
Indebtedness:
Notes payable, net........................................ $1,013,640 $1,144,406
Convertible debentures, net............................... 136,915 185,468
Bank notes payable, net................................... 397,827 1,154,182
Bonds and mortgages payable, net.......................... 42,077 113,382
---------- ----------
Total indebtedness.................................... 1,590,459 2,597,438
---------- ----------
Accounts payable, accrued expenses and other
liabilities............................................. 110,545 139,833
---------- ----------
Total liabilities..................................... 1,701,004 2,737,271
---------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Stock, $0.10 par value; 6,000 shares authorized;
701 shares issued and outstanding in 2000 and 1999........ 70 70
Common Stock, $0.10 par value; 500,000 shares authorized;
144,210 and 142,320 shares issued and outstanding in 2000
and 1999, respectively.................................... 14,421 14,232
Additional paid-in-capital.................................. 3,592,306 3,586,994
Unearned compensation....................................... (2,526) (6,104)
Accumulated other comprehensive income...................... -- 4,468
Distributions in excess of net income....................... (1,238,683) (948,018)
---------- ----------
2,365,588 2,651,642
Due from Meditrust Operating Company........................ -- (736)
Notes receivable--Meditrust Operating Company............... -- (13,128)
---------- ----------
Total shareholders' equity............................ 2,365,588 2,637,778
---------- ----------
Total liabilities and shareholders' equity............ $4,066,592 $5,375,049
========== ==========
The accompanying notes are an integral part of these financial statements.
82
MEDITRUST CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
(IN THOUSANDS, EXCEPT FOR PER
SHARE DATA)
REVENUE:
Rental.................................................... $ 116,040 $165,431 $ 191,874
Interest.................................................. 95,172 138,180 152,486
Rent from Meditrust Operating Company..................... 278,379 274,018 125,706
Interest from Meditrust Operating Company................. 616 -- 712
Royalty from Meditrust Operating Company.................. 20,666 16,350 6,326
Hotel..................................................... 11,216 12,437 5,781
Other..................................................... -- 1,750 35,987
--------- -------- ---------
522,089 608,166 518,872
--------- -------- ---------
EXPENSES:
Interest.................................................. 186,457 244,700 178,374
Interest to Meditrust Operating Company................... -- 1,713 --
Depreciation and amortization............................. 135,414 128,642 84,327
Amortization of goodwill.................................. 21,977 20,723 12,505
General and administrative................................ 19,017 13,968 18,374
Hotel operations.......................................... 5,377 4,723 2,060
Rental property operations................................ 28,895 36,517 15,638
Loss on sale of securities................................ -- -- 4,159
Loss (gain) on sale of assets............................. 131,513 (12,042) (52,642)
Income from unconsolidated joint venture.................. -- -- (906)
Impairment of real estate assets.......................... 183,698 63,170 63,954
Provision for loss on equity securities................... 50,279 -- --
Other..................................................... 32,901 16,138 32,098
--------- -------- ---------
795,528 518,252 357,941
--------- -------- ---------
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM.................................... (273,439) 89,914 160,931
Income tax expense........................................ 629 -- --
--------- -------- ---------
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEM........................................ (274,068) 89,914 160,931
DISCONTINUED OPERATIONS:
Income from operations, net............................... -- -- 14,635
Adjustment to loss on disposal of Santa Anita, net........ -- 6,655 (82,953)
Adjustment to loss on disposal of Cobblestone Golf Group,
net..................................................... -- 33,561 (227,557)
--------- -------- ---------
NET (LOSS) INCOME BEFORE EXTRAORDINARY ITEM................. (274,068) 130,130 (134,944)
EXTRAORDINARY ITEM:
Gain on early extinguishments of debt..................... 1,403 -- --
--------- -------- ---------
NET (LOSS) INCOME........................................... (272,665) 130,130 (134,944)
Preferred stock dividends................................... (18,000) (16,283) (8,444)
--------- -------- ---------
NET (LOSS) INCOME AVAILABLE TO COMMON SHAREHOLDERS.......... $(290,665) $113,847 $(143,388)
========= ======== =========
BASIC (LOSS) EARNINGS PER COMMON SHARE:
(Loss) income available to Common Shareholders before
discontinued operations and extraordinary item.......... $ (2.04) $ 0.51 $ 1.25
Discontinued operations, net.............................. -- 0.28 (2.43)
Gain on early extinguishments of debt..................... 0.01 -- --
--------- -------- ---------
Net (loss) income......................................... $ (2.03) $ 0.79 $ (1.18)
========= ======== =========
DILUTED (LOSS) EARNINGS PER COMMON SHARE:
(Loss) income available to Common Shareholders before
discontinued operations and extraordinary item.......... $ (2.04) $ 0.51 $ 1.20
Discontinued operations, net.............................. -- 0.28 (2.33)
Gain on early extinguishments of debt..................... 0.01 -- --
--------- -------- ---------
Net (loss) income......................................... $ (2.03) $ 0.79 $ (1.13)
========= ======== =========
The accompanying notes are an integral part of these financial statements.
83
MEDITRUST CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND OTHER
COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
SHARES OF
BENEFICIAL
INTEREST
OR PAIRED ACCUMULATED
COMMON OTHER
SHARES ADDITIONAL UNEARNED COMPRE-
------------------- PREFERRED PAID-IN TREASURY COMPEN- HENSIVE
SHARES AMOUNT STOCK CAPITAL STOCK SATION INCOME
-------- -------- --------- ---------- --------- ---------- -------------
(IN THOUSANDS)
BALANCE, DECEMBER 31, 1997.................. 89,433 $ 8,943 $-- $1,985,229 $ -- $ -- $ 3,569
Proceeds from issuance of Common Stock, net
of offering costs of $5,769............... 8,500 850 265,425
Proceeds from issuance of Preferred Stock,
net of offering costs of $6,334........... 70 168,596
Purchase of treasury stock.................. (160,223)
Effect of merger with Cobblestone........... 8,177 818 235,928
Effect of merger with La Quinta............. 43,280 4,328 1,146,028
Issuance of restricted stock grants......... 315 32 6,921 (6,718)
Issuance of shares of Common Stock for:
Conversion of debentures, net of unamortized
issue costs of $1......................... 284 28 7,002
Employee compensation and stock options..... 642 64 5,307
Dividends paid..............................
Property distribution.......................
Net loss for the year ended December 31,
1998......................................
Change in market value of equity investment
in excess of cost......................... 13,402
------- ------- --- ---------- --------- ------- --------
BALANCE, DECEMBER 31, 1998.................. 150,631 15,063 70 3,820,436 (160,223) (6,718) 16,971
Issuance of shares of Common Stock for:
Employee compensation and stock options..... 128 13 1,673
Purchase and retirement of treasury stock... (8,501) (850) (261,126) 160,223
Issuance of restricted stock grants......... 230 23 3,201 (287)
Retirement of forfeited restricted stock
grants.................................... (168) (17) (2,190)
Amortization of unearned compensation....... 901
Effect of TeleMatrix acquisition............ 25,000
Dividends paid..............................
Change in market value of equity investments
in excess of cost......................... (12,503)
Net income for the year ended December 31,
1999......................................
------- ------- --- ---------- --------- ------- --------
BALANCE, DECEMBER 31, 1999.................. 142,320 14,232 70 3,586,994 -- (6,104) 4,468
COMPRE-
DISTRIBUTIONS NOTE HENSIVE
IN EXCESS RECEIVABLE DUE FROM INCOME
OF EARNINGS OPERATING OPERATING TOTAL (LOSS)
------------- ----------- ---------- ---------- ---------
(IN THOUSANDS)
BALANCE, DECEMBER 31, 1997.................. $(192,373) $(13,128) $ -- $1,792,240
Proceeds from issuance of Common Stock, net
of offering costs of $5,769............... 266,275
Proceeds from issuance of Preferred Stock,
net of offering costs of $6,334........... 168,666
Purchase of treasury stock.................. (160,223)
Effect of merger with Cobblestone........... 236,746
Effect of merger with La Quinta............. 1,150,356
Issuance of restricted stock grants......... 235
Issuance of shares of Common Stock for:
Conversion of debentures, net of unamortized
issue costs of $1......................... 7,030
Employee compensation and stock options..... 5,371
Dividends paid.............................. (438,639) (438,639)
Property distribution....................... (33,162) (33,162)
Net loss for the year ended December 31,
1998...................................... (134,944) (134,944) (134,944)
Change in market value of equity investment
in excess of cost......................... 13,402 13,402
--------- -------- --------- ---------- ---------
BALANCE, DECEMBER 31, 1998.................. (799,118) (13,128) -- 2,873,353 $(121,542)
=========
Issuance of shares of Common Stock for:
Employee compensation and stock options..... 1,686
Purchase and retirement of treasury stock... (101,753)
Issuance of restricted stock grants......... (2,943) (6)
Retirement of forfeited restricted stock
grants.................................... 2,207
Amortization of unearned compensation....... 901
Effect of TeleMatrix acquisition............ 25,000
Dividends paid.............................. (279,030) (279,030)
Change in market value of equity investments
in excess of cost......................... (12,503) $ (12,503)
Net income for the year ended December 31,
1999...................................... 130,130 130,130 130,130
--------- -------- --------- ---------- ---------
BALANCE, DECEMBER 31, 1999.................. (948,018) (13,128) (736) 2,637,778 $ 117,627
=========
The accompanying notes are an integral part of these financial statements.
84
MEDITRUST CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND OTHER
COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
SHARES OF
BENEFICIAL INTEREST ACCUMULATED
OR PAIRED OTHER
COMMON SHARES ADDITIONAL UNEARNED COMPRE-
------------------- PREFERRED PAID-IN TREASURY COMPEN- HENSIVE
SHARES AMOUNT STOCK CAPITAL STOCK SATION INCOME
-------- -------- --------- ---------- -------- --------- -----------
Issuance of shares of Common
Stock for:
Employee compensation and stock
options...................... 180 18 934 (519)
Issuance of restricted stock
grants......................... 1,760 176 4,858 (2,088)
Accelerated amortization of
restricted shares.............. 5,240
Retirement of forfeited
restricted stock grants........ (50) (5) (731)
Amortization of unearned
compensation................... 945
Dividends paid...................
Sale of TeleMatrix stock to MOC
Holding Co..................... 251
Settlement of notes receivable
from Meditrust Operating
Company........................
Change in market value of equity
securities in excess of cost... (54,749)
Other than temporary impairment
of equity Securities........... 50,281
Net loss for the year ended
December 31, 2000..............
------- ------- --- ---------- -------- ------- --------
BALANCE, DECEMBER 31, 2000....... 144,210 $14,421 $70 $3,592,306 $ -- $(2,526) $ --
======= ======= === ========== ======== ======= ========
COMPRE-
DISTRIBUTIONS NOTE HENSIVE
IN EXCESS RECEIVABLE DUE FROM INCOME
OF EARNINGS OPERATING OPERATING TOTAL (LOSS)
------------- ---------- --------- ---------- ---------
Issuance of shares of Common
Stock for:
Employee compensation and stock
options...................... 433
Issuance of restricted stock
grants......................... 2,946
Accelerated amortization of
restricted shares.............. 5,240
Retirement of forfeited
restricted stock grants........ 736 --
Amortization of unearned
compensation................... 945
Dividends paid................... (18,000) (18,000)
Sale of TeleMatrix stock to MOC
Holding Co..................... 251
Settlement of notes receivable
from Meditrust Operating
Company........................ 13,128 13,128
Change in market value of equity
securities in excess of cost... (54,749) $ (54,749)
Other than temporary impairment
of equity Securities........... 50,281 50,281
Net loss for the year ended
December 31, 2000.............. (272,665) (272,665) (272,665)
----------- ------- ---- ---------- ---------
BALANCE, DECEMBER 31, 2000....... $(1,238,683) $ -- $ -- $2,365,588 $(277,133)
=========== ======= ==== ========== =========
The accompanying notes are an integral part of the financial statements.
85
MEDITRUST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
2000 1999 1998
----------- ----------- -----------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income........................................... $ (272,665) $ 130,130 $ (134,944)
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation of real estate............................... 129,680 123,253 86,395
Goodwill amortization..................................... 21,977 20,723 15,066
Loss (gain) on sale of assets............................. 131,513 (52,258) 34,470
Shares issued for compensation............................ 449 133 430
Equity in income of unconsolidated joint venture, net of
dividends received...................................... -- -- 544
Gain on early extinguishments of debt..................... (2,183) -- --
Other depreciation, amortization and other items, net..... 13,110 26,462 15,749
Other non cash items...................................... 242,370 66,544 309,612
----------- ----------- -----------
Cash flows from operating activities available for
distribution.............................................. 264,251 314,987 327,322
Net change in other assets and liabilities................ (31,922) (54,573) (139,716)
----------- ----------- -----------
Net cash provided by operating activities............... 232,329 260,414 187,606
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common and preferred stock...... -- -- 447,044
Purchase of treasury stock................................ -- (101,303) (160,223)
Proceeds from borrowings on bank notes payable............ 252,000 1,176,000 2,445,000
Repayment of bank notes payable........................... (1,017,359) (1,868,641) (767,000)
Repayment of notes payable................................ (130,287) (12,500) (220,000)
Equity offering and debt issuance costs................... -- (1,303) (47,288)
Intercompany lending, net................................. (10,340) 4,215 26,385
Repayment of convertible debentures....................... (48,115) -- (43,152)
Principal payments on bonds and mortgages payable......... (63,649) (15,937) (37,625)
Dividends/distributions to shareholders................... (14,062) (279,030) (438,639)
Proceeds from exercise of stock options................... -- 312 4,939
----------- ----------- -----------
Net cash (used in) provided by financing activities..... (1,031,812) (1,098,187) 1,209,441
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate capital expenditures and development
funding................................................. (40,186) (128,316) (636,707)
Investment in real estate mortgages and development
funding................................................. (161) (33,321) (222,524)
Prepayment proceeds and principal payments received on
real estate mortgages................................... 673,121 154,828 407,241
Payment of costs of prior year asset sales................ (24,248) -- --
Proceeds from sale of assets.............................. 232,834 570,858 459,833
Proceeds from sale of securities.......................... -- -- 3,606
Acquisition of Cobblestone................................ -- -- (178,523)
Acquisition of La Quinta.................................. -- -- (956,054)
Cash acquired in Cobblestone merger....................... -- -- 723
Cash acquired in La Quinta merger......................... -- -- 18,004
Cash acquired in TeleMatrix acquisition................... -- 1,430 --
Working capital and notes receivable advances, net of
repayments and collections.............................. (8,665) (14,621) 6,211
Investment in equity securities........................... -- -- (30,222)
----------- ----------- -----------
Net cash provided by (used in) investing activities....... 832,695 550,858 (1,128,412)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents...... 33,212 (286,915) 268,635
Cash and cash equivalents at:
Beginning of year......................................... 5,779 292,694 24,059
----------- ----------- -----------
End of year............................................... $ 38,991 $ 5,779 $ 292,694
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
86
MEDITRUST OPERATING COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------
2000 1999
----------- ------------
(IN THOUSANDS, EXCEPT FOR
PER SHARE DATA)
ASSETS
Cash and cash equivalents................................... $ 2 $ 1,441
Fees, interest and other receivables........................ 16,647 20,038
Other current assets, net................................... 9,613 12,643
--------- ---------
Total current assets...................................... 26,262 34,122
Investment in common stock of Meditrust Corporation......... 37,581 37,581
Goodwill, net............................................... 28,655 29,433
Property, plant and equipment, less accumulated depreciation
of $7,918 and $2,572, respectively........................ 56,125 51,669
Other non-current assets.................................... 6,959 8,009
--------- ---------
Total assets.............................................. $ 155,582 $ 160,814
========= =========
LIABILITIES
Accounts payable............................................ $ 28,876 $ 20,803
Accrued payroll and employee benefits....................... 30,767 21,452
Accrued expenses and other current liabilities.............. 6,516 10,030
Due to Meditrust Corporation................................ 91,195 54,820
--------- ---------
Total current liabilities................................. 157,354 107,105
Note payable to Meditrust Corporation....................... -- 13,128
Other non-current liabilities............................... 3,173 4,988
--------- ---------
Total liabilities......................................... 160,527 125,221
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common Stock, $0.10 par value; 500,000 shares authorized;
142,905 and 141,015 shares issued and outstanding in 2000
and 1999, respectively.................................... 14,290 14,102
Additional paid-in-capital.................................. 104,734 104,814
Unearned compensation....................................... (2,385) (656)
Accumulated other comprehensive income...................... (985) --
Accumulated deficit......................................... (120,599) (59,108)
--------- ---------
(4,945) 59,152
Due from Meditrust Corporation.............................. -- (23,559)
--------- ---------
Total shareholders' equity................................ (4,945) 35,593
--------- ---------
Total liabilities and shareholders' equity.............. $ 155,582 $ 160,814
========= =========
The accompanying notes are an integral part of these financial statements.
87
MEDITRUST OPERATING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
2000 1999 1998
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUE:
Hotel..................................................... $600,329 $594,140 $252,642
Interest.................................................. 81 43 607
Interest from Meditrust Corporation....................... -- 1,713 --
-------- -------- --------
600,410 595,896 253,249
-------- -------- --------
EXPENSES:
Hotel operations.......................................... 316,253 279,265 117,524
Depreciation and amortization............................. 14,724 7,211 2,901
Amortization of goodwill.................................. 778 747 760
Interest and other........................................ 494 273 84
Interest to Meditrust Corporation......................... 616 -- 712
General and administrative................................ 30,968 18,858 8,724
Royalty to Meditrust Corporation.......................... 20,666 16,350 6,326
Rent to Meditrust Corporation............................. 278,379 274,018 125,706
Other..................................................... -- 29,676 15,163
Gain on asset sales....................................... (977) -- --
-------- -------- --------
661,901 626,398 277,900
-------- -------- --------
LOSS FROM CONTINUING OPERATIONS BEFORE BENEFIT FOR INCOME
TAXES..................................................... (61,491) (30,502) (24,651)
Income tax benefit.......................................... -- -- (4,800)
-------- -------- --------
LOSS FROM CONTINUING OPERATIONS............................. (61,491) (30,502) (19,851)
DISCONTINUED OPERATIONS:
Loss from operations, net................................. -- -- (3,914)
Adjustment to loss on disposal of Santa Anita, net........ -- (3,694) 15,040
Adjustment to loss on disposal of Cobblestone Golf Group,
net..................................................... -- (6,109) (9,478)
-------- -------- --------
NET LOSS.................................................... $(61,491) $(40,305) $(18,203)
======== ======== ========
BASIC LOSS PER COMMON SHARE:
Loss from continuing operations........................... $ (0.43) $ (0.21) $ (0.16)
Discontinued operations, net.............................. -- (0.07) 0.01
-------- -------- --------
Net loss.................................................. $ (0.43) $ (0.28) $ (0.15)
-------- -------- --------
DILUTED LOSS PER COMMON SHARE:
Loss from continuing operations........................... $ (0.43) $ (0.21) $ (0.16)
Discontinued operations, net.............................. -- (0.07) 0.01
-------- -------- --------
Net loss.................................................. $ (0.43) $ (0.28) $ (0.15)
-------- -------- --------
The accompanying notes are an integral part of these financial statements.
88
MEDITRUST OPERATING COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AND OTHER COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
SHARES OF BENEFICIAL
INTEREST OR PAIRED
COMMON STOCK ADDITIONAL UNEARNED DUE FROM
-------------------- PAID-IN TREASURY COMPEN- MEDITRUST
SHARES AMOUNT CAPITAL STOCK SATION CORPORATION
--------- -------- ---------- -------- --------- -----------
(IN THOUSANDS)
BALANCE, DECEMBER 31, 1997......... 88,128 $ 8,813 $ 49,739 $ -- $ -- $ (864)
Proceeds from issuance of Common
Stock, net of offering costs of
$105............................. 8,500 850 4,313
Purchase of treasury stock......... (3,103)
Effect of merger with
Cobblestone...................... 8,177 818 3,582
Effect of merger with La Quinta.... 43,280 4,328 17,952 (22,280)
Issuance of restricted stock
grants........................... 315 32 104 (136)
Issuance of shares of Common Stock
for:
Conversion of debentures......... 284 28 108 (136)
Employee compensation and stock
options........................ 642 64 41 (105)
Property contribution.............. 33,162
Net loss for the year ended
December 31, 1998................
-------- ------- -------- ------- ------- --------
BALANCE, DECEMBER 31, 1998......... 149,326 14,933 109,001 (3,103) -- (23,521)
Issuance of shares of Common Stock
for:
Employee compensation and stock
options........................ 128 13 20 (33)
Purchase and retirement of treasury
stock............................ (8,501) (850) (4,219) 3,103
Issuance of restricted stock
grants........................... 230 23 40 (3,000) (5)
Retirement of forfeited restricted
stock grants..................... (168) (17) (28) 2,109
Amortization of unearned
compensation..................... 235
Net loss for the year ended
December 31, 1999................
-------- ------- -------- ------- ------- --------
BALANCE, DECEMBER 31, 1999......... 141,015 14,102 104,814 -- (656) (23,559)
Issuance of shares of Common Stock
for:
Employee compensation and stock
options........................ 180 18 (10) (9)
Issuance of restricted stock
grants........................... 1,760 175 (61) (2,753)
Retirement of forfeited restricted
stock grants..................... (50) (5) (9) 633
Amortization of unearned
compensation..................... 391
Settlement of amount due from
Meditrust Corporation............ 23,568
Minimum pension liability
adjustment.......................
Net loss for the year ended
December 31, 2000................
-------- ------- -------- ------- ------- --------
BALANCE, DECEMBER 31, 2000......... 142,905 $14,290 $104,734 $ -- $(2,385) $ --
======== ======= ======== ======= ======= ========
ACCUMULATED
OTHER
COMPRE- COMPRE-
HENSIVE RETAINED HENSIVE
INCOME EARNINGS TOTAL (LOSS)
----------- --------- -------- --------
(IN THOUSANDS)
BALANCE, DECEMBER 31, 1997......... $ -- $ (600) $ 57,088
Proceeds from issuance of Common
Stock, net of offering costs of
$105............................. 5,163
Purchase of treasury stock......... (3,103)
Effect of merger with
Cobblestone...................... 4,400
Effect of merger with La Quinta.... --
Issuance of restricted stock
grants........................... --
Issuance of shares of Common Stock
for:
Conversion of debentures......... --
Employee compensation and stock
options........................ --
Property contribution.............. 33,162
Net loss for the year ended
December 31, 1998................ (18,203) (18,203) $(18,203)
----- --------- -------- --------
BALANCE, DECEMBER 31, 1998......... -- (18,803) 78,507 $(18,203)
========
Issuance of shares of Common Stock
for:
Employee compensation and stock
options........................ --
Purchase and retirement of treasury
stock............................ (1,966)
Issuance of restricted stock
grants........................... (2,942)
Retirement of forfeited restricted
stock grants..................... 2,064
Amortization of unearned
compensation..................... 235
Net loss for the year ended
December 31, 1999................ (40,305) (40,305) $(40,305)
----- --------- -------- --------
BALANCE, DECEMBER 31, 1999......... -- (59,108) 35,593 $(40,305)
========
Issuance of shares of Common Stock
for:
Employee compensation and stock
options........................ (1)
Issuance of restricted stock
grants........................... (2,639)
Retirement of forfeited restricted
stock grants..................... 619
Amortization of unearned
compensation..................... 391
Settlement of amount due from
Meditrust Corporation............ 23,568
Minimum pension liability
adjustment....................... (985) (985) $ (985)
Net loss for the year ended
December 31, 2000................ (61,491) (61,491) (61,491)
----- --------- -------- --------
BALANCE, DECEMBER 31, 2000......... $(985) $(120,599) $ (4,945) $(62,476)
===== ========= ======== ========
The accompanying notes are an integral part of these financial statements.
89
MEDITRUST OPERATING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(61,491) $(40,305) $(18,203)
Adjustments to reconcile net loss to cash used in
operating activities:
Goodwill amortization..................................... 778 747 760
(Gain) loss on sale of assets............................. (977) 9,803 (15,040)
Shares issued for compensation............................ -- 26 8
Other depreciation and amortization....................... 15,123 11,780 15,686
Other items............................................... -- 4,356 8,845
Net change in other assets and liabilities of discontinued
operations.............................................. -- (4,227) (6,852)
Net change in other assets and liabilities................ 34,949 (12,416) 3,361
-------- -------- --------
Net cash used in operating activities................... (11,618) (30,236) (11,435)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock........................... -- -- 9,669
Purchase of treasury stock................................ -- (1,966) (3,103)
Equity offering costs..................................... -- -- (105)
Intercompany lending, net................................. 10,340 (4,215) (26,385)
Proceeds from stock option exercises...................... -- 6 96
-------- -------- --------
Net cash provided by (used in) financing activities..... 10,340 (6,175) (19,828)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital improvements to real estate....................... -- (1,176) (282)
Proceeds from sale of assets.............................. -- 26,263 24,634
Acquisition of real estate................................ (161) -- --
Cash acquired in TeleMatrix acquisition................... -- 3 --
-------- -------- --------
Net cash (used in) provided by investing activities..... (161) 25,090 24,352
-------- -------- --------
Net decrease in cash and cash equivalents............... (1,439) (11,321) (6,911)
Cash and cash equivalents at:
Beginning of year......................................... 1,441 12,762 19,673
-------- -------- --------
End of year............................................... $ 2 $ 1,441 $ 12,762
======== ======== ========
The accompanying notes are an integral part of these financial statements.
90
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Meditrust Corporation and subsidiaries ("Realty") and Meditrust Operating
Company and subsidiaries ("Operating") (collectively the "Companies") are two
separate companies, the common stock of which trades as a single unit on the
New York Stock Exchange under a stock pairing arrangement.
Realty is a self-administered real estate investment trust ("REIT") under
the Internal Revenue Code of 1986 as amended ("the Code") and invests primarily
in lodging and healthcare facilities.
The lodging facilities include hotels located in the western and southern
regions of the United States. The healthcare facilities include nursing homes,
assisted living facilities, medical office buildings and other healthcare
related facilities. These facilities are located throughout the United States
and are operated by regional and national healthcare providers. Realty also
invests in an entity which invests in similar facilities abroad.
Realty leases each of its hotels to Operating, which is responsible for
operating the hotels, or to other third-party lessees (the "Lessees"). As of
December 31, 2000, Realty leased 297 of its hotel investments to Operating for
five year terms, pursuant to separate participating leases providing for the
payment of the greater of base or participating rent, plus certain additional
charges, as applicable (the "Participating Hotel Facility Leases").
Operating is currently engaged in hotel operations previously conducted by
La Quinta Inns, Inc., its wholly owned subsidiaries and its unincorporated
partnership and joint venture ("La Quinta") and leases the respective facilities
and licenses the La Quinta tradename from Realty and its subsidiaries. La Quinta
is a lodging company focused on the operation and development of hotels. As of
December 31, 2000, La Quinta operated 299 hotels with approximately 38,000 rooms
located in the western and southern regions of the United States.
BASIS OF PRESENTATION AND CONSOLIDATION
Separate financial statements have been presented for Realty and Operating.
Combined Realty and Operating financial statements have been presented as the
Companies. All significant intercompany and inter-entity balances and
transactions have been eliminated in combination. The Companies and Realty use
an unclassified balance sheet presentation.
The consolidated financial statements of Realty and Operating include the
accounts of the respective entity and its majority-owned partnerships after the
elimination of all significant intercompany accounts and transactions.
On July 17, 1998, the Companies acquired La Quinta and its related
operations. This transaction was accounted for under the purchase method of
accounting. Accordingly, the financial statements include, among other things,
the results of operations and cash flows of La Quinta from July 17, 1998 through
the date of the financial statements (See Note 3).
As a result of a comprehensive restructuring plan announced in
November 1998 (the "1998 Plan"), the Companies have reflected the golf-related
real estate and operating properties (the "Cobblestone Golf Group") and Santa
Anita Racetrack as discontinued operations (See Note 5).
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 may differ from these estimates.
91
THE COMPANIES' MORE SIGNIFICANT ACCOUNTING POLICIES FOLLOW:
REAL ESTATE INVESTMENTS
Land, buildings and improvements are stated at cost. Depreciation is
calculated on a straight-line basis over 20 to 40 years, the expected useful
lives of the buildings and major improvements. Hotel equipment, furniture and
fixtures are recorded at cost. Depreciation is calculated using the
straight-line method over three to 15 years, the estimated useful lives of the
related assets. Leasehold improvements are recorded at cost and depreciated over
the shorter of the lease term or the estimated useful life.
Expenditures that materially increase the property's life are capitalized.
Maintenance and repairs are expensed as incurred. When depreciable property is
retired or disposed of, the related cost and accumulated depreciation is removed
from the accounts and any gain or loss is reflected in current operations.
Property and equipment are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. For each asset held for use, the sum of expected future cash
flows (undiscounted and without interest charges) of the asset is compared to
the net book value of the asset. If the sum of expected future cash flows
(undiscounted and without interest charges) is less than the net book value of
the asset, the excess of the net book value over the estimated fair value is
charged to current earnings. When an asset is identified by management as held
for sale, the Companies discontinue depreciation of the asset and the carrying
value is reduced, if necessary, to the estimated fair value less costs to sell.
Fair value is determined based upon discounted cash flows of the assets at rates
deemed reasonable for the type of property and prevailing market conditions,
appraisals and, if appropriate, current estimated net sales proceeds from
pending offers. A gain or loss is recorded to the extent that the amounts
ultimately received for the sale of assets differ from the adjusted book values
of the assets. Gains and losses on sales of assets are recognized at the time
the assets are sold provided there is reasonable assurance of the collectability
of the sales price and any future activities to be performed by the Companies
relating to the assets sold are expected to be insignificant.
All costs associated with, or allocable to, hotel construction are
capitalized. All pre-opening and start-up costs are expensed as incurred.
Real estate mortgages and loans receivable are classified and accounted for
as impaired when, based on current information and events, it is probable that
the Companies will be unable to collect all principal and interest due on the
loan in accordance with the original contractual terms. Upon determination that
an impairment has occurred, the amount of the impairment is recognized as a
valuation allowance based upon an analysis of the net realizable value of the
underlying property collateralizing the loan. Payments of interest on impaired
loans received by the Companies are recorded as interest income provided the
amount does not exceed that which would have been earned at the historical
effective interest rate.
CAPITALIZED ACQUISITION, DEVELOPMENT AND INTEREST COSTS
Realty capitalizes development costs and other indirect costs. Additionally,
Realty capitalizes the interest cost associated with developing new facilities.
The amount capitalized is based upon a rate of interest that approximates the
Companies' weighted average cost of financing and is reflected as a reduction of
interest expense.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of certificates of deposit and other
investments with less than 90-day original maturities and are stated at cost
which approximates fair market value.
92
GOODWILL
Goodwill represents the excess of cost over the fair value of assets
acquired and is amortized using the straight-line method over periods ranging
from 10 to 40 years. The Companies assess the recoverability of goodwill
whenever adverse events or changes in circumstances or business climate indicate
that the expected future cash flows (undiscounted and without interest charges)
for individual business segments may not be sufficient to support recorded
goodwill. If undiscounted cash flows are not sufficient to support the recorded
asset, an impairment is recognized to reduce the carrying value of the goodwill
based on the expected discounted cash flows of the business segment. Expected
cash flows are discounted at a rate commensurate with the risk involved.
Goodwill associated with the Santa Anita merger primarily relates to the
value of the paired-share structure and, due to the permanent nature of the
structure, is being amortized over a 40-year period. Accordingly, goodwill
recorded as part of the Santa Anita merger is expected to remain, even though
the Santa Anita Racetrack has been sold, as long as the Companies continue to
utilize the paired share structure. Goodwill also includes amounts associated
with the acquisition of La Quinta, TeleMatrix and Realty's previous investment
advisor which are being amortized on a straight-line basis over 20, 15 and
10 year periods, respectively.
INVESTMENTS IN EQUITY SECURITIES
Investments in equity securities have been classified as available-for-sale
and recorded at current market value. The difference between market value and
cost (unrealized holding gains and losses) is recorded in shareholders' equity
or included in income if a decline in market value is considered
other-than-temporary. Gains and losses on sales of investments are calculated
based on the specific identification method and are recognized at the time the
investments are sold.
INTANGIBLE ASSETS
Intangible assets, consisting of La Quinta's tradename, a non-compete
agreement and assembled workforce, are included in other assets and are
amortized on a straight-line basis using lives ranging from three to 20 years
based on management's assessment of the fair value of the intangible assets. The
Companies evaluate the carrying values of intangible assets in the same manner
that they evaluate the carrying values of real estate assets.
DEBT ISSUANCE COSTS
Debt issuance costs, which are a component of other assets, have been
deferred and are amortized on a straight-line basis (which approximates the
effective interest method) over the term of the related borrowings.
DEFERRED REVENUE
Realty's deferred revenue, which is a component of other liabilities,
consists primarily of fees that are being amortized over the term of the related
investment.
SELF-INSURANCE PROGRAMS
The lodging segment uses a paid loss retrospective insurance plan for
general and auto liability and workers' compensation whereby the operation is
effectively self-insured. Predetermined loss limits have been arranged with
insurance companies to limit the per occurrence cash outlay.
Hotel employees and their dependents are covered by a self-insurance program
for major medical and hospitalization coverage, which is partially funded by
payroll deductions. Payments for major medical and hospitalization to individual
participants below specified amounts are self-insured by the Companies.
93
SHAREHOLDERS' EQUITY
The outstanding shares of Realty's common stock and Operating's common stock
are only transferable and tradable in combination as a paired unit consisting of
one share of Realty's common stock and one share of Operating's common stock.
However, Operating owns 1,305,000 unpaired shares of Realty as a result of the
Santa Anita Merger in 1997.
REALTY'S REVENUE RECOGNITION
Realty's rental income from operating leases is recognized on a
straight-line basis over the life of the respective lease agreements. Interest
income on real estate mortgages is recognized on the accrual basis, which
approximates the effective interest method.
OPERATING REVENUE AND SEASONALITY
Hotel revenues are derived from room rentals and other sources such as
charges to guests for long-distance telephone service, fax machine use, movie
and vending commissions, meeting and banquet room revenue and laundry services.
Hotel revenues are recognized as earned.
The hotel 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, the opening of newly constructed
hotels and the timing of any hotel acquisitions may cause variation of revenue
from quarter to quarter.
EARNINGS PER SHARE
Basic earnings per share is computed based upon the weighted average number
of shares of common stock outstanding during the period presented. Diluted
earnings per share is computed based upon the weighted average number of shares
of common stock and dilutive common stock equivalents outstanding during the
period presented. The diluted earnings per share computations also include
options to purchase common stock that were outstanding during the period. The
number of shares outstanding related to the options has been calculated by
application of the "treasury stock" method. See Note 18 for more detailed
disclosure regarding the applicable numerators and denominators used in the
earnings per share calculations.
STOCK BASED COMPENSATION
Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), provides companies an alternative to
accounting for stock-based compensation as prescribed under Accounting
Principles Board Opinion No. 25 ("APB 25"). SFAS No. 123 encourages, but does
not require, companies to recognize expense for stock-based awards based on
their fair value at date of grant. SFAS No. 123 allows companies to follow
existing accounting rules (intrinsic value method under APB 25) provided that
pro forma disclosures are made of what net income and earnings per share would
have been had the new fair value method been used. The Companies have elected to
adopt the disclosure requirements of SFAS No. 123, but will continue to account
for stock-based compensation under APB 25.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Management has estimated the fair value of its financial instruments using
available market information and various valuation methodologies. Considerable
judgment is required in interpreting market data to develop estimates of fair
value. Accordingly, the estimated values for Realty and Operating as of
December 31, 2000 and 1999 are not necessarily indicative of the amounts that
could be realized in current market exchanges.
94
INCOME TAXES
Realty has elected to be taxed as a REIT under the Code and believes it has
met all the requirements for qualification as such. Accordingly, Realty will not
be subject to federal income taxes on amounts distributed to shareholders,
provided it distributes annually at least 95% (90% beginning in 2001) of its
REIT taxable income and meets certain other requirements for qualifying as a
REIT. Therefore, generally no provision for federal income taxes is believed
necessary in the financial statements of Realty except for certain transactions
resulting in capital gains which may require a federal tax provision and for
subsidiaries taxable as C-corporations. TeleMatrix, Inc. has been a
non-qualified REIT subsidiary since April 17, 2000 and, accordingly has been
taxed as a C-corporation since that date. Realty and TeleMatrix have elected to
treat TeleMatrix as a taxable REIT subsidiary for taxable years beginning on or
after January 1, 2001. In certain instances, Realty may find it necessary or
advisable to utilize one or more additional taxable REIT subsidiaries and will
be required to accrue and pay federal and state income taxes on the earnings of
such subsidiaries.
The reported amount of the Companies' net assets exceeded their tax basis by
approximately $1,347,805,000 and $1,514,100,000 as of December 31, 2000 and
1999, respectively.
Operating income tax expense (benefit) is based on reported earnings before
income taxes. Deferred income taxes reflect the temporary differences between
assets and liabilities recognized for financial reporting and such amounts
recognized for tax purposes, which requires recognition of deferred tax
liabilities and assets. Deferred tax liabilities and assets are determined based
on the differences between the financial statement and tax basis of assets and
liabilities using the tax rates in effect for the year in which the differences
are expected to reverse. A valuation allowance is recognized if it is
anticipated that some or all of a deferred tax asset may not be realized.
DERIVATIVES
The Companies enter into interest rate swap agreements to manage interest
rate exposure. The differential to be paid or received is accrued in a manner
consistent with the terms of the agreements and market interest rates and is
recognized in interest expense over the term of the related debt using a method
which approximates the effective interest method. The related amounts payable to
or receivable from financial institutions are included in other liabilities or
assets. The fair value of the swap agreements and changes in the fair value as a
result of changes in market interest rates have not been recognized in the
financial statements.
NEWLY ISSUED ACCOUNTING STANDARDS
In September 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
which replaced SFAS No. 125 of the same name. The Statement provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. The Statement is effective for transfers
and servicing of financial assets and extinguishments of liabilities occurring
after March 31, 2001. The Statement is also effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000.
Disclosures for prior years' comparative financial statements are not required.
The Companies are currently not affected by the Statement's requirements.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities", an amendment to SFAS
No. 133. SFAS No. 133 required that all derivative investments be recorded on
the balance sheet at fair value. Changes in the fair value of derivatives are
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 No.138 will not have a material
effect on their financial statements.
95
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation," an interpretation of APB
Opinion No. 25, "Accounting for Stock Issued to Employees". This Interpretation
clarified the application of Opinion 25, including among other issues: (a) the
definition of an employee for purposes of applying Opinion 25, (b) the criteria
for determining whether a stock ownership plan qualifies as non-compensatory,
(c) the accounting implications of various modifications to the terms of a
previously fixed stock option or award and (d) the accounting for the exchange
of stock compensation awards in a business combination. The Interpretation was
effective July 1, 2000 and the effects of applying the Interpretation are
recognized on a prospective basis. The adoption did not have a material impact
on the Companies' financial condition or results of operations.
RECLASSIFICATION
Certain reclassifications have been made to the 1999 presentation to conform
to the 2000 presentation.
2. SUPPLEMENTAL CASH FLOW INFORMATION
Details of the net changes in other assets and liabilities for the Companies
(excluding noncash items, deferred income recognized in excess of cash received
and changes in restricted cash and related liabilities) follow:
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
--------- -------- ---------
(IN THOUSANDS)
Change in fees, interest and other receivables.............. $ 11,420 $ (2,922) $ 24,946
Change in other assets...................................... (17,108) (28,357) (6,544)
Change in accrued expenses and other liabilities............ 8,715 (35,710) (143,278)
-------- -------- ---------
$ 3,027 $(66,989) $(124,876)
======== ======== =========
Details of other non-cash items follow:
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
--------- -------- ---------
(IN THOUSANDS)
Provision for assets held for use........................... $ 24,586 $ -- $ 14,700
Provision for assets held for sale.......................... 75,479 48,344 33,218
Provision for loss on real estate mortgage and loans
receivable................................................ 83,633 14,826 16,036
Straight line rent.......................................... (1,050) (3,357) (12,555)
Provision for loss on working capital and other
receivables............................................... 5,146 4,606 16,400
Accelerated amortization of unearned compensation........... 5,240 -- --
Provision for loss on discontinued operations............... -- -- 236,570
Provisions for loss on equity securities.................... 50,279 -- --
Write-off of capitalized pre-development costs.............. -- -- 8,720
Reserve for restructuring expenses.......................... -- 2,125 5,668
Write-off of software development costs..................... -- 3,998 --
Other....................................................... (943) 358 (300)
-------- -------- ---------
$242,370 $ 70,900 $ 318,457
======== ======== =========
96
Details of interest and income taxes paid and non-cash investing and
financing transactions follow:
THE MEDITRUST COMPANIES:
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
2000 1999 1998
--------- --------- ----------
(IN THOUSANDS)
Interest paid during the period........................... $193,147 $241,115 $ 166,452
Interest capitalized during the period.................... 824 7,116 13,480
Non-cash investing and financing transactions:
Non-cash proceeds of asset sale......................... 53,900 -- --
Value of real estate acquired:
Land, land improvements and buildings................. -- -- 11,493
Retirements of project costs............................ (15,928) (19,798) (20,651)
Accumulated depreciation and provisions of buildings.... 95,801 27,425 33,161
Increase (decrease) in real estate mortgages net of
participation reduction............................... 147 431 (31,483)
Allowance for loan losses on prepaid mortgages.......... 46,149 -- --
Change in market value of equity securities in excess of
cost.................................................. (54,749) (12,503) 13,402
Value of shares issued for conversion of debentures..... -- -- 7,167
In connection with the TeleMatrix merger:
Fair value of assets acquired........................... $ -- $ 8,436 $ --
Excess purchase consideration over estimated fair market
value of assets acquired.............................. -- 21,986 --
Liabilities assumed..................................... -- (5,422) --
-------- -------- ----------
Value of the issuance of Preferred Shares............... $ -- $ 25,000 $ --
In connection with the Cobblestone merger:
Fair value of assets acquired........................... $ -- $ -- $ 302,713
Excess purchase consideration over estimated fair market
value of assets acquired.............................. -- -- 152,031
Liabilities assumed..................................... -- -- (35,769)
Cash, net............................................... -- -- (177,800)
-------- -------- ----------
Value of the issuance of Paired Common Shares........... $ -- $ -- $ 241,175
In connection with the La Quinta merger:
Fair value of assets acquired........................... $ -- $ -- $2,660,188
Excess purchase consideration over estimated fair market
value of assets acquired.............................. -- -- 301,977
Liabilities assumed..................................... -- -- (851,479)
Cash, net............................................... -- -- (938,050)
-------- -------- ----------
Value of the issuance of Paired Common Shares........... $ -- $ -- $1,172,636
97
MEDITRUST CORPORATION:
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
2000 1999 1998
--------- --------- ----------
(IN THOUSANDS)
Interest paid during the period........................... $192,738 $240,023 $ 166,181
Interest capitalized during the period.................... 640 6,223 13,480
Non-cash investing and financing transactions:
Non-cash proceeds of asset sale......................... 53,900 -- --
Value of real estate acquired:
Land, land improvements and buildings................. -- -- 11,493
Retirements and write-offs of project costs............. (15,928) (19,798) (20,651)
Accumulated depreciation and provisions of buildings
sold.................................................. 95,801 27,425 33,161
Increase (decrease) in real estate mortgages net of
participation reduction............................... 147 431 (31,483)
Allowance for loan losses on prepaid mortgages.......... 46,149 -- --
Change in market value of equity securities in excess of
cost.................................................. (54,749) (12,503) 13,402
Value of shares issued for conversion of debentures..... -- -- 7,031
Property distribution................................... -- -- (33,162)
In connection with the TeleMatrix merger:
Fair value of assets acquired........................... -- 8,436 --
Excess purchase consideration over estimated fair market
value of assets acquired.............................. -- 21,986 --
Liabilities assumed..................................... -- (5,422) --
-------- -------- ----------
Value of the issuance of preferred shares............... $ -- $ 25,000 $ --
In connection with the Cobblestone merger:
Fair value of assets acquired........................... $ -- $ -- $ 272,463
Excess purchase consideration over estimated fair market
value of assets acquired.............................. -- -- 152,031
Liabilities assumed..................................... -- -- (9,919)
Cash, net............................................... -- -- (177,800)
-------- -------- ----------
Value of the issuance of Common Shares.................. $ -- $ -- $ 236,775
In connection with the La Quinta merger:
Fair value of assets acquired........................... $ -- $ -- $2,426,339
Excess purchase consideration over estimated fair market
value of assets acquired.............................. -- -- 301,977
Liabilities assumed..................................... -- -- (639,910)
Cash, net............................................... -- -- (938,050)
-------- -------- ----------
Value of the issuance of Common Shares.................. $ -- $ -- $1,150,356
98
MEDITRUST OPERATING COMPANY:
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------
2000 1999 1998
-------- -------- ---------
(IN THOUSANDS)
Interest paid during the period............................. $409 $1,092 $ 324
Interest capitalized during the period...................... 184 893 --
Non-cash investing and financing transactions:
Value of shares issued for conversion of debentures....... -- -- 136
Property contribution..................................... -- -- 33,162
In connection with the Cobblestone merger:
Fair value of assets acquired............................. $ -- $ -- $ 30,250
Liabilities assumed....................................... -- -- (25,850)
---- ------ ---------
Value of the issuance of Common Shares.................... $ -- $ -- $ 4,400
In connection with the La Quinta merger:
Fair value of assets acquired............................. $ -- $ -- $ 233,849
Liabilities assumed....................................... -- -- (211,569)
---- ------ ---------
Value of the issuance of Common Shares.................... $ -- $ -- $ 22,280
3. LA QUINTA MERGER
On July 17, 1998, Realty completed its merger with La Quinta (the "La Quinta
Merger") whereby La Quinta merged with and into Realty, with Realty as the
surviving corporation. Accordingly, the operations of La Quinta are included in
the combined and consolidated financial statements of the Companies since the
consummation of the La Quinta Merger.
Total consideration paid in connection with the La Quinta Merger
approximated $2,980,000,000. The excess of the purchase price, including costs
of the La Quinta Merger, over the fair market value of the net assets acquired
approximated $302,000,000 and was recorded as goodwill. During 1999, certain
pre-acquisition contingencies as well as other estimates made in recording the
La Quinta Merger in 1998 were quantified and finalized. As a result, goodwill
increased by $6,000,000 to reflect payments made to former and current
executives under specific employment agreements that were in effect at the date
of the La Quinta Merger. Also, goodwill decreased by $5,000,000 as a result of
the reversal of certain self-insurance reserves and other accrued liabilities
being settled for amounts that were less than previously anticipated. Goodwill
associated with the La Quinta Merger is being amortized over 20 years.
As a result of plans made at the time of the La Quinta Merger, management
relocated certain functions of the La Quinta corporate headquarters to Irving,
Texas from San Antonio, Texas. A provision for the estimated cost of relocation
of approximately $10,100,000, including certain lease termination costs,
severance and related employment costs and office and employee relocation costs,
was originally included in the acquisition costs as liabilities assumed. As of
December 31, 1999, the relocation had been completed and approximately
$3,000,000 of this provision related to certain severance and office and
employee relocation costs was reversed against goodwill.
4. OTHER MERGERS AND ACQUISITIONS
On October 7, 1999, Realty acquired TeleMatrix, Inc., a provider of
telephone software and equipment for the lodging industry ("TeleMatrix"). Total
consideration approximated $26,341,000 and was comprised of 1,000 shares of 9%
Series B Cumulative Redeemable Convertible Preferred Stock valued at
$25,000,000, acquisition costs and liabilities assumed. In addition, Realty
entered into a $1,000,000, five-year non-compete agreement with the former owner
of TeleMatrix. The excess of the purchase price over fair market value of the
net assets acquired of approximately $21,986,000 was recorded as goodwill and is
being amortized over 15 years. This acquisition has been accounted for under the
purchase method and, accordingly, operations of TeleMatrix are included in the
lodging revenue and expense categories of the combined and consolidated
statements since consummation of the acquisition.
99
5. DISCONTINUED OPERATIONS
During November 1998, the Boards of Directors of Realty and Operating
approved a comprehensive restructuring plan. Significant components of the
restructuring plan included the sale of Cobblestone Golf Group, which consisted
of 43 golf properties and related operations and the Santa Anita Racetrack and
adjacent property. Accordingly, operating results for Cobblestone Golf Group and
the Santa Anita Racetrack were reclassified and reported as discontinued
operations.
On December 10, 1998, the Companies sold certain assets, leases and licenses
used in connection with the horseracing business conducted at Santa Anita
Racetrack and recorded a loss on sale of $67,913,000 for the year ended
December 31, 1998. During the year ended December 31, 1999, the Companies
recorded an adjustment of $2,961,000. This adjustment in the estimated loss on
disposal resulted from working capital purchase price adjustments and
differences in estimated costs of sale.
The Companies recorded a provision for loss on the disposition of
Cobblestone Golf Group of approximately $237,035,000, including estimated income
taxes of $56,848,000, as of December 31, 1998, based on the estimated proceeds
to be realized on sale. On December 31, 1998, the net assets subject to sale
totaled $305,416,000 and were classified as net assets of discontinued
operations on the combined consolidated balance sheet. On March 31, 1999, the
Companies sold the Cobblestone Golf Group for $393,000,000. During the year
ended December 31, 1999, the Companies recorded a gain of approximately
$27,452,000 to adjust the estimated loss on disposal of the Cobblestone Golf
Group. This change resulted primarily from a revision of the provision for
income taxes payable with respect to recognized built-in gains, working capital
purchase price adjustments and differences in estimated costs of sale.
Combined operating results of discontinued golf operations for the period of
January 1, 1999 through the date of sale, March 29, 1999 (exclusive of any
interest expense, depreciation and corporate charges), follow:
COBBLESTONE
GOLF GROUP
--------------
(IN THOUSANDS)
Revenues.................................................... $22,694
Operating expenses.......................................... 20,536
--------------
Contribution................................................ 2,158
Other expenses.............................................. 6,260
--------------
Loss before income taxes.................................... (4,102)
Income tax benefit.......................................... --
--------------
Net loss.................................................... $ (4,102)
==============
Operating results for the nine months ended September 30, 1998 (exclusive of
any corporate charges or interest expense) of discontinued golf and racetrack
operations follow:
COBBLESTONE
GOLF GROUP SANTA ANITA TOTAL
----------- ----------- --------
(IN THOUSANDS)
Revenue............................................ $43,278 $55,421 $98,699
Net income......................................... 1,963 8,758 10,721
Revenue and net income from the measurement date of September 30, 1998
through December 31, 1998 follow:
COBBLESTONE
GOLF GROUP SANTA ANITA TOTAL
----------- ----------- --------
(IN THOUSANDS)
Revenue............................................ $28,849 $7,741 $36,590
Net income......................................... 1,763 132 1,895
100
6. REAL ESTATE INVESTMENTS
The following is a summary of the Companies' real estate investments:
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(IN THOUSANDS)
Land........................................................ $ 393,083 $ 444,523
Buildings and improvements, net of accumulated depreciation
of $242,191 and $259,777 and other provisions of $24,916
and $12,330............................................... 2,231,267 2,876,418
Real estate mortgages and loans receivable, net of a
valuation allowance of $53,640 and $32,415................ 222,571 1,059,920
Assets held for sale, net of accumulated depreciation of
$131,463 and $27,565 and other provisions of $98,606 and
$71,266................................................... 505,755 291,798
---------- ----------
$3,352,676 $4,672,659
========== ==========
During the year ended December 31, 2000, the Companies provided net funding
of $4,039,000 for ongoing construction of healthcare facilities committed to
prior to November 1998. The Companies also provided net funding of $36,092,000
for capital improvements related to the lodging segment. In addition, the
Companies provided $161,000 for ongoing construction of mortgaged facilities
already in the portfolio.
The Companies received $673,121,000 in principal payments on mortgages
receivable during the year ended December 31, 2000 comprised of:
- $6,795,000 in monthly principal amortization;
- $1,586,000 in partial principal prepayments; and
- $664,740,000 in principal payments on mortgages (with a net book value of
$761,902,000, net of reserves of $46,149,000 previously recorded by the
Companies and related working capital and interest receivables with a net
book value of $30,743,000) received as a result of real estate asset
transactions entered into by the Companies pursuant to the Five Point
Plan.
These transactions resulted in a net loss of $127,904,000.
Also during the year ended December 31, 2000, the Companies sold 42
facilities comprised of real estate and other assets with net book values of
$285,751,000 (net of previously recorded impairment reserves of $63,149,000).
Net proceeds on these transactions amounted to $283,233,000 and consisted of:
- $229,333,000 in cash;
- $7,661,000 of assumed debt; and
- $46,239,000 of subordinated indebtedness due in 2005, net of a discount of
$5,855,000 (on the difference between the 9.0% stated rate of interest and
the 12.0% imputed interest rate).
These transactions resulted in a net loss of $3,686,000.
Total provisions for impairments of real estate investments recorded during
the years ended December 31, 2000, 1999 and 1998 were $183,698,000, $63,170,000
and $63,954,000 respectively. As of December 31, 2000 and 1999, the total
impairment valuation allowance balances were $177,162,000 and $116,011,000,
respectively.
101
The following details changes in the net book value of real estate
investments for the years ended December 31, 2000 and 1999:
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(IN THOUSANDS)
Net book value of investment in real estate assets at
beginning of period, net.................................. $4,672,659 $5,086,736
Lodging
Capital improvements...................................... 36,092 65,888
Depreciation expense and write-offs....................... (106,244) (96,240)
Net book value of assets sold............................. (3,610) (3,504)
Healthcare
Mortgages:
Principal payments........................................ (6,795) (9,777)
Construction loan funding................................. 161 33,321
Partial principal prepayments............................. (1,586) (5,869)
Net book value of mortgages repaid........................ (761,902) (142,396)
Provision for loss on mortgages........................... (83,633) (14,826)
Other adjustments to mortgages............................ 16,406 1,833
Sale/lease-back assets:
Construction funding...................................... 4,039 38,312
Depreciation expense...................................... (24,117) (35,779)
Provision for loss on assets held for sale................ (75,479) (48,344)
Provision for loss on assets held for use................. (24,586) --
Net book value of real estate assets sold................. (285,751) (206,174)
Other adjustments to real estate investments.............. (2,978) 9,478
---------- ----------
Net book value of investment in real estate assets at end of
period, net............................................... $3,352,676 $4,672,659
========== ==========
The activity in the valuation allowance for real estate investments for the
years ended December 31, 2000 and 1999 is summarized as follows:
REAL ESTATE
MORTGAGES AND
BUILDINGS AND LOANS ASSETS HELD
IMPROVEMENTS RECEIVABLE FOR SALE TOTAL
------------- ------------- ----------- ---------
(IN THOUSANDS)
Balance at December 31, 1998.............. $ 14,630 $ 18,991 $ 33,288 $ 66,909
Provision recorded........................ -- 14,826 48,344 63,170
Provision applied to sales or
prepayments............................. (2,289) -- (4,288) (6,577)
Other adjustments......................... (11) (1,402) (6,078) (7,491)
-------- -------- -------- ---------
Balance at December 31, 1999.............. 12,330 32,415 71,266 116,011
Provision recorded........................ 24,586 83,633 75,479 183,698
Transfers to assets held for sale......... (12,000) -- 12,000 --
Provision applied to sales or
prepayments............................. -- (46,149) (63,149) (109,298)
Other adjustments......................... (16,259) 3,010 (13,249)
-------- -------- -------- ---------
Balance at December 31, 2000.............. $ 24,916 $ 53,640 $ 98,606 $ 177,162
======== ======== ======== =========
IMPAIRMENT OF REAL ESTATE ASSETS
At December 31, 2000 and 1999, 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 $75,479,000, $48,344,000 and
$33,218,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
In addition, the Companies recorded
102
provisions of $24,586,000, $0 and $14,700,000 for the years ended December 31,
2000, 1999 and 1998, respectively, on real estate assets held for use where
current facts, circumstances and analysis indicate that the assets might be
impaired. Also, during the years ended December 31, 2000 and 1999, the Companies
sold assets for which impairments of $63,149,000 and $6,577,000, respectively,
had been previously recorded.
As of December 31, 2000 and 1999, the Companies had an impairment valuation
allowance of $98,606,000 and $71,266,000, respectively, related to assets held
for sale. Additionally, the Companies had an impairment valuation allowance of
$24,916,000 and $12,330,000, respectively, related to held for use properties
where management believes that a reduction in the assets' cost basis is
appropriate based on an assessment of current circumstances, including but not
limited to, the amount of debt maturing in 2001 and prices realized on recent
healthcare asset sales.
IMPAIRMENT OF MORTGAGE LOANS
During the years ended December 31, 2000, 1999 and 1998, the Companies
recorded a provision for loss related to the mortgage portfolio of $83,633,000,
$14,826,000 and $16,036,000, respectively. Also during the year ended
December 31, 2000, mortgage loan receivables, which had previously provided
provisions of $46,149,000, were prepaid. As of December 31, 2000 and 1999, the
Companies had $53,640,000 and $32,415,000, respectively, in loan valuation
reserves primarily relating to mortgage loans in the portfolio.
The Companies continue to evaluate the assets in its healthcare portfolio as
well as to 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.
The following table details the real estate portfolio by type of facility:
PORTFOLIO BY TYPE
GROSS NET BOOK # OF % OF # OF # OF
INVESTMENT VALUE PROPERTIES PORTFOLIO MORTGAGES PROPERTIES LEASES LEASES
----------- ---------- ---------- --------- ----------- ---------- --------- --------
(IN THOUSANDS, EXCEPT NUMBER OF PROPERTIES AND PERCENTAGES)
LODGING PORTFOLIO:
Hotels...................... $2,669,577 $2,448,391 299
HEALTHCARE PORTFOLIO:
Long Term Care.............. 750,157 630,128 93 58% $168,949 25 $ 461,179 68
Assisted Living............. 328,974 308,465 94 29% 35,815 3 272,650 91
Acute Care Hospital......... 65,650 56,189 1 5% -- -- 56,189 1
Medical Office Buildings.... 37,818 37,025 5 3% 26,212 3 10,813 2
Other Healthcare............ 51,316 49,640 6 5% 45,235 5 4,405 1
---------- ---------- --- ---- -------- -- --------- ---
1,233,915 1,081,447 199 100% 276,211 36 805,236 163
Valuation Allowance......... -- (177,162) -- (53,640) (123,522)
---------- ---------- --- -------- ---------
1,233,915 904,285 199 $222,571 $ 681,714
---------- ---------- --- ======== =========
Total Real Estate
Portfolio................. $3,903,492 $3,352,676 498
========== ========== ===
Companies in the assisted living sector of the healthcare industry operate
approximately 9.2% of the net book value of the Companies' total real estate
investments (and approximately 28.5% of the healthcare portfolio before the
valuation allowance), while companies in the long term care sector approximate
18.8% of the net book value of the Companies' total real estate investments (and
approximately 58.3% of the healthcare portfolio before the valuation allowance).
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
103
income (loss), funds available from operations, its ability to make
distributions to its shareholders and meet debt obligations. 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,
increased 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 longer fill-up
periods 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 slowed their growth plans and may
have a negative effect on their operating cash flows.
OPERATORS IN BANKRUPTCY
As of December 31, 2000, the Companies have exposure to five operators who
have filed for protection under Chapter 11: Sun Healthcare Group, Inc. ("Sun"),
Mariner Health Group ("Mariner"), Integrated Health Services, Inc.
("Integrated"), Genesis Health Ventures, Inc. ("Genesis") and CareMatrix
Corporation ("CareMatrix"). The following table describes the number of
facilities, net assets before valuation allowance by lease/mortgage and the
lease/mortgage income for each of the five operators that have filed for
Chapter 11.
YEAR ENDED
LEASES MORTGAGES DECEMBER 31, 2000
----------------------- ----------------------- -------------------
TOTAL RENTAL INTEREST
OPERATOR DATE FILED FACILITIES FACILITIES NET ASSETS FACILITIES NET ASSETS INCOME INCOME
- -------- ---------- ---------- ---------- ---------- ---------- ---------- -------- --------
(IN THOUSANDS, EXCEPT FOR NUMBER OF FACILITIES)
Sun(5)............... 10/14/99 39 35 $285,130 4 $30,410 $46,650 $ --(1)
Mariner.............. 1/18/00 2 1 6,789 1 7,057 977 --(2)
Integrated........... 2/2/00 10 10 37,066 -- -- 6,288 N/A
Genesis.............. 6/26/00 8 4 15,127 4 18,425 1,653 1,019(3)
CareMatrix........... 11/9/00 4 1 13,840 3 35,606 1,648 1,691(4)
-- -- -------- -- ------- ------- ------
Totals............... 63 51 $357,952 12 $91,498 $57,216 $2,710
== == ======== == ======= ======= ======
- ------------------------
(1) No interest payments related to the Sun mortgages have been received since
October 14, 1999 and, accordingly, these mortgages were placed on
non-accrual status.
(2) No interest payments related to the Mariner mortgage were received and,
accordingly, this mortgage was placed on non-accrual status.
(3) Mortgages related to Genesis have been placed on non-accrual status and
interest income is recorded as payments are received.
(4) Mortgages related to CareMatrix have been placed on non-accrual status and
interest income is recorded as payments are received.
(5) Net lease assets operated by Sun include straight-line rent receivables of
$4,389,000.
The Companies continue to monitor its operators that have filed for
Chapter 11. To date, the Companies have not come to any definitive agreement
with any of these operators. In the event any of its leases are successfully
rejected through the course of the bankruptcy proceedings, the Companies intend
to transition the operations of these facilities to other operators.
Management has initiated various actions to protect the Companies' interests
under its leases and mortgages, including the draw down and renegotiation of
certain escrow accounts and agreements. While the earnings capacity of certain
facilities has been reduced and the reductions may extend to
104
future periods, management believes that it has recorded appropriate 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.
7. OTHER ASSETS
Other assets include investments in equity securities classified as
available-for-sale, La Quinta intangible assets and the TeleMatrix non-compete
agreement, furniture, fixtures and equipment and other receivables.
The investment in equity securities classified as available-for-sale
includes approximately 26,606,000 shares of Nursing Home Properties Plc
("NHP Plc"), a property investment group that specializes in the financing,
through sale leaseback transactions, of nursing homes located in the United
Kingdom. These shares were acquired at various dates between July 1996 and
August 1998 and represented an ownership interest in NHP Plc of 19.99%, of which
Realty had voting rights with respect to 9.99%. During the year ended
December 31, 2000, the market value of this investment significantly decreased
below the Companies' initial cost. In accordance with SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities", the Companies are
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. Realty determined that decline was other-than-temporary during 2000 and
adjusted the cost basis of its investment in NHP Plc to fair value by recording
a charge to earnings of $49,445,000 based on the difference between the
Companies' cost of $57,204,000 and the market value as of December 31, 2000 of
$7,759,000. On January 22, 2001, the Companies sold their investment in NHP Plc
for net proceeds of $7,737,000 and recorded a charge to earnings of $22,000 in
the 2001 financial statements.
The investment in equity securities classified as available-for-sale also
includes 1,081,000 shares of Balanced Care Corporation, a healthcare operator.
This investment had a market value of $271,000 at December 31, 2000. The initial
cost of this investment was $1,105,000. During 2000, the difference between the
cost and the current market value of this investment, $834,000, was recorded as
a charge to earnings in accordance with SFAS No. 115.
Intangible assets consist of the La Quinta tradename, assembled workforce
and the TeleMatrix non-compete agreement which had net book values at
December 31, 2000 of $86,055,000, $1,696,000 and $753,000, respectively.
Realty provides for a valuation allowance against its assets on a periodic
basis. As of December 31, 2000 and 1999 the valuation allowance provided against
other assets and receivables aggregated approximately $32,785,000 and
$8,649,000, respectively.
8. SHARES OF BENEFICIAL INTEREST/COMMON SHARES
Cash flows from operating activities available for distribution differ from
net income primarily due to depreciation and amortization, as well as other
noncash expenses. Distributions in excess of earnings, as reflected on Realty's
and the Companies' consolidated balance sheets, are primarily a result of an
accumulation of this difference. All shares participate equally in distributions
and in net assets available for distribution to shareholders on liquidation or
termination of Realty. The Directors of Realty have the authority to effect
certain share redemptions or prohibit the transfer of shares under certain
circumstances.
Total distributions to common shareholders during the years ended
December 31, 2000, 1999 and 1998 included a return of capital per share of 0.0%,
9.4% and 4.1%, respectively. The 1998 distribution
105
also included a long-term capital gain distribution of 30.2% per share. The 1999
and 1998 distributions also included unrecaptured Internal Revenue Code
Section 1250 depreciation from real property of 0.3% and 6.3% per share,
respectively.
The Series A Preferred Stock is entitled to quarterly dividends at the rate
of 9% per annum of the $250 per share liquidation preference. On and after
June 17, 2003, the Series A Preferred Stock may be redeemed for cash at the
option of Realty, in whole or in part, at a redemption price of $250 per share,
plus accrued and unpaid dividends, if any, to the redemption date. The 2000,
1999 and 1998 distributions also included unrecaptured Internal Revenue Code
Section 1250 depreciation from real property of 0.0%, 0.3% and 6.6% per share,
respectively.
During 1999, Realty issued 1,000 shares of 9% Series B Cumulative Redeemable
Convertible Preferred Stock (the "Series B Preferred Stock") with a par value of
$0.10 per share in connection with the acquisition of TeleMatrix, Inc. The
Series B Preferred Stock is entitled to quarterly dividends at the rate of 9%
per annum of the $25,000 per share liquidation preference. On and after
October 7, 2004, the Series B Preferred Stock may be redeemed for cash at the
option of Realty, in whole or in part, at a redemption price of $25,000 per
share, plus accrued and unpaid dividends, if any, to the redemption date. The
Series B Preferred Stock is convertible, at the option of the holder, into
paired common shares on October 7, 2004 or the first day that dividends on any
shares of Series B Preferred Stock are in arrears for six or more dividend
periods. Each share of Series B Preferred Stock converts into 2,680 paired
common shares. The conversion ratio may be adjusted from time to time as
defined. Total distributions to holders of Series B Preferred Stock during the
years ended December 31, 2000 and 1999 included unrecaptured Code Section 1250
depreciation from real property of 0.0% and 0.3% per share, respectively.
The following classes of Preferred Stock, Excess Stock and Series Common
Stock are authorized as of December 31, 2000; no shares were issued or
outstanding at December 31, 2000 and 1999:
Meditrust Operating Company Preferred Stock $0.10 par value; 6,000,000
shares authorized;
Meditrust Corporation Excess Stock $0.10 par value; 25,000,000 shares
authorized;
Meditrust Operating Company Excess Stock $0.10 par value; 25,000,000 shares
authorized;
Meditrust Corporation Series Common Stock $0.10 par value; 30,000,000 shares
authorized; and
Meditrust Operating Company Series Common Stock $0.10 par value; 30,000,000
shares authorized.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are subjective in nature and are dependent upon a
number of significant assumptions associated with each financial instrument or
group of financial instruments. Because of a variety of permitted calculations
and assumptions regarding estimates of future cash flows, risks, discount rates
and relevant comparable market information, reasonable comparisons of the
Companies' fair value information with other companies cannot necessarily be
made.
The following methods and assumptions were used for real estate mortgages
and long term indebtedness to estimate the fair value of financial instruments
for which it is practicable to estimate value:
The fair value of real estate mortgages has been estimated by discounting
future cash flows using current interest rates at which similar loans would be
made to borrowers with similar credit ratings and for the same remaining
maturities. Due to early repayment of approximately $761,902,000 of real estate
mortgages and impairment provisions of $83,633,000 taken during the year ended
December 31, 2000, the fair market value of real estate mortgages remaining in
the portfolio approximate the $222,571,000 carrying value of these mortgages at
December 31, 2000. The fair value of real estate mortgages
106
approximated $987,540,000 as of December 31, 1999. The carrying value of these
mortgages was $1,059,920,000 as of December 31, 1999.
The quoted market price for the Companies' publicly traded convertible
debentures and rates currently available to the Companies for debt with similar
terms and remaining maturities were used to estimate fair value of existing
debt. The fair value of the Companies' indebtedness amounted to approximately
$1,421,521,000 and $2,390,573,000 as of December 31, 2000 and 1999,
respectively. The carrying value of these convertible debentures and other debt
was $1,596,350,000 and $2,613,763,000 as of December 31, 2000 and 1999,
respectively.
The following table summarizes the underlying notional amounts and fair
values of interest rate swap agreements as of December 31 (in thousands):
2000 1999
- ------------------- --------------------
NOTIONAL FAIR NOTIONAL FAIR
AMOUNT VALUE AMOUNT VALUE
- -------- -------- --------- --------
$400,000 $1,000 $750,000 $6,000
10. INDEBTEDNESS
Indebtedness at December 31, 2000 and 1999 is as follows:
2000 1999
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Notes payable, net:
Principal payments aggregating $106,000 due from
August 2002 to September 2015, bearing interest at rates
between 7.510% and 8.625%................................. $ 105,700 $ 105,575
Principal payments aggregating $125,000 due in July 2000,
bearing interest at 7.375%................................ -- 124,731
Principal payments aggregating $75,050 due in July 2001,
bearing interest at 7.6%.................................. 74,996 79,828
Principal payments aggregating $48,200 due in October 2001,
bearing interest at 7.11%................................. 48,200 50,000
Principal payments aggregating $100,000 due in March 2004,
bearing interest at 7.25%................................. 100,539 100,710
Principal payments aggregating $100,000 due in
September 2005, bearing interest at 7.40%................. 99,955 99,945
Principal payments aggregating $50,000 due in
February 2007, bearing interest at 7.27%.................. 50,000 50,000
Principal payments aggregating $160,000 due in August 2007,
bearing interest at 7%.................................... 157,941 157,629
Principal payments aggregating $50,000 due in April 2008,
bearing interest at 7.33%................................. 50,000 50,000
Principal payments aggregating $150,000 due in August 2011,
bearing interest at 7.114%................................ 149,319 149,131
Principal payments aggregating $175,000 due in
September 2026, (redeemable in September 2003 at the
option of the note holder) bearing interest at 7.82%...... 174,490 174,357
Other....................................................... 2,500 2,500
---------- ----------
$1,013,640 $1,144,406
---------- ----------
CONVERTIBLE DEBENTURES, NET:
8.54% interest, convertible at $27.15 per share, due
July 2000................................................. $ -- $ 42,157
7.5% interest, convertible at $30.11 per share, due
March 2001................................................ 82,992 89,492
9% interest, convertible at $22.47 per share, due
January 2002.............................................. 2,370 2,370
107
2000 1999
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
8.56% interest, convertible at $27.15 per share, due
July 2002................................................. 51,553 51,449
---------- ----------
$ 136,915 $ 185,468
---------- ----------
BANK NOTES PAYABLE, NET:
Revolving credit agreement maturing July 17, 2001........... $ -- $ 658,322
Term loan due July 17, 2001................................. 397,827 495,860
---------- ----------
$ 397,827 $1,154,182
---------- ----------
BONDS AND MORTGAGES PAYABLE, NET:
Mortgage notes, interest ranging from 7.87% to 10.39%,
monthly principal and interest payments ranging from $10
to $51 and maturing from March 2001 through March 2033,
collateralized by four and ten facilities, respectively... $ 15,706 $ 38,561
Manatee County, Florida Industrial Development Revenue
Bonds, Series 1995, annual principal payments ranging from
$120 in 2001 to $240 due in December 2015, bearing
interest at 7.35%, collateralized by one facility......... 3,115 3,205
Mortgage loans maturing in October and November of 2001,
5.38% and 9.89%, respectively, weighted average effective
interest rates............................................ 2,646 44,483
Industrial Development Revenue Bonds, maturing August 2001
through February 2012, 4.24% and 3.53%, respectively,
weighted average effective interest rates................. 20,610 27,133
---------- ----------
$ 42,077 $ 113,382
---------- ----------
$1,590,459 $2,597,438
========== ==========
The notes payable, convertible debentures, bank notes payable and bonds and
mortgages payable are presented net of unamortized debt issuance costs of
$5,891,000 and $16,325,000 at December 31, 2000 and 1999, respectively.
Amortization expense associated with the debt issuance costs amounted to
$8,342,000, $13,130,000 and $12,264,000 for the years ended December 31, 2000,
1999 and 1998, respectively and is reflected in interest expense.
108
The Companies had the following debt activity for the years ended
December 31, 2000 and 1999:
BONDS AND
NOTES CONVERTIBLE BANK NOTES MORTGAGES
PAYABLE, NET DEBENTURES, NET PAYABLE, NET PAYABLE, NET TOTAL
------------ --------------- ------------ ------------ -----------
(IN THOUSANDS)
DECEMBER 31, 1998......... $1,155,837 $185,013 $ 1,831,336 $129,536 $ 3,301,722
Repayment of principal.... (12,500) -- (1,868,641) (15,937) (1,897,078)
Borrowings................ -- -- 1,176,000 -- 1,176,000
Other decrease in
principal............... -- -- -- (221) (221)
Other amortization........ (161) -- -- -- (161)
Amortization of debt
issuance costs and
other................... 1,230 455 15,487 4 17,176
---------- -------- ----------- -------- -----------
DECEMBER 31, 1999......... 1,144,406 185,468 1,154,182 113,382 2,597,438
Repayment of principal.... (130,287) (48,115) (1,017,359) (63,649) (1,259,410)
Borrowings................ -- -- 252,000 -- 252,000
Debt assumed by third-
party, (Note 6)......... -- -- -- (7,661) (7,661)
Gain on early
extinguishments of
debt.................... (1,463) (720) -- -- (2,183)
Amortization of debt
issuance costs and
other................... 984 282 9,004 5 10,275
---------- -------- ----------- -------- -----------
DECEMBER 31, 2000......... $1,013,640 $136,915 $ 397,827 $ 42,077 $ 1,590,459
========== ======== =========== ======== ===========
NOTES PAYABLE
On August 16, 1999, Realty repaid $12,500,000 of its notes payable, which
matured on that date and bore interest at 7.25%.
During 2000, the Companies repaid $87,254,000 of notes payable at maturity.
In addition, the Companies repurchased $43,033,000 of notes payable, resulting
in a gain on early extinguishments of debt of $1,463,000.
CONVERTIBLE DEBENTURES
On June 30, 2000, Realty repaid the 8.54% convertible debentures with a
balance of $34,835,000 that were scheduled to mature on July 1, 2000.
The 7.5% debentures issued in March 1994 are subject to redemption by the
Companies at 100% of the principal amount plus accrued interest.
The 9% convertible debentures issued in April 1992 are subject to redemption
by the Companies at 100% of the principal amount plus accrued interest.
The 8.56% debentures issued in July 1995 are subject to redemption by the
Companies at 100% of the principal amount plus accrued interest to the extent
necessary to preserve Realty's status as a REIT.
During 2000, the Companies repurchased $13,280,000 of convertible
debentures, which resulted in a gain on early extinguishments of debt of
approximately $720,000.
BANK NOTES PAYABLE
In July 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 on July 17, 2001;
Tranche B, a term loan in the amount of $500,000,000,
109
amounts of which if repaid may not be reborrowed, which matured on 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 on July 17, 1999 with a six month extension
option that was exercised in June, 1999; and Tranche D, a term loan in the
amount of $500,000,000, amounts of which if repaid may not be reborrowed, which
matures on July 17, 2001.
On November 23, 1998, Realty amended its Credit Agreement to provide for
Realty's cash repayment of a portion of its Forward Equity Issuance Transaction
("FEIT"), to amend 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 will also extend 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 March 10, 1999, Realty reached a second agreement with its bank group to
further amend the Credit Agreement. The second amendment, which was subject to
the successful completion of the sale of Cobblestone Golf Group, provided for a
portion of the sale proceeds to be applied to settle a portion of the FEIT. The
second amendment also provided for, among other things: deletion of limitations
on certain healthcare investments and lowering of the Tranche A loan commitments
to $850,000,000. On March 31, 1999, the Companies completed the sale of
Cobblestone Golf Group.
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.
Effective September 5, 2000, the Companies reached a fourth agreement with
its bank group to further amend the Credit Agreement. The fourth amendment
provided for, among other things: changes to the definition of the minimum
tangible net worth covenant; limitation on cash and cash equivalents held and
limitations on capital expenditures; reduced the Tranche A revolving loan
commitment from $850,000,000 to $400,000,000; and allowed an optional prepayment
of $50,000,000 on the Tranche D term loan. In addition, the amendment specifies
when and how the proceeds of future asset sales are required to be applied
against any outstanding balances on Tranches A and D.
Borrowings under the Credit Agreement include LIBOR, base rate and money
market borrowings. Pricing on the loan commitments, lines and letters of credit
under the Credit Agreement varies according to the pricing level commensurate
with the credit quality of Realty. Events of default under the Credit Agreement
include, among other things: failure to pay any principal or reimbursement
obligation when due, failure to meet any of the covenants of the Credit
Agreement, failure of the representations and warranties to be true in any
material respect and default under other debt instruments of the Companies or
their subsidiaries. The Credit Agreement includes covenants with respect to
maintaining certain financial benchmarks, limitations on the types and
percentage 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. In addition, Operating is a guarantor of all of the obligations of
Realty under the Credit Agreement.
During the year ended December 31, 2000, the Companies and Realty received
net cash proceeds of approximately $905,955,000 from the sale of certain
healthcare assets and the repayment of healthcare mortgage loans. These cash
proceeds were primarily used to repay the Companies' outstanding debt.
110
TRANCHE A REVOLVING LOAN
During the year ended December 31, 2000, Realty borrowed $252,000,000 from
the Tranche A revolving loan and repaid approximately $917,359,000 of the
balance. Realty had no borrowings outstanding on the Tranche A revolving loan at
December 31, 2000.
At December 31, 2000, the Companies and Realty had approximately
$366,000,000 (net of outstanding letters of credit) in available borrowings
under its revolving tranche commitment.
TRANCHE B TERM LOAN
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 April 8, 1999, Realty repaid
the remaining $250,000,000 of its Tranche B term loan and cancelled a
$250,000,000 swap contract that was scheduled to mature in July 1999.
TRANCHE C TERM LOAN
On December 24, 1999, Realty repaid $250,000,000 of its Tranche C term loan,
which was scheduled to mature on January 17, 2000.
TRANCHE D TERM LOAN
During 2000, Realty repaid $100,000,000 of its Tranche D term loan,
resulting in a balance of $397,827,000 (net of unamortized debt costs of
$2,173,000) at December 31, 2000.
INTEREST RATE SWAP AGREEMENT
During July 1998, Realty entered into an interest rate swap agreement to
reduce the impact on interest expense of fluctuating interest rates on
$1,250,000,000 of its Credit Agreement. Realty agreed with the counterparty to
exchange, on a monthly basis, the difference between Realty's fixed pay rate and
the counterparty's variable pay rate of one month LIBOR. During January and
April 1999, Realty cancelled two $250,000,000 contracts from the interest rate
swap agreement in connection with the repayments described below. At
December 31, 2000, Realty was a fixed rate payor of approximately 5.7% and
received a variable rate of approximately 6.7%. Differentials in the swapped
amounts are recorded as adjustments to interest expense of Realty. Total
interest (income) expense related to the swap agreement was approximately
$4,070,000 and $4,101,000, respectively, for the years ended December 31, 2000
and 1999.
During 2000, the Companies cancelled $350,000,000 of its interest rate swap
agreement. At December 31, 2000, the Companies were fixed rate payors of 5.7%
under an interest rate swap agreement with an underlying notional amount of
$400,000,000 and received a variable rate of 6.7%. Differentials in the swapped
amounts are recorded as adjustments to interest expense of the Companies.
The Companies' revolving commitment carried interest at its option of the
base rate of the prime rate plus 2.0% (11.5% at December 31, 2000) or LIBOR plus
2.875% (9.5% weighted average rate at December 31, 2000).
BONDS AND MORTGAGES PAYABLE
Realty is obligated by agreements relating to fourteen issues of Industrial
Revenue Bonds ("IRBs"), in an aggregate amount of $20,610,000, to purchase the
bonds at face value prior to maturity under certain circumstances. The bonds
have floating interest rates which are indexed periodically. Bondholders may,
when the rate is changed, put the bonds to the designated remarketing agent. If
the remarketing agent is unable to resell the bonds, it may draw upon an
irrevocable letter of credit that secures the IRBs. In such event, Realty would
be required to repay the funds drawn on the letters of credit within 24 months.
The Companies have $21,111,000 of outstanding letters of credit expiring on
111
May 31, 2001 related to the fourteen IRBs. As of December 31, 2000, no draws had
been made upon any such letters of credit. The schedule of annual maturities
shown below includes these IRBs as if they will not be subject to repayment
prior to maturity. Assuming all bonds under such IRB arrangements are presented
for payment prior to December 31, 2000 and the remarketing agents are unable to
resell such bonds, the maturities of long-term debt shown below would increase
by $5,350,000 for the year ending December 31, 2002.
Total debt maturing in the year 2001 is $628 million, including
approximately $90 million that was due on March 1, 2001 and which has been paid
off through borrowings under the line of credit. In addition, on July 15, 2001,
the Companies have approximately $75 million of debt maturing. The $400 million
outstanding bank term loan and the $400 million commitment on the line of credit
mature on July 17, 2001. Meditrust is reviewing various alternatives with
respect to the bank term loan and line of credit, however, there can be no
assurances that the Companies will be able to refinance or pay down this debt
prior to its maturity. The remaining $63 million of 2001 debt maturities are
primarily in October 2001. 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 certain healthcare assets.
The aggregate maturities of notes payable, convertible debentures, bank
notes payable and bonds and mortgages payable for the five years subsequent to
December 31, 2000 are as follows:
YEAR (IN THOUSANDS)
- ---- --------------
2001............................................ $ 628,032
2002............................................ 92,250
2003............................................ 207,112
2004............................................ 251,724
2005............................................ 116,412
Thereafter...................................... 300,820
----------
Total debt...................................... $1,596,350
Unamortized debt issuance costs................. (5,891)
----------
Total debt, net................................. $1,590,459
==========
11. FORWARD EQUITY ISSUANCE TRANSACTION
On February 26, 1998, the Companies entered into a forward equity issuance
transaction ("FEIT") with Merrill Lynch International, a UK-based broker/dealer
subsidiary of Merrill Lynch & Co., Inc. (collectively with its agent and
successor in interest, "MLI"). Pursuant to the terms of a Stock Purchase
Agreement, MLI purchased 8,500,000 shares of Series A Non-Voting Convertible
Common Stock with a par value of $0.10 per share from each of the Companies at a
purchase price of $32.625 per share (collectively with the Paired Common Shares
the shares of Series A non-voting convertible Common Stock are convertible into,
the "Notional Shares"). Net proceeds from the issuance were approximately
$272,000,000 and were used by the Companies to repay existing indebtedness.
The FEIT and a related Purchase Price Adjustment Agreement included an
adjustment mechanism under which the Companies delivered approximately 9,700,000
Collateral Shares in 1998, all of which were returned to the Companies when the
Companies settled in cash a portion of the adjustment transaction in
December 1998. Prior to the settlement, MLI held any paired common shares
delivered by the Companies under the Purchase Price Adjustment Agreement in a
collateral account (the "Collateral Shares").
112
On November 11, 1998, the Companies entered into an agreement with MLI to
amend the FEIT. Under the agreement, Realty agreed to grant a mortgage of the
Santa Anita Racetrack to MLI and repurchase from MLI approximately 50% of the
FEIT with cash generated in part from the sale of certain assets, including the
Santa Anita Racetrack. MLI agreed, subject to the terms of the settlement
agreement, not to sell any shares of the existing FEIT until February 26, 1999.
In December 1998, the Companies paid MLI $152,000,000 ($127,000,000 of which was
from the sale of certain assets including the Santa Anita Racetrack) for the
repurchase of 1,635,000 Notional Shares and the release of 9,700,000 Collateral
Shares. At December 31, 1998 the Notional Shares outstanding were reduced to
approximately 6,865,000 paired common shares and there were no contingent shares
issuable.
On April 1, 1999, the Companies settled the FEIT with MLI with a payment
totaling approximately $89,840,000. MLI returned approximately 6,865,000 Paired
Common Shares representing all of the remaining outstanding paired common shares
under the FEIT on that date.
12. OTHER EXPENSES
For the years ended December 31, 2000, 1999 and 1998, other expenses
consisted of the following:
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
RESTRUCTURING:
Employee severance and related employment costs............. $21,132 $25,000 $ 7,149
Accelerated amortization of unearned compensation........... 5,240 -- --
Write-off of capitalized pre-development costs.............. -- -- 8,720
External consulting fees.................................... 301 6,184 11,882
Write-off of software development costs..................... -- 3,998 --
Write-off of capitalized debt costs and swap breakage
fees...................................................... -- 6,026 --
Write-off of debt costs and other prepayment expenses....... 3,142 -- --
------- ------- -------
Restructuring and related expenses........................ 29,815 41,208 27,751
OTHER:
Costs of transactions not consummated....................... -- -- 3,110
Provision for loss on working capital and other
receivables............................................... 5,146 4,606 16,400
Bad debt recoveries......................................... (2,060) -- --
------- ------- -------
Other expenses............................................ 3,086 4,606 19,510
------- ------- -------
TOTAL....................................................... $32,901 $45,814 $47,261
======= ======= =======
RESTRUCTURING CHARGES
In January 2000, the Companies executed a separation and consulting
agreement with the Chief Executive Officer, President and Treasurer of Realty,
pursuant to which Realty made a cash payment of approximately $9,460,000
(including consulting fees), converted 155,000 restricted paired common shares
into unrestricted paired common shares (which resulted in approximately
$2,461,000 of accelerated amortization of unearned compensation) and continued
certain medical, dental and other benefits.
Also in January 2000, the Companies announced that the Meditrust corporate
headquarters would be moved to Irving, Texas and that changes would be made to
the management team. As a result, in June 2000, the Boards of Directors approved
a plan to reduce the number of employees by 14 as of December 31, 2000,
including four officers. The reduction was primarily in the financial and legal
groups of the Companies' Needham, Massachusetts offices. Accordingly, during the
year ended December 31, 2000, the Companies recorded $14,451,000 for severance
related expenses 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 Irving, Texas by December 31, 2002. As part
of the
113
plan to close the Needham office, additional severance and other payments are
expected in the future. In addition, the Companies recorded a charge of
$3,142,000 related to accelerated amortization of debt issuance costs and
certain other expenses associated with the early repayment of debt and the
reduction of the Companies' revolving credit facility.
The Companies also incurred approximately $301,000 of professional fees
during the year ended December 31, 2000 related to implementation of the Five
Point Plan.
On May 10, 1999, the Companies entered into a separation agreement with the
former Director and Chairman of the Companies and Chief Executive Officer and
Treasurer of Operating. Under the terms of the separation agreement, the
Companies made severance payments totaling $25,000,000 in cash and continued
certain life insurance benefits. The Companies established a Special Committee
of the Boards of Directors of Realty and Operating (the "Special Committee") to
evaluate this executive's employment contract and determine 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.
During the year ended December 31, 1999, the Companies incurred
approximately $12,210,000 of non-recurring costs 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, other advisory fees related to the
1998 Plan and the separation agreement.
During the year ended December 31, 1999, the Companies recorded a charge of
approximately $3,998,000 to write-off certain internal and external software
development costs related to a front desk system under development for the
lodging division based on La Quinta management's decision to abandon the
project.
Pursuant to the 1998 Plan, the Companies announced plans to refocus their
capital investment program by reducing healthcare related investments and
ceasing development of any new hotels other than the completion of those La
Quinta-Registered Trademark- Inn & Suites currently under construction.
Accordingly, the Companies recorded non-recurring costs in 1998 of $8,720,000
for the write-off of certain previously capitalized costs associated with
lodging development and $7,149,000 for severance related costs attributable to
workforce reductions of 87 employees at the Companies' lodging and healthcare
divisions.
The Companies recorded $11,882,000 of costs in fiscal year 1998 incurred for
various consultants engaged to assist in the development and implementation of
the 1998 Plan.
OTHER
During the years ended December 31, 2000, 1999 and 1998, the Companies
recorded provisions and other expenses of approximately $5,146,000, $4,606,000
and $16,400,000, respectively, on working capital and other receivables
management considered uncollectable. The Companies also recorded approximately
$2,060,000 of bad debt recoveries during the year ended December 31, 2000
related to receivables written off in prior years.
In 1998, the Companies incurred approximately $3,110,000 in costs related to
the evaluation of certain acquisitions not completed by the Companies.
13. LEASE COMMITMENTS
LODGING
The Participating Hotel Facility Leases between Realty and Operating are
generally long-term and provide for quarterly base or minimum rents plus
contingent or percentage rents based on quarterly gross revenue thresholds for
each hotel facility. Operating is generally responsible for paying all
114
operating expenses of the hotel facilities while Realty is responsible for costs
attributable to real estate taxes and insurance. The leases are accounted for as
operating leases. Total rental expense recognized by Operating to Realty under
such leases was approximately $278,379,000, $274,018,000 and $125,706,000 for
the years ended December 31, 2000, 1999 and 1998, respectively, of which
approximately $45,651,000, $50,715,000 and $29,494,000, respectively, was
contingent rent.
Realty's future minimum rents at December 31, 2000, receivable from
Operating under noncancelable Participating Hotel Facility Leases, are as
follows:
YEAR ENDED DECEMBER 31, (IN THOUSANDS)
- ----------------------- --------------
2001.......................... $240,640
2002.......................... 240,640
2003.......................... 120,320
--------
Total......................... $601,600
========
Realty also leases restaurants it owns to third-parties. These leases are
accounted for as operating leases and expire over a period from 2001 to 2018 and
provide for minimum rent and contingent rent based on a percentage of annual
sales in excess of stipulated amounts. Total restaurant rental income for 2000,
1999 and 1998 was $6,182,000, $7,188,000 and $3,382,000, respectively, of which
$393,000, $1,109,000 and $570,000, respectively, was contingent rent.
Realty's future minimum rents at December 31, 2000, to be received under
non-cancelable operating restaurant leases, are as follows:
YEAR ENDED DECEMBER 31, (IN THOUSANDS)
- ----------------------- --------------
2001.......................... $ 5,621
2002.......................... 5,222
2003.......................... 4,503
2004.......................... 3,856
2005.......................... 3,311
Thereafter.................... 10,330
-------
Total......................... $32,843
=======
Realty is also committed to third-parties for certain ground lease
arrangements which contain contingent rent provisions based upon revenues and
also certain renewal options at fair market value at the conclusion of the
initial lease terms. The leases extend for varying periods through 2014. Future
minimum rental payments required under operating ground leases that have initial
or remaining non-cancelable lease terms in excess of one year are as follows:
YEAR ENDED DECEMBER 31, (IN THOUSANDS)
- ----------------------- --------------
2001.......................... $ 311
2002.......................... 272
2003.......................... 272
2004.......................... 272
2005.......................... 195
Thereafter.................... 870
------
Total......................... $2,192
======
Total rent for ground leases was $1,150,000, $1,057,000 and $480,000 for
2000, 1999 and 1998, respectively.
115
Operating leases certain non-hotel real estate and equipment for the hotels'
operations under various lease agreements. The leases extend for varying periods
through 2009 and generally are for a fixed monthly amount.
Operating's future minimum rents at December 31, 2000, payable under
non-hotel non-cancelable operating leases, are as follows:
YEAR ENDED DECEMBER 31, (IN THOUSANDS)
- ----------------------- --------------
2001.......................... $ 2,411
2002.......................... 2,092
2003.......................... 1,990
2004.......................... 1,489
2005.......................... 1,392
Thereafter.................... 5,102
-------
Total......................... $14,476
=======
Total rent expense for operating leases was approximately $2,896,000,
$2,631,000 and $1,040,00 for the years ended December 31, 2000, 1999 and 1998,
respectively.
HEALTHCARE
Realty's healthcare related property and facilities are generally leased
pursuant to non-cancelable, fixed-term operating leases expiring from 2001 to
2012. The leases ordinarily provide multiple, five-year renewal options and the
right of first refusal or the option to purchase the facilities at the greater
of the fair market value or Realty's investment at the end of the initial term
of the lease or at various times during the lease.
The healthcare related lessees are required to pay aggregate base rent
during the lease term and applicable debt service payments as well as
percentage, supplemental and additional rent (as defined in the lease
agreements). The majority of the healthcare related leases are triple net which
generally requires the lessees to pay all taxes, insurance, maintenance and
other operating costs of the land and facilities.
Future minimum rents, expected to be received by Realty during the initial
term of the healthcare related leases for the years subsequent to December 31,
2000, are as follows:
YEAR ENDED DECEMBER 31, (IN THOUSANDS)
- ----------------------- --------------
2001.......................... $ 97,526
2002.......................... 94,906
2003.......................... 94,906
2004.......................... 94,280
2005.......................... 77,216
Thereafter.................... 120,702
--------
Total......................... $579,536
========
14. COMMITMENTS AND CONTINGENCIES
The Companies are a party to a number of claims and lawsuits arising out of
the normal course of business. The Companies believe that none of these claims
or pending lawsuits, either individually or in the aggregate, will have a
material adverse effect on the Companies' business or on their consolidated
financial position or results of operations.
116
Realty had purchase commitments related to certain new construction and
renovation projects in the lodging segment of approximately $10,123,000 related
to projects with total estimated costs of $47,107,000 at December 31, 2000.
15. RESTRICTED STOCK AND STOCK OPTION PLAN
The Meditrust Corporation Amended and Restated 1995 Share Award Plan (the
"Meditrust Corporation Plan") provides that the maximum number of Common Shares
(the "Meditrust Corporation Shares") that may be issued under the Meditrust
Corporation Plan shall not exceed the sum of 3,616,741 plus an amount equal to
5% of the Meditrust Corporation Shares outstanding from time to time. The
Meditrust Operating Company Amended and Restated 1995 Share Award Plan (the
"Meditrust Operating Plan" and together with the Meditrust Corporation Plan, the
"Plans") provides that the maximum number of Common Shares (the "Meditrust
Operating Shares") that may be issued under the Meditrust Operating Plan shall
not exceed an amount equal to 5% of the Meditrust Operating Shares outstanding
from time to time.
Under each of the Plans, the maximum number of stock appreciation rights
that may be granted to an eligible person during any one year period shall not
exceed 450,000, subject to certain adjustments. Also, under each of the Plans,
awards are to be issued either as Options, Dividend Equivalents, Stock
Appreciation Rights, Restricted Stock Awards, Performance Share Awards or Stock
Bonuses (each, an "Award"). At December 31, 2000, under the Meditrust
Corporation Plan and the Meditrust Operating Plan, 1,518,000 and 2,854,000
shares, respectively, were available for future grant.
Each Award expires on such date as determined by management and the
Compensation Committee of the Boards of Directors (the "Committee"), but in the
case of options or other rights to acquire Paired Common Shares, not later than
10 years after the date of the Award. Options granted under each of the Plans
vest according to a schedule determined by the Committee. The Committee may
authorize the deferral of any payment of cash or issuance of Paired Common
Shares under each of the Plans at the election and request of a participant. Up
to 4,000,000 shares are available under each of the Plans to be issued as
incentive stock options. Directors, officers, employees and individual
consultants, advisors or agents who render or who have rendered bona fide
services to the corporation are eligible to participate in the Plan for such
corporation.
The Committee has the discretion to accelerate or extend the exercisability
or vesting of any or all such outstanding Awards within the maximum ten-year
period, including in the event of retirement, death or termination of
employment. Options outstanding at December 31, 2000 expire in 2001 through
2010.
Under each of the Plans, a like number of shares of the Meditrust
Corporation Shares or Meditrust Operating Shares, as the case may be, shall be
purchased from the other corporation or arrangements shall be made with such
other corporation for the simultaneous issuance by the other corporation of the
same number of Common Shares as the number of Common Shares issued in connection
with an Award. Under each of the Plans, the option price shall not be less than
the par value of the Meditrust Corporation Shares and the Meditrust Operating
Shares subject to the Award. In the event of a "change in control," as defined
in each of the Plans, all options outstanding will become fully vested.
The Companies apply the provisions of Accounting Principles Board Option
No. 25 (APB No. 25) in accounting for stock-based awards. Accordingly, no
compensation cost has been recognized for the fixed stock option plans.
RESTRICTED STOCK PERFORMANCE AWARDS
Restricted stock performance awards have been granted under the Plans. The
shares carry voting and dividend rights; however, sale of the shares is
restricted prior to vesting. Subject to continued employment, vesting occurs
over three years from the date of grant upon achievement of performance goals as
defined, or as the Boards of Directors may determine. During the year ended
December 31,
117
2000, 1,760,000 restricted shares of the Companies' stock were issued to
employees under the Plans and 50,000 restricted shares were forfeited and thus
cancelled and retired. Restricted shares outstanding at December 31, 2000 and
1999 were 1,710,000 and 395,000, respectively.
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 shown as a reduction of
shareholders' equity in the accompanying consolidated and combined balance
sheets. For the years ended December 31, 2000, 1999 and 1998, amortization of
unearned restricted stock compensation was $1,336,000, $1,136,000 and $0,
respectively. In January 2000, the Companies executed a separation and
consulting agreement with the Chief Executive Officer, President and Treasurer
of Realty and reduced the number of employees in the financial and legal groups
of the Companies' Needham, Massachusetts offices. Under the terms of certain
severance agreements, vesting of 395,000 restricted paired common shares was
accelerated, such that the shares were unrestricted at December 31, 2000.
Accordingly, during the year ended December 31, 2000, the Companies recorded
$5,240,000 of accelerated amortization of unearned compensation.
STOCK OPTIONS
Options to purchase 1,054,000 Meditrust Corporation Shares and 320,000
Meditrust Operating Shares were exercisable as of December 31, 2000.
Had compensation cost for the Companies' stock option-based compensation
plans been determined based on the fair value at the grant dates for Awards
under the Plans consistent with the method pursuant to SFAS No. 123, the
Companies' net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
--------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Net income (loss) available to Paired Common Shareholders:
As reported............................................... $(352,156) $73,542 $(161,591)
Pro forma................................................. (352,693) 73,456 (162,354)
Earnings (loss) per Paired Common Share:
Basic as reported......................................... $ (2.48) $ 0.52 $ (1.34)
Diluted as reported....................................... (2.48) 0.51 (1.29)
Basic pro forma........................................... (2.49) 0.51 (1.35)
Diluted pro forma......................................... (2.49) 0.51 (1.29)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2000, 1999 and 1998: dividend yield of 0.0%,
17.0% and 14.1% and expected volatility of 50%, 48% and 33% for each year,
respectively. Other assumptions used in the Black-Scholes analysis include
risk-free interest rates of 5.9%, 5.6% and 4.4% in 2000, 1999 and 1998,
respectively and an expected life of four years for each grant.
118
A summary of the Companies' stock option activity and related information
follows:
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
2000 1999 1998
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000'S) PRICE (000'S) PRICE (000'S) PRICE
-------- -------- -------- -------- -------- --------
Fixed options:
Outstanding at beginning of year....... 4,311 $ 21 5,022 $ 20 3,811 $ 30
Granted................................ 5,532 4 100 13 2,934 13
Options from merger.................... -- -- -- -- 452 4
Exercised.............................. -- -- (17) 4 (611) 8
Forfeited.............................. (1,727) 20 (794) 17 (1,564) 31
------ ----- ------ ----- ------ -----
Outstanding at end of year............. 8,116 $ 10 4,311 $ 21 5,022 $ 20
------ ----- ------ ----- ------ -----
Options exercisable at year end........ 1,374 1,489 1,032
Weighted average fair value of options
granted during the year.............. $0.89 $1.42 $1.05
The weighted-average exercise price equals the weighted-average grant date
fair value as if all options were granted at fair market value on the date of
grant.
The following table summarizes information about fixed stock options
outstanding at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------ ----------------------
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
AT 12/31/00 REMAINING EXERCISE AT 12/31/00 EXERCISE
(000'S) CONTRACTUAL LIFE PRICE (000'S) PRICE
----------- ---------------- -------- ----------- --------
Range of exercise prices:
$1.81--$3.31....................... 3,670 10 $ 3.15 -- $ --
$5.38--$16.06...................... 3,371 9 9.50 635 13.31
$25.07--$32.77..................... 1,075 6 31.43 739 30.82
----- -- ------ ----- ------
8,116 9 $ 9.53 1,374 $22.73
===== == ====== ===== ======
16. RETIREMENT, PENSION AND OTHER BENEFITS
Realty entered into a non-qualified Trustee Retirement Plan (the "Retirement
Plan") during 1996. The Retirement Plan provided eligible Trustees defined
retirement benefits based on trustee fees and years of service. At December 31,
1998 and 1997, the present value of the accumulated benefit obligation was
$1,802,000 and $1,616,000, respectively. Retirement expense, including prior
amortization cost and a current provision for the Retirement Plan, totaled
$1,214,000 and $346,000 in the accompanying income statements for 1998 and 1997,
respectively.
On December 10, 1998, the Board of Directors of Realty voted to accept the
recommendations of the Compensation Committee to make a payment, pursuant to the
Meditrust Corporation Plan, of unrestricted stock of the Companies to certain
Directors that previously qualified under the Retirement Plan, in an amount
equal to the present value of each individual's accumulated benefit.
During 1995, Realty entered into a Split-Dollar Life Insurance Agreement
with a trust established by the then Chairman and Chief Executive Officer,
pursuant to which Realty has agreed to advance policy premiums on life insurance
policies paying a death benefit to the trust. Realty is entitled to
reimbursement of the amounts advanced, without interest, which right is
collateralized by an assignment
119
of the life insurance policies and a personal guarantee of the former Chairman
in the amount of the excess, if any, of the premiums paid by Realty over the
cash surrender value of the insurance policies.
The Companies have savings plans that qualify under Section 401(K) of the
Code under which eligible employees are entitled to participate up to a
specified annual maximum contribution level. The Companies match a portion of
such contributions that amounted to $369,000, $538,000 and $320,000, for the
years ended December 31, 2000, 1999 and 1998, respectively. During 2000, the
Boards of Directors approved enhancements to benefits provided to employees
under the 401(K) Plan. These enhancements include an increase in La Quinta's
match of employee contributions and a change in vesting requirements which allow
employees more favorable vesting terms.
La Quinta sponsors the La Quinta Retirement Plan. The projected benefit
obligations and fair value of the assets on the date of the La Quinta Merger
(July 17, 1998) were $19,725,000 and $17,425,000, respectively.
On December 31, 1998, the La Quinta Supplemental Executive Retirement Plan
("SERP") was established with a prior service cost of $3,004,000. During 1999, a
significant portion of the executives covered under the plan terminated
employment related to the acquisition resulting in a decrease in the projected
benefit obligation of $1,420,000 and an acceleration of prior service cost
recognition of $1,355,000. The impact on the statement of operations was a gain
of $56,000.
The projected benefit obligation, accumulated benefit obligation and fair
value of assets for the La Quinta SERP with accumulated benefit obligation in
excess of plan assets were $198,000, $198,000 and $0, respectively, as of
December 31, 2000 and $1,361,000, $402,000 and $0, respectively, as of
December 31, 1999.
Effective January 1, 1999, the Companies converted their existing La Quinta
Retirement Plan to a cash balance pension plan. Existing accrued benefits under
the La Quinta Retirement Plan were converted into a beginning account balance as
of January 1, 1999, which decreased the projected benefit obligation by
$1,122,000. Under the new cash balance pension plan, the Companies make
quarterly contributions to the account based on a percentage of quarterly
employee compensation and years of service. Interest credits to the account
balances are based on rates for one-year US Treasury Securities. The account
balances are available to employees after they reach age 55.
Prior to January 1, 1999, the La Quinta Retirement Plan was a defined
benefit pension plan covering all La Quinta employees. Benefits accrued to the
participant according to a career average benefit formula integrated with Social
Security benefits. The Companies' funding policy for this plan was to annually
contribute the minimum amount required by federal law.
On October 23, 2000, the Boards of Directors approved the termination of the
SERP and Retirement Plans. The termination was effective on December 31, 2000.
The Companies expect to make a final contribution to the plan prior to the
distribution of its assets to the participants. The amount of this final
contribution is expected to be approximately $2,000,000. The termination will
result in cash contribution savings of approximately $1,800,000 per year going
forward.
120
The following table provides detail of the changes in benefit obligations,
components of benefit costs and weighted-average assumptions for the La Quinta
SERP and Retirement Plans at December 31, 2000 and 1999:
2000 1999
-------- --------
(IN THOUSANDS)
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year................... $20,528 $21,806
Service cost.............................................. 1,948 2,567
Interest cost............................................. 1,483 1,433
Actuarial loss (gain)..................................... 729 (1,467)
Benefits paid............................................. (2,447) (2,391)
Curtailment............................................... (2,174) (1,420)
------- -------
Benefit obligation at end of year......................... $20,067 $20,528
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year............ $20,509 $19,020
Actual return on plan assets.............................. (1,047) 1,469
Employer contribution..................................... 1,205 2,411
Benefits paid............................................. (2,447) (2,391)
------- -------
Fair value of plan assets at end of year.................. $18,220 $20,509
Funded status............................................. $(1,847) $ (19)
Unrecognized actuarial gain (loss)........................ 455 (2,666)
Unrecognized prior service cost credit.................... -- 476
------- -------
Net amount recognized..................................... $(1,392) $(2,209)
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION
CONSIST OF:
Accrued benefit liability................................. $(2,377) $(2,209)
Minimum pension liability................................. (985) --
------- -------
Net amount recognized..................................... $(1,392) $(2,209)
WEIGHTED-AVERAGE ASSUMPTIONS:
Discount rate as of end of year........................... 7.00% 7.75%
Expected return on plan assets for the year............... 8.00% 8.00%
Rate of compensation increase as of end of year
Management employees.................................... 6.00% 6.00%
Non-management employees................................ 5.00% 5.00%
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost.............................................. $ 1,948 $ 2,567
Interest cost............................................. 1,483 1,433
Expected return on plan assets............................ (1,609) (1,551)
Amortization of:
Prior service cost...................................... 476 51
Gain from prior periods................................. (61) --
Curtailment gain.......................................... (1,849) (65)
------- -------
Net periodic benefit cost................................. $ 388 $ 2,435
======= =======
In 1999, La Quinta established the La Quinta Executive Savings Plan (the
"ESP"). The ESP is a non-qualified deferred compensation plan covering a select
group of management and highly compensated employees of La Quinta. The ESP
allows eligible employees to defer receipt of a portion of their compensation by
making an election before the compensation is earned. La Quinta matches a
121
portion of such employee contributions, which amounted to approximately $36,000
and $75,000 in 2000 and 1999, respectively.
17. INCOME TAXES
Realty has elected to be treated as a REIT under the Code. During the year
ended December 31, 2000, Realty recorded a taxable loss and was not required to
make any distributions to its shareholders to maintain REIT status. The
financial statements for Realty reflect a tax provision and related balance
sheet accounts recorded for TeleMatrix, which became a taxable, decontrolled
REIT subsidiary on April 17, 2000. On February 4, 2000, the IRS released
temporary and proposed regulations on the treatment of net built-in-gain of
C-corporation assets that become assets of a REIT in a carryover basis
transaction. The regulations generally require the C-corporation to recognize
gain and be subject to corporate-level tax, as if it had sold all the assets
transferred at fair market value. In lieu of this treatment, the regulations
permit the REIT to elect to be subject to the rules of Section 1374 of the Code.
These rules generally subject the REIT to corporate-level tax on built-in gains
recognized from the sale of transferred assets within ten years. Realty has
determined that the regulations are applicable to assets transferred from La
Quinta and has elected to be subject to the rules of Section 1374 of the Code
for built-in gains recognized within ten years of the La Quinta merger date.
Section 382 of the Code restricts a corporation's ability to use its net
operating loss ("NOL") carryforwards following certain "ownership changes."
Operating determined that such an ownership change occurred and accordingly a
portion of the NOL carryforwards available for use in any particular taxable
year will be limited. To the extent that Operating does not utilize the full
amount of the annual NOL limit, the unused amount may be used to offset taxable
income in future years. NOL carryforwards expire 20 years after the year in
which they arise (15 years for NOLs arising prior to 1998) and the last of
Operating's NOL carryforwards will expire in 2020. A valuation allowance is
provided for the full amount of the NOL's as the realization of the tax benefits
from such NOLs is not assured.
Operating recorded a deferred tax asset of $11,156,000 and a deferred tax
liability of $5,485,000 (subsequently reduced to $644,500) as a result of the La
Quinta Merger. A valuation allowance is provided for $11,156,000 of the deferred
tax asset, as realization of such asset is not assured.
Operating has provided a valuation allowance with respect to certain post-La
Quinta Merger increases in deferred tax assets as realization of these amounts
is not assured.
The deferred income taxes for Realty as of December 31, 2000 and 1999 were
comprised of the following components: $61,000 deferred tax asset related to the
amortization of a non-compete agreement at December 31, 2000 and a $391,000
deferred tax liability related to depreciation at December 31, 1999.
122
Components of deferred income taxes for Operating as of December 31, 2000
and 1999 are as follows:
DECEMBER 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
Deferred tax liabilities for continuing operations:
Amortization of assembled workforce and reservation
system.................................................... $ 645 $ 2,821
Depreciation................................................ 2,347 1,212
-------- --------
Total deferred tax liabilities............................ $ 2,992 $ 4,033
-------- --------
Deferred tax assets for continuing operations:
Federal net operating loss carryovers....................... $ 38,418 $ 18,542
State net operating loss carryovers......................... 3,851 2,111
Self-insurance deductible when paid......................... 8,774 8,623
Vacation pay deductible when paid........................... 1,490 1,417
Pension plan................................................ 454 259
Restructuring accruals deductible when paid................. -- 185
Other....................................................... 1,535 961
-------- --------
Total deferred tax assets................................. $ 54,522 $ 32,098
-------- --------
Valuation allowance......................................... (52,023) (28,558)
-------- --------
Net deferred tax liability................................ $ (493) $ (493)
======== ========
A reconciliation of Realty's total income tax provision for the calendar
year 2000, 1999 and 1998 to the statutory federal corporation income tax rate
and applicable state tax rates is as follows:
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
(IN THOUSANDS)
Computed "expected" tax provision........................... $ (128) $ -- $ --
Initial deferred tax provision.............................. 384 -- --
State tax provision, net of federal effect.................. 20 -- --
Nondeductible amortization.................................. 350 -- --
Other....................................................... 3 -- --
-------- ------- -------
Total income tax expense.................................... $ 629 $ -- $ --
======== ======= =======
A reconciliation of Operating's total income tax benefit for calendar year
2000, 1999 and 1998 to the statutory federal corporation income tax rate of 35%
and applicable state tax rates as follows:
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
(IN THOUSANDS)
Computed "expected" tax provision........................... $(21,522) $(5,124) $(8,628)
State tax provision, net of federal effect.................. (1,874) (623) (887)
Premerger liabilities....................................... -- (956) --
Relocation costs............................................ (189) (1,832) --
Valuation allowance......................................... 23,465 8,098 873
Gain from discontinued operations........................... -- -- 2,581
Other....................................................... 120 437 1,261
-------- ------- -------
Total income tax benefit.................................... $ -- $ -- $(4,800)
======== ======= =======
123
18. EARNINGS PER SHARE
COMBINED CONSOLIDATED EARNINGS PER SHARE FOR THE COMPANIES IS COMPUTED AS
FOLLOWS:
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
(Loss) income from continuing operations.................. $(335,559) $ 59,412 $ 141,080
Preferred stock dividends................................. (18,000) (16,283) (8,444)
--------- -------- ---------
(Loss) income available to Common Shareholders before
discontinued operations and extraordinary item.......... (353,559) 43,129 132,636
Discontinued operations, net.............................. -- 30,413 (294,227)
Gain on early extinguishments of debt..................... 1,403 -- --
--------- -------- ---------
Net (loss) income available to Common Shareholders........ $(352,156) $ 73,542 $(161,591)
========= ======== =========
Average outstanding shares of Paired Common Stock......... 141,854 142,783 120,515
Dilutive effect of:
Contingently issuable shares............................ -- 91 4,757
Stock options........................................... -- 33 236
--------- -------- ---------
Average outstanding equivalent shares of Paired Common
Stock................................................... 141,854 142,907 125,508
========= ======== =========
EARNINGS PER SHARE
Assuming no dilution:
(Loss) income available to Common Shareholders before
discontinued operations and extraordinary item.......... $ (2.49) $ 0.30 $ 1.10
Discontinued operations, net.............................. -- 0.22 (2.44)
Gain on early extinguishments of debt..................... 0.01 -- --
--------- -------- ---------
Net (loss) income available to Common Shareholders........ $ (2.48) $ 0.52 $ (1.34)
========= ======== =========
Assuming dilution:
(Loss) income available to Common Shareholders before
discontinued operations and extraordinary item.......... $ (2.49) $ 0.30 $ 1.06
Discontinued operations, net.............................. -- 0.21 (2.35)
Gain on early extinguishments of debt..................... 0.01 -- --
--------- -------- ---------
Net (loss) income available to Common Shareholders........ $ (2.48) $ 0.51 $ (1.29)
========= ======== =========
Options to purchase 7,498,000, 4,311,000 and 3,471,000 Paired Common Shares
at prices ranging from $2.88 to $36.46 were outstanding during the years ended
December 31, 2000, 1999 and 1998, respectively, but were not included in the
computation of diluted EPS because the options' exercise prices were equal to or
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
September 2010, were still outstanding at December 31, 2000.
In addition, options to purchase 618,000 Paired Common Shares (weighted
average effect of 95,000 shares for the year ended December 31, 2000) at prices
ranging from $1.81 to $2.81 were outstanding during fiscal year 2000 and were
not included in the computation of EPS because their inclusion would result in
an antidilutive per-share amount as the Companies reported a loss from
continuing operations available to Common Shareholders for the year ended
December 31, 2000.
Convertible debentures outstanding for the years ended December 31, 2000,
1999 and 1998 of 5,118,000, 6,540,000 and 6,579,000 Paired Common Shares,
respectively and Convertible Preferred
124
Stock for the year ended December 31, 2000 and 1999 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:
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
(Loss) income from continuing operations.................... $(274,068) $ 89,914 $ 160,931
Preferred stock dividends................................... (18,000) (16,283) (8,444)
--------- -------- ---------
(Loss) income available to Common Shareholders before
discontinued operations and extraordinary item............ (292,068) 73,631 152,487
Discontinued operations, net................................ -- 40,216 (295,875)
Gain on early extinguishments of debt....................... 1,403 -- --
--------- -------- ---------
Net (loss) income available to Common Shareholders.......... $(290,665) $113,847 $(143,388)
========= ======== =========
Average outstanding shares of Paired Common Stock........... 143,159 144,088 121,820
Dilutive effect of:
Contingently issuable shares.............................. -- 91 4,757
Stock options............................................. -- 33 236
--------- -------- ---------
Average outstanding equivalent shares of Paired Common
Stock..................................................... 143,159 144,212 126,813
========= ======== =========
EARNINGS PER SHARE
Assuming no dilution:
(Loss) income available to Common Shareholders before
discontinued operations and extraordinary item............ $ (2.04) $ 0.51 $ 1.25
Discontinued operations, net................................ -- 0.28 (2.43)
Gain on early extinguishments of debt....................... 0.01 -- --
--------- -------- ---------
Net (loss) income available to Common Shareholders.......... $ (2.03) $ 0.79 $ (1.18)
========= ======== =========
Assuming dilution:
(Loss) income available to Common Shareholders before
discontinued operations and extraordinary item............ $ (2.04) $ 0.51 $ 1.20
Discontinued operations, net................................ -- 0.28 (2.33)
Gain on early extinguishments of debt....................... 0.01 -- --
--------- -------- ---------
Net (loss) income available to Common Shareholders.......... $ (2.03) $ 0.79 $ (1.13)
========= ======== =========
Options to purchase 4,802,000, 3,119,000 and 3,471,000 Paired Common Shares
at prices ranging from $3.31 to $36.46 were outstanding during the years ended
December 31, 2000, 1999 and 1998, 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 September 2010, were
still outstanding at December 31, 2000.
Convertible debentures outstanding for the years ended December 31, 2000,
1999 and 1998 of 5,118,000, 6,540,000 and 6,579,000 Paired Common Shares,
respectively and Convertible Preferred Stock for the years ended December 31,
2000 and 1999 of 2,680,000 Paired Common Shares were not included in the
computation of diluted EPS because the inclusion would result in an antidilutive
effect.
125
MEDITRUST OPERATING COMPANY EARNINGS PER SHARE IS COMPUTED AS FOLLOWS:
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Loss from continuing operations............................. $(61,491) $(30,502) $(19,851)
Discontinued operations..................................... -- (9,803) 1,648
-------- -------- --------
Net loss available to Common Shareholders................... $(61,491) $(40,305) $(18,203)
======== ======== ========
Average outstanding shares of Paired Common Stock........... 141,854 142,783 120,515
Dilutive effect of:
Contingently issuable shares.............................. -- -- --
Stock options............................................. -- -- --
-------- -------- --------
Average outstanding equivalent shares of Paired Common
Stock..................................................... 141,854 142,783 120,515
======== ======== ========
EARNINGS PER SHARE
Assuming no dilution:
Loss available to shareholders before discontinued
Operations................................................ $ (0.43) $ (0.21) $ (0.16)
Discontinued operations..................................... -- (0.07) 0.01
-------- -------- --------
Net loss available to Common Shareholders................... $ (0.43) $ (0.28) $ (0.15)
======== ======== ========
Assuming dilution:
Loss available to Common Shareholders before discontinued
operations................................................ $ (0.43) $ (0.21) $ (0.16)
Discontinued operations..................................... -- (0.07) 0.01
-------- -------- --------
Net loss available to Common Shareholders................... $ (0.43) $ (0.28) $ (0.15)
======== ======== ========
Options to purchase 2,696,000, 1,192,000 and 18,000 Paired Common Shares at
prices ranging from $2.88 to $16.06 were outstanding during the years ended
December 31, 2000, 1999 and 1998, respectively, but were not included in the
computation of diluted EPS because the options' exercise prices were greater
then 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 outstanding at December 1998 expired in December 1999. The options which
expire on dates ranging from December 2008 to September 2010 were still
outstanding at December 31, 2000.
In addition, options to purchase 618,000 Paired Common Shares (weighted
average effect of 95,000 shares for the year ended December 31, 2000) at prices
ranging from $1.81 to $2.81 were outstanding during fiscal year 2000 and were
not included in the computation of EPS because their inclusion would result in
an antidilutive per-share amount as the Companies reported a loss from
continuing operations available to Common Shareholders for the year ended
December 31, 2000.
Convertible debentures outstanding for the years ended December 31, 2000,
1999 and 1998 of 5,118,000, 6,540,000 and 6,579,000 Paired Common Shares,
respectively and Convertible Preferred Stock for the years ended December 31,
2000 and 1999 of 2,680,000 Paired Common Shares were not included in the
computation of diluted EPS because the inclusion would result in an antidilutive
effect.
Operating 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 December 31, 2000. These shares affect the calculation of
Realty's net income per Common Share but are eliminated in the calculation of
net income per Paired Common Share for the Companies.
126
19. TRANSACTIONS BETWEEN REALTY AND OPERATING
Operating leases hotel facilities from Realty and its subsidiaries. The
Participating Hotel Facilities Lease arrangements between Operating and Realty
include base and additional rent provisions and require Realty to assume costs
attributable to property taxes and insurance. At December 31, 2000, Operating
owed Realty $58,567,000 related to these hotel leases.
Operating has entered into a royalty arrangement with Realty for the use of
the La Quinta tradename at a rate of approximately 2.5% of gross revenues, as
defined in the agreement. At December 31, 2000, Operating owed Realty $3,275,000
related to the royalty arrangement.
Subsequent to the La Quinta Merger, Realty distributed certain assets,
including two newly constructed lodging facilities, to Operating with an
established value of $33,162,000. Realty and Operating accounted for this
transaction as a property distribution and contribution, respectively.
During 1999, Realty and Operating issued shares under the Plans. Amounts due
from Realty and Operating in connection with Awards of shares under the Plans
were shown as a reduction of shareholders' equity in the accompanying
consolidated balance sheets of Realty and Operating as of December 31, 1999.
In connection with certain acquisitions, Operating issued shares to Realty
and recorded a receivable. Due to the affiliation of Realty and Operating, the
receivable from Realty has been classified in Operating's shareholders' equity.
Operating owns 1,305,000 shares of Realty as a result of acquisition activity.
Operating delivered a note to Realty for $13,128,000 on November 5, 1997.
The purpose of the note was to adjust the relative values of Meditrust and
Meditrust Acquisition Company in order to ensure that the Santa Anita Merger
qualified as a tax free reorganization. This transaction is eliminated in the
combined consolidated financial statements. However, due to the affiliation of
Realty and Operating, the note was classified in shareholders' equity in Realty
and a note payable has been recorded in Operating. The note was originally
scheduled to mature on November 1, 2009 and bore interest at 6.42%. Interest is
payable quarterly in arrears. On December 31, 2000, Realty settled the note
payable to Operating in full.
Realty provided certain services to Operating, primarily related to general
tax preparation and consulting, legal, accounting and certain aspects of human
resources. In connection with the relocation of the Meditrust corporate
headquarters to Irving, Texas (as further described in Note 12 to the combined
consolidated financial statements), Operating will be responsible for providing
these services for both companies going forward.
20. QUARTERLY FINANCIAL INFORMATION
The following quarterly financial data summarizes the unaudited quarterly
results for the Companies for the years ended December 31, 2000 and 1999.
QUARTER ENDED 2000
----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- --------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL
AMOUNTS)
Revenue........................................... $214,748 $219,452 $210,561 $178,077
Income (loss) from continuing operations.......... 10,282 (83,478) (217,804) (44,559)
Extraordinary gain................................ 1,394 9 -- --
Net income (loss)................................. 11,676 (83,469) (217,804) (44,559)
Segment EBITDA: (a)
Lodging........................................... $ 62,912 $ 63,419 $ 56,997 $ 38,694
Healthcare........................................ 60,547 53,376 46,152 37,806
Other............................................. 673 555 570 627
-------- -------- -------- --------
Total EBITDA...................................... $124,132 $117,350 $103,719 $ 77,127
127
QUARTER ENDED 2000
----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- --------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL
AMOUNTS)
Lodging Statistics:
Occupancy......................................... 61.1% 67.4% 66.5% 58.8%
Average Daily Rate................................ $ 64.33 $ 63.16 $ 62.37 $ 60.52
RevPAR (b)........................................ $ 39.33 $ 42.58 $ 41.47 $ 35.55
Earnings per share:
Basic earnings (loss) per Paired Common Share:
Income (loss) from continuing operations........ $ 0.04 $ (0.62) $ (1.56) $ (0.34)
Extraordinary gain.............................. 0.01 -- -- --
-------- -------- -------- --------
Net income (loss)............................... $ 0.05 $ (0.62) $ (1.56) $ (0.34)
======== ======== ======== ========
Diluted earnings (loss) per Paired Common Share:
Income (loss) from continuing operations........ $ 0.04 $ (0.62) $ (1.56) $ (0.34)
Extraordinary gain.............................. 0.01 -- -- --
-------- -------- -------- --------
Net income (loss)............................... $ 0.05 $ (0.62) $ (1.56) $ (0.34)
======== ======== ======== ========
QUARTER ENDED 1999
----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- --------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL
AMOUNTS)
Revenue............................................. $227,304 $239,714 $235,722 $209,241
Income (loss) from continuing operations............ 14,875 47,643 46,659 (49,765)
Discontinued operations............................. 4,869 -- 16,644 8,900
Net income (loss)................................... 19,744 47,643 63,303 (40,865)
Segment EBITDA (a)
Lodging............................................. $ 70,891 $ 79,667 $ 74,136 $ 49,855
Healthcare.......................................... 70,742 71,180 69,972 69,494
Other............................................... -- -- -- 963
-------- -------- -------- --------
Total EBITDA........................................ $141,633 $150,847 $144,108 $120,312
Lodging Statistics
Occupancy........................................... 67.1% 73.0% 69.4% 57.1%
Average Daily Rate.................................. $ 61.73 $ 60.45 $ 61.34 $ 60.57
RevPAR (b).......................................... $ 41.42 $ 44.14 $ 42.56 $ 34.59
Earnings per share
Basic earnings (loss) per Paired Common Share:
Income (loss) from continuing operations.......... $ 0.07 $ 0.31 $ 0.30 $ (0.38)
Discontinued operations........................... 0.04 -- 0.12 0.06
-------- -------- -------- --------
Net income (loss)................................. $ 0.11 $ 0.31 $ 0.42 $ (0.32)
======== ======== ======== ========
Diluted earnings (loss) per Paired Common Share:
Income (loss) from continuing operations.......... $ 0.07 $ 0.31 $ 0.30 $ (0.38)
Discontinued operations........................... 0.04 -- 0.12 0.06
-------- -------- -------- --------
Net income (loss)................................. $ 0.11 $ 0.31 $ 0.42 $ (0.32)
======== ======== ======== ========
- --------------------------
(a) EBITDA is defined as income from continuing operations plus interest, income
taxes, depreciation and amortization; adjusted for loss or gain on sale of
assets, impairment provisions, provisions for loss on equity securities and
other expenses.
(b) RevPAR is the measurement of revenue per available room. It is equal to the
average daily rate multiplied by the occupancy percentage.
128
21. SEGMENT REPORTING
DESCRIPTION OF THE TYPES OF PRODUCTS AND SERVICES FROM WHICH EACH REPORTABLE
SEGMENT DERIVES ITS REVENUES
The Companies have two reportable segments: lodging and healthcare. The
lodging segment includes the ownership, development and operation of hotels in
the mid-priced segment of the lodging industry under the brand name La Quinta,
which is concentrated in the western and southern United States. La Quinta
hotels appeal to guests who desire high-quality rooms, convenient locations and
competitive prices, but who do not require banquet and convention facilities,
in-house restaurants, cocktail lounges or room service. Competitive factors in
the industry include reasonableness of room rates, quality of accommodations,
service level and convenience of locations. The healthcare segment generally
invests in healthcare related facilities throughout the United States by
providing financing to healthcare operators. This financing takes the form of
mortgages, development loans and sale/ leaseback transactions.
MEASUREMENT OF SEGMENT PROFIT OR LOSS AND SEGMENT ASSETS
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. 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. The Companies
account for Realty and Operating transactions at current market prices as if the
transactions were to third-parties.
FACTORS MANAGEMENT USED TO IDENTIFY THE ENTERPRISE'S REPORTABLE SEGMENTS
The Companies' reportable segments are strategic business segments operating
in different industries and offering different products and services. They are
managed separately because each business requires different skill sets and
marketing strategies. As described in Note 5, the Golf and Horseracing segments
have been reported as discontinued operations in the accompanying financial
statements.
129
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.
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Lodging:
Room revenue................................................ $ 561,697 $ 566,484 $ 241,868
Guest services and other.................................... 33,270 35,561 16,555
Operating expenses.......................................... (311,624) (281,424) (119,584)
Rental property operating costs............................. (28,293) (27,239) (8,439)
General and administrative expenses......................... (33,028) (18,833) (7,512)
--------- --------- ---------
Lodging contribution........................................ 222,022 274,549 122,888
--------- --------- ---------
Healthcare:
Rental income (a)........................................... 116,040 $ 165,431 $ 191,874
Interest income............................................. 95,253 138,223 153,093
Rental property operating costs............................. (602) (9,278) (7,199)
General and administrative expenses......................... (12,810) (12,988) (19,586)
--------- --------- ---------
Healthcare contribution..................................... 197,881 281,388 318,182
--------- --------- ---------
Other: (b)
Revenue..................................................... 16,578 4,532 --
Operating expenses.......................................... (10,006) (2,564) --
General and administrative expenses......................... (4,147) (1,005) --
--------- --------- ---------
Other contribution.......................................... 2,425 963 --
--------- --------- ---------
Combined contribution....................................... 422,328 556,900 441,070
--------- --------- ---------
Reconciliation to Combined Consolidated Financial
Statements:
Interest expense............................................ 186,951 244,973 178,458
Depreciation and amortization
Lodging................................................... 125,172 99,628 44,772
Healthcare................................................ 24,343 36,097 42,456
Other..................................................... 623 128 --
Amortization of goodwill.................................... 22,755 21,470 13,265
Loss on sale of securities.................................. -- -- 4,159
Loss (gain) on sale of assets............................... 130,536 (12,042) (52,642)
Other income................................................ -- (1,750) (35,987)
Income from unconsolidated joint venture.................... -- -- (906)
Provision for impairment on real estate assets.............. 183,698 63,170 63,954
Provision for loss on equity securities..................... 50,279 -- --
Other expenses.............................................. 32,901 45,814 47,261
--------- --------- ---------
757,258 497,488 304,790
--------- --------- ---------
(Loss) income from continuing operations before income
taxes..................................................... (334,930) 59,412 136,280
Income tax expense (benefit)................................ 629 -- (4,800)
--------- --------- ---------
(Loss) income from continuing operations.................... (335,559) 59,412 141,080
Income from discontinued operations....................... -- -- 10,721
Gain (loss) on disposal of discontinued operations........ -- 30,413 (67,913)
Provision for loss on disposition of discontinued
operations.............................................. -- -- (237,035)
--------- --------- ---------
(Loss) income before extraordinary item..................... (335,559) 89,825 (153,147)
Extraordinary gain on early extinguishments of debt......... 1,403 -- --
--------- --------- ---------
130
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Net (loss) income........................................... (334,156) 89,825 (153,147)
Preferred stock dividends................................... (18,000) (16,283) (8,444)
--------- --------- ---------
Net (loss) income available to Paired Common shareholders... $(352,156) $ 73,542 $(161,591)
========= ========= =========
- ------------------------
(a) Revenue from segments below the quantitative thresholds is attributable to
two operating segments of the Companies. Those segments include a property
management business, which manages medical office buildings not owned by the
healthcare segment and rents received from restaurant properties leased to
third parties included in the lodging segment. None of those segments have
ever met any of the quantitative thresholds for determining reportable
segments.
(b) Other contribution includes TeleMatrix, a provider of telephone software and
equipment for the lodging industry. TeleMatrix was acquired in
October 1999. Operations of TeleMatrix are included in the lodging revenue
and expense categories of the combined and consolidated statements since
consummation of the acquisition.
The following table reconciles revenue to the accompanying financial
statements.
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
(IN THOUSANDS)
Lodging:
Room revenue................................................ $561,697 $566,484 $241,868
Guest services and other.................................... 33,270 35,561 16,555
Other(a).................................................... 16,578 4,532 --
-------- -------- --------
Total lodging revenue....................................... 611,545 606,577 258,423
Healthcare:
Rental income............................................... 116,040 165,431 191,874
Interest income............................................. 95,253 138,223 153,093
-------- -------- --------
Total healthcare revenue.................................... 211,293 303,654 344,967
Other income................................................ -- 1,750 35,987
-------- -------- --------
Total revenue............................................... $822,838 $911,981 $639,377
======== ======== ========
- ------------------------
(a) Represents revenue from TeleMatrix.
131
The following table presents assets by reported segment and in the
aggregate.
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(IN THOUSANDS)
Lodging gross real estate investments....................... $2,669,577 $2,648,408
Lodging accumulated depreciation............................ (221,186) (126,255)
---------- ----------
Lodging real estate investments, net...................... 2,448,391 2,522,153
Healthcare gross real estate investments.................... 1,233,915 2,427,604
Accumulated depreciation, valuation allowances and
provisions................................................ (329,630) (277,098)
---------- ----------
Healthcare real estate investments, net................... 904,285 2,150,506
Net real estate....................................... 3,352,676 4,672,659
Other assets:
Cash and cash equivalents................................... 38,993 7,220
Fees, interest and other receivables........................ 73,476 79,042
Goodwill, net............................................... 457,789 480,673
Other assets, net........................................... 170,213 228,163
---------- ----------
Total assets................................................ $4,093,147 $5,467,757
========== ==========
22. CONCENTRATION OF RISK
As of December 31, 2000, the healthcare portfolio comprised approximately
27.0% of the Companies' total real estate investments. Sun and Alterra currently
operate approximately 13.7% of the total real estate investments, or 42.6% of
the healthcare portfolio before the valuation allowance. A schedule of
significant healthcare operators follows:
PORTFOLIO BY OPERATOR
GROSS NET BOOK # OF % OF # OF # OF
INVESTMENT VALUE PROPERTIES PORTFOLIO MORTGAGES PROPERTIES LEASES LEASES
---------- ---------- ---------- --------- --------- ---------- --------- --------
(IN THOUSANDS, EXCEPT NUMBER OF PROPERTIES AND PERCENTAGES)
LODGING:
La Quinta Companies............ $2,669,577 $2,448,391 299
HEALTHCARE PORTFOLIO:
Sun Healthcare Group, Inc...... 393,377 311,151 39 29% $ 30,410 4 $280,741 35
Alterra........................ 161,592 149,190 57 14% -- -- 149,190 57
Other Non-Public Operators..... 108,842 102,892 11 9% 81,160 9 21,732 2
Harborside..................... 103,307 92,372 18 9% 15,922 4 76,450 14
Balanced Care Corporation...... 93,618 91,974 19 9% 36,695 7 55,279 12
Tenet Healthcare/Iasis......... 65,650 56,189 1 5% -- -- 56,189 1
CareMatrix Corporation......... 50,606 49,446 4 5% 35,606 3 13,840 1
Other Public Operators......... 49,164 42,794 7 4% 7,057 1 35,737 6
Integrated Health
Services, Inc................ 50,973 37,066 10 3% -- -- 37,066 10
Genesis Health
Ventures, Inc................ 35,625 33,552 8 3% 18,425 4 15,127 4
Assisted Living Concepts....... 31,487 28,400 16 3% -- -- 28,400 16
ARV Assisted Living, Inc....... 28,982 26,461 4 2% -- -- 26,461 4
Life Care Centers of
America, Inc................. 26,212 26,212 2 2% 26,212 2 -- --
HealthSouth.................... 24,724 24,724 2 2% 24,724 2 -- --
Paramount Real Estate
Services..................... 9,756 9,024 1 1% -- -- 9,024 1
---------- ---------- --- --- -------- -- -------- ---
1,233,915 1,081,447 199 100% 276,211 36 805,236 163
Valuation Allowance............ -- (177,162) -- (53,640) (123,522)
---------- ---------- --- -------- --------
1,233,915 904,285 199 $222,571 $681,714
---------- ---------- --- ======== ========
Total Real Estate Portfolio.... $3,903,492 $3,352,676 498
========== ========== ===
132
Companies in the assisted living sector of the healthcare industry operate
approximately 9.2% of the net book value of the Companies' total real estate
investments (and approximately 28.5% of the healthcare portfolio before the
valuation allowance), while companies in the long-term sector approximate 18.8%
of the net book value of the Companies' total real estate investments (and
approximately 58.3% of the healthcare portfolio before the valuation allowance).
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, its
ability to make distributions to its shareholders and meet debt obligations. 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 longer fill-up
periods 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 slowed their growth plans and may
have a negative effect on their operating cash flows.
OPERATORS IN BANKRUPTCY
As of December 31, 2000, the Companies have exposure to five operators who
have filed for protection under Chapter 11: Sun Healthcare Group, Inc. ("Sun"),
Mariner Health Group ("Mariner"), Integrated Health Services, Inc.
("Integrated"), Genesis Health Ventures, Inc. ("Genesis") and CareMatrix
Corporation ("CareMatrix"). The following table describes the number of
facilities, net assets before valuation allowance by lease/mortgage and the
lease/mortgage income by each of the five operators that have filed for
Chapter 11:
YEAR ENDED
DECEMBER 31, 2000
LEASES MORTGAGES -------------------
TOTAL ----------------------- ----------------------- RENTAL INTEREST
OPERATOR DATE FILED FACILITIES FACILITIES NET ASSETS FACILITIES NET ASSETS INCOME INCOME
- -------- ---------- ---------- ---------- ---------- ---------- ---------- -------- --------
(IN THOUSANDS, EXCEPT FOR NUMBER OF FACILITIES)
Sun(5)............... 10/14/99 39 35 $285,130 4 $30,410 $46,650 $ --(1)
Mariner.............. 1/18/00 2 1 6,789 1 7,057 977 --(2)
Integrated........... 2/2/00 10 10 37,066 -- -- 6,288 N/A
Genesis.............. 6/26/00 8 4 15,127 4 18,425 1,653 1,019(3)
CareMatrix........... 11/9/00 4 1 13,840 3 35,606 1,648 1,691(4)
-- -- -------- -- ------- ------- ------
Totals............... 63 51 $357,952 12 $91,498 $57,216 $2,710
== == ======== == ======= ======= ======
- --------------------------
(1) No interest payments related to the Sun mortgages have been received since
October 14, 1999 and, accordingly, these mortgages were placed on
non-accrual status.
(2) No interest payments related to the Mariner mortgage were received and,
accordingly, this mortgage was placed on non-accrual status.
(3) Mortgages related to Genesis have been placed on non-accrual status and
interest income is recorded as payments are received.
(4) Mortgages related to CareMatrix have been placed on non-accrual status and
interest income is recorded as payments are received.
(5) Net lease assets operated by Sun include straight-line rent receivables of
$4,389,000.
133
The Companies continue to monitor its operators that have filed for
Chapter 11. To date, the Companies have not come to definitive agreement with
any of these operators. In the event any of its leases are successfully rejected
through the course of the bankruptcy proceedings, the Companies intend to
transition the operations of these facilities to other operators.
Management has initiated various actions to protect the Companies' interests
under its leases and mortgages including the draw down 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.
23. SUBSEQUENT EVENTS
On January 2, 2001, Realty paid dividends on the 9% Series A Cumulative
Redeemable Preferred Stock of $3,938,000 to shareholders of record as of
December 15, 2000.
On January 22, 2001, the Companies sold 26,606,000 shares of Nursing Home
Properties Plc ("NHP Plc") (See Note 7), for net proceeds of $7,737,000 and
recognized an additional loss on the sale of securities of $22,000 (cumulative
loss of $49,467,000, including $49,445,000 charged to earnings during the year
ended December 31, 2000).
On January 26, 2001, the Companies settled benefit obligations of $198,000
related to the Supplemental Executive Retirement Plan.
On March 1, 2001 the Companies borrowed approximately $95,000,000 under the
line of credit and used the proceeds to pay off $90,000,000 due on March 1, 2001
(including $83,000,000 of its 7.5% convertible debentures) and related interest
due on March 1, 2001.
On April 3, 2001, Meditrust announced the transfer of its beneficial
ownership interest in the majority of its long term care skilled nursing
facilities. The Companies received gross proceeds of $441 million consisting of
$406 million in cash and $35 million in subordinated indebtedness due
April 2006. The Companies expect to record an additional valuation allowance of
approximately $5 million in the first quarter of 2001 in connection with the
closing of the transaction and have previously recorded valuation allowances of
$75 million related to these assets.
Net proceeds from the transaction have been applied towards debt reduction.
As a result, as of April 3, 2001, bank notes payable have been reduced to
$86 million from $487 million as of March 1, 2001, total debt maturing in 2001
has been reduced to $223 million from $628 million at December 31, 2000, and
total indebtedness has been reduced to $1.2 billion from $1.6 billion at
December 31, 2000. The Companies anticipate meeting remaining 2001 debt
maturities by refinancing existing debt, as well as through additional asset
sales and cash flow generated from operating activities.
The Companies transferred beneficial ownership interest in certain
healthcare properties and mortgages with a net book value of $436 million
relating to 78 long term care facilities and one medical office building
operated by Genesis Health Ventures, Inc., Harborside Healthcare Corporation,
HealthSouth Corporation, Integrated Health Services, Inc., Mariner Health
Group, Inc., Sun Healthcare Group, Inc and one non-public operator. After giving
affect for the transaction, Meditrust's remaining healthcare portfolio has a net
book value of $468 million at December 31, 2000 consisting of $317 million of
leased assets and $151 million of mortgages. The remaining 120 healthcare
properties contributed revenues of approximately $62.0 million to total
healthcare segment revenues of $211.3 million for the year ended December 31,
2000.
The Companies intend to file a joint current report on Form 8-K which will
provide additional information about the transaction and the Companies'
remaining healthcare assets.
134
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Boards of Directors of Meditrust Corporation
and Meditrust Operating Company:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in shareholders' equity and of
cash flows and the combined consolidated balance sheets and the related combined
consolidated statements of operations, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Meditrust Corporation and Meditrust Operating Company and subsidiaries
(collectively the "Companies") at December 31, 2000 and 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Companies' management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
February 2, 2001, except with respect to
the matters discussed in Note 23,
as to which the date is April 3, 2001
135
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Shareholders and Boards of Directors of Meditrust Corporation
and Meditrust Operating Company:
Our audits of the consolidated financial statements referred to in our
report dated February 2, 2001, except with respect to the matters discussed in
Note 23, as to which the date is April 3, 2001, appearing in this Joint Annual
Report on Form 10-K of Meditrust Corporation and Meditrust Operating Company
also included an audit of the financial statement schedules listed in
Item 14(a) (2) of this Form 10-K. In our opinion, these financial statement
schedules present fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
/s/ PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
February 2, 2001
136
MEDITRUST CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Valuation allowance included in fees, interest and other receivables and
other assets for the year ended December 31:
ADDITIONS
CHARGED AS ADDITIONS &
REVENUE ADJUSTMENTS
BALANCE AT REDUCTIONS OR CHARGED BALANCE AT
BEGINNING OF COSTS AND TO/FROM OTHER END OF
YEAR PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ---- ------------ ------------- ------------- ------------ ----------
1998.................. $8,991,539 $15,731,584 $(2,955,000)(A) $(19,827,192)(B) $1,940,931
1999.................. 1,940,931 6,708,490 -- -- 8,649,421
2000.................. 8,649,421 24,135,251 -- -- 32,784,672
- ------------------------
(A) Reclassified to loan valuation allowance.
(B) Includes $21,936,412 related to receivables and working capital loans
charged off net of $2,109,220 of valuation allowance balances acquired in
the La Quinta Merger.
There was no valuation allowance included in accrued expenses or other
liabilities for the years ended December 31, 2000, 1999 and 1998.
137
THE MEDITRUST COMPANIES
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2000
COSTS
BUILDING & CAPITALIZED TOTAL
ENCUM- IMPROVEMENTS SUBSEQUENT TO BUILDING &
BRANCES AT ACQUISITION ACQUISITIONS IMPROVEMENTS LAND(1) TOTAL(4)
-------- --------------- -------------- -------------- ------------- ----------
Hotels, each less than 5% of
total......................... $ -- $ 2,124,789 $166,638 $2,291,427 $ 378,150 $2,669,577
Healthcare, each less than 5% of
total......................... 18,822 886,676 -- 886,676 71,028 957,704
------- --------------- -------- ---------- ------------- ----------
Total......................... $18,822 $ 3,011,465 $166,638 $3,178,103 $ 449,178 $3,627,281(6)
======= =============== ======== ========== ============= ==========
ACCUMULATED CONST. DATE
DEPREC.(3)(4) DATE ACQUIRED
-------------- -------- ---------
Hotels, each less than 5% of
total......................... $221,186 Various Various
Healthcare, each less than 5% of
total......................... 152,468 Various Various
--------
Total......................... $373,654
========
- ----------------------------------
(1) Gross amount at which land is carried at close of period also represents
initial cost to Realty.
(2) Cost for federal income tax purposes.
(3) Depreciation is calculated using a 40-year life.
138
THE MEDITRUST COMPANIES
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2000
(4) Real estate and accumulated depreciation reconciliation's for the three
years ended December 31, 2000 are as follows:
ACCUMULATED
DEPRECIATION
AND
VALUATION
REAL ESTATE ALLOWANCE
----------- ------------
(IN THOUSANDS)
Balance at close of year--December 31, 1997................. $1,627,779 $124,832
Additions during the period:
Acquisitions.............................................. 636,989 --
Value of real estate acquired in mergers.................. 2,751,339 --
Provision for depreciation................................ -- 86,395
Other..................................................... -- 6,344
Deductions:
Sale of real estate....................................... (518,190) (33,161)
Income from joint venture net of dividends received....... (544) --
Other..................................................... (9,158) --
---------- --------
Balance at close of year--December 31, 1998(7).............. 4,488,215 184,410
---------- --------
Additions during the period:
Acquisitions.............................................. 129,492 --
Provision for depreciation................................ -- 125,714
Deductions:
Sale of real estate....................................... (614,232) (20,724)
Other..................................................... (19,798) (2,057)
---------- --------
Balance at close of year--December 31, 1999................. 3,983,677 287,343
Additions during the period:
Acquisitions.............................................. 40,292 --
Provision for depreciation................................ -- 116,962
Deductions:
Sale of real estate....................................... (398,471) (36,754)
Other..................................................... 1,783 6,103
---------- --------
Balance at close of year--December 31, 2000................. 3,627,281 373,654
Provision for impairment, 1998............................ -- 47,918
Provision for impairment, 1999............................ -- 48,344
Provision for impairment, 2000............................ -- 100,065
Provision for impairment on assets sold................... -- (72,805)
---------- --------
Balance per financial statements............................ $3,627,281 $497,176
========== ========
- ------------------------
(5) Includes real estate investments written down due to impairment.
(6) Includes real estate assets held for sale that were written down to fair
value less costs to sell.
(7) Includes real estate of $370,957,000 and accumulated depreciation of
$4,172,000 included in net assets of discontinued operations.
139
THE MEDITRUST COMPANIES
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 2000
INTEREST FINAL MATURITY
DESCRIPTION (A) RATE DATE PERIODIC PAYMENT TERMS
- --------------- -------- ----------------- -----------------------------------------------------------
INDIVIDUAL MORTGAGES IN EXCESS OF
3% OF THE TOTAL CARRYING AMOUNT:
7 Long-term care facilities located 10.70% August 31, 2006 Monthly payments of principal and interest of $347, balloon
in Missouri payment of $34,824 due at maturity
5 Alcohol and substance abuse 11.0% September 30, Monthly payments of principal and interest of $326, balloon
treatment facilities located in 2006 payment of $27,988 due at maturity
Florida, New York and Oklahoma
13 Long-term care facilities From From June 2001 Monthly payments of principal and interest of $1,103,
located in Arizona, Colorado, 9.4% to to November 2005 balloon payment of $95,926 due at maturity
Florida, Indiana, Kansas and Utah 13.0%
2 Medical Office buildings located From From August 2005 Monthly payments of interest only, balloon payment of
in Tennessee and Massachusetts 7.6% to to August 2008 $18,441 due at maturity
10.0%
1 Assisted Living Facility located 9.10% November 8, 2005 Monthly payments of principal and interest of $215, balloon
in Florida payment of $24,491 due at maturity
Land under development, 1 loan, 10.00% March 4, 2004 Monthly payments of interest only, balloon payment of
located in Florida $10,085 due at maturity
MORTGAGES INDIVIDUALLY LESS THAN 3%
OF TOTAL CARRYING AMOUNT:
Long-term care facilities, 5 From From June 2004 (d)
mortgages, face amounts ranging 10.25% to January 2008
from $900 to $8,664, located in to
Connecticut, Massachusetts, 11.5%
New York and Pennsylvania
Medical office buildings, 1 8.83% August 1, 2008 (d)
mortgage, face amount of $7,771,
located in Tennessee
Assisted living facilities, 2 9.85% September 2005 (d)
mortgages, face amounts of $4,728 and March 2008
and $5,592, located in Michigan
2 Notes secured by real estate in 9.95% September 2002 (d)
California and and
10.5% November 2002
FACE CARRYING
AMOUNT OF AMOUNT OF
DESCRIPTION (A) MORTGAGES MORTGAGES (C)
- --------------- ----------- --------------
(IN THOUSANDS)
INDIVIDUAL MORTGAGES IN EXCESS OF
3% OF THE TOTAL CARRYING AMOUNT:
7 Long-term care facilities located $ 41,385 $ 36,695
in Missouri
5 Alcohol and substance abuse 33,300 31,582
treatment facilities located in
Florida, New York and Oklahoma
13 Long-term care facilities 138,034 106,547
located in Arizona, Colorado,
Florida, Indiana, Kansas and Utah
2 Medical Office buildings located 18,441 18,441
in Tennessee and Massachusetts
1 Assisted Living Facility located 26,450 25,867
in Florida
Land under development, 1 loan, 10,085 10,085
located in Florida
MORTGAGES INDIVIDUALLY LESS THAN 3%
OF TOTAL CARRYING AMOUNT:
Long-term care facilities, 5 25,707
mortgages, face amounts ranging
from $900 to $8,664, located in
Connecticut, Massachusetts,
New York and Pennsylvania
Medical office buildings, 1 7,771
mortgage, face amount of $7,771,
located in Tennessee
Assisted living facilities, 2 9,948
mortgages, face amounts of $4,728
and $5,592, located in Michigan
2 Notes secured by real estate in 3,568
California
--------
$276,211(b)
========
- ----------------------------------
(a) Virtually all mortgage loans on real estate are first mortgage loans.
(b) The aggregate cost for federal income tax purposes.
(c) As of December 31, 2000, nine mortgages are delinquent with principal and
interest payments, as the operator has filed for protection under
Chapter 11 of the U.S. Bankruptcy Code. Accordingly, interest income on
these mortgages has been reserved.
(d) Monthly payments of principal and interest normally payable at a level
amount, with a balloon payment at maturity.
140
THE MEDITRUST COMPANIES
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 2000
Reconciliation of carrying amount of mortgage loans for the three years
ended December 31, 2000 is as follows:
(IN THOUSANDS)
--------------
Balance at December 31, 1997................................ $1,432,825
Additions during period:
New mortgage loans...................................... 76,260
Construction loan advances.............................. 146,264
Deductions during period:
Collection of principal................................. (9,125)
Non-cash deduction...................................... (31,483)
Prepayment of mortgage loans............................ (398,116)
----------
Balance at December 31, 1998................................ 1,216,625
Additions during period:
Construction loan advances.............................. 33,321
Non-cash increase....................................... 431
Deductions during period:
Collection of principal................................. (15,646)
Prepayment of mortgages................................. (120,973)
Mortgages sold.......................................... (21,423)
----------
Balance at December 31, 1999................................ 1,092,335
Additions during period:
Construction loan advances.............................. 161
Non-cash increase....................................... 147
Deductions during period:
Collection of principal................................. (8,381)
Prepayment of mortgages................................. (157,369)
Mortgages sold.......................................... (650,682)
----------
Balance at December 31, 2000................................ $ 276,211
Allowance for loan losses................................... (53,640)
----------
Balance per financial statements............................ $ 222,571
==========
141
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to Item 4a above and the table and the information
appearing in the first subsection of the section entitled "Election of Directors
of The Meditrust Companies" and the section entitled "The Companies--Executive
Officers and Directors" contained in the Companies' Joint Proxy Statement for
their Annual Meetings of Shareholders ("Annual Meetings Proxy Statement"), to be
filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended ("Regulation 14A"). There are no family relationships among any of the
Directors or executive officers of the Companies.
Incorporated by reference to the section entitled "Certain Transactions"
contained in the Companies' Annual Meetings Proxy Statement, to be filed
pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the section entitled "Executive Compensation"
contained in the Companies' Annual Meeting Proxy Statement, to be filed pursuant
to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the table appearing in the first subsection of
the section entitled "Election of Directors of The Meditrust Companies" and the
section entitled "Principal and Management Shareholders of The Meditrust
Companies" contained in the Companies' Annual Meeting Proxy Statement, to be
filed pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the section entitled "Certain Transactions"
contained in the Companies' Annual Meeting Proxy Statement, to be filed pursuant
to Regulation 14A.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A)
1. Financial Statements
2. Financial Statement Schedules
PAGE(S)
--------
Report of Independent Accountants on Financial Statement
Schedules................................................. 136
II. Valuation and Qualifying Accounts....................... 137
III. Real Estate and Accumulated Depreciation............... 138
IV. Mortgage Loans on Real Estate........................... 140
All other schedules for which provision is made in the applicable accounting
regulation of the SEC are not required under the related instructions, are
inapplicable or have been disclosed in the notes to consolidated financial
statements and, therefore, have been omitted.
142
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrants have duly caused this report to be signed
on their behalf by the undersigned, thereunto duly authorized.
MEDITRUST CORPORATION
By:
----------------------------------------
David L. Rea
Chief Financial Officer and Treasurer
(and Principal Financial
and Accounting Officer)
Dated: March 30, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
- ----------------------------------- ----------------------------------- ---------------------
- ---------------------------------- Chairman of the Board of Directors
Clive D. Bode March 30, 2001
- ---------------------------------- Director
William C. Baker March 30, 2001
- ---------------------------------- Director
William G. Byrnes March 30, 2001
- ---------------------------------- Director
Francis W. Cash March 30, 2001
- ---------------------------------- Director
James P. Conn March 30, 2001
- ---------------------------------- Director
John C. Cushman, III March 30, 2001
- ---------------------------------- Director
Stephen E. Merrill March 30, 2001
143
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrants have duly caused this report to be signed
on their behalf by the undersigned, thereunto duly authorized.
MEDITRUST OPERATING COMPANY
By:
----------------------------------------
David L. Rea
Chief Financial Officer and Treasurer
(and Principal Financial
and Accounting Officer)
Dated: March 30, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
- ---------------------------------- Chairman of the Board of Directors
Clive D. Bode March 30, 2001
- ---------------------------------- Director
William C. Baker March 30, 2001
- ---------------------------------- Director
William G. Byrnes March 30, 2001
- ---------------------------------- Director
Francis W. Cash March 30, 2001
- ---------------------------------- Director
James P. Conn March 30, 2001
- ---------------------------------- Director
John C. Cushman, III March 30, 2001
- ---------------------------------- Director
Stephen E. Merrill March 30, 2001
144
EXHIBITS INDEX
EXHIBIT NO. TITLE METHOD OF FILING
- ----------- ---------------------------------------- ----------------------------------------
3.1 Amended and Restated Certificate of Incorporated by reference to
Incorporation of Meditrust Corporation Exhibit 3.1 to the Joint Annual Report
filed with the Secretary of State of on Form 10-K for the fiscal year ended
Delaware on June 21, 1999 December 31, 1999
3.2 Amended and Restated Certificate of Incorporated by reference to
Incorporation of Meditrust Operating Exhibit 3.2 to the Joint Annual Report
Company filed with the Secretary of on Form 10-K for the fiscal year ended
State of Delaware on June 21, 1999 December 31, 1999
3.3 Amended and Restated By-laws of Incorporated by reference to
Meditrust Corporation Exhibit 3.5 to 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 Incorporated by reference to
Meditrust Operating Company Exhibit 3.6 to the Joint Registration
Statement on Form S-4 of Meditrust
Corporation and Meditrust Operating
Company (File Nos. 333-47737 and
333-47737-01)
4.1 Meditrust Corporation Amended and Incorporated by reference to
Restated 1995 Share Award Plan Exhibit 4.1 to Joint Registration
Statement on Form S-8 of Meditrust
Corporation and Meditrust Operating
Company (File Nos. 333-39771 and
333-39771-01)
4.2 Meditrust Operating Company Amended and Incorporated by reference to
Restated 1995 Share Award Plan Exhibit 4.2 to Joint Registration
Statement on Form S-8 of Meditrust
Corporation and Meditrust Operating
Company (File Nos. 333-39771 and
333-39771-01)
4.3 Form of Fiscal Agency Agreement dated Incorporated by reference to
November 15, 1993 between Meditrust and Exhibit 4.7 to Form 10-K of Meditrust
Fleet National Bank, as fiscal agent for the fiscal year ended December 31,
1993
4.4 Form of Indenture dated April 23, 1992 Incorporated by reference to Exhibit 4
between Meditrust and Fleet National to the Registration Statement on
Bank, as Trustee Form S-3 of Meditrust (File
No. 33-45979)
4.5 Form of 9% Convertible Debenture due Incorporated by reference to
2002 Exhibit 4.1 to the Registration
Statement on Form S-3 of Meditrust (File
No. 33-45979)
4.6 Form of Indenture, dated March 9, 1994 Incorporated by reference to Exhibit 4
between Meditrust and Shawmut Bank, as to the Registration Statement on
Trustee Form S-3 of Meditrust (File
No. 33-50835)
4.7 Form of 7 1/2% Convertible Debenture due Incorporated by reference to Exhibit 4
2001 to the Registration Statement on
Form S-3 of Meditrust (File
No. 33-50835)
145
EXHIBIT NO. TITLE METHOD OF FILING
- ----------- ---------------------------------------- ----------------------------------------
4.8 Form of First Supplemental Indenture Incorporated by reference to
dated as of July 26, 1995, to Indenture Exhibit 4.1 to the Current Report on
dated as of July 26, 1995 between Form 8-K of Meditrust dated July 13,
Meditrust and Fleet National Bank 1995
4.9 Form of 8.56% Convertible Senior Note Incorporated by reference to
due July 1, 2002 Exhibit 4.1 to the Current Report on
Form 8-K of Meditrust dated July 27,
1995
4.10 Form of Second Supplemental Indenture Incorporated by reference to
dated as of July 28, 1995, to Indenture Exhibit 4.1 to the Current Report on
dated as of July 26, 1995 between Form 8-K of Meditrust dated July 27,
Meditrust and Fleet National Bank, as 1995
Trustee
4.11 Form of Fixed Rate Senior Medium-term Incorporated by reference to
Note Exhibit 4.3 to the Current Report on
Form 8-K of Meditrust dated August 8,
1995
4.12 Form of Floating Rate Medium-term Note Incorporated by reference to
Exhibit 4.4 to the Current Report on
Form 8-K of Meditrust dated August 8,
1995
4.13 Form of Third Supplemental Indenture Incorporated by reference to
dated as of August 10, 1995, to Exhibit 4.2 to the Current Report on
Indenture dated as of July 26, 1995 Form 8-K of Meditrust dated August 8,
between Meditrust and Fleet National 1995
Bank
4.14 Form of 7.60% Note due July 15, 2001 Incorporated by reference to
Exhibit 4.1 to the Current Report on
Form 8-K of Meditrust dated July 13,
1995
4.15 Form of Fourth Supplemental Indenture Incorporated by reference to
dated as of September 10, 1996, to Exhibit 4.1 to the Current Report on
Indenture dated as of July 26, 1995 Form 8-K of Meditrust dated
between Meditrust and Fleet National September 6, 1996
Bank
4.16 Form of 7.82% Note due September 10, Incorporated by reference to
2026 Exhibit 4.1 to the Current Report on
Form 8-K of Meditrust dated
September 6, 1996
4.17 Form of Fifth Supplemental Indenture Incorporated by reference to
dated as of August 12, 1997, to Exhibit 4.25 to Joint Annual Report on
Indenture dated as of July 26, 1995 Form 10-K of The Meditrust Companies for
between Meditrust and Fleet National the fiscal year ended December 31, 1998
Bank (State Street Bank and Trust
Company, as Successor Trustee)
4.18 Form of Remarketed Reset Note due Incorporated by reference to
August 15, 2002 Exhibit 4.26 to Joint Annual Report on
Form 10-K of The Meditrust Companies for
the fiscal year ended December 31, 1998
146
EXHIBIT NO. TITLE METHOD OF FILING
- ----------- ---------------------------------------- ----------------------------------------
4.19 Form of Sixth Supplemental Indenture Incorporated by reference to
dated as of August 12, 1997, to Exhibit 4.27 to Joint Annual Report on
Indenture dated as of July 26, 1995 Form 10-K of The Meditrust Companies for
between Meditrust and State Street Bank the fiscal year ended December 31, 1998
and Trust Company
4.20 Form of 7% Notes due August 15, 2007 Incorporated by reference to
Exhibit 4.28 to Joint Annual Report on
Form 10-K of The Meditrust Companies for
the fiscal year ended December 31, 1998
4.21 Form of Seventh Supplemental Indenture Incorporated by reference to
dated August 12, 1997, to Indenture Exhibit 4.29 to Joint Annual Report on
dated as of July 26, 1995 between Form 10-K of The Meditrust Companies for
Meditrust and State Street Bank and the fiscal year ended December 31, 1998
Trust Company
4.22 Form of 7.114% Note due August 15, 2011 Incorporated by reference to
Exhibit 4.30 to Joint Annual Report on
Form 10-K of The Meditrust Companies for
the fiscal year ended December 31, 1998
4.23 Form of Deposit Agreement, among Incorporated by reference to
Meditrust Corporation and State Street Exhibit 4.3 to Joint Current Report on
Bank and Trust Company and all holders Form 8-K of Meditrust Corporation and
from time to time of Receipts for Meditrust Operating Company, event date
Depositary Shares, including form of June 16, 1998
Depositary Receipts
10.1 Credit Agreement dated as of July 17, Incorporated by reference to Joint
1998 among Meditrust Corporation, Morgan Quarterly Report on Form 10-Q for the
Guaranty Trust Company of New York and Quarter ended June 30, 1998
the other Banks set forth therein
10.2 Amended and Restated Lease Agreement Incorporated by reference to
between Mediplex of Queens, Inc. and Exhibit 2.2 to the Current Report on
QPH, Inc. dated December 30, 1986 Form 8-K of Meditrust dated January 13,
1987
10.3 Registration Rights Agreement, dated as Incorporated by reference to
of January 3, 1998 by and among Exhibit 10.3 to Joint Current Report on
Meditrust Corporation, Meditrust Form 8-K of Meditrust Corporation and
Operating Company and certain other Meditrust Operating Company, event date
parties signatory thereto January 8, 1998
10.4 Shareholders Agreement, dated as of Incorporated by reference to
January 3, 1998, by and among Meditrust Exhibit 10.2 to Joint Current Report of
Corporation, Meditrust Operating Form 8-K of Meditrust Corporation and
Company, certain shareholders of La Meditrust Operating Company, event date
Quinta Inns, Inc., and solely for January 8, 1998
purposes of Section 3.6 of such
Agreement, La Quinta Inns, Inc.
147
EXHIBIT NO. TITLE METHOD OF FILING
- ----------- ---------------------------------------- ----------------------------------------
10.5 First Amendment to Shareholders Incorporated by reference to Annex D-1
Agreement dated April 30, 1998, by and to the Joint Proxy Statement/Prospectus
among Meditrust Corporation, Meditrust on Form S-4/A of Meditrust Corporation
Operating Company and certain and Meditrust Operating Company (File
shareholders of La Quinta Inns, Inc., Nos. 333-47737 and 333-47737-01)
and solely for the purposes of
Section 3.6 of such Agreement, La Quinta
Inns, Inc.
10.6 Amendment to Credit Agreement dated as Incorporated by reference to
of November 23, 1998 among Meditrust Exhibit 10.16 to Joint Annual Report on
Corporation, Morgan Guaranty Trust Form 10-K of The Meditrust Companies for
Company of New York and the other Banks the fiscal year ended December 31, 1998
set forth therein
10.7 Second Amendment to Credit Agreement Incorporated by reference to
dated as of March 10, 1999 by and among Exhibit 99.1 to Joint Quarterly Report
Meditrust Corporation, Morgan Guaranty on Form 10-Q for the Quarter ended
Trust Company of New York and the other March 31, 1999
Banks set forth therein
10.8 Employment Agreement dated as of Incorporated by reference to
January 1, 1999 by and between Meditrust Exhibit 10.1 to Joint Quarterly Report
Corporation and David F. Benson on Form 10-Q for the Quarter ended
March 31, 1999
10.9 Employment Agreement dated as of Incorporated by reference to
January 1, 1999 by and between Meditrust Exhibit 10.2 to Joint Quarterly Report
Corporation and Michael S. Benjamin on Form 10-Q for the Quarter ended
March 31, 1999
10.10 Employment Agreement dated as of Incorporated by reference to
January 1, 1999 by and between Meditrust Exhibit 10.3 to Joint Quarterly Report
Corporation and Michael F. Bushee on Form 10-Q for the Quarter ended
March 31, 1999
10.11 Employment Agreement dated as of Incorporated by reference to
January 1, 1999 by and between Meditrust Exhibit 10.4 to Joint Quarterly Report
Corporation and Laurie T. Gerber on Form 10-Q for the Quarter ended
March 31, 1999
10.12 Separation Agreement dated as of Incorporated by reference to
May 10, 1999 by and among Meditrust Exhibit 99.2 to Joint Current Report on
Corporation, Meditrust Operating Form 8-K of Meditrust Corporation and
Company, Abraham D. Gosman and other Meditrust Operating Company, event dated
parties thereto May 10, 1999
10.13 Termination and Severance Agreement Incorporated by reference to
dated as of January 28, 2000 by and Exhibit 99.2 to Joint Current Report on
among Meditrust Corporation, Meditrust Form 8-K of Meditrust Corporation and
Operating Company, David F. Benson and Meditrust Operating Company, event dated
other parties thereto January 28, 2000
10.14 Employment Agreement dated as of Incorporated by reference to
March 22, 2000, Exhibit 10.2 to the Joint Quarterly
by and between Meditrust Corporation and Report on Form 10-Q for the quarter
Francis W. Cash ended March 31, 2000
10.15 Employment Agreement dated as of Incorporated by reference to
June 12, 2000, by and between Meditrust Exhibit 10.1 to the Joint Quarterly
Operating Company and David L. Rea Report on Form 10-Q for the quarter
ended June 30, 2000
148
EXHIBIT NO. TITLE METHOD OF FILING
- ----------- ---------------------------------------- ----------------------------------------
10.16 Amendment to Employment Agreement Incorporated by reference to
effective as of June 12, 2000 by and Exhibit 10.3 to the Joint Quarterly
among Meditrust Corporation, Meditrust Report on Form 10-Q for the quarter
Operating Company and David L. Rea ended June 30, 2000
10.17 Third Amendment to Credit Agreement Incorporated by reference to
dated as of June 30, 2000 by and among Exhibit 10.3 to the Joint Quarterly
Meditrust Corporation, Morgan Guaranty Report on Form 10-Q for the quarter
Trust Company of New York and the other ended June 30, 2000
Banks set forth therein.
10.18 Fourth Amendment, made as of August 31, Incorporated by reference to
2000, by and among Meditrust Exhibit 10.1 to the Joint Current
Corporation, Morgan Guarantee Trust Report on Form 8-K, event dated
Company of New York, Bankers Trust August 31, 2000
Company, BankBoston, N.A., Fleet
National Bank and the Banks listed
therein
11 Statement Regarding Computation of Per See financial statements
Share Earnings
21 Subsidiaries of the Registrant Included in this filing
23 Consent of Included in this filing
PricewaterhouseCoopers L.L.P.
149