SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
[ ] 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 in its (Exact name of registrant as specified in it charter)
charter)
DELAWARE DELAWARE
(State or other jurisdiction of incorporation or (State or other jurisdiction of incorporation or
organization) organization)
95-3520818 95-3419438
(I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.)
909 HIDDEN RIDGE, SUITE 600 909 HIDDEN RIDGE, SUITE 600
IRVING, TX 75038 IRVING, TX 75038
(Address of principal executive offices, including zip (Address of principal executive offices, including
code) zip code)
(214) 492-6600 (214) 492-6600
(Registrant's telephone number, including area code) (Registrant's telephone number, including area code)
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of each of the issuers' classes of common
stock, as of the close of business on April 27, 2001, were:
Meditrust Corporation: 144,341,666
Meditrust Operating Company: 143,036,289
THE MEDITRUST COMPANIES
FORM 10-Q
INDEX
PAGE
Part I. Financial Information
Item 1. Financial Statements
The Meditrust Companies
Combined Consolidated Balance Sheets as of March 31, 2001
(unaudited) and December 31, 2000................................................................ 1
Combined Consolidated Statements of Operations for the three months
ended March 31, 2001 (unaudited) and 2000 (unaudited)............................................ 2
Combined Consolidated Statements of Cash Flows for the three
months ended March 31, 2001 (unaudited) and 2000 (unaudited)..................................... 3
Meditrust Corporation
Consolidated Balance Sheets as of March 31, 2001 (unaudited)
and December 31, 2000............................................................................ 4
Consolidated Statements of Operations for the three months ended
March 31, 2001 (unaudited) and 2000 (unaudited).................................................. 5
Consolidated Statements of Cash Flows for the three months ended
March 31, 2001 (unaudited) and 2000 (unaudited).................................................. 6
Meditrust Operating Company
Consolidated Balance Sheets as of March 31, 2001 (unaudited)
and December 31, 2000............................................................................ 7
Consolidated Statements of Operations for the three months
ended March 31, 2001 (unaudited) and 2000 (unaudited)............................................ 8
Consolidated Statements of Cash Flows for the three months ended
March 31, 2001 (unaudited) and 2000 (unaudited).................................................. 9
Notes to Combined Consolidated Financial Statements (unaudited).................................... 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................................ 26
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................. 41
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K........................................................... 41
Signatures......................................................................................... 42
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE MEDITRUST COMPANIES
COMBINED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
-------------------- ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000
-------------------- ------------------
ASSETS: (unaudited)
Real estate investments, net ................................................... $ 3,322,002 $ 3,352,676
Cash and cash equivalents....................................................... 36,396 38,993
Fees, interest and other receivables............................................ 60,547 73,476
Goodwill, net................................................................... 452,104 457,789
Other assets, net............................................................... 161,863 170,213
-------------------- ------------------
Total assets........................................................... $ 4,032,912 $ 4,093,147
==================== ==================
LIABILITIES:
Indebtedness:
Notes payable, net.......................................................... $ 1,013,806 $ 1,013,640
Convertible debentures, net................................................. 53,942 136,915
Bank notes payable, net..................................................... 486,176 397,827
Bonds and mortgages payable, net............................................ 33,778 42,077
-------------------- ------------------
Total indebtedness........................................................ 1,587,702 1,590,459
-------------------- ------------------
Accounts payable, accrued expenses and other liabilities........................ 137,274 179,877
-------------------- ------------------
Total liabilities......................................................... 1,724,976 1,770,336
-------------------- ------------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Meditrust Corporation Preferred Stock, $0.10 par value; 6,000 shares
authorized; 701 shares issued and outstanding at March 31, 2001
and December 31, 2000................................................. 70 70
Paired Common Stock, $0.20 combined par value; 500,000 shares
authorized; 143,008 and 142,905 paired shares issued and outstanding
at March 31, 2001 and December 31, 2000, respectively................. 28,603 28,580
Additional paid-in-capital.................................................. 3,659,662 3,659,339
Unearned compensation....................................................... (4,489) (4,911)
Accumulated other comprehensive income...................................... (812) (985)
Distributions in excess of net income....................................... (1,375,098) (1,359,282)
-------------------- ------------------
Total shareholders' equity............................................... 2,307,936 2,322,811
-------------------- ------------------
Total liabilities and shareholders' equity........................... $ 4,032,912 $ 4,093,147
==================== ==================
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements contained within the Companies' Form 10-K for the year
ended December 31, 2000, are an integral part of these financial statements.
1
THE MEDITRUST COMPANIES
COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31,
----------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000
----------------------- ----------------------
REVENUE:
Hotel................................................................... $ 152,996 $ 149,747
Rental.................................................................. 27,194 31,995
Interest................................................................ 9,263 31,890
----------------------- ----------------------
189,453 213,632
----------------------- ----------------------
EXPENSES:
Hotel operations........................................................ 74,400 70,626
Interest................................................................ 34,936 55,236
Depreciation and amortization........................................... 35,300 36,739
Amortization of goodwill................................................ 5,686 5,699
General and administrative.............................................. 12,161 11,231
Rental property operations.............................................. 7,804 7,643
Loss on sale of assets.................................................. 54 3,812
Impairment of real estate assets, mortgages and notes receivable........ 21,088 -
Other................................................................... 10,020 12,364
----------------------- ----------------------
201,449 203,350
----------------------- ----------------------
(LOSS) INCOME BEFORE INCOME TAXES, EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE.................. (11,996) 10,282
Income tax expense........................................................ 176 -
----------------------- ----------------------
(LOSS) INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF (12,172) 10,282
CHANGE IN ACCOUNTING PRINCIPLE.......................................
EXTRAORDINARY ITEM:
Gain on early extinguishments of debt................................ - 1,394
CUMULATIVE EFFECT ON PRIOR YEARS (TO DECEMBER 31, 2000)
OF CHANGE IN ACCOUNTING PRINCIPLE.................................... 856 -
----------------------- ----------------------
NET (LOSS) INCOME......................................................... (11,316) 11,676
Preferred stock dividends............................................ (4,500) (4,500)
----------------------- ----------------------
NET (LOSS) INCOME AVAILABLE TO COMMON SHAREHOLDERS........................ $ (15,816) $ 7,176
======================= ======================
BASIC (LOSS) EARNINGS PER PAIRED COMMON SHARE:
(Loss) income available to Common Shareholders
before extraordinary item........................................... $ (0.12) $ 0.04
Gain on early extinguishments of debt................................... - 0.01
Cumulative effect on prior years of change in accounting principle...... 0.01 -
----------------------- ----------------------
Net (loss) income....................................................... $ (0.11) $ 0.05
======================= ======================
DILUTED (LOSS) EARNINGS PER PAIRED COMMON SHARE:
(Loss) income available to Common Shareholders $ (0.12) $ 0.04
before extraordinary item..........................................
Gain on early extinguishments of debt................................... - 0.01
Cumulative effect on prior years of change in accounting principle...... 0.01 -
----------------------- ----------------------
Net (loss) income....................................................... $ (0.11) $ 0.05
======================= ======================
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements contained within the Companies' Form 10-K for the year
ended December 31, 2000, are an integral part of these financial statements.
2
THE MEDITRUST COMPANIES
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
-----------------------------------
(IN THOUSANDS) 2001 2000
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income....................................................................... $ (11,316) $ 11,676
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation of real estate........................................................ 31,473 32,409
Goodwill amortization.............................................................. 5,686 5,699
Loss on sale of assets............................................................. 54 3,812
Shares issued for compensation..................................................... 345 -
Gain on early extinguishments of debt.............................................. - (2,174)
Other depreciation, amortization and other items, net ............................. 5,737 6,453
Other non-cash items............................................................... 30,983 2,303
---------------- ----------------
Cash Flows from Operating Activities Available for Distribution......................... 62,962 60,178
Net change in other assets and liabilities......................................... (53,265) (31,918)
---------------- ----------------
Net cash provided by operating activities..................................... 9,697 28,260
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on bank notes payable.......................................... 95,000 112,000
Repayment of bank notes payable......................................................... (7,737) (228,464)
Repayment of notes payable.............................................................. - (32,845)
Repayment of convertible debentures..................................................... (82,992) (9,781)
Equity offering and debt issuance costs................................................. - (500)
Principal payments on bonds and mortgages payable....................................... (8,173) (16,327)
Dividends/distributions to shareholders................................................. (4,500) (4,500)
---------------- ----------------
Net cash used in financing activities......................................... (8,402) (180,417)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate capital expenditures and development funding ............................... (12,979) (7,534)
Investment in real estate mortgages and development funding ............................ - (161)
Prepayment proceeds and principal payments received on real estate mortgages............ 750 18,461
Proceeds from sale of assets............................................................ 600 180,994
Proceeds from sale of securities........................................................ 7,737 -
Payment of costs related to prior year asset sales...................................... - (25,879)
Working capital and notes receivable advances, net of repayments and collections........ - (9,387)
---------------- ----------------
Net cash (used in) provided by investing activities............................ (3,892) 156,494
---------------- ----------------
Net (decrease) increase in cash and cash equivalents........................... (2,597) 4,337
Cash and cash equivalents at:
Beginning of period..................................................................... 38,993 7,220
---------------- ----------------
End of period........................................................................... $ 36,396 $ 11,557
================ ================
Supplemental disclosure of cash flow information (Note 2)
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements contained within the Companies' Form 10-K and for the
year ended December 31, 2000, are an integral part of these financial
statements.
3
MEDITRUST CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
------------------- -------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000
------------------- -------------------
ASSETS: (unaudited)
Real estate investments, net.............................................. $ 3,302,644 $ 3,333,168
Cash and cash equivalents................................................. 36,386 38,991
Fees, interest and other receivables...................................... 38,725 56,829
Goodwill, net............................................................. 423,643 429,134
Rent and royalties receivable from Meditrust Operating Company............ 140,532 63,516
Due from Meditrust Operating Company...................................... - 27,679
Other assets, net......................................................... 108,215 117,275
------------------- -------------------
Total assets.................................................... $ 4,050,145 $ 4,066,592
=================== ===================
LIABILITIES:
Indebtedness:
Notes payable, net.................................................... $ 1,013,806 $ 1,013,640
Convertible debentures, net........................................... 53,942 136,915
Bank notes payable, net............................................... 486,176 397,827
Bonds and mortgages payable, net...................................... 33,778 42,077
------------------- -------------------
Total indebtedness............................................... 1,587,702 1,590,459
------------------- -------------------
Due to Meditrust Operating Company........................................ 28,747 -
Accounts payable, accrued expenses and other liabilities.................. 72,425 110,545
------------------- -------------------
Total liabilities................................................... 1,688,874 1,701,004
------------------- -------------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Stock, $0.10 par value; 6,000 shares authorized; 701 shares
issued and outstanding at March 31, 2001 and
December 31, 2000............................................... 70 70
Common Stock, $0.10 par value; 500,000 shares authorized; 144,313
and 144,210 shares issued and outstanding at March 31, 2001 and
December 31, 2000, respectively .................................... 14,432 14,421
Additional paid-in-capital............................................ 3,592,640 3,592,306
Unearned compensation............................................... (2,240) (2,526)
Accumulated other comprehensive income.............................. 173 -
Distributions in excess of net income................................. (1,243,804) (1,238,683)
------------------- -------------------
Total shareholders' equity.......................................... 2,361,271 2,365,588
------------------- -------------------
Total liabilities and shareholders' equity........................ $ 4,050,145 $ 4,066,592
=================== ===================
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements contained within the Companies' Form 10-K for the year
ended December 31, 2000, are an integral part of these financial statements.
4
MEDITRUST CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000
-------------------- --------------------
REVENUE:
Rental ................................................................ $ 27,194 $ 31,995
Interest............................................................... 9,257 31,853
Rent from Meditrust Operating Company.................................. 71,568 68,880
Interest from Meditrust Operating Company.............................. - 141
Royalty from Meditrust Operating Company............................... 5,448 4,873
Hotel ................................................................. 3,055 2,791
-------------------- --------------------
116,522 140,533
-------------------- --------------------
EXPENSES:
Hotel operations....................................................... 1,442 1,325
Interest............................................................... 34,857 55,125
Depreciation and amortization.......................................... 32,726 33,663
Amortization of goodwill............................................... 5,492 5,505
General and administrative............................................. 4,340 3,999
Rental property operations............................................. 7,804 7,643
Loss on sale of assets................................................. 54 3,812
Impairment of real estate assets, mortgages and notes receivable....... 21,088 -
Other ................................................................. 10,020 12,364
-------------------- --------------------
117,823 123,436
-------------------- --------------------
(LOSS) INCOME BEFORE INCOME TAXES, EXTRAORDINARY ITEM AND (1,301) 17,097
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE................
Income tax expense........................................................ 176 -
-------------------- --------------------
(LOSS) INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF (1,477) 17,097
CHANGE IN ACCOUNTING PRINCIPLE.......................................
EXTRAORDINARY ITEM:
Gain on early extinguishments of debt.............................. - 1,394
CUMULATIVE EFFECT ON PRIOR YEARS (TO DECEMBER 31, 2000)
OF CHANGE IN ACCOUNTING PRINCIPLE.................................. 856 -
-------------------- --------------------
NET (LOSS) INCOME....................................................... (621) 18,491
Preferred stock dividends.......................................... (4,500) (4,500)
-------------------- --------------------
NET (LOSS) INCOME AVAILABLE TO COMMON SHAREHOLDERS...................... $ (5,121) $ 13,991
==================== ====================
BASIC (LOSS) EARNINGS PER PAIRED COMMON SHARE:
(Loss) income available to Common Shareholders
before extraordinary item................................... $ (0.04) $ 0.09
Gain on early extinguishments of debt............................ - 0.01
Cumulative effect on prior years of change in accounting principle 0.01 -
-------------------- --------------------
Net (loss) income................................................ $ (0.03) $ 0.10
==================== ====================
DILUTED (LOSS) EARNINGS PER PAIRED COMMON SHARE:
(Loss) income available to Common Shareholders
before extraordinary item................................... $ (0.04) $ 0.09
Gain on early extinguishments of debt............................ - 0.01
Cumulative effect on prior years of change in accounting principle 0.01 -
-------------------- --------------------
Net (loss) income................................................ $ (0.03) $ 0.10
==================== ====================
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements contained within the Companies' Form 10-K for the year
ended December 31, 2000, are an integral part of these financial statements.
5
MEDITRUST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------------------
(IN THOUSANDS) 2001 2000
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (621) $ 18,491
Adjustments to reconcile net (loss) income to net cash provided by operating
activities:
Depreciation of real estate..................................................... 31,303 32,239
Goodwill amortization........................................................... 5,492 5,505
Loss on sale of assets.......................................................... 54 3,812
Gain on early extinguishments of debt........................................... - (2,174)
Shares issued for compensation.................................................. 345 -
Other depreciation, amortization and other items, net........................... 3,153 3,524
Other non-cash items............................................................ 30,983 2,303
----------------- -----------------
Cash Flows from Operating Activities Available for Distribution...................... 70,709 63,700
Net change in other assets and liabilities ..................................... (61,041) (35,240)
----------------- -----------------
Net cash provided by operating activities.................................. 9,668 28,460
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on bank notes payable....................................... 95,000 112,000
Repayment of bank notes payable...................................................... (7,737) (228,464)
Repayment of notes payable........................................................... - (32,845)
Repayment of convertible debentures.................................................. (82,992) (9,781)
Equity offering and debt issuance costs.............................................. - (500)
Intercompany lending, net............................................................ - (59)
Principal payments on bonds and mortgages payable.................................... (8,173) (16,327)
Dividends/distributions to shareholders.............................................. (4,500) (4,500)
----------------- -----------------
Net cash used in financing activities............................................ (8,402) (180,476)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate capital expenditures and development funding ............................ (12,958) (7,475)
Investment in real estate mortgages and development funding.......................... - (161)
Prepayment proceeds and principal payments received on real estate mortgages......... 750 18,461
Payment of costs related to prior year asset sales................................... - (25,879)
Proceeds from sale of assets......................................................... 600 180,994
Proceeds from sale of securities..................................................... 7,737 -
Working capital and notes receivable advances, net of repayments and
collections.................................................................... - (9,387)
----------------- -----------------
Net cash provided by (used in) investing activities.............................. (3,871) 156,553
----------------- -----------------
Net increase (decrease) in cash and cash equivalents............................. (2,605) 4,537
Cash and cash equivalents at:
Beginning of period.................................................................. 38,991 5,779
----------------- -----------------
End of period........................................................................ $ 36,386 $ 10,316
================= =================
Supplemental disclosure of cash flow information (Note 2)
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements contained within the Companies' Form 10-K for the year
ended December 31, 2000, are an integral part of these financial statements.
6
MEDITRUST OPERATING COMPANY
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
-------------------- -------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000
-------------------- -------------------
ASSETS: (unaudited)
Cash and cash equivalents.................................................. $ 10 $ 2
Fees, interest and other receivables....................................... 21,822 16,647
Due from Meditrust Corporation............................................. 28,747 -
Other current assets, net.................................................. 9,552 9,613
-------------------- -------------------
Total current assets.................................................. 60,131 26,262
Investment in common stock of Meditrust Corporation........................ 37,581 37,581
Goodwill, net.............................................................. 28,461 28,655
Property, plant and equipment, less accumulated depreciation
of $10,954 and $9,339, respectively.................................... 57,113 56,125
Other non-current assets................................................... 6,592 6,959
-------------------- -------------------
Total assets................................................ $ 189,878 $ 155,582
==================== ===================
LIABILITIES:
Accounts payable........................................................... $ 28,259 $ 28,876
Accrued payroll and employee benefits...................................... 27,118 30,767
Accrued expenses and other current liabilities............................. 6,735 6,516
Rent and royalty payable to Meditrust Corporation.......................... 140,532 63,516
Due to Meditrust Corporation............................................... - 27,679
-------------------- -------------------
Total current liabilities............................................ 202,644 157,354
Other non-current liabilities.............................................. 2,737 3,173
-------------------- -------------------
Total liabilities.................................................... 205,381 160,527
-------------------- -------------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common Stock, $0.10 par value; 500,000 shares authorized; 143,019 and
142,905 shares issued and outstanding at March 31, 2001 and
December 31, 2000, respectively ...................................... 14,302 14,290
Additional paid-in-capital................................................. 104,723 104,734
Unearned compensation...................................................... (2,249) (2,385)
Accumulated other comprehensive income..................................... (985) (985)
Accumulated deficit........................................................ (131,294) (120,599)
-------------------- -------------------
Total shareholders' deficit........................................ (15,503)
(4,945)
-------------------- -------------------
Total liabilities and shareholders' equity..................... $ 189,878 $ 155,582
==================== ===================
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements contained within the Companies' Form 10-K for the year
ended December 31, 2000, are an integral part of these financial statements.
7
MEDITRUST OPERATING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000
--------------------- --------------------
REVENUE:
Hotel ................................................................... $ 150,045 $ 147,046
Interest ................................................................ 6 37
--------------------- --------------------
150,051 147,083
--------------------- --------------------
EXPENSES:
Hotel operations ........................................................ 73,038 69,391
Depreciation and amortization ........................................... 2,574 3,076
Amortization of goodwill ............................................... 194 194
Interest and other ...................................................... 79 111
Interest to Meditrust Corporation ....................................... - 141
General and administrative .............................................. 7,845 7,232
Royalty to Meditrust Corporation ........................................ 5,448 4,873
Rent to Meditrust Corporation ........................................... 71,568 68,880
--------------------- --------------------
160,746 153,898
--------------------- --------------------
NET LOSS .................................................................. $ (10,695) $ (6,815)
===================== ====================
EARNINGS PER COMMON SHARE:
Assuming no dilution .................................................... $ (0.08) $ (0.05)
Assuming dilution........................................................ $ (0.08) $ (0.05)
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements contained within the Companies' Form 10-K for the year
ended December 31, 2000, are an integral part of these financial statements.
8
MEDITRUST OPERATING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31,
-----------------------------------------
2001 2000
------------------- --------------------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................................ $ (10,695) $ (6,815)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Goodwill amortization...................................................... 194 194
Other depreciation and amortization........................................ 2,754 3,099
Net change in other assets and liabilities................................. 7,776 3,322
------------------- --------------------
Net cash provided by (used in) operating activities................... 29 (200)
------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Intercompany borrowing, net..................................................... - 59
------------------- --------------------
Net cash provided by financing activities.................................. - 59
------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital improvements to real estate............................................. (21) (59)
------------------- --------------------
Net cash used in investing activities...................................... (21) (59)
------------------- --------------------
Net increase (decrease) in cash and cash equivalents....................... 8 (200)
Cash and cash equivalents at:
Beginning of period............................................................. 2 1,441
------------------- --------------------
End of period................................................................... $ 10 $ 1,241
=================== ====================
Supplemental disclosure of cash flow information (Note 2)
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements contained within the Companies' Form 10-K for the year
ended December 31, 2000, are an integral part of these financial statements.
9
MEDITRUST CORPORATION AND SUBSIDIARIES
AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with generally accepted accounting
principles, have been condensed or omitted in this Form 10-Q in accordance with
the Rules and Regulations of the Securities and Exchange Commission (the "SEC").
In the opinion of Meditrust Corporation and subsidiaries ("Realty") and
Meditrust Operating Company and subsidiaries ("Operating" and collectively with
Realty the "Companies" or "The Meditrust Companies"), the accompanying unaudited
combined consolidated financial statements reflect all adjustments (consisting
of normal recurring accruals) necessary to present fairly the financial position
as of March 31, 2001, the results of operations for the three month periods
ended March 31, 2001 and 2000, and cash flows for the three month periods ended
March 31, 2001 and 2000. The results of operations for the three month period
ended March 31, 2001 are not necessarily indicative of the results which may be
expected for any other interim period or for the entire year.
Also, in the opinion of Realty, Operating and The Meditrust Companies,
the disclosures contained in this Form 10-Q are adequate to make the information
presented not misleading. See the Companies' Joint Annual Report on Form 10-K
for the year ended December 31, 2000 for additional information relevant to
significant accounting policies followed by the Companies.
BASIS OF PRESENTATION AND CONSOLIDATION
Separate financial statements have been presented for Realty and for
Operating. Combined Realty and Operating financial statements have been
presented as The Meditrust Companies. All significant intercompany and
inter-entity balances and transactions have been eliminated in combination. The
Meditrust Companies and Realty use an unclassified balance sheet presentation.
The consolidated financial statements of Realty and Operating include
the accounts of the respective entity and its majority-owned subsidiaries,
including unincorporated partnerships and joint ventures, after the elimination
of all significant intercompany accounts and transactions.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
CHANGE IN ACCOUNTING PRINCIPLE
The Companies use interest rate swap agreements to manage its exposure
to interest rate risk. Statement of Financial Accounting Standards No. 133 (SFAS
No. 133), "Accounting for Derivative Instruments and Hedging Activities" as
amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities", was adopted by the Companies beginning January 1,
2001. SFAS No. 133 requires that an entity recognize all derivatives as either
assets or liabilities measured at fair value.
SFAS No. 133 requires the Company to recognize all derivatives on the
balance sheet at fair value. If the derivative is a hedge, depending on the
nature of the hedge, changes in the fair value of the derivative will either be
offset against the change in fair value of the hedged assets, liabilities, or
firm commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. Any ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings and
7any derivatives that are not hedges must be adjusted to fair value through
income. Adoption of these new accounting standards resulted in a net charge to
earnings of $1,236,000 during the three months ended March 31, 2001 comprised of
an increase in interest expense of approximately $2,092,000 and a partially
offsetting entry to reflect the cumulative effect of a change in accounting
principle (through December 31, 2000) of $856,000. Additionally, the adoption
required the Companies to record a liability on the balance sheet to record the
fair value of the interest rate swap at March 31, 2001.
RECLASSIFICATION
Certain reclassifications have been made to the 2000 presentation to
conform to the 2001 presentation.
10
MEDITRUST CORPORATION AND SUBSIDIARIES
AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. SUPPLEMENTAL CASH FLOW INFORMATION
Details of other non-cash items:
THREE MONTHS ENDED MARCH 31,
-------------------------------------
(IN THOUSANDS) 2001 2000
------------------ ----------------
Provision for assets held for sale.................................................. $ 7,589 $ -
Provision for assets held for use................................................... 1,074 -
Provision for loss on real estate mortgages and notes receivable.................... 12,425 -
Straight line rent.................................................................. - (442)
Provision for loss on interest and other receivables ............................... 9,475 284
Reserve for restructuring expenses.................................................. 545 -
Accelerated amortization of unearned compensation................................... - 2,461
Other............................................................................... (125) -
----------------- ---------------
Total other non-cash items.......................................................... $ 30,983 $ 2,303
================= ===============
Details of interest paid and non-cash investing and financing transactions:
THE MEDITRUST COMPANIES:
THREE MONTHS ENDED MARCH 31,
------------------------------------
(IN THOUSANDS) 2001 2000
----------------- ---------------
Interest paid during the period...................................................... $ 44,200 $ 81,360
Interest capitalized during the period............................................... 208 423
Non-cash investing and financing transactions:
Non-cash proceeds of asset sale (see Note 3).................................... - 53,900
Accumulated depreciation and provision for impairment of assets sold............ - 78,387
Increase in real estate mortgages net of participation reduction................ (3) 57
Allowance for loan losses on prepaid mortgages.................................. - 5,027
Change in market value of equity securities .................................... 173 (34,359)
MEDITRUST CORPORATION:
THREE MONTHS ENDED MARCH 31,
-----------------------------------
(IN THOUSANDS) 2001 2000
----------------- --------------
Interest paid during the period...................................................... $ 44,164 $ 81,151
Interest capitalized during the period............................................... 190 325
Non-cash investing and financing transactions:
Non-cash proceeds of asset sale (see Note 3).................................... - 53,900
Accumulated depreciation and provision for impairment of assets sold............ - 78,387
Increase in real estate mortgages net of participation reduction................ (3) 57
Allowance for loan losses on prepaid mortgages.................................. - 5,027
Change in market value of equity securities .................................... 173 (34,359)
MEDITRUST OPERATING COMPANY:
THREE MONTHS ENDED MARCH 31,
----------------------------------
(IN THOUSANDS) 2001 2000
-------------- ----------------
Interest paid during the period...................................................... $ 36 $ 209
Interest capitalized during the period............................................... 18 98
11
MEDITRUST CORPORATION AND SUBSIDIARIES
AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. REAL ESTATE INVESTMENTS
The following is a summary of the Companies' real estate investments:
MARCH 31, DECEMBER 31,
(IN THOUSANDS) 2001 2000
-------------------- -------------------
Land.................................................................................. $ 391,611 $ 393,083
Buildings and improvements, net of accumulated depreciation of $265,392
and $242,191 and impairment reserve of $25,990 and $24,916....................... 2,204,337 2,231,267
Real estate mortgages and notes receivable, net of a impairment reserve
of $55,535 and $53,640........................................................... 219,923 222,571
Assets held for sale, net of accumulated depreciation of $129,871 and
$131,463 and impairment reserve of $106,195 and $98,606.......................... 506,131 505,755
-------------------- -------------------
$ 3,322,002 $ 3,352,676
==================== ===================
During the three months ended March 31, 2001, the Companies incurred
$12,736,000 in capital improvements related to the lodging segment.
Additionally, during the three months ended March 31, 2001, lodging
depreciation expense and write-offs of $30,087,000 included $7,036,000 of
write-downs of four lodging facilities that management reclassified as
held-for-sale during the first quarter of 2001. The Companies received
$750,000 in monthly principal amortization on mortgages receivable during the
three months ended March 31, 2001.
Total provision for impairments of real estate assets, mortgages and
notes receivable recorded during the three months ended March 31, 2001 and 2000
were $21,088,000 and $0, respectively. As of March 31, 2001 and December 31,
2000, the total impairment impairment reserve balance was $187,720,000 and
$177,162,000, respectively.
The following is the rollforward of the net book value of investments
in real estate during the first quarter of 2001:
(IN THOUSANDS)
Net book value of investments in real estate assets at December 31, 2000........... $ 3,352,676
Lodging
Capital improvements......................................................... 12,736
Net book value of assets sold and other adjustments.......................... (626)
Depreciation expense and write-offs.......................................... (30,087)
Healthcare
Mortgages:
Principal payments........................................................... (750)
Provision for loss on real estate mortgages and notes receivable............. (12,425)
Increase in real estate mortgages net of participation reduction............. (3)
Other adjustments............................................................ 10,530
Sale/lease-back assets:
Depreciation expense......................................................... (1,386)
Provision for loss on assets held for sale................................... (7,589)
Provision for loss on assets held for use.................................... (1,074)
------------------
Net book value of investment in real estate assets at March 31, 2001............... $ 3,322,002
==================
The activity in the impairment reserve for real estate investments for
the three months ended March 31, 2001 is summarized as follows:
REAL ESTATE
BUILDINGS MORTGAGES
AND AND NOTES ASSETS HELD
(IN THOUSANDS) IMPROVEMENTS RECEIVABLE FOR SALE TOTAL
------------------ ---------------- ---------------- ----------------
Balance at December 31, 2000...................... $ 24,916 $ 53,640 $ 98,606 $ 177,162
Provision recorded................................ 1,074 12,425 7,589 21,088
Other adjustments................................. - (10,530) - (10,530)
------------------ ---------------- ---------------- ----------------
Balance at March 31, 2001......................... $ 25,990 $ 55,535 $ 106,195 $ 187,720
================== ================ ================ ================
12
MEDITRUST CORPORATION AND SUBSIDIARIES
AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. REAL ESTATE INVESTMENTS, CONTINUED
IMPAIRMENT OF REAL ESTATE ASSETS
At March 31, 2001 and December 31, 2000, the Companies classified
certain assets as held for sale based on management having the authority and
intent of entering into commitments for sale transactions expected to close in
the next twelve months. Based on estimated net sale proceeds, the Companies
recorded a provision for loss on assets held for sale of $7,589,000 for the
three months ended March 31, 2001. In addition, during the three month period
ended March 31, 2001, the Companies recorded a provision of $1,074,000 on real
estate assets held for use where current facts, circumstances and analysis
indicate that the assets might be impaired.
As of March 31, 2001 and December 31, 2000, the Companies have an
impairment allowance of $106,195,000 and $98,606,000, respectively, related to
assets held for sale and $25,990,000 and $24,916,000, respectively, pertaining
to properties held for use 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 MORTGAGES AND NOTES RECEIVABLE
During the three months ended March 31, 2001, the Companies recorded a
provision for loss related to the mortgage portfolio of $12,425,000 (of which
$10,530,000 related to working capital and other notes receivables classified as
fees, interest and other receivables). As of March 31, 2001 and December 31,
2000, the Companies have $55,535,000 and $53,640,000, 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 as of March 31, 2001:
PORTFOLIO BY TYPE
(IN THOUSANDS, EXCEPT NUMBER OF Gross Net Book # of % of # of # of
PROPERTIES AND PERCENTAGES) Investment Value Properties Portfolio Mortgages Properties Leases Leases
------------ ---------- ------------ ------------ ------------ ----------- --------- -------
LODGING PORTFOLIO:
Hotel $2,671,824 $2,430,414 299
HEALTHCARE PORTFOLIO:
Long Term Care 749,669 629,640 93 58% $ 168,461 25 $ 461,179 68
Assisted Living 328,882 307,448 94 29% 35,723 3 271,725 91
Acute Care Hospital 65,650 55,790 1 5% - - 55,790 1
Other Healthcare 51,142 49,466 6 5% 45,062 5 4,404 1
Medical Office Buildings 37,818 36,964 5 3% 26,212 3 10,752 2
------------ ---------- ------------ ------------ ------------ ----------- --------- -------
1,233,161 1,079,308 199 100% 275,458 36 803,850 163
Impairment Reserve (187,720) (55,535) (132,185)
------------ ---------- ------------ ------------ ---------
1,233,161 891,588 199 $ 219,923 $ 671,665
------------ ---------- ------------ ============ =========
Total Real Estate Portfolio $3,904,985 $3,322,002 498
============ ========== ============
Companies in the assisted living sector of the healthcare industry
approximate 9% of the net book value of the Companies' total real estate
investments (and approximately 29% of the healthcare portfolio before the
impairment reserve), while companies in the long term care sector approximate
19% of the net book value of Realty's total real estate investments (and
approximately 58% of the healthcare portfolio before the impairment reserve).
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
13
MEDITRUST CORPORATION AND SUBSIDIARIES
AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. REAL ESTATE INVESTMENTS, CONTINUED
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, 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 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
and their ability to access capital.
OPERATORS IN BANKRUPTCY
As of March 31, 2001, the Companies had exposure to five operators who
have filed for bankruptcy 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 by lease/mortgage and the lease/mortgage income for each
of the five operators which are in Chapter 11 proceedings.
(IN THOUSANDS, EXCEPT FOR NUMBER OF FACILITIES) Three months ended
March 31, 2001
-----------------------------
Total Leases Mortgages Rental Interest
Operator Date filed Facilities Facilities Net Assets Facilities Net Assets Income Income
- ----------------------------------------- --------------------------- --------------------------- -----------------------------
Sun (5) 10/14/99 39 35 $ 280,919 4 $ 30,390 $ 11,572 $ - (1)
Mariner 1/18/00 2 1 6,789 1 7,064 244 - (2)
Integrated 2/2/00 10 10 37,066 - - 2,152 N/A
Genesis 6/26/00 8 4 15,127 4 18,425 389 858 (3)
CareMatrix 11/9/00 4 1 13,840 3 35,523 374 860 (4)
------------ --------------------------- --------------------------- -----------------------------
Totals 63 51 $ 353,741 12 $ 91,402 $ 14,731 $ 1,718
============ =========================== =========================== =============================
(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
$177,000.
The Companies continue to monitor its operators that have filed for
Chapter 11. The Companies have not come to any definitive agreement with any of
these operators to date. 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
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
14
MEDITRUST CORPORATION AND SUBSIDIARIES
AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. REAL ESTATE INVESTMENTS, CONTINUED
be written down below the current carrying value based upon estimates of fair
value at such time. On April 3, 2001, The Meditrust Companies announced the
transfer of its beneficial ownership interest in the majority of its long term
care skilled facilities to Care Realty, L.L.C., the "Care Realty Transfer," and
thereby significantly reduced its exposure to bankrupt operators (see Note 12).
4. INDEBTEDNESS
During the three months ended March 31, 2001, the Companies had the
following debt activity:
Bonds and
Notes Convertible Bank Notes Mortgages
(IN THOUSANDS) Payable, Net Debentures, Net Payable, Net Payable, Net Total
-------------- ---------------- ----------------- ----------------- --------------
DECEMBER 31, 2000................... $ 1,013,640 $ 136,915 $ 397,827 $ 42,077 $ 1,590,459
Repayment of principal.............. - (82,992) (7,737) (8,173) (98,902)
Borrowings.......................... - - 95,000 - 95,000
Amortization of debt
issuance costs and other......... 166 19 1,086 (126) 1,145
-------------- ---------------- ----------------- ----------------- --------------
MARCH 31, 2001...................... $ 1,013,806 $ 53,942 $ 486,176 $ 33,778 $ 1,587,702
============== ================ ================= ================= ==============
CONVERTIBLE DEBENTURES, NET
The Companies' convertible debentures which matured on March 1, 2001
with a balance of $82,992,000 were repaid through borrowings under the Tranche A
revolving line of credit.
BANK NOTES PAYABLE, NET
During the three months ended March 31, 2001, the Companies borrowed
$95,000,000 on the Tranche A revolving line of credit to repay the convertible
debenture maturity and other debt and used proceeds from the sale of equity
securities to repay approximately $7,737,000 on the Tranche D term loan.
Approximately $265,874,000 (net of outstanding letters of credit) was available
at March 31, 2001 on the Tranche A revolving commitment at the Companies' option
at a base rate of the prime rate plus 2% (10% at March 31, 2001) or LIBOR plus
2.875% (approximately 7.9% at March 31, 2001).
In addition, subsequent to March 31, 2001, the Companies used proceeds
received in connection with the Care Realty Transfer to reduce bank notes
payable by $401 million (see Note 12).
BONDS AND MORTGAGES PAYABLE, NET
During the three months ended March 31, 2001, the Companies repaid,
through borrowings under the line of credit, approximately $8,173,000 in
principal on bonds and mortgages payable, which included a balloon payment of
$7,091,000 on a mortgage which matured on March 1, 2001.
INTEREST RATE SWAP AGREEMENT
At March 31, 2001, the Companies were fixed rate payors of 5.7% under
an interest rate swap agreement with a notional amount of $400,000,000 and
received a variable rate of 5.056%, which expires in July 2001. The swap
agreement was measured at fair value at March 31, 2001 and included in accounts
payable, accrued expenses and other liabilities in accordance with SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." The interest
rate swap was not designated as a hedging instrument and, accordingly, a net
charge to earnings of $1,236,000 was recorded during the three months ended
March 31, 2001 comprised of an increase in interest expense of approximately
$2,092,000 and a partially offsetting entry to reflect the cumulative effect of
a change in accounting principle (through December 31, 2000) of $856,000.
Additionally, the adoption required the Companies to record a liability on the
balance sheet to record the fair value of the interest rate swap at March 31,
2001.
15
MEDITRUST CORPORATION AND SUBSIDIARIES
AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. SHAREHOLDERS' EQUITY
As of March 31, 2001, the following classes of Preferred Stock, Excess
Stock and Series Common Stock were authorized; no shares were issued or
outstanding at either March 31, 2001 or December 31, 2000:
o Meditrust Operating Company Preferred Stock $.10 par value; 6,000,000
shares authorized;
o Meditrust Corporation Excess Stock $.10 par value; 25,000,000 shares
authorized;
o Meditrust Operating Company Excess Stock $.10 par value; 25,000,000 shares
authorized;
o Meditrust Corporation Series Common Stock $.10 par value; 30,000,000
shares authorized;
o Meditrust Operating Company Series Common Stock $.10 par value; 30,000,000
shares authorized.
During the three months ended March 31, 2001, 109,000 restricted shares
of the Companies' common stock were issued to employees under The Meditrust
Corporation 1995 Share Award Plan and The Meditrust Operating Company 1995 Share
Award Plan (collectively known as the "Share Award Plan"). During the three
months ended March 31, 2001, 53,000 restricted shares were forfeited and thus
cancelled and retired. Restricted shares outstanding at March 31, 2001 and
December 31, 2000 were 1,766,000 and 1,710,000, respectively.
Under the Share Award Plan, participants are entitled to cash dividends
and voting rights on their respective restricted shares. Restrictions generally
limit the sale or transfer of shares during a restricted period, not to exceed
three years. Participants vest in the restricted shares granted upon the
earliest of six months to three years after the date of issuance, upon achieving
the performance goals as defined, completion of the vesting periods, or as the
Boards of Directors (the "Boards") may determine.
For the three months ended March 31, 2000, pursuant to a separation and
consulting agreement with the former Director and Chairman of the Companies and
the Chief Executive Officer and Treasurer of Operating, the vesting period for
155,000 restricted shares was accelerated such that the shares were immediately
vested. This resulted in approximately $2,461,000 of accelerated amortization of
unearned compensation in the three months ended March 31, 2000.
Unearned compensation is charged for the market value of the restricted
shares on the date of grant and is being amortized over the restricted period.
The unamortized unearned compensation value is reflected as a reduction of
shareholders' equity in the accompanying consolidated and combined consolidated
balance sheets.
6. COMPREHENSIVE INCOME (LOSS) AND OTHER ASSETS
In January 2001, Realty sold its investment in Nursing Home Properties
Plc ("NHP Plc"), a property investment group which specializes in the financing,
through sale leaseback transactions, of nursing homes located in the United
Kingdom. The investment 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%. Realty sold its investment in NHP Plc for
net proceeds of $7,737,000 and recorded a charge to earnings of $22,000 for the
difference in the net book value and the selling price of the stock. Realty had
recorded a loss on its equity investment through December 31, 2000 of
$49,445,000.
At March 31, 2001 and December 31, 2000, Realty had an investment of
1,081,000 shares of capital stock in Balanced Care Corporation, a healthcare
operator. This investment had a market value of $444,000 and $271,000 at March
31, 2001 and December 31, 2000, respectively. An adjustment to accumulated other
comprehensive income of $173,000 was recorded in 2001 to reflect the unrealized
gain on this investment.
16
MEDITRUST CORPORATION AND SUBSIDIARIES
AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. COMPREHENSIVE INCOME (LOSS) AND OTHER ASSETS, CONTINUED
The following is a summary of the Companies' comprehensive loss:
THREE MONTHS ENDED MARCH 31,
----------------------------------------
(IN THOUSANDS) 2001 2000
----------------- ----------------
Net (loss) income.................................................... $ (11,316) $ 11,676
Other comprehensive income (loss):
Changes in market value of equity securities.................... 173 (34,359)
----------------- ----------------
Comprehensive loss................................................... $ (11,143) $ (22,683)
================= ================
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. Realty
provides for a impairment reserve against its assets on a periodic basis. As of
March 31, 2001, and December 31, 2000, the impairment reserve provided against
other assets and receivables aggregated approximately $52,496,000 and
$32,785,000, respectively.
7. DISTRIBUTIONS PAID TO SHAREHOLDERS
On April 2, 2001, Realty paid a dividend of $0.5625 per depository
share of preferred stock to holders of record on March 15, 2001 of its 9.00%
Series A Cumulative Redeemable Preferred Stock. On March 26, 2001, Realty also
paid a quarterly dividend at a rate of 9.00% per annum on the liquidation
preference of $25,000 per share to the holder of the 9.00% Series B Cumulative
Redeemable Convertible Preferred Stock.
8. OTHER EXPENSES
For the three months ended March 31, 2001 and 2000, other expenses
consisted of the following:
THREE MONTHS ENDED MARCH 31,
-------------------------------------
(IN THOUSANDS) 2001 2000
------------------ -----------------
Restructuring:
Employee severance and related employment costs................................. $ 545 $ 9,460
Accelerated amortization of unearned compensation............................... - 2,461
Other restructuring expense..................................................... - 159
------------------ -----------------
Restructuring and related expenses......................................... 545 12,080
Other:
Provision for loss on interest and other receivables............................ 9,475 284
------------------ -----------------
Other expenses............................................................. 9,475 284
------------------ -----------------
Total................................................................................ $ 10,020 $ 12,364
================== =================
RESTRUCTURING CHARGES
In June 2000, the Boards approved a plan to reduce the number of
employees, primarily in the financial and legal groups, of the Companies'
Needham, Massachusetts offices. For the three months ended March 31, 2001, the
Companies recorded $545,000 of other expense related to retention incentive
compensation earned by the remaining healthcare segment employees based on
achievement of asset sale goals and compliance with specified employment terms
in order to facilitate the sale of certain healthcare assets and closing of the
Needham office by December 2002.
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.
17
MEDITRUST CORPORATION AND SUBSIDIARIES
AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. OTHER EXPENSES, CONTINUED
OTHER
During the three months ended March 31, 2001 and 2000, the Companies
recorded provisions and other expenses of approximately $9,475,000 and $284,000,
respectively, on interest and other receivables management considers
uncollectable.
9. EARNINGS PER SHARE
THE COMPANIES' COMBINED CONSOLIDATED EARNINGS PER SHARE IS
COMPUTED AS FOLLOWS:
THREE MONTHS ENDED MARCH 31,
------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000
--------------- ----------------
(Loss) income from continuing operations before extraordinary item
and cumulative effect of change in accounting principle $(12,172) $ 10,282
Preferred stock dividends (4,500) (4,500)
--------------- ----------------
(Loss) income from continuing operations before extraordinary item
and cumulative effect of change in accounting principle (16,672) 5,782
Gain on early extinguishments of debt - 1,394
Cumulative effect on prior years (to December 31, 2000)
of a change in accounting principle 856 -
--------------- ----------------
Net (loss) income $ (15,816) $ 7,176
=============== ================
Weighted average outstanding shares of Paired Common Stock 142,958 141,230
Dilutive effect of stock options - -
--------------- ----------------
Dilutive potential paired common stock 142,958 141,230
=============== ================
EARNINGS PER SHARE
Assuming no dilution:
(Loss) income available to Common Shareholders before extraordinary
item and cumulative effect of a change in accounting principle $ (0.12) $ 0.04
Gain on early extinguishments of debt - 0.01
Cumulative effect on prior years (to December 31, 2000) of a change in
accounting principle 0.01 -
--------------- ----------------
Net (loss) income available to Common Shareholders $ (0.11) $ 0.05
=============== ================
Assuming dilution:
(Loss) income available to Common Shareholders before extraordinary
item and cumulative effect of a change in accounting principle $ (0.12) $ 0.04
Gain on early extinguishments of debt - 0.01
Cumulative effect on prior years (to December 31, 2000) of a change in
accounting principle 0.01 -
--------------- ----------------
Net (loss) income available to Common Shareholders $ (0.11) $ 0.05
=============== ================
Proforma amounts assuming the new accounting principle is applied
retroactively:
(Loss) income before extraordinary item $ (16,672) $ 6,669
Earnings per common share--assuming no dilution $ (0.12) $ 0.05
Earnings per common share--assuming dilution $ (0.12) $ 0.05
Net (loss) income $ (16,672) $ 8,063
Earnings per common share--assuming no dilution $ (0.12) $ 0.06
Earnings per common share--assuming dilution $ (0.12) $ 0.06
18
MEDITRUST CORPORATION AND SUBSIDIARIES
AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. EARNINGS PER SHARE, CONTINUED
Options to purchase 4,477,000 and 3,358,000 Paired Common Shares at
prices ranging from $4.03 to $32.77 were outstanding during the three months
ended March 31, 2001 and 2000, respectively, but were not included in the
computation of diluted EPS because the options' exercise price was greater than
the average market price of the Paired Common Shares or because the inclusion
would result in an antidilutive effect in periods where a loss was incurred. The
options, which expire on dates ranging from September 2004 to April 2010, were
still outstanding at March 31, 2001.
In addition, options to purchase 3,006,000 Paired Common Shares
(dilutive effect of 360,000 shares for the three months ended March 31, 2001) at
prices ranging from $1.81 to $3.31 were outstanding during the three months
ended March 31, 2001 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 three months ended March 31, 2001.
Convertible debentures outstanding for the three months ended March 31,
2001 and 2000 of 3,387,000 and 6,177,000 Paired Common Shares, respectively, are
not included in the computation of diluted EPS because the inclusion would
result in an antidilutive effect. In addition, convertible preferred stock for
the three months ended March 31, 2001 and 2000 of 2,680,000 Paired Common Shares
are not included in the computation of diluted EPS because the inclusion would
result in antidilution.
On January 1, 2001, the Companies applied the provisions of SFAS No.
133, which states that the changes in the fair value (i.e., gains or losses) of
a derivative depends on whether it has been designated and qualifies as part of
a hedging relationship and, if so, on the reason for holding it. It further
states that gain or loss on a derivative instrument not designated as a hedging
instrument shall be recognized currently in earnings. At March 31, 2001, the
interest rate swap was not designated as a hedging instrument and, therefore,
the change in fair value for the three months ended March 31, 2001 of $2,092,000
was recorded as a charge to interest expense. In prior periods, only
differentials in the swapped amounts were recorded as adjustments to interest
expense. The cumulative effect of applying SFAS No. 133 to periods prior to
December 31, 2000 increased income for the three month period ended March 31,
2001 by approximately $856,000 (approximately $0.01 per share) while the effect
of applying SFAS No. 133 to the three months ended March 31, 2000 would have
increased income before extraordinary item and net income by $887,000 and is
reflected in the pro forma amounts shown in the table illustrating the
computation of the Companies' combined consolidated earnings per share. The pro
forma amounts reflect retroactive application on interest expense.
MEDITRUST CORPORATION EARNINGS PER SHARE IS COMPUTED AS FOLLOWS:
THREE MONTHS ENDED MARCH 31,
----------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000
--------------- --------------
(Loss) income from continuing operations before extraordinary item and $ (1,477) $ 17,097
cumulative effect of change in accounting principle
Preferred stock dividends (4,500) (4,500)
--------------- --------------
(Loss) income from continuing operations before extraordinary item and (5,977) 12,597
cumulative effect of change in accounting principle
Gain on early extinguishments of debt - 1,394
Cumulative effect on prior years (to December 31, 2000)
of a change in accounting principle 856 -
--------------- --------------
Net (loss) income $ (5,121) $ 13,991
=============== ==============
Weighted average outstanding shares of Paired Common Stock 144,263 142,535
Dilutive effect of stock options - -
--------------- --------------
Dilutive potential Paired Common Stock 144,263 142,535
=============== ==============
EARNINGS PER SHARE
Assuming no dilution:
(Loss) income available to Common Shareholders before extraordinary
item and cumulative effect of a change in accounting principle $ (0.04) $ 0.09
Gain on early extinguishments of debt - 0.01
Cumulative effect on prior years (to December 31, 2000) of a change in
accounting principle 0.01 -
--------------- --------------
Net (loss) income available to Common Shareholders $ (0.03) $ 0.10
=============== ==============
19
MEDITRUST CORPORATION AND SUBSIDIARIES
AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. EARNINGS PER SHARE, CONTINUED
THREE MONTHS ENDED MARCH 31,
------------------------------------
Assuming dilution: 2001 2000
--------------- ----------------
(Loss) income available to Common Shareholders before extraordinary
item and cumulative effect of a change in accounting principle $ (0.04) $ 0.09
Gain on early extinguishments of debt - 0.01
Cumulative effect on prior years (to December 31, 2000) of a change in
Accounting principle 0.01 -
--------------- ----------------
Net (loss) income available to Common Shareholders $ (0.03) $ 0.10
=============== ================
Proforma amounts assuming the new accounting principle is applied
retroactively:
(Loss) income before extraordinary item $ (5,977) $ 13,484
Earnings per common share--assuming no dilution $ (0.04) $ 0.09
Earnings per common share--assuming dilution $ (0.04) $ 0.09
Net (loss) income $ (5,977) $ 14,878
Earnings per common share--assuming no dilution $ (0.04) $ 0.10
Earnings per common share--assuming dilution $ (0.04) $ 0.10
Options to purchase 3,833,000 and 2,093,000 Paired Common Shares at
prices ranging from $4.03 to $32.77 were outstanding during the three months
ended March 31, 2001 and 2000, respectively, but were not included in the
computation of diluted EPS because the options' exercise price was greater than
the average market price of the Paired Common Shares or because the inclusion
would result in an antidilutive effect in periods where a loss was incurred. The
options, which expire on dates ranging from September 2004 to April 2010, were
still outstanding at March 31, 2001.
In addition, options to purchase 458,000 Paired Common Shares (dilutive
effect of 11,000 shares for the three months ended March 31, 2001) priced at
$3.31 were outstanding during the three months ended March 31, 2001 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 three months ended March 31,
2001.
Convertible debentures outstanding for the three months ended March 31,
2001 and 2000 of 3,387,000 and 6,177,000 Paired Common Shares, respectively, are
not included in the computation of diluted EPS because the inclusion would
result in an antidilutive effect. In addition, convertible preferred stock for
the three months ended March 31, 2001 and 2000 of 2,680,000 Paired Common Shares
are not included in the computation of diluted EPS because the inclusion would
result in antidilution.
On January 1, 2001, the Companies applied the provisions of SFAS No. 133,
which states that the changes in the fair value (i.e., gains or losses) of a
derivative depends on whether it has been designated and qualifies as part of a
hedging relationship and, if so, on the reason for holding it. It further states
that gain or loss on a derivative instrument not designated as a hedging
instrument shall be recognized currently in earnings. At March 31, 2001, the
interest rate swap was not designated as a hedging instrument and, therefore,
the change in fair value for the three months ended March 31, 2001 of $2,092,000
was recorded as a charge to interest expense. In prior periods, only
differentials in the swapped amounts were recorded as adjustments to interest
expense. The cumulative effect of applying SFAS No. 133 to periods prior to
December 31, 2000 increased income for the three month period ended March 31,
2001 by approximately $856,000 (approximately $0.01 per share) while the effect
of applying SFAS No. 133 to the three months ended March 31, 2000 would have
increased income before extraordinary item and net income by $887,000 and is
reflected in the pro forma amounts shown in the table illustrating the
computation of the Meditrust Corporation consolidated earnings per share. The
pro forma amounts reflect retroactive application on interest expense.
20
MEDITRUST CORPORATION AND SUBSIDIARIES
AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. EARNINGS PER SHARE, CONTINUED
MEDITRUST OPERATING COMPANY EARNINGS PER SHARE IS COMPUTED AS FOLLOWS:
THREE MONTHS ENDED MARCH 31,
------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000
--------------- ----------------
Loss from continuing operations $ (10,695) $ (6,815)
Preferred stock dividends - -
--------------- ----------------
Loss from continuing operations available to Common Shareholders $ (10,695) $ (6,815)
=============== ================
Weighted average outstanding shares of Paired Common Stock 142,958 141,230
Dilutive effect of stock options - -
--------------- ----------------
Dilutive potential paired Common Stock 142,958 141,230
=============== ================
Earnings per share:
Basic $ (0.08) $ (0.05)
Diluted $ (0.08) $ (0.05)
Options to purchase 644,000 and 1,265,000 Paired Common Shares at
prices ranging from $5.63 to $16.06 were outstanding during the three months
ended March 31, 2001 and 2000, respectively, but were not included in the
computation of diluted EPS because the options' exercise price was greater than
the average market price of the Paired Common Shares or because the inclusion
would result in an antidilutive effect in periods where a loss was incurred. The
options, which expire on dates ranging from December 2008 to January 2010, were
still outstanding at March 31, 2001.
In addition, options to purchase 2,548,000 Paired Common Shares
(dilutive effect of 349,000 shares for the three months ended March 31, 2001) at
prices ranging from $1.81 to $3.31 were outstanding during the three months
ended March 31, 2001 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 three months ended March 31, 2001.
Convertible debentures outstanding for the three months ended March 31,
2001 and 2000 of 3,387,000 and 6,177,000 Paired Common Shares, respectively, are
not included in the computation of diluted EPS because the inclusion would
result in an antidilutive effect. In addition, convertible preferred stock for
the three months ended March 31, 2001 and 2000 of 2,680,000 Paired Common Shares
are not included in the computation of diluted EPS because the inclusion would
result in antidilution.
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 March 31, 2001. These shares affect the calculations of Realty's
net income per common share but are eliminated in the calculation of net income
per Paired Common Share for The Meditrust Companies.
10. TRANSACTIONS BETWEEN REALTY AND OPERATING COMPANY
Operating leases hotel facilities from Realty and its subsidiaries. The
hotel facility lease arrangements between Operating and Realty are for a five
year term (expiring July 2003), include base and additional rent provisions and
require Realty to assume costs attributable to property taxes and insurance.
In connection with certain acquisitions, Operating issued shares to
Realty to be paired with Realty shares. Also, Operating owns 1,305,000
unpaired common shares of Realty. Periodically, Realty and Operating issue
paired shares under the Share Award Plan.
Operating provides certain management services to Realty primarily
related to executive management, general tax preparation and consulting, legal,
accounting, and certain aspects of human resources. Realty compensates Operating
for direct costs of providing such services.
21
MEDITRUST CORPORATION AND SUBSIDIARIES
AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11. SEGMENT REPORTING
The Companies evaluate performance based on contribution from each
reportable segment. The Companies define contribution 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, franchise and income taxes and certain
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.
The following table presents information used by management by
reported segment. The Companies do not allocate interest expense, income
taxes or unusual items to segments.
THREE MONTHS ENDED MARCH 31,
------------------------------------------
(IN THOUSANDS) 2001 2000
-------------------- -------------------
Lodging:
Room revenue....................................................... $ 140,892 $ 138,491
Guest services and other........................................... 7,213 7,721
Operating expenses................................................. (71,381) (68,656)
General and administrative expenses................................ (8,287) (7,544)
Rental property operating costs.................................... (7,728) (7,125)
-------------------- -------------------
Lodging Contribution.................................................... 60,709 62,887
-------------------- -------------------
Healthcare:
Rental income...................................................... 27,194 31,995
Interest income.................................................... 9,263 31,890
General and administrative expenses................................ (2,797) (2,795)
Rental property operating costs.................................... (76) (518)
-------------------- -------------------
Healthcare Contribution................................................. 33,584 60,572
-------------------- -------------------
Other:(a)
Revenue............................................................ 4,891 3,535
Operating expense.................................................. (3,019) (1,970)
General and administrative expenses................................ (1,077) (892)
-------------------- -------------------
Other Contribution...................................................... 795 673
-------------------- -------------------
Combined Contribution................................................... 95,088 124,132
Reconciliation to Combined Consolidated Financial Statements:
Interest expense, net................................................... 34,936 55,236
Depreciation and amortization
Lodging............................................................ 33,711 30,101
Healthcare......................................................... 1,411 6,494
Other.............................................................. 178 144
Amortization of goodwill................................................ 5,686 5,699
Loss on sale of assets.................................................. 54 3,812
Provision for impairment on real estate assets, mortgages and notes
receivable .......................................................... 21,088 -
Other expenses.......................................................... 10,020 12,364
-------------------- -------------------
$ 107,084 $ 113,850
22
MEDITRUST CORPORATION AND SUBSIDIARIES
AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11. SEGMENT REPORTING, CONTINUED
THREE MONTHS ENDED MARCH 31,
------------------------------------------
2001 2000
-------------------- -------------------
(Loss) income before income taxes and extraordinary item................ $ (11,996) $ 10,282
Income tax expense ..................................................... 176 -
-------------------- -------------------
(Loss) income from before extraordinary item and (12,172) 10,282
cumulative effect of change in accounting principle...................
Gain on early extinguishments of debt................................... - 1,394
Cumulative effect of change in accounting principle..................... 856 -
-------------------- -------------------
Net (loss) income....................................................... (11,316) 11,676
Preferred stock dividends............................................... (4,500) (4,500)
-------------------- -------------------
Net (loss) income available to Paired Common Shareholders............... $ (15,816) $ 7,176
==================== ===================
(a) Other Contribution includes TeleMatrix, a provider of telephones, software
and equipment for the lodging industry.
12. SUBSEQUENT EVENTS
On April 3, 2001, Meditrust announced the transfer of its beneficial
ownership interest in the majority of its long term care skilled nursing
facilities to Care Realty, L.L.C. (the "Care Realty Transfer"). The Companies
received gross proceeds of $441 million consisting of $406 million in cash and
$35 million in subordinated indebtedness due April 2006. As of March 31, 2001,
the Companies had previously recorded impairment reserve of approximately $80
million related to these assets. The Companies transferred beneficial ownership
interest in certain healthcare properties and mortgages with a total net book
value of $436 million relating to 78 long term care facilities and one medical
office building operated by the following entities: 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.
Net proceeds from the Care Realty transfer have been applied towards
debt reduction. As a result, bank notes payable were reduced by $401 million.
After giving effect for the transfer, the Companies' remaining healthcare
portfolio has a net book value of $461 million at March 31, 2001, consisting of
$312 million of leased assets and $150 million of mortgages. The remaining 120
healthcare properties contributed revenues of approximately $15.0 million to
total healthcare segment revenues of $36.5 million for the quarter ended March
31, 2001.
The following unaudited pro forma schedules have been prepared assuming
that the Care Realty transfer was completed as of January 1, 2001 and 2000 and
give effect to the transaction and application of proceeds therefrom. The
unaudited pro forma earnings information has been prepared assuming the
transactions described above were completed at the beginning of the periods
indicated.
The pro forma adjustments are based upon available information and
contain assumptions that management believes are reasonable under the
circumstances. The pro forma schedules provided below are for informational
purposes only and do not purport to be indicative of the Companies' financial
condition or the results of operations that would actually have been obtained
had such transactions been completed for the periods or as of the dates
presented or that may be obtained in the future.
MARCH 31, DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000
------------------------ ------------------------
Real estate investments, net $ 2,891,894 $ 2,916,726
Total assets 3,636,209 3,685,159
Total liabilities 1,328,273 1,373,281
Total shareholders' equity 2,307,936 2,311,878
23
MEDITRUST CORPORATION AND SUBSIDIARIES
AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
12. SUBSEQUENT EVENTS, CONTINUED
THREE MONTHS ENDED YEAR ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA) MARCH 31, 2001 DECEMBER 31, 2000
----------------------- -----------------------
Revenues $ 170,643 $ 751,152
Expenses 192,509 1,115,719
Net loss (21,186) (363,793)
Loss per share
Assuming no dilution $ (0.18) $ (2.69)
Assuming dilution $ (0.18) $ (2.69)
PRO FORMA REMAINING PORTFOLIO BY TYPE AT MARCH 31, 2001
(IN THOUSANDS, EXCEPT NUMBER OF Gross Net Book # of % of # of # of
PROPERTIES AND PERCENTAGES) Investment Value Properties Portfolio Mortgages Properties Leases Leases
----------- ---------- ---------- ---------- ---------- ---------- ------ --------
LODGING PORTFOLIO:
Hotel $2,671,824 $2,430,414 299
HEALTHCARE PORTFOLIO:
Assisted Living 328,882 307,448 94 54% $ 35,723 3 $ 271,725 91
Long Term Care 128,459 120,334 15 21% 72,277 10 48,057 5
Acute Care Hospital 65,650 55,790 1 10% - - 55,790 1
Other Healthcare 51,142 49,466 6 9% 45,062 5 4,404 1
Medical Office Buildings 35,968 35,175 4 6% 26,212 3 8,963 1
----------- ---------- ---------- ---------- ---------- ---------- -------- --------
610,101 568,213 120 100% 179,274 21 388,939 99
Impairment Reserve - (106,733) (29,367) (77,366)
----------- ---------- ---------- ---------- ---------
610,101 461,480 120 $ 149,907 $ 311,573
----------- ---------- ---------- ========== =========
Total Real Estate Portfolio $3,281,925 $2,891,894 419
=========== ========== ==========
REMAINING OPERATORS IN CHAPTER 11 BANKRUPTCY (PRO FORMA AT MARCH 31, 2001)
(IN THOUSANDS, EXCEPT Three months ended
FOR NUMBER OF FACILITIES) Leases Mortgages March 31, 2001
--------------------------- --------------------------- -----------------------------
Total Rental Interest
Operator Date filed Facilities Facilities Net Assets Facilities Net Assets Income Income
- ----------------------------------------- --------------------------- --------------------------- -----------------------------
CareMatrix 11/9/00 4 1 $ 13,840 3 $ 35,523 $ 374 $ 860
Sun 10/14/99 1 1 10,762 - - 353 N/A
------------ --------------------------- --------------------------- -----------------------------
Total 5 2 $ 24,602 3 $ 35,523 $ 727 $ 860
============ =========================== =========================== =============================
24
MEDITRUST CORPORATION AND SUBSIDIARIES
AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
12. SUBSEQUENT EVENTS, CONTINUED
PRO FORMA PORTFOLIO BY OPERATOR AT MARCH 31, 2001
(IN THOUSANDS, EXCEPT NUMBER OF Gross Net Book # of % of # of # of
PROPERTIES AND PERCENTAGES) Investment Value Properties Portfolio Mortgages Properties Leases Leases
------------ ---------- ------------ ------------ ----------- ------------ -------- --------
LODGING:
La Quinta Companies $2,671,824 $2,430,414 299
HEALTHCARE PORTFOLIO:
Alterra 161,592 148,265 57 26% $ - - $ 148,265 57
Balanced Care Corporation 93,557 91,913 19 16% 36,635 7 55,278 12
Other Non-Public Operators 80,904 80,904 9 14% 80,904 9 - -
Tenet Healthcare/Iasis 65,650 55,790 1 10% - - 55,790 1
Other Public Operators 61,437 51,942 7 9% - - 51,942 7
CareMatrix Corporation 50,524 49,363 4 9% 35,523 3 13,840 1
Assisted Living Concepts 31,487 28,400 16 5% - - 28,400 16
ARV Assisted Living, Inc. 28,982 26,461 4 5% - - 26,461 4
Life Care Centers of America, Inc. 26,212 26,212 2 5% 26,212 2 - -
Paramount Real Estate Services 9,756 8,963 1 1% - - 8,963 1
------------ ---------- ------------ ------------ ----------- ------------ --------- --------
610,101 568,213 120 100% 179,274 21 388,939 99
Impairment Reserve (106,733) (29,367) (77,366)
------------ ---------- ------------ ----------- --------
610,101 461,480 120 $ 149,907 $ 311,573
------------ ---------- ------------ =========== ========
Total Real Estate Portfolio $3,281,925 $2,891,894 419
============ ========== ============
On April 13, 2001, Realty sold its investment in an additional
healthcare facility. Net proceeds of $1,889,000 from this asset sale have been
applied towards bank notes payable. The net book value after the valuation
reserve of this facility was $374,000. As a result of the transaction, Realty
will record a gain on the sale of the healthcare facility of $1,515,000 in the
second quarter of fiscal year 2001.
25
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CERTAIN MATTERS DISCUSSED HEREIN MAY CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS. THE MEDITRUST
COMPANIES (THE "COMPANIES"), CONSISTING OF MEDITRUST CORPORATION ("REALTY") AND
MEDITRUST OPERATING COMPANY ("OPERATING"), INTEND SUCH FORWARD-LOOKING
STATEMENTS TO BE COVERED BY THE SAFE HARBOR PROVISIONS FOR FORWARD-LOOKING
STATEMENTS, AND ARE INCLUDING THIS STATEMENT FOR PURPOSES OF COMPLYING WITH
THESE SAFE HARBOR PROVISIONS. ALTHOUGH THE COMPANIES BELIEVE THE FORWARD-LOOKING
STATEMENTS ARE BASED ON REASONABLE ASSUMPTIONS, THE COMPANIES CAN GIVE NO
ASSURANCE THAT THEIR EXPECTATIONS WILL BE ATTAINED. ACTUAL RESULTS AND THE
TIMING OF CERTAIN EVENTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN OR
CONTEMPLATED BY THE FORWARD-LOOKING STATEMENTS DUE TO A NUMBER OF FACTORS,
INCLUDING, WITHOUT LIMITATION, GENERAL ECONOMIC AND REAL ESTATE CONDITIONS, THE
CONDITIONS OF THE CAPITAL MARKETS IN GENERAL, THE 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-Q, THE ENACTMENT OF LEGISLATION FURTHER IMPACTING THE COMPANIES'
STATUS AS A PAIRED SHARE REAL ESTATE INVESTMENT TRUST ("REIT") OR REALTY'S
STATUS AS A REIT, THE FURTHER IMPLEMENTATION OF REGULATIONS GOVERNING PAYMENTS
TO, AS WELL AS THE FINANCIAL CONDITIONS OF OPERATORS OF, REALTY'S HEALTHCARE
RELATED ASSETS, INCLUDING THE FILING FOR PROTECTION UNDER THE US BANKRUPTCY CODE
BY ANY OPERATORS OF THE COMPANIES' HEALTHCARE ASSETS, THE IMPACT OF THE
PROTECTION OFFERED UNDER THE US BANKRUPTCY CODE FOR THOSE OPERATORS WHO HAVE
ALREADY FILED FOR SUCH PROTECTION AND OTHER RISKS DETAILED FROM TIME TO TIME IN
THE FILINGS OF REALTY AND OPERATING WITH THE SECURITIES AND EXCHANGE COMMISSION
("SEC"), INCLUDING, WITHOUT LIMITATION, THOSE RISKS DESCRIBED IN ITEM 7 OF THE
JOINT ANNUAL REPORT ON FORM 10-K ENTITLED "CERTAIN FACTORS YOU SHOULD CONSIDER"
BEGINNING ON PAGE 63 THEREOF.
OVERVIEW
The basis of presentation includes Management's Discussion and Analysis
of Financial Condition and Results of Operations for the combined and separate
registrants under the Securities and Exchange Act of 1934, as amended.
Management of the Companies believe 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., a lodging
company (the "La Quinta Merger"), 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 Racetrack) and $280 million of healthcare properties,
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 between
January 1, 2000 and March 31, 2001 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 March 31, 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. As of March 31, 2001, the Companies had previously recorded impairment
reserve of approximately $80 million related to these assets. The Companies
transferred beneficial ownership interest in certain healthcare
26
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 effect to the
above mentioned transaction, the net book value of the Companies' remaining
investment in healthcare facilities would have been $461 million at March 31,
2001.
Also, consistent with the Companies' plan to focus on the lodging
division, the Companies made certain changes in its executive management team
and have transitioned the financial and legal functions of its healthcare
operations from the Companies' Needham, Massachusetts office and intend to
consolidate the remaining healthcare operations to 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 2000 the Companies
appointed David L. Rea as Chief Financial Officer and 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 Alan 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 in the growth of
fee-based income through implementation of a franchising program. On April 10,
2001, the first La Quinta franchise hotel opened for business under this new
program. As of April 23, 2001 the Companies had approved an additional 31
franchise contracts.
THE MEDITRUST COMPANIES - COMBINED RESULTS OF OPERATIONS
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 three months ended March 31, 2001, the
Companies reported a net loss available to paired common shareholders of
$15,816,000 or $0.11 per diluted common share compared to net income of
$7,176,000 or $0.05 per diluted common share for the three months ended March
31, 2000.
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 three months ended March 31, 2001 and 2000. The Companies consider
contributions from each operating segment to include revenue from each business,
less operating expenses, rental property operating expenses and 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
THREE MONTHS ENDED MARCH 31,
------------------------------------
(IN THOUSANDS) 2001 2000
------------------ ----------------
REVENUE:
Lodging $ 148,105 $ 146,212
Healthcare 36,457 63,885
Other 4,891 3,535
------------------ ----------------
Total revenue 189,453 213,632
------------------ ----------------
OPERATING EXPENSES:
Lodging 87,396 83,325
Healthcare 2,873 3,313
Other 4,096 2,862
------------------ ----------------
Total operating expenses 94,365 89,500
------------------ ----------------
CONTRIBUTIONS:
Lodging, net 60,709 62,887
Healthcare, net 33,584 60,572
Other 795 673
------------------ ----------------
Total contributions $ 95,088 $ 124,132
================== ================
27
The combined contribution from operating segments for the three months
ended March 31, 2001 was $95,088,000, compared to $124,132,000 for the three
months ended March 31, 2000. This represents a decrease of $29,044,000 or 23%.
The decline in the combined contribution is primarily the result of the sale of
healthcare assets. The contribution is comprised of revenues of $189,453,000 and
$213,632,000, offset by operating expenses of $94,365,000 and $89,500,000 for
the three months ended March 31, 2001 and 2000, respectively.
Lodging provided a contribution of $60,709,000 for the three months
ended March 31, 2001, a decrease of $2,178,000 or 3.5% from the same period in
2000. The lodging segment revenues were comprised of revenues of $148,105,000
and $146,212,000 offset by operating expenses of $87,396,000 and $83,325,000 for
the three months ended March 31, 2001 and 2000, respectively. The decrease in
the lodging contribution was primarily due to increases in hotel operating
expenses (partially offset by an increase in occupancy resulting in revenue
increases), as more fully described below in management's discussion of the
results of Operating.
The following table summarizes statistical lodging data for the three
months ended March 31, 2001 and 2000:
2001 2000
---------------- -----------------
Number of Hotels In Operation 299 301
Number of Hotels Under Construction 3 1
Occupancy Percentage 64.4% 61.1%
ADR (1) $ 63.19 $ 64.33
RevPAR (2) $ 40.67 $ 39.33
Available Rooms (3) 3,489 3,552
Comparable Hotels (4) 299 299
Occupancy Percentage 64.4% 61.2%
ADR (1) $ 63.19 $ 64.44
RevPAR (2) $ 40.67 $ 39.43
Available Rooms (3) 3,489 3,528
(1) Represents average daily rate
(2) Represents revenue per available room
(3) Available room night count in thousands
(4) Represents hotels open for more than one year
Hotel operating revenues are generally measured as a function of
average daily rate ("ADR") and occupancy. Revenue per available room ("RevPAR"),
which is the product of occupancy percentage and ADR, increased 3.4% (or 3.1%
for comparable hotels) to $40.67 in the first quarter of 2001 from $39.33 in the
first quarter of 2000. The occupancy percentage increased 3.3 percentage points
to 64.4% in the first three months of 2001 from 61.1% for the same period in
2000. The ADR decreased to $63.19 in the first quarter of 2001 from $64.33 in
the first quarter of 2000, a decrease of $1.14 or 1.8%. The increase in RevPAR
resulted from an increase in occupancy primarily attributed to recent
promotional efforts and changes in pricing strategy. An increase in direct
expenses for the three month period ended March 31, 2001 compared to the three
month period ended March 31, 2000 included the impact of unusually high energy
costs partially offset by decreases in credit card discounts and repairs and
maintenance expense. Despite increases in occupancy levels, direct hotel labor
costs were held to approximately 2000 levels due to new policies, practices and
efficiencies. Additionally, corporate overhead expense for the three month
period ended March 31, 2001 increased $857,000 primarily due to expenses related
to the transitioning of certain information systems services to a third-party
provider and due to franchise start-up costs incurred during the quarter.
Healthcare provided a contribution of $33,584,000 in the first three
months of 2001, a decrease of $26,988,000 or 4.5% from the prior year's first
three months. 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 $36,457,000 and
$63,885,000 and operating expenses of $2,873,000 and $3,313,000 for the three
months ended March 31, 2001 and 2000, respectively.
28
The following table summarizes the healthcare portfolio by type of facility as
of March 31, 2001 and December 31, 2000:
MARCH 31, 2001 DECEMBER 31, 2000
----------------------------------- -----------------------------------
Type of Facility FACILITIES BEDS/UNITS FACILITIES BEDS/UNITS
---------------------------------------------- ----------------- ---------------- ----------------- -----------------
Assisted Living 94 4,457 94 4,457
Long-Term Care 93 11,604 93 11,604
Medical Office Buildings 5 - 5 -
Acute Care Hospital 1 492 1 492
Other Healthcare 6 625 6 625
----------------- ---------------- ----------------- -----------------
199 17,178 199 17,178
================= ================ ================= =================
The Companies had a remaining net investment of $219,923,000 and
$222,571,000 in the form of mortgages outstanding to operators of 36 of the
facilities listed above as of March 31, 2001 and December 31, 2000,
respectively. The Companies had a remaining net investment of $671,665,000 and
$681,714,000 in the form of leases with operators of 163 of the facilities
listed above at March 31, 2001 and December 31, 2000, 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
$495,000, and included decreases in rental property operating expenses of
$442,000 and decreases in general & administrative expenses of $53,000. 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 $795,000 for the three months ended March 31,
2001, an increase of 18.1% from the prior year's first three months. This
contribution was comprised of revenues of $4,891,000 and $3,535,000 and expenses
of $4,096,000 and $2,862,000 for the three month periods ended March 31, 2001
and 2000, respectively. TeleMatrix expenses include operating expenses of
$3,019,000 and $1,970,000 and general and administrative expenses of $1,077,000
and $892,000 for the three months ended March 31, 2001 and 2000, respectively.
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 11 "Segment Reporting" of the combined and consolidated statements.
INTEREST EXPENSE
For the three months ended March 31, 2001, interest expense was
$34,936,000, compared to $55,236,000 for the three months ended March 31, 2000.
The $20,300,000 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.
29
REAL ESTATE INVESTMENTS, DEPRECIATION, ASSET SALES, AND PROVISION FOR
IMPAIRMENT OF REAL ESTATE ASSETS, MORTGAGES AND NOTES RECEIVABLE
As of March 31, 2001 and 2000, the Companies had net investments in
real estate as summarized in the table below:
(IN THOUSANDS) THREE MONTHS ENDED MARCH 31,
-----------------------------------
INVESTMENT IN REAL ESTATE ASSETS, NET 2001 2000
----------------- ---------------
LODGING
Lodging assets net book value, beginning of period $ 2,448,391 $ 2,522,153
Funding of capital improvements 12,736 4,947
Net book value of assets sold and other adjustments (626) (3,007)
Depreciation expense and loss on early retirement (30,087) (22,966)
----------------- ---------------
TOTAL INVESTMENT IN LODGING ASSETS, NET 2,430,414 2,501,127
----------------- ---------------
HEALTHCARE
Mortgage assets net book value, beginning of period 222,571 1,059,920
Principal payments (750) (2,286)
Construction loan funding - 161
Partial principal prepayments - 363
Provisions for loss on real estate mortgages (12,425) -
and notes receivable
Net book value of mortgages repaid - (16,539)
Increase in real estate mortgages net of participation (3) -
reduction
Other adjustments to mortgages 10,530 57
----------------- ---------------
Mortgage assets net book value, end of period 219,923 1,041,676
----------------- ---------------
Sale/lease-back assets net book value, beginning of period 681,714 1,090,586
Construction funding - 2,238
Depreciation expense (1,386) (6,435)
Provisions for loss on assets held for sale (7,589) -
Provisions for loss on assets held for use (1,074) -
Net book value of real estate assets sold - (237,539)
Other adjustments to real estate investments - (1,882)
----------------- ---------------
Sale/lease-back assets net book value, end of period 671,665 846,968
----------------- ---------------
TOTAL INVESTMENT IN HEALTHCARE REAL ESTATE ASSETS, NET 891,588 1,888,644
----------------- ---------------
TOTAL REAL ESTATE INVESTMENT, NET BOOK VALUE $3,322,002 $4,389,771
================= ===============
DEPRECIATION AND AMORTIZATION
Depreciation and amortization for the three months ended March 31, 2001
and 2000 were $40,986,000 and $42,438,000, respectively. The decrease of
$1,452,000 was primarily the result of the sale of healthcare properties and
certain healthcare and certain lodging properties being classified as held for
sale.
ASSET SALES
During the three months ended March 31, 2001, the Companies realized
losses of $54,000 on the sale of equity securities and the sale of one lodging
restaurant facility compared to losses on asset sales of $3,812,000 recorded
during the three months ended March 31, 2000.
30
PROVISION FOR IMPAIRMENT OF REAL ESTATE ASSETS, MORTGAGES AND NOTES RECEIVABLE
During the three months ended March 31, 2001, the Companies recorded a
provision for impairment of real estate assets, mortgages and notes receivable
of $21,088,000. The Companies recorded a provision for loss on assets held for
sale of $7,589,000 and a provision of $1,074,000 on real estate assets held for
use for the three months ended March 31, 2001. During the three months ended
March 31, 2001, the Companies recorded a provision for loss related to the
mortgage portfolio of $12,425,000 (of which $10,530,000 was related to working
capital and other notes receivables classified as fees, interest and other
receivables).
OTHER EXPENSES
In June 2000, the Companies' Boards of Directors approved a plan to
reduce the number of employees, primarily in the financial and legal groups, of
the Companies' Needham, Massachusetts offices by December 2002. For the three
months ended March 31, 2001, the Companies recorded $545,000 of other expense
related to retention incentive compensation earned by the remaining healthcare
segment employees based on achievement of specified employment terms in order to
facilitate the sale of certain healthcare assets and closing of the Needham
office by December 2002. In addition, during the three months ended March 31,
2001, the Companies recorded provisions and other expenses of approximately
$9,475,000 on interest receivable and other receivables management considers
uncollectable.
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. The Companies recorded provisions
and other expenses of approximately $284,000 on other receivables.
EXTRAORDINARY ITEM
During the three months ended March 31, 2000, the Companies retired
$44,800,000 of debt at a discount prior to its maturity date and, as part of
certain asset sale transactions, repaid secured debt totaling $14,936,000. As a
result of these early repayments of debt, a net gain of $1,394,000 was realized
and is reflected as an extraordinary item.
CHANGE IN ACCOUNTING PRINCIPLE
On January 1, 2001, the Companies applied the provisions of SFAS No.
133, which states that if the derivative is a hedge, depending on the nature of
the hedge, changes in the fair value of the derivative will either be offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. It further states that gains or
losses on a derivative instrument not designated as a hedging instrument shall
be recognized currently in earnings. At March 31, 2001, the interest rate swap
was not designated as a hedging instrument and, therefore, $1,236,000 was
recorded as a charge to earnings during the three months ended March 31, 2001
comprised of an increase in interest expense of approximately $2,092,000 and a
partially offsetting entry to reflect the cumulative effect of a change in
accounting principle (through December 31, 2000) of $856,000.
31
REALTY - RESULTS OF OPERATIONS
Realty reported a net loss available to Common Paired Shareholders of
$5,121,000 or $0.03 per diluted common share for the three months ended March
31, 2001, compared to net income of $13,991,000 or $0.10 per diluted common
share for the three months ended March 31, 2000.
REVENUES AND EXPENSES
Revenue for the three months ended March 31, 2001 was $116,522,000,
compared to $140,533,000 for the three months ended March 31, 2000, a decrease
of $24,013,000. The revenue decrease was primarily attributable to a decrease in
interest revenue of $22,596,000. This decrease primarily resulted from mortgage
repayments over the last year.
For the three months ended March 31, 2001, total recurring expenses
were $86,661,000, compared to $107,260,000 for the three months ended March 31,
2000, a decrease of $20,599,000. This decrease was primarily attributable to a
decrease in interest expense of $20,268,000 due to reductions of debt
outstanding resulting from application of proceeds from various asset sales and
mortgage repayments over the past year.
ASSET SALES
During the three months ended March 31, 2001, Realty realized losses of
$54,000 on the sale of equity securities and the sale of one lodging restaurant
facility compared to losses on asset sales of $3,812,000 recorded during the
three months ended March 31, 2000. Provisions of $49,445,000 and $58,795,000 had
previously been taken related to the asset sales completed in the three months
ended March 31, 2001 and 2000, respectively.
PROVISION FOR IMPAIRMENT OF REAL ESTATE ASSETS, MORTGAGES AND NOTES RECEIVABLE
During the three months ended March 31, 2001, Realty classified certain
assets as held for sale based on management having the authority and intent of
entering into commitments for sale transactions expected to close in the next
twelve months. Based on estimated net sale proceeds, Realty recorded a provision
for loss on assets held for sale of $7,589,000 during the three months ended
March 31, 2001. During the three months ended March 31, 2001, Realty recorded a
provision for real estate mortgages and notes receivable of $12,425,000 (of
which $10,530,000 related to working capital and other notes receivables
classified as fees, interest and other receivables). In addition, during the
three months ended March 31, 2001, Realty recorded an impairment provision of
$1,074,000 on real estate assets held for use where current facts, circumstances
and analysis indicate that the assets might be impaired.
OTHER EXPENSES
For the three months ended March 31, 2001, the Realty recorded $545,000
of other expense related to retention incentive compensation earned by the
remaining healthcare segment employees based on achievement of specified
employment terms in order to facilitate the sale of certain healthcare assets
and the closing of the Needham office by December 2002. In addition, during the
three months ended March 31, 2001, the Companies recorded provisions and other
expenses of approximately $9,475,000 on interest receivable and other
receivables management considers uncollectable.
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. Realty also recorded provisions and
other expenses of approximately $284,000 on other receivables.
EXTRAORDINARY ITEM
During the three months ended March 31, 2000, the Companies retired
$44,800,000 of debt at a discount prior to its maturity date and, as part of
certain asset sale transactions, repaid secured debt totaling $14,936,000. As a
result of these early repayments of debt, a net gain of $1,394,000 was realized
and is reflected as an extraordinary item.
CHANGE IN ACCOUNTING PRINCIPLE
On January 1, 2001, Realty applied the provisions of SFAS No. 133,
which states that if the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of the derivative will either be offset against
the change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. It further states that gains or losses on a
derivative instrument not designated as a hedging instrument shall be
32
recognized currently in earnings. At March 31, 2001, the interest rate swap was
not designated as a hedging instrument and, therefore, $1,236,000 was recorded
as a charge to earnings during the three months ended March 31, 2001 comprised
of an increase in interest expense of approximately $2,092,000 and a partially
offsetting entry to reflect the cumulative effect of a change in accounting
principle (through December 31, 2000) of $856,000.
OPERATING - RESULTS OF OPERATIONS
For the three months ended March 31, 2001, Operating incurred a net
loss available to common paired shareholders of $10,695,000 compared to
$6,815,000 for the three months ended March 31, 2000. The net loss per common
share for three months ended March 31, 2001 was $0.08 compared to $0.05 for the
three months ended March 31, 2000. The net loss per common share amount
increased primarily as a result of increases in operating expenses partially
offset by an increase in total revenue for the three months ended March 31, 2001
when compared to the same period in fiscal year 2000.
REVENUES AND EXPENSES
Hotel revenues for the three months ended March 31, 2001 were
$150,045,000, compared to $147,046,000 for the three months ended March 31,
2000, an increase of $2,999,000. Approximately $140,892,000 or 95% of hotel
revenues were derived from room rentals. Hotel operating revenues generally are
measured as a function of the ADR and occupancy. The ADR decreased to $63.19
during three months ended March 31, 2001 from $64.33 during the first three
months of 2000, a decrease of $1.14 or 1.8%. Occupancy increased 3.3 percentage
points to 64.4% in the first three months of 2001 from 61.1% for the first three
months of 2000. Revenue per available room ("RevPAR"), which is the product of
occupancy percentage and ADR, increased 3.4% (or 3.1% for comparable hotels) to
$40.67 in the first quarter of 2001 from $39.33 in the first quarter of 2000.
The increase in RevPAR is due to the increase in occupancy attributable to
recent promotional efforts and changes in pricing strategy offset by a decrease
in ADR. TeleMatrix sales are included in hotel revenues and increased $1,356,000
to $4,891,000 for the three month period ending March 31, 2000.
Total recurring expenses for the three months ended March 31, 2001
were $160,746,000 compared to $153,898,000 for the same period in 2000, an
increase of $6,848,000. The increase in recurring expenses is primarily due
to increases in hotel operating expenses, general and administrative expenses
and rent to Realty. Hotel operating expenses increased $3,647,000 during the
three months ended March 31, 2001 over the hotel operating expenses in the
first quarter of 2000. The increase was primarily due to an $1,827,000
increase in utility and energy cost over the same period in 2000 and
increases in corporate overhead related to the transition of certain
information systems services to a third-party provider and franchise start-up
costs incurred during the quarter. The increases were partially offset by
decreases in credit card discount and repairs and maintenance expense. Direct
hotel labor costs were kept at approximately 2000 levels despite an increase
in occupancy due to new policies, procedures and efficiencies. TeleMatrix
costs of sales increased $1,015,000 to $2,744,000 for the three months ended
March 31, 2001 due to increases in sales activity in business and residential
product lines in the first quarter of 2001.
Operating experienced an increase in rent to Meditrust Corporation
during the three months ended March 31, 2001 compared to the three months ended
March 31, 2000. The $2,688,000 increase from $68,880,000 for the three months
ended March 31, 2000 to $71,568,000 for the three months ended March 31, 2001
was primarily due to an annual increase of $2,190,000 in the rate Realty charges
Operating based on the Consumer Price Index.
33
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 Inns and 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. At March 31, 2001, approximately $486,000,000 of
the Companies' debt obligations were 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 March
31, 2001, the Companies had $400,000,000 of interest rate swaps outstanding,
maturing in July 2001, in which the Companies pay a fixed rate of 5.7% to the
counterparty and receive LIBOR from the counterparty. Accordingly, at March 31,
2001, the Companies have $86,000,000 of 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 also is relevant to Operating.
CASH FLOWS FROM OPERATING ACTIVITIES
The principal source of cash used to fund future operating expenses and
recurring capital expenditures for the Companies, Realty and Operating will be
generated from cash flows provided by operating activities. 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 healthcare related assets. As part of
the Five Point Plan, the Companies and Realty may sell additional healthcare
related assets to meet their debt 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. The Companies and Realty obtain short-term
financing through the use of bank lines of credit, which may be replaced with
long-term financing as appropriate. From time to time, the Companies and Realty
utilize interest rate swaps to attempt to hedge interest rate volatility. It is
the Companies' and Realty's objective to match 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.
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 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
34
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 from $1,000,000,000 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 allowance of an optional
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.
During the three months ended March 31, 2001, Realty repaid $7,737,000
on the Tranche D term loan and borrowed $95,000,000 on the Tranche A revolving
line of credit. The resulting balance of bank notes payable was $486,176,000
(net of unamortized debt issuance costs of $1,087,000) at March 31, 2001.
Realty has approximately $75,000,000 of notes payable maturing in July
2001 at approximately the same time as the remaining balance of $392,000,000 on
the Tranche D term loan and the outstanding balance of $95,000,000 on the
revolving credit commitment, with a maximum capacity of $400,000,000, mature.
Realty intends to use cash flows from operations, proceeds from asset sales
under the Five Point Plan and debt refinancing to fund the repayment of debt
obligations as they come due. The Companies are pursuing the refinancing of
amounts due under Realty's senior credit facility, which the Companies believe
may be facilitated by the continued sale of healthcare assets.
The following is a summary of the Companies' future debt maturities as
of March 31, 2001:
(IN MILLIONS)
NOTES CONVERTIBLE BANK BONDS AND
YEAR PAYABLE DEBENTURES NOTES MORTGAGES TOTAL
--------------------------------------- ----------- ---------------- ------------ ---------------- ----------
2001 $ 123 $ - $ 487 $ 14 $ 624
2002 36 54 - 2 92
2003 205 (1) - - 2 207
2004 250 (2) - - 2 252
2005 116 - - - 116
2006 and thereafter 287 - - 14 301
----------- ---------------- ------------ ---------------- ----------
Total debt............................ 1,017 54 487 34 1,592
Unamortized debt issuance costs....... (3) - (1) - (4)
----------- ---------------- ------------ ---------------- ----------
Debt, net of unamortized
debt issuance costs................... $ 1,014 $ 54 $ 486 $ 34 $ 1,588
=========== ================ ============ ================ ==========
(1) Assumes that $175 million of the 7.82% Notes due in 2026 are put to the
Companies
(2) Assumes that $150 million of the 7.114% Notes due in 2011 are put
to the Companies
At March 31, 2001, the Companies' gross real estate investments totaled
approximately $3,904,985,000 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 6 other healthcare facilities.
35
The Companies had shareholders' equity of $2,307,936,000 and debt
constituted 41% of the Companies' total capitalization as of March 31, 2001. At
March 31, 2001, Realty had shareholders' equity of $2,361,271,000 and Operating
had a shareholders' deficit of $15,503,000.
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.
On April 3, 2001, Meditrust announced the transfer of its beneficial
ownership interest in the majority of its long term care skilled nursing
facilities to Care Realty, L.L.C. 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 transfer have been applied
towards debt reduction. As a result, bank notes payable were reduced by $401
million.
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 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
the 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") 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.
36
INFORMATION REGARDING OPERATORS OF HEALTHCARE ASSETS
As of March 31, 2001, the healthcare portfolio comprised approximately
27% of the net book value of the Companies' total real estate investments before
impairment reserve. Sun and Alterra currently operate approximately 14% of the
total real estate investments, or 43% of the healthcare portfolio before the
impairment reserve. A schedule of significant healthcare operators follows:
PORTFOLIO BY OPERATOR
(IN THOUSANDS, EXCEPT NUMBER OF Gross Net Book # of % of # of # of
PROPERTIES AND PERCENTAGES) Investment Value Properties Portfolio Mortgages Properties Leases Leases
----------- ---------- ---------- ----------- ----------- ------------ ---------- --------
LODGING:
La Quinta Companies $2,671,824 $2,430,414 299
HEALTHCARE PORTFOLIO:
Sun Healthcare Group, Inc. 393,356 311,131 39 29% $ 30,390 4 $ 280,741 35
Alterra 161,592 148,265 57 14% - - 148,265 57
Other Non-Public Operators 108,256 102,306 11 9% 80,904 9 21,402 2
Harborside 103,253 92,318 18 9% 15,868 4 76,450 14
Balanced Care Corporation 93,557 91,913 19 9% 36,634 7 55,279 12
Tenet Healthcare/Iasis 65,650 55,790 1 5% - - 55,790 1
CareMatrix Corporation 50,523 49,363 4 5% 35,523 3 13,840 1
Other Public Operators 49,501 43,130 7 4% 7,064 1 36,066 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 24,438 24,438 2 2% 24,438 2 - -
Paramount Real Estate Services 9,756 8,963 1 1% - - 8,963 1
----------- ---------- ---------- ----------- ----------- ------------ ---------- --------
1,233,161 1,079,308 199 100% 275,458 36 803,850 163
Impairment Reserve (187,720) (55,535) (132,185)
----------- ---------- ---------- ----------- ----------
1,233,161 891,588 199 $ 219,923 $ 671,665
----------- ---------- ---------- =========== ==========
Total Real Estate Portfolio $3,904,985 $3,322,002 498
=========== ========== ==========
At March 31, 2001, companies in the assisted living sector of the
healthcare industry approximate 9% of the net book value of the Companies' total
real estate investments (and approximately 29% of the healthcare portfolio
before the impairment reserve), while companies in the long term care sector
approximate 19% of the net book value of Realty's total real estate investments
(and approximately 58% of the healthcare portfolio before the impairment
reserve).
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 caused
their growth plans to decelerate and may have a negative effect on their
operating cash flows and their access to capital.
On April 3, 2001, Meditrust announced the transfer of its beneficial
ownership interest in the majority of its long term care skilled nursing
facilities to Care Realty, L.L.C. The Companies received gross proceeds of $441
million consisting of $406 million in cash and $35 million in subordinated
indebtedness due April 2006. After giving effect for the transfer, Meditrust's
remaining
37
healthcare portfolio has a net book value of $461 million at March 31, 2001
consisting of $312 million of leased assets and $150 million of mortgages net of
a impairment reserve of $29 million and $77 million, respectively.
OPERATORS IN BANKRUPTCY
As of March 31, 2001, the Companies had exposure to five operators who
have filed for bankruptcy 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 by lease/mortgage and the lease/mortgage income of each
of the five operators which are in Chapter 11 proceedings:
(IN THOUSANDS, EXCEPT FOR NUMBER OF Three months ended
FACILITIES) Leases Mortgages March 31, 2001
--------------------------- --------------------------- -----------------------------
Total Rental Interest
Operator Date filed Facilities Facilities Net Assets Facilities Net Assets Income Income
- ----------------------------------------- --------------------------- --------------------------- -----------------------------
Sun (5) 10/14/99 39 35 $ 280,919 4 $ 30,390 $ 11,572 $ - (1)
Mariner 1/18/00 2 1 6,789 1 7,064 244 - (2)
Integrated 2/2/00 10 10 37,066 - - 2,152 N/A
Genesis 6/26/00 8 4 15,127 4 18,425 389 858 (3)
CareMatrix 11/9/00 4 1 13,840 3 35,523 374 860 (4)
------------ --------------------------- --------------------------- -----------------------------
Totals 63 51 $ 353,741 12 $ 91,402 $ 14,731 $ 1,718
============ =========================== =========================== =============================
(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
$177,000.
On April 3, 2001, Meditrust announced the transfer of its beneficial
ownership interest in the majority of its long term care skilled nursing
facilities to Care Realty, L.L.C. After giving effect for the transfer, the
Companies have only five facilities with a net book value of $60 million
attributable to two operators in bankruptcy, down from $445 million at March 31,
2001.
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 the current
carrying value based upon estimates of fair value at such time.
COMBINED FUNDS FROM OPERATIONS
Combined Funds from Operations ("FFO") of the Companies was $41,660,000
and $47,702,000 for the three months ended March 31, 2001 and 2000,
respectively. Effective January 1, 2000 the National Association of Real Estate
Investment Trusts ("NAREIT") adopted a new definition of FFO.
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, and
extraordinary items.
38
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 loss and income available to common
shareholders to FFO illustrates the difference between the two measures of
operating performance for the three months ended March 31, 2001 and 2000.
Certain reconciling items include amounts reclassified from discontinued
operations and, accordingly, do not agree to revenue and expense captions in the
Companies' financial statements.
THREE MONTHS ENDED MARCH 31,
----------------------------------------
(IN THOUSANDS) 2001 2000
------------------ -------------------
Net (loss) income available to common shareholders $ (15,816) $ 7,176
Depreciation of real estate and intangible amortization 37,159 38,108
Other capital gains and losses 54 3,812
Other expenses (a) 20,943 -
Income tax expense 176 -
Extraordinary item - (1,394)
Cumulative effect of change in accounting principle (856) -
------------------ -------------------
Funds from Operations $ 41,660 $ 47,702
================== ===================
(a) Other expenses include provisions for assets and mortgages of
$21,088,000 (of which $10,530,000 relates to working capital
and other notes receivables) offset by recoveries on prior
impairments of $145,000 for the three months ended March 31,
2001.
Weighted average paired common shares outstanding:
Basic 142,958 141,230
Diluted 142,958 141,230
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, and 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
39
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 five
percent 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 five
percent 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 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) SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," which replaced SFAS No. 125 of the same name, was issued. 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 comparative
financial statements are not required. The Companies are currently not affected
by the Statement's requirements.
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.
40
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no changes in the qualitative or quantitative market
risk of the Companies since the prior reporting period.
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Employment Agreement dated as of Incorporated by reference to Exhibit
January 1, 1999 by and between 10.3 to Joint Quarterly Report on
Meditrust Corporation and Michael Form 10-Q for the Quarter ended March
F. Bushee 31, 1999
10.2 First Amendment to Employment Included in this filing
Agreement dated as of January
24, 2000 by and between Meditrust
Corporation and Michael F. Bushee
10.3 Employment Letter Agreement dated Included in this filing
as of June 30, 2000 by and between
Meditrust Corporation and Michael
F. Bushee
(b) Reports on Form 8-K
The Meditrust Companies filed a joint current report on Form 8-K for
event dated April 17, 2001.
41
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MEDITRUST CORPORATION
/s/ David L. Rea
----------------
David L. Rea
Chief Financial Officer and Treasurer
-
MEDITRUST OPERATING COMPANY
/s/ David L. Rea
----------------
David L. Rea
Chief Financial Officer and Treasurer
42