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 September 30, 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
LA QUINTA PROPERTIES, INC. LA QUINTA CORPORATION
(Exact name of registrant as specified in its charter) (Exact name of registrant as specified in it 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 (Address of principal executive offices, including
zip 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 September 30, 2001, were:
La Quinta Properties, Inc.: 144,361,878
La Quinta Corporation: 143,056,501
THE LA QUINTA COMPANIES
FORM 10-Q
INDEX
PAGE
Part I. Financial Information
Item 1. Financial Statements
The La Quinta Companies
Combined Consolidated Balance Sheets as of September 30, 2001 (unaudited)
and December 31, 2000............................................................................ 3
Combined Consolidated Statements of Operations for the three and nine month periods
ended September 30, 2001 (unaudited) and 2000 (unaudited)........................................ 4
Combined Consolidated Statements of Cash Flows for the nine
month periods ended September 30, 2001 (unaudited) and 2000 (unaudited).......................... 5
La Quinta Properties, Inc.
Consolidated Balance Sheets as of September 30, 2001 (unaudited)
and December 31, 2000............................................................................ 6
Consolidated Statements of Operations for the three and nine month periods ended
September 30, 2001 (unaudited) and 2000 (unaudited).............................................. 7
Consolidated Statements of Cash Flows for the nine month periods ended
September 30, 2001 (unaudited) and 2000 (unaudited).............................................. 8
La Quinta Corporation
Consolidated Balance Sheets as of September 30, 2001 (unaudited)
and December 31, 2000............................................................................ 9
Consolidated Statements of Operations for the three and nine month periods
ended September 30, 2001 (unaudited) and 2000 (unaudited)........................................ 10
Consolidated Statements of Cash Flows for the nine month periods ended
September 30, 2001 (unaudited) and 2000 (unaudited).............................................. 11
Notes to Combined Consolidated Financial Statements (unaudited).................................... 12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................................ 28
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................. 47
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K........................................................... 47
Signatures......................................................................................... 48
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE LA QUINTA COMPANIES
COMBINED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000
------------- ------------
(unaudited)
ASSETS:
Real estate investments, net ................................................... $ 2,707,398 $ 3,352,676
Cash and cash equivalents....................................................... 144,575 38,993
Fees, interest and other receivables............................................ 65,250 73,476
Goodwill, net................................................................... 441,281 457,789
Other assets, net............................................................... 171,951 176,103
----------- -----------
Total assets........................................................... $ 3,530,455 $ 4,099,037
=========== ===========
LIABILITIES:
Indebtedness:
Notes payable............................................................... $ 928,297 $ 1,017,244
Convertible debentures...................................................... -- 137,028
Bank notes payable.......................................................... 147,510 400,000
Bonds and mortgages payable................................................. 20,531 42,077
----------- -----------
Total indebtedness........................................................ 1,096,338 1,596,349
----------- -----------
Accounts payable, accrued expenses and other liabilities........................ 153,349 179,877
----------- -----------
Total liabilities......................................................... 1,249,687 1,776,226
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
La Quinta Properties, Inc. Preferred Stock, $0.10 par value; 6,000 shares
authorized; 701 shares issued and outstanding at September 30, 2001
and December 31, 2000................................................. 70 70
Paired Common Stock, $0.20 combined par value; 500,000 shares
authorized; 143,057 and 142,905 paired shares issued and outstanding
at September 30, 2001 and December 31, 2000, respectively............. 28,611 28,580
Additional paid-in-capital.................................................. 3,659,452 3,659,339
Unearned compensation....................................................... (3,246) (4,911)
Accumulated other comprehensive income...................................... (1,050) (985)
Distributions in excess of net income....................................... (1,403,069) (1,359,282)
----------- -----------
Total shareholders' equity............................................... 2,280,768 2,322,811
----------- -----------
Total liabilities and shareholders' equity........................... $ 3,530,455 $ 4,099,037
=========== ===========
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.
3
THE LA QUINTA COMPANIES
COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000 2001 2000
---------------------- ----------------------
REVENUE:
Lodging.............................................................. $146,097 $ 158,877 $457,787 $ 468,834
Rental .............................................................. 8,476 27,299 44,866 87,697
Interest............................................................. 6,391 22,752 23,327 83,622
---------------------- ----------------------
160,964 208,928 525,980 640,153
---------------------- ----------------------
EXPENSES:
Direct lodging operations............................................ 68,164 74,549 201,116 206,989
Other lodging expenses............................................... 15,800 15,455 49,076 45,504
Interest............................................................. 22,170 45,786 81,796 152,443
Depreciation and amortization........................................ 29,122 42,500 88,366 113,329
Amortization of goodwill ............................................ 5,296 5,689 16,508 17,076
General and administrative........................................... 10,951 15,260 36,075 42,634
(Gain) loss on sale of assets and mortgage repayments................ (7,657) 126,362 (9,948) 130,725
Impairment of real estate assets, mortgages and notes receivable..... 21,268 91,306 81,876 152,432
Provision for loss on equity securities.............................. -- -- -- 39,076
Other ............................................................... 802 9,825 10,319 30,945
---------------------- ----------------------
165,916 426,732 555,184 931,153
---------------------- ----------------------
LOSS BEFORE INCOME TAXES, EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE................... (4,952) (217,804) (29,204) (291,000)
Income tax expense.................................................. 1,632 -- 2,025 --
---------------------- ----------------------
LOSS BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE..................................... (6,584) (217,804) (31,229) (291,000)
EXTRAORDINARY ITEM:
Gain on early extinguishments of debt................................ 86 -- 86 1,403
Cumulative effect of change in accounting principle.................. -- -- 856 --
---------------------- ----------------------
NET LOSS................................................................... (6,498) (217,804) (30,287) (289,597)
Preferred stock dividends............................................. (4,500) (4,500) (13,500) (13,500)
---------------------- ----------------------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS.................................. $(10,998) $(222,304) $(43,787) $(303,097)
====================== ======================
BASIC LOSS PER PAIRED COMMON SHARE:
Loss available to Common Shareholders
before extraordinary item and cumulative effect of change in
accounting principle............................................... $ (0.08) $ (1.56) $ (0.31) $ (2.15)
Gain on early extinguishments of debt................................ -- -- -- 0.01
Cumulative effect of change in accounting principle.................. -- -- 0.01 --
---------------------- ----------------------
Net loss............................................................. $ (0.08) $ (1.56) $ (0.30) $ (2.14)
====================== ======================
DILUTED LOSS PER PAIRED COMMON SHARE:
Loss available to Common Shareholders
before extraordinary item and cumulative effect of change in
accounting principle............................................. $ (0.08) $ (1.56) $ (0.31) $ (2.15)
Gain on early extinguishments of debt................................ -- -- -- 0.01
Cumulative effect of change in accounting principle.................. -- -- 0.01 --
---------------------- ----------------------
Net loss............................................................. $ (0.08) $ (1.56) $ (0.30) $ (2.14)
====================== ======================
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
THE LA QUINTA COMPANIES
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
(IN THOUSANDS) 2001 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................................ $ (30,287) $(289,597)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation of real estate........................................................ 76,687 98,124
Goodwill amortization.............................................................. 16,508 17,076
(Gain) loss on sale of assets...................................................... (9,948) 130,725
Shares issued for compensation..................................................... 306 269
Gain on early extinguishments of debt.............................................. (86) (2,183)
Other depreciation, amortization and other items, net ............................. 17,377 22,576
Other non-cash items............................................................... 93,944 209,782
--------- ---------
Cash Flows from Operating Activities Available for Distribution......................... 164,501 186,772
Net change in other assets and liabilities......................................... (49,517) (29,599)
--------- ---------
Net cash provided by operating activities..................................... 114,984 157,173
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on bank notes payable.......................................... 245,000 252,000
Repayment of bank notes payable......................................................... (497,490) (967,359)
Repayment of notes payable.............................................................. (88,740) (130,408)
Repayment of convertible debentures..................................................... (137,028) (48,115)
Debt issuance costs..................................................................... (9,447) --
Principal payments on bonds and mortgages payable....................................... (18,432) (59,120)
Dividends/distributions to shareholders................................................. (13,500) (13,500)
--------- ---------
Net cash used in financing activities......................................... (519,637) (966,502)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate capital expenditures and development funding ............................... (55,848) (28,463)
Investment in real estate mortgages and development funding ............................ -- (161)
Prepayment proceeds and principal payments received on real estate mortgages............ 30,540 668,085
Proceeds from sale of assets............................................................ 527,806 229,386
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........ -- (10,137)
--------- ---------
Net cash provided by investing activities...................................... 510,235 832,831
--------- ---------
Net increase in cash and cash equivalents...................................... 105,582 23,502
Cash and cash equivalents at:
Beginning of period..................................................................... 38,993 7,220
--------- ---------
End of period........................................................................... $ 144,575 $ 30,722
========= =========
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.
5
LA QUINTA PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000
------------- -------------
ASSETS: (unaudited)
Real estate investments, net.............................................. $ 2,678,811 $ 3,333,168
Cash and cash equivalents................................................. 144,266 38,991
Fees, interest and other receivables...................................... 46,764 56,829
Goodwill, net............................................................. 413,209 429,134
Rent and royalties receivable from La Quinta Corporation.................. 170,575 63,516
Due from La Quinta Corporation............................................ -- 27,679
Other assets, net......................................................... 121,151 123,165
----------- -----------
Total assets.................................................. $ 3,574,776 $ 4,072,482
=========== ===========
LIABILITIES:
Indebtedness:
Notes payable......................................................... $ 928,297 $ 1,017,244
Convertible debentures................................................ -- 137,028
Bank notes payable.................................................... 147,510 400,000
Bonds and mortgages payable........................................... 20,531 42,077
----------- -----------
Total indebtedness............................................... 1,096,338 1,596,349
----------- -----------
Due to La Quinta Corporation.............................................. 23,508 --
Accounts payable, accrued expenses and other liabilities.................. 88,310 110,545
----------- -----------
Total liabilities................................................... 1,208,156 1,706,894
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Stock, $0.10 par value; 6,000 shares authorized; 701 shares
issued and outstanding at September 30, 2001 and
December 31, 2000................................................... 70 70
Common Stock, $0.10 par value; 500,000 shares authorized; 144,362
and 144,210 shares issued and outstanding at September 30, 2001
and December 31, 2000, respectively ................................ 14,436 14,421
Additional paid-in-capital............................................ 3,592,438 3,592,306
Unearned compensation................................................. (1,572) (2,526)
Accumulated other comprehensive income................................ (65) -
Distributions in excess of net income................................. (1,238,687) (1,238,683)
----------- -----------
Total shareholders' equity.......................................... 2,366,620 2,365,588
----------- -----------
Total liabilities and shareholders' equity........................ $ 3,574,776 $ 4,072,482
=========== ===========
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
LA QUINTA PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ----------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000 2001 2000
--------------------- ----------------------
REVENUE:
Lodging........................................................ $ 2,272 $ 2,875 $ 7,777 $ 8,549
Rental ........................................................ 8,476 27,299 44,866 87,697
Interest....................................................... 6,456 22,793 23,504 83,721
Rent from La Quinta Corporation................................ 71,815 74,291 221,147 219,812
Interest from La Quinta Corporation............................ -- 160 -- 444
Royalty from La Quinta Corporation............................. 5,387 5,574 16,381 15,717
--------------------- ----------------------
94,406 132,992 313,675 415,940
--------------------- ----------------------
EXPENSES:
Direct lodging operations...................................... 496 883 1,900 2,375
Other lodging expenses......................................... 7,605 7,979 23,940 23,280
Interest....................................................... 22,192 45,684 81,813 152,243
Depreciation and amortization.................................. 26,696 37,528 80,335 101,910
Amortization of goodwill ...................................... 5,102 5,495 15,925 16,493
General and administrative..................................... 3,512 5,675 12,936 16,054
(Gain) loss on sale of assets and mortgage repayments.......... (7,657) 126,369 (9,948) 131,702
Impairment of real estate assets, mortgages and
notes receivable............................................ 21,268 91,306 81,876 152,432
Provision for loss on equity securities........................ -- -- -- 39,076
Other ......................................................... 802 9,825 10,319 30,945
--------------------- ----------------------
80,016 330,744 299,096 666,510
--------------------- ----------------------
INCOME (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE............... 14,390 (197,752) 14,579 (250,570)
Income tax expense............................................. 1,632 -- 2,025 --
--------------------- ----------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE............................ 12,758 (197,752) 12,554 (250,570)
EXTRAORDINARY ITEM:
Gain on early extinguishments of debt.......................... 86 -- 86 1,403
Cumulative effect of change in accounting principle............ -- -- 856 --
--------------------- ----------------------
NET INCOME (LOSS).................................................... 12,844 (197,752) 13,496 (249,167)
Preferred stock dividends...................................... (4,500) (4,500) (13,500) (13,500)
--------------------- ----------------------
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS................... $ 8,344 $(202,252) $ (4) $(262,667)
===================== ======================
BASIC LOSS PER PAIRED COMMON SHARE:
Income (loss) available to Common Shareholders
before extraordinary item and cumulative
effect of change in accounting principle................... $ 0.06 $ (1.41) $ (0.01) $ (1.85)
Gain on early extinguishments of debt.......................... -- - -- 0.01
Cumulative effect of change in accounting principle............ -- - 0.01 --
--------------------- ----------------------
Net income (loss).............................................. $ 0.06 $ (1.41) $ -- $ (1.84)
===================== ======================
DILUTED LOSS PER PAIRED COMMON SHARE:
Income (loss) available to Common Shareholders
before extraordinary item and cumulative
effect of change in accounting principle................... $ 0.06 $ (1.41) $ (0.01) $ (1.85)
Gain on early extinguishments of debt.......................... -- -- -- 0.01
Cumulative effect of change in accounting
principle.................................................. -- -- 0.01 --
--------------------- ----------------------
Net income (loss).............................................. $ 0.06 $ (1.41) $ -- $ (1.84)
===================== ======================
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
LA QUINTA PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
(IN THOUSANDS) 2001 2000
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................... $ 13,496 $(249,167)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation of real estate..................................................... 76,037 97,613
Goodwill amortization........................................................... 15,925 16,493
(Gain) loss on sale of assets................................................... (9,948) 131,702
Gain on early extinguishments of debt........................................... (86) (2,183)
Shares issued for compensation.................................................. 306 269
Other depreciation, amortization and other items, net........................... 9,010 11,668
Other non-cash items............................................................ 93,944 209,782
--------- ---------
Cash Flows from Operating Activities Available for Distribution...................... 198,684 216,177
Net change in other assets and liabilities ..................................... (84,396) (57,673)
--------- ---------
Net cash provided by operating activities.................................. 114,288 158,504
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on bank notes payable....................................... 245,000 252,000
Repayment of bank notes payable...................................................... (497,490) (967,359)
Repayment of notes payable........................................................... (88,740) (130,408)
Repayment of convertible debentures.................................................. (137,028) (48,115)
Debt issuance costs.................................................................. (9,447) --
Principal payments on bonds and mortgages payable.................................... (18,432) (59,120)
Dividends/distributions to shareholders.............................................. (13,500) (13,500)
--------- ---------
Net cash used in financing activities............................................ (519,637) (966,502)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate capital expenditures and development funding ............................ (55,459) (28,381)
Investment in real estate mortgages and development funding.......................... -- (161)
Prepayment proceeds and principal payments received on real estate mortgages......... 30,540 668,085
Payment of costs related to prior year asset sales................................... -- (25,879)
Proceeds from sale of assets......................................................... 527,806 229,386
Proceeds from sale of securities..................................................... 7,737 --
Working capital and notes receivable advances, net of repayments and
collections.................................................................... -- (10,137)
--------- ---------
Net cash provided by investing activities........................................ 510,624 832,913
--------- ---------
Net increase in cash and cash equivalents........................................ 105,275 24,915
Cash and cash equivalents at:
Beginning of period.................................................................. 38,991 5,779
--------- ---------
End of period........................................................................ $ 144,266 $ 30,694
========= =========
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.
8
LA QUINTA CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000
------------- ------------
ASSETS:
(unaudited)
Cash and cash equivalents.................................................. $ 309 $ 2
Fees, interest and other receivables....................................... 18,486 16,647
Due from La Quinta Properties, Inc......................................... 23,508 --
Other current assets, net.................................................. 9,652 9,613
--------- ---------
Total current assets.................................................. 51,955 26,262
Investment in Common Stock of La Quinta Properties, Inc.................... 37,581 37,581
Goodwill, net.............................................................. 28,072 28,655
Property, plant and equipment, net of accumulated depreciation
of $16,188 and $9,339, respectively.................................... 69,020 56,125
Other non-current assets................................................... 5,791 6,959
--------- ---------
Total assets................................................ $ 192,419 $ 155,582
========= =========
LIABILITIES:
Accounts payable........................................................... $ 27,343 $ 28,876
Accrued payroll and employee benefits...................................... 24,157 30,767
Accrued expenses and other current liabilities............................. 7,067 6,516
Rent and royalty payable to La Quinta Properties, Inc...................... 170,575 63,516
Due to La Quinta Properties, Inc........................................... -- 27,679
--------- ---------
Total current liabilities............................................ 229,142 157,354
Other non-current liabilities.............................................. 11,297 3,173
--------- ---------
Total liabilities.................................................... 240,439 160,527
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT:
Common Stock, $0.10 par value; 500,000 shares authorized; 143,057 and
142,905 shares issued and outstanding at September 30, 2001 and
December 31, 2000, respectively ...................................... 14,306 14,290
Additional paid-in-capital................................................. 104,715 104,734
Unearned compensation...................................................... (1,674) (2,385)
Accumulated other comprehensive income..................................... (985) (985)
Accumulated deficit........................................................ (164,382) (120,599)
--------- ---------
Total shareholders' deficit........................................ (48,020) (4,945)
--------- ---------
Total liabilities and shareholders' deficit.................... $ 192,419 $ 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.
9
LA QUINTA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000 2001 2000
------------------------- ------------------------
REVENUE:
Lodging .............................................. $143,884 $156,100 $450,267 $460,599
Interest ............................................. 7 14 27 76
-------- -------- -------- --------
143,891 156,114 450,294 460,675
-------- -------- -------- --------
EXPENSES:
Direct lodging operations ........................... 67,668 73,667 199,216 204,614
Other lodging expenses .............................. 8,244 7,551 25,339 22,466
Depreciation and amortization ....................... 2,426 4,972 8,031 11,419
Amortization of goodwill ............................ 194 194 583 583
Interest and other .................................. 50 157 187 375
Interest to La Quinta Properties, Inc ............... -- 160 -- 444
General and administrative .......................... 7,449 9,607 23,193 26,652
Royalty to La Quinta Properties, Inc ................ 5,387 5,574 16,381 15,717
Rent to La Quinta Properties, Inc. .................. 71,815 74,291 221,147 219,812
Gain on sale of assets .............................. -- (7) -- (977)
-------- -------- -------- --------
163,233 176,166 494,077 501,105
-------- -------- -------- --------
NET LOSS ............................................... $(19,342) $(20,052) $(43,783) $(40,430)
======== ======== ======== ========
LOSS PER COMMON SHARE:
Basic ................................................ $ (0.14) $ (0.14) $ (0.31) $ (0.29)
Diluted .............................................. $ (0.14) $ (0.14) $ (0.31) $ (0.29)
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements contained within the Companies' Form 10-K for the year
ended December 31, 2000, are an integral part of these financial statements.
10
LA QUINTA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
2001 2000
---------- --------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................................ $(43,783) $(40,430)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Goodwill amortization...................................................... 583 583
Gain on sale of assets..................................................... -- (977)
Other depreciation and amortization........................................ 9,017 11,509
Net change in other assets and liabilities................................. 34,879 27,984
-------- --------
Net cash provided by (used in) operating activities................... 696 (1,331)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of real estate and development funding.............................. (389) (82)
-------- --------
Net cash used in investing activities...................................... (389) (82)
-------- --------
Net increase (decrease) in cash and cash equivalents....................... 307 (1,413)
Cash and cash equivalents at:
Beginning of period............................................................. 2 1,441
-------- --------
End of period................................................................... $ 309 $ 28
======== ========
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.
11
LA QUINTA PROPERTIES, INC. AND SUBSIDIARIES
AND LA QUINTA CORPORATION 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 accounting principles generally
accepted in the United States, 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").
Effective June 20, 2001, The Meditrust Companies were renamed The La
Quinta Companies. Meditrust Corporation was renamed La Quinta Properties, Inc.
and Meditrust Operating Company was renamed La Quinta Corporation. The renamed
La Quinta Companies continue to trade on the New York Stock Exchange as a
paired-share REIT under the new ticker symbol "LQI".
In the opinion of La Quinta Properties, Inc. and subsidiaries
("Realty") and La Quinta Corporation and subsidiaries ("Operating", and
collectively with Realty, the "Companies" or "The La Quinta 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 September 30, 2001, the results of
operations for the three and nine month periods ended September 30, 2001 and
2000, and cash flows for the nine month periods ended September 30, 2001 and
2000. The results of operations for the three and nine month periods ended
September 30, 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 La Quinta 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 La Quinta Companies. All significant intercompany and
inter-entity balances and transactions have been eliminated in combination. The
La Quinta 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 used interest rate swap agreements, a derivative
instrument, to manage exposure to interest rate risk. Statement of Financial
Accounting Standards (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
and that depending on the nature of the hedge, changes in the fair value of the
derivative be offset against the change in fair value of the hedged assets or
liabilities 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 is immediately recognized in earnings and any
derivatives that are not hedges are adjusted to fair value through income. The
Companies did not obtain hedge accounting for derivatives; therefore, the
Companies' derivatives were carried at fair value on the balance sheet and
changes in the fair value were recognized in current period earnings.
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
a loss for the change in fair value for the three months ended March 31, 2001
recorded 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.
12
LA QUINTA PROPERTIES, INC. AND SUBSIDIARIES
AND LA QUINTA CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
On June 27, 2001, the Companies settled its interest rate swap
agreement. The Companies settled the interest rate swap at its fair value of
approximately $566,000, decreasing interest expense by $670,000 to record the
difference between the recorded liability and fair market value on the date of
settlement.
As of September 30, 2001, the Companies have no outstanding
derivatives.
NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("FASB")
approved Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." The Statement
requires that long-lived assets to be disposed of other than by sale be
considered held and used until they are disposed of. The Statement also requires
that long-lived assets to be disposed of by sale be accounted for under the
requirements of SFAS No. 121 which requires that such assets be measured at the
lower of carrying amounts or fair value less cost to sell and to cease
depreciation (amortization). SFAS No. 144 describes a probability-weighted cash
flow estimation approach to deal with situations in which alternative courses of
action to recover the carrying amount of a long-lived asset are under
consideration or a range is estimated for the amount of possible future cash
flows. As a result, discontinued operations are no longer measured on a net
realizable basis, and future operating losses are no longer recognized before
they occur. Additionally, goodwill is removed from the scope of SFAS No. 144
and, as a result, is no longer required to be allocated to long-lived assets to
be tested for impairment. The Statement is effective for financial statements
issued for fiscal years beginning after December 15, 2001, and interim periods
within those fiscal years. The Companies will adopt SFAS No. 144 on January 1,
2002 and have not yet determined what the impact of SFAS No. 144 will be on the
Companies' results of operations and financial position.
On August 15, 2001, the FASB issued SFAS No. 143, "Accounting for
Asset Retirement Obligations". SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying
amount of the long-lived asset. SFAS No. 143 will be effective for financial
statements issued for fiscal years beginning after June 15, 2002. An entity
shall recognize the cumulative effect of adoption of SFAS No. 143 as a change
in accounting principal. The Companies have not determined whether SFAS No.
143 will have an impact on the Companies' results of operations and financial
position.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations",
and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires
that the purchase method of accounting be used for all business combinations
initiated after September 30, 2001. SFAS No. 141 became effective for all
business combinations initiated after June 30, 2001 and SFAS No. 142 will be
effective for fiscal years beginning after December 15, 2001 and will require 1)
intangible assets (as defined in SFAS No. 141) to be reclassified into goodwill,
2) the ceasing of amortization of goodwill, and 3) the testing of goodwill for
impairment at transition and on an annual basis (more frequently if the
occurrence of an event or circumstance indicates an impairment). The Companies
will adopt SFAS No. 142 on January 1, 2002. The Companies are currently
evaluating the impact of the goodwill assessment on the Companies' results of
operations and financial position.
In January 2001, the Emerging Issues Task Force of the Financial
Accounting Standards Board (the "EITF") reached a consensus ("the Consensus") on
a portion of the EITF Issue No. 00-22 "Accounting for `Points' and Certain Other
Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products
or Services to Be Delivered in the Future." The Consensus addresses the
recognition of a cash rebate or refund obligation as a reduction of revenue
based on a systematic and rational allocation of cost. In January 2001,
Operating implemented a customer retention program which provides a cash rebate.
In accordance with the consensus, Operating classified such cash rebates or
refunds as a reduction of revenues. In addition, the EITF will address incentive
or loyalty programs such as the "La Quinta Returns Club." Operating has
historically reported the cost that it would refund the hotel for the free night
as offsetting components of marketing expense and lodging revenues and reflected
a zero economic impact of the "free night stay." In 2001, Operating has netted
these revenues and costs resulting in no financial statement impact of the
transaction. The 2000 comparable marketing expense and lodging revenue
components have been reclassified to conform with the fiscal year 2001 financial
statement presentation. The Companies will re-evaluate the impact of the final
Consensus of the EITF on the Companies' accrual of the "minimal" value of a
night's stay award and will make any necessary adjustments and revision to
accounting policy upon implementation of EITF issue No. 00-22.
RECLASSIFICATION
Certain reclassifications have been made to the 2000 presentation to
conform to the 2001 presentation.
13
LA QUINTA PROPERTIES, INC. AND SUBSIDIARIES
AND LA QUINTA CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. SUPPLEMENTAL CASH FLOW INFORMATION
Details of other non-cash items:
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2001 2000
-------- --------
(IN THOUSANDS)
Impairment of assets held for sale.................................................. $ 38,745 $ 24,853
Impairment of assets held for use................................................... 20,534 56,147
Impairment of real estate mortgages and notes receivable............................ 22,597 71,432
Provision for loss on equity securities............................................. -- 39,076
Straight line rent.................................................................. -- (966)
Provision for loss on interest and other receivables ............................... 9,933 4,577
Reserve for restructuring expenses.................................................. 2,260 10,812
Accelerated amortization of unearned compensation................................... -- 3,851
Other............................................................................... (125) --
-------- --------
Total other non-cash items.......................................................... $ 93,944 $209,782
======== ========
Details of interest paid and non-cash investing and financing transactions:
THE LA QUINTA COMPANIES:
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
(IN THOUSANDS) 2001 2000
-------- --------
Interest paid during the period...................................................... $108,349 $176,757
Interest capitalized during the period............................................... 942 676
Non-cash investing and financing transactions:
Non-cash proceeds of asset sale (see Note 3).................................... 29,872 53,900
Accumulated depreciation and impairment on assets sold.......................... 252,033 95,885
Increase in real estate mortgages net of participation reduction................ 7 150
Allowance for loan losses on prepaid mortgages.................................. -- 46,149
Change in market value of equity securities .................................... (65) (49,062)
LA QUINTA PROPERTIES, INC.:
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2001 2000
-------- --------
(IN THOUSANDS)
Interest paid during the period...................................................... $108,294 $176,426
Interest capitalized during the period............................................... 870 516
Non-cash investing and financing transactions:
Non-cash proceeds of asset sale (see Note 3).................................... 29,872 53,900
Accumulated depreciation and impairment on assets sold.......................... 252,033 95,885
Increase in real estate mortgages net of participation reduction................ 7 150
Allowance for loan losses on prepaid mortgages.................................. -- 46,149
Change in market value of equity securities .................................... (65) (49,062)
LA QUINTA CORPORATION:
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
(IN THOUSANDS) 2001 2000
--------- --------
Interest paid during the period...................................................... $ 55 $ 331
Interest capitalized during the period............................................... 72 160
14
LA QUINTA PROPERTIES, INC. AND SUBSIDIARIES
AND LA QUINTA CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. REAL ESTATE INVESTMENTS
The following is a summary of the Companies' real estate investments:
SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS) 2001 2000
------------- ------------
Land............................................................................. $ 377,490 $ 393,083
Buildings and improvements, net of accumulated depreciation of $293,665 2,056,821
and $240,356 and impairments of $41,432 and $26,751......................... 2,231,267
Real estate mortgages and notes receivable, net of impairments 83,130
of $24,172 and $53,640...................................................... 222,571
Assets held for sale, net of accumulated depreciation of $26,394 and 189,957
$130,167 and impairments of $57,558 and $99,902............................. 505,755
---------- ----------
$2,707,398 $3,352,676
========== ==========
During the nine months ended September 30, 2001, the Companies incurred
$56,931,000 in capital improvements related to the lodging segment.
Additionally, during the nine months ended September 30, 2001, lodging real
estate had depreciation expense and write-offs of $72,743,000. Total impairments
on the Companies' investment in lodging real estate recorded for the nine months
ended September 30, 2001 were $29,230,000 for impairments on assets held for
sale (includes a $3,197,000 impairment on assets classified as held for use at
June 30, 2001 and reclassified as held for sale at September 30, 2001). As of
September 30, 2001 and December 31, 2000, the total impairment balance on the
investment in lodging facilities was $24,670,000 and $3,131,000, respectively.
During the nine month period ended September 30, 2001, the Companies sold four
hotels and other lodging related properties with net book values of $9,430,000
(net of impairments of $7,690,000). Net proceeds on these transactions totaled
$9,946,000.
The Companies received $132,432,000 in principal payments on mortgages
receivable during the nine month period ended September 30, 2001 comprised of:
o $1,681,000 in monthly principal payments;
o $28,859,000 in partial principal prepayments; and
o $101,892,000 in principal payments on mortgages with a net book
value of $101,611,000 (net of impairment balances of $30,965,000
previously recorded by the Companies) received as a result of real
estate asset transactions entered into by the Companies pursuant to
the Five Point Plan.
These transactions resulted in a net gain of $3,196,000.
Also during the nine month period ended September 30, 2001, the
Companies sold 81 healthcare facilities comprised of real estate and other
assets with net book values of $411,765,000 (net of previously recorded
impairments of $79,251,000). Net proceeds on these transactions totaled
$416,856,000 and consisted of:
o $386,984,000 in cash;
o $2,990,000 of assumed debt; and
o $29,872,000 of subordinated indebtedness due in 2006, net of a
discount of $5,128,000 (on the difference between the 9.0% stated
rate of interest and the 13.0% imputed interest rate).
These transactions resulted in a net gain of $5,093,000.
Total impairments of healthcare real estate assets, mortgages and notes
receivable recorded during the nine months ended September 30, 2001 and 2000
were $52,646,000 and $152,432,000, respectively. As of September 30, 2001 and
December 31, 2000, the total impairment balance was $98,492,000 and
$177,162,000, respectively.
15
LA QUINTA PROPERTIES, INC. AND SUBSIDIARIES
AND LA QUINTA CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. REAL ESTATE INVESTMENTS, CONTINUED
The following is the rollforward of the net book value of investments
in real estate during the first nine months of 2001:
(IN THOUSANDS)
Net book value of investments in real estate assets at December 31, 2000........... $3,352,676
Lodging
Capital improvements...................................................... 56,931
Depreciation expense and write-offs....................................... (72,743)
Impairment on assets held for sale........................................ (29,230)
Net book value of assets sold and other adjustments....................... (15,214)
Healthcare
Mortgages:
Principal payments........................................................ (1,681)
Net book value of partial principal prepayments........................... (25,937)
Net book value of mortgages prepaid....................................... (101,611)
Impairment on real estate mortgages and notes receivable.................. (22,597)
Increase in real estate mortgages net of participation reduction.......... 7
Other adjustments......................................................... 12,378
Sale/lease-back assets:
Depreciation expense...................................................... (3,945)
Impairment on assets held for sale........................................ (9,515)
Impairment on assets held for use......................................... (20,534)
Net book value of real estate assets sold................................. (411,587)
----------
Net book value of investments in real estate assets at September 30, 2001.......... $2,707,398
==========
The change in impairment balances for real estate investments for the
nine months ended September 30, 2001 are summarized as follows:
Real Estate
Mortgages and
Buildings Notes Assets Held
(IN THOUSANDS) and Improvements Receivable for Sale Total
---------------- ------------- ----------- -----
Lodging impairments at December 31, 2000............. $ 1,835 $ -- $ 1,296 $ 3,131
Healthcare impairments at December 31, 2000.......... 24,916 53,640 98,606 177,162
------- -------- -------- ---------
Total impairment balance at December 31, 2000........ 26,751 53,640 99,902 180,293
Impairments recorded................................. 20,534 22,597 38,745 81,876
Transfer to held for sale............................ (4,727) -- 4,727 --
Assets sold.......................................... (1,126) (39,687) (85,816) (126,629)
Other adjustments.................................... -- (12,378) -- (12,378)
------- -------- -------- ---------
Lodging impairments at September 30, 2001............ -- -- 24,670 24,670
Healthcare impairments at September 30, 2001......... 41,432 24,172 32,888 98,492
------- -------- -------- ---------
$41,432 $ 24,172 $ 57,558 $ 123,162
======= ======== ======== =========
IMPAIRMENT OF REAL ESTATE ASSETS
At September 30, 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 an impairment on assets held for sale of $38,745,000 and $24,853,000
respectively, for the nine month periods ended September 30, 2001 and 2000. In
addition, during the nine month period ended September 30, 2001 and 2000, the
Companies recorded an impairment of $20,534,000 and $56,147,000 on real estate
assets held for use where current facts, circumstances and analysis indicate
that the assets might be impaired.
16
LA QUINTA PROPERTIES, INC. AND SUBSIDIARIES
AND LA QUINTA CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. REAL ESTATE INVESTMENTS, CONTINUED
As of September 30, 2001 and December 31, 2000, the Companies have an
impairment balance of $57,558,000 and $99,902,000, respectively, related to
assets held for sale and $41,432,000 and $26,751,000, respectively, pertaining
to properties held for use.
IMPAIRMENT OF MORTGAGES AND NOTES RECEIVABLE
During the nine months ended September 30, 2001, the Companies recorded
an impairment related to the mortgage portfolio of $22,597,000 (of which
$12,378,000 related to working capital and other notes receivables classified as
fees, interest and other receivables). During the nine month period ended
September 30, 2000, the Companies recorded an impairment related to the mortgage
portfolio of $71,432,000. As of September 30, 2001 and December 31, 2000, the
Companies have $24,172,000 and $53,640,000, respectively, in loan impairments
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 the 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 September 30, 2001:
PORTFOLIO BY TYPE # of
(IN THOUSANDS, EXCEPT NUMBER OF Gross Net Book Operating % of # of # of
PROPERTIES AND PERCENTAGES) Investment Value (2) Properties Portfolio Mortgages Properties Leases Leases
----------- ----------- ----------- ---------- ------------- ----------- -------- -------
LODGING PORTFOLIO:
Hotel (1) $ 2,700,071 $ 2,388,135 293
HEALTHCARE PORTFOLIO:
Assisted Living 289,543 269,768 82 65% $ 35,533 3 $ 234,235 79
Acute Care Hospital 65,650 55,123 1 13% - - 55,123 1
Long Term Care 48,854 47,258 4 11% 35,354 3 11,904 1
Medical Office Buildings and
Other Healthcare 46,501 45,606 4 11% 36,415 3 9,191 1
----------- ---------- ----- ---- -------- -- --------- --
450,548 417,755 91 100% 107,302 9 310,453 82
Impairment (98,492) (24,172) (74,320)
----------- ---------- ----- -------- ---------
450,548 319,263 91 $ 83,130 $ 236,133
----------- ---------- ----- ======== =========
Total Real Estate Portfolio $ 3,150,619 $ 2,707,398 384
=========== =========== =====
(1) The lodging portfolio net book value is net of the impairment balance
of $24,670,000.
(2) Net book value shown above includes non-operating properties,
including undeveloped land and two flood-damaged hotels undergoing
renovation.
Lodging assets comprise approximately 88.2% of the Companies' total
real estate portfolio. Companies in the assisted living sector of the healthcare
industry approximate 10.0% of the net book value of the Companies' total real
estate investments (and approximately 64.6% of the healthcare portfolio before
the impairment balance), while companies in the long term care sector
approximate 1.7% of the net book value of the Companies' total real estate
investments (and approximately 11.3% of the healthcare portfolio before the
impairment balance).
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 or 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
17
LA QUINTA PROPERTIES, INC. AND SUBSIDIARIES
AND LA QUINTA CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. REAL ESTATE INVESTMENTS, CONTINUED
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 September 30, 2001, the Companies had exposure to two operators,
CareMatrix Corporation ("CareMatrix") and Assisted Living Concepts ("ALC"), who
have filed for bankruptcy protection under Chapter 11. The following table
describes the number of facilities, net assets by lease/mortgage and the
lease/mortgage income for the operators that are in Chapter 11 proceedings:
(IN THOUSANDS, EXCEPT
FOR NUMBER OF FACILITIES) Leases Mortgages September 30, 2001
---------------------- ---------------------- ---------------------
Total Rental Interest
Operator Date filed Facilities Facilities Net Assets Facilities Net Assets Income Income
- ------------------------- ------------- ---------- ---------- ---------- ---------- ---------- ------- ----------
CareMatrix 11/9/2000 3 -- $ -- 3 $35,354 N/A $2,574 (1)
Assisted Living Concepts (2) 10/1/2001 16 16 28,400 -- -- $2,500 N/A
---------- ---------- ----------- ---------- --------- ------ ------
Totals 19 16 $28,400 3 $35,354 $2,500 $2,574
========== ========== =========== ========== ========= ====== ======
(1) Mortgages related to CareMatrix have been placed on non-accrual
status and interest income is recorded only as payments are received.
(2) On October 24, 2001, the Companies sold its investment in leases
operated by ALC (see Note 13).
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. 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 losses based on its assessment of current circumstances. However,
upon changes in circumstances, including but not limited to, possible
foreclosure, lease termination, or further declines in operating results or
capital market changes, 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.
4. INDEBTEDNESS
During the nine months ended September 30, 2001, the Companies had the
following debt activity:
Bonds and
Convertible Bank Notes Mortgages
(IN THOUSANDS) Notes Payable Debentures Payable Payable Total
-------------- ----------- ---------- --------- -----------
DECEMBER 31, 2000................... $1,017,244 $ 137,028 $ 400,000 $ 42,077 $1,596,349
Repayment of principal.............. (88,826) (137,028) (497,490) (18,432) (741,776)
Borrowings.......................... -- -- 245,000 -- 245,000
Debt assumed by third party......... -- -- -- (2,990) (2,990)
Other............................... (121) -- -- (124) (245)
---------- --------- --------- -------- ----------
SEPTEMBER 30, 2001.................. $ 928,297 $ -- $ 147,510 $ 20,531 $1,096,338
========== ========= ========= ======== ==========
18
LA QUINTA PROPERTIES, INC. AND SUBSIDIARIES
AND LA QUINTA CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. INDEBTEDNESS, CONTINUED
NOTES PAYABLE
On July 16, 2001, the Companies repaid $75,050,000 in notes payable at
maturity with proceeds from the new credit facility as defined below.
On July 3, 2001 and July 10, 2001, the Companies repaid a combined $11
million of notes payable scheduled to mature in August 2002 with proceeds from
the new Credit Facility, as defined below. On September 24, 2001, the Companies
repaid $2.8 million of notes payable scheduled to mature in September 2026.
These repurchases resulted in a gain on early extinguishments of debt of
$86,000.
CONVERTIBLE DEBENTURES
The Companies' convertible debentures with a balance of $82,992,000
matured on March 1, 2001 and were repaid with borrowings under the Tranche A
revolving line of credit.
On July 30, 2001, the Companies redeemed $54,036,000 in convertible
debentures that were scheduled to mature in January and July 2002 with proceeds
from the new Credit Facility as defined below.
BANK NOTES PAYABLE
During the nine months ended September 30, 2001, the Companies borrowed
$95 million on the Tranche A revolving line of credit to repay the convertible
debentures, which matured on March 1, 2001, and other debt. The balance of the
borrowing on the line of credit was fully repaid in April 2001 with proceeds
from the sale of healthcare assets. Also during the nine months ended September
30, 2001, the Companies repaid $400 million on the Tranche D term loan. The
Tranche D term loan was repaid during the second quarter with proceeds from the
sale of certain healthcare assets and borrowings under its new Credit Facility.
Effective June 8, 2001, the Companies terminated the Tranche A
revolver and Tranche D term loan of its 1998 Credit Facility and entered into
a new credit agreement with a bank group which provided for a $150 million
term loan and a $200 million revolving line of credit (the "new Credit
Facility"). Effective July 31, 2001, the revolving line of credit was
increased to $225 million. Borrowings under the new Credit Facility initially
bear interest at LIBOR plus 3.5% (6.1% at September 30, 2001). The new Credit
Facility matures in May 2003 and may be extended under certain conditions at
the Companies' option. Approximately $202,044,000 (net of outstanding letters
of credit) was available under the revolving line of credit at September 30,
2001.
In September 2001, the Companies repaid approximately $2.5 million in
principal on the new Credit Facility from operating cash flow.
BONDS AND MORTGAGES PAYABLE
During the nine months ended September 30, 2001, the Companies repaid
$18,432,000 in principal on bonds and mortgages payable from operating cash flow
and borrowings under the line of credit. The amount repaid included a balloon
payment of $7,091,000 on a mortgage which matured on March 1, 2001. In addition,
a $2,990,000 bond was assumed by a third party in August 2001 related to the
sale of a healthcare asset.
INTEREST RATE SWAP AGREEMENT
Through June 25, 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 the Companies settled on June 27,
2001. The swap agreement was measured at fair value at March 31, 2001 and
recorded as a liability 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. Upon termination of the
interest rate swap agreement on June 25, 2001, the Companies decreased interest
expense by $670,000, the difference between the fair value of the swap at
settlement, $566,000, and the fair value at March 31, 2001.
19
LA QUINTA PROPERTIES, INC. AND SUBSIDIARIES
AND LA QUINTA CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. COMMITMENTS AND CONTINGENCIES
On June 27, 2001, a complaint was filed in the United States District
Court for the District of Massachusetts, entitled STEADFAST INSURANCE CO. v.
MEDITRUST CORP., ET AL., Civ Action No. 01-CV-1115-MEL. The complaint, which has
not yet been served on Meditrust Corporation or on any other of the named
defendants, and which was filed by the plaintiff under seal, names Meditrust
Corporation and certain of its present and former directors and officers as
defendants. The plaintiff, which claims to be the subrogee or assignee of the
claims of various entities, alleges purported causes of action including breach
of contract, negligence, violation of 15 USC Section 771, violation of Mass.
Gen. L. c. 110, Section 410, negligent misrepresentation, and violation of Mass.
Gen. L. c. 93A Section 11, arising out of an alleged misrepresentation in the
offering memorandum for Meditrust Corporation's 7.114% Exercisable Put Option
Securities and seeks approximately $15 million plus other potential damages. The
Companies believe that it has meritorious defenses to the lawsuit, as well as
claims against non-parties to the lawsuit that may satisfy all or part of any
potential liability that may be found against Meditrust Corporation. The
Companies are currently determining its response to this lawsuit.
6. SHAREHOLDERS' EQUITY
As of September 30, 2001, the following classes of Preferred Stock,
Excess Stock and Series Common Stock were authorized; no shares were issued or
outstanding at either September 30, 2001 or December 31, 2000:
o La Quinta Corporation Preferred Stock $0.10 par value; 6,000,000
shares authorized;
o La Quinta Properties, Inc. Excess Stock $0.10 par value; 25,000,000
shares authorized;
o La Quinta Corporation Excess Stock $0.10 par value; 25,000,000
shares authorized;
o La Quinta Properties, Inc. Series Common Stock $0.10 par value;
30,000,000 shares authorized;
o La Quinta Corporation Series Common Stock $0.10 par value;
30,000,000 shares authorized.
During the nine months ended September 30, 2001, 193,000 restricted
shares of the Companies' common stock were issued to employees under The La
Quinta Properties 1995 Share Award Plan and The La Quinta Corporation 1995 Share
Award Plan (collectively known as the "Share Award Plan"). During the nine
months ended September 30, 2001, 108,000 restricted shares were forfeited and
thus cancelled. Restricted shares outstanding at September 30, 2001 and December
31, 2000 were 1,795,000 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
six years. Participants vest in the restricted shares granted upon the earliest
of nine months to six 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 nine months ended September 30, 2000, pursuant to certain
employment and severance agreements, vesting periods for 395,000 restricted
shares were accelerated such that the shares were accelerated from the original
vesting periods to vest between January 2000 and December 2000. This resulted in
approximately $3,851,000 of accelerated amortization of unearned compensation in
the nine months ended September 30, 2000.
Unearned compensation is charged for the fair value of the restricted
shares on the date of grant and is 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.
20
LA QUINTA PROPERTIES, INC. AND SUBSIDIARIES
AND LA QUINTA CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. COMPREHENSIVE LOSS, OTHER ASSETS, FEES, INTEREST AND OTHER RECEIVABLES
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 September 30, 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 $206,000 and $271,000 at
September 30, 2001 and December 31, 2000, respectively. A net adjustment to
accumulated other comprehensive income of $65,000 was recorded in 2001 to
reflect the unrealized loss on this investment.
The following is a summary of the Companies' comprehensive loss:
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
(IN THOUSANDS) 2001 2000
--------- ---------
Net loss............................................................. $(30,287) $(289,597)
Other comprehensive loss:
Unrealized holding losses arising during the period............. (65) (49,062)
Reclassification adjustment for losses recognized in net loss... -- 39,076
-------- ---------
Comprehensive loss................................................... $(30,352) $(299,583)
======== =========
Other assets include investments in equity securities classified as
available for sale, La Quinta intangible assets, the TeleMatrix non-competition
agreement, furniture, fixtures and equipment.
Realty provides for reserves against other assets and receivables. As
of September 30, 2001, and December 31, 2000, the reserve provided against other
assets and receivables aggregated approximately $27,365,000 and $32,785,000,
respectively.
On May 31, 2001, the Companies sold a note receivable with a carrying
value of $30,810,000 (net of a previously recorded reserve of $21,284,000). The
Companies received total proceeds of $31,974,000 from the sale and recorded a
net gain of approximately $1,190,000.
8. 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.
On July 2, 2001, Realty paid a dividend of $0.5625 per depository share
of preferred stock to holders of record on June 15, 2001 of its 9.00% Series A
Cumulative Redeemable Preferred Stock. On June 28, 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.
On October 1, 2001, Realty paid a dividend of $0.5625 per depository
share of preferred stock to holders of record on September 14, 2001 of its 9.00%
Series A Cumulative Redeemable Preferred Stock. On September 28, 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.
21
LA QUINTA PROPERTIES, INC. AND SUBSIDIARIES
AND LA QUINTA CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. OTHER EXPENSES
For the nine months ended September 30, 2001 and 2000, other expenses
consisted of the following:
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
(IN THOUSANDS) 2001 2000
-------- --------
Restructuring:
Employee severance and related employment costs...................... $ 1,840 $20,272
Accelerated amortization of unearned compensation.................... -- 3,851
Write-off of debt costs and other prepayment expenses................ 100 3,142
Other restructuring expense.......................................... 796 280
------- -------
Restructuring and related expenses.............................. 2,736 27,545
Bad debt:
Provision for loss on interest and other receivables................. 9,933 4,645
Bad debt recoveries.................................................. (2,350) (1,245)
------- -------
Bad debt expenses............................................... 7,583 3,400
------- -------
Total Other Expenses...................................................... $10,319 $30,945
======= =======
RESTRUCTURING CHARGES
In June 2000, the Boards approved a plan to reduce the number of
employees by 14 as of December 31, 2000, including four officers, primarily in
the financial and legal groups, of the Companies' Needham, Massachusetts
offices. For the nine months ended September 30, 2001 and 2000, the Companies
recorded $1,840,000 and $12,202,000 (including $1,390,000 of accelerated
amortization of unearned compensation for the acceleration of vesting periods on
240,000 shares of restricted stock), respectively, of other expense related to
severance and retention incentive compensation earned by the healthcare segment
employees based on achievement of healthcare 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).
During the nine months ended September 30, 2001, the Companies recorded
$796,000 of other expense related to professional fees incurred related to a
corporate restructuring approved by the Boards of Directors and proposed to
shareholders in the fourth quarter of 2001.
The Companies also incurred approximately $280,000 of professional fees
during the nine months ended September 30, 2000 related to the implementation of
the Five Point Plan. In addition, during the nine months ended September 30,
2001 and 2000, the Companies recorded a charge of $100,000 and $3,142,000,
respectively, related to accelerated amortization of debt issuance costs and
certain other expenses associated with the early repayment of debt and the
reduction of the Companies' revolving line of credit.
OTHER
During the nine months ended September 30, 2001 and 2000, the Companies
recorded provisions and other expenses of approximately $9,933,000 and
$4,645,000, respectively, on interest and other receivables management considers
uncollectable. The Companies also recorded approximately $2,350,000 and
$1,245,000, respectively, of bad debt recoveries during the nine months ended
September 30, 2001 and 2000 related to receivables previously written off.
22
LA QUINTA PROPERTIES, INC. AND SUBSIDIARIES
AND LA QUINTA CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. EARNINGS PER SHARE
Earnings or loss per paired common share and per share is calculated as
net income or loss divided by the weighted average number of common shares
outstanding. Diluted net earnings per share assumes, when dilutive, issuance of
the net incremental shares from stock options. Certain options outstanding
during the periods represented below were not included in the computation
because their inclusion would result in an antidilutive per-share amount as the
Companies reported losses from continuing operations available to Common
Shareholders. The following tables reconcile the net income or loss amounts and
share numbers used in the computation of net loss per share.
THE COMPANIES' COMBINED CONSOLIDATED EARNINGS PER SHARE IS COMPUTED AS
FOLLOWS:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ---------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000 2001 2000
------------ ------------- ----------- -----------
Loss from continuing operations before extraordinary item
and cumulative effect of change in accounting principle $ (6,584 (217,804) (31,229) $(291,000)
Preferred stock dividends (4,500) (4,500) (13,500) (13,500)
-------- --------- -------- ---------
Loss from continuing operations before extraordinary item
and cumulative effect of change in accounting principle (11,084) (222,304) (44,729) (304,500)
-------- --------- -------- ---------
Gain on early extinguishments of debt 86 -- 86 1,403
Cumulative effect of a change in accounting principle -- -- 856 --
-------- --------- -------- ---------
Net loss $(10,998) $(222,304) $(43,787) $(303,097)
======== ========= ======== =========
Weighted average outstanding shares of Paired Common Stock 143,077 142,121 143,013 141,596
Dilutive effect of stock options -- -- -- --
-------- --------- -------- ---------
Dilutive potential paired common share 143,077 142,121 143,013 141,596
======== ========= ======== =========
EARNINGS (LOSS) PER SHARE
Basic:
Loss available to Common Shareholders before extraordinary
item and cumulative effect of a change in accounting principle $ (0.08) $ (1.56) $ (0.31) $ (2.15)
Gain on early extinguishments of debt -- -- -- 0.01
Cumulative effect of a change in accounting principle -- -- 0.01 --
-------- --------- -------- ---------
Net loss available to Common Shareholders $ (0.08) $ (1.56) $ (0.30) $ (2.14)
======== ========= ======== =========
Diluted:
Loss available to Common Shareholders before extraordinary item
and cumulative effect of a change in accounting principle $ (0.08) $ (1.56) (0.31) $ (2.15)
Gain on early extinguishments of debt -- -- -- 0.01
Cumulative effect of a change in accounting principle -- -- 0.01 --
-------- --------- -------- ---------
Net loss available to Common Shareholders $ (0.08) $ (1.56) $ (0.30) $ (2.14)
======== ========= ======== =========
23
LA QUINTA PROPERTIES, INC. AND SUBSIDIARIES
AND LA QUINTA CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. EARNINGS PER SHARE, CONTINUED
LA QUINTA PROPERTIES, INC. EARNINGS PER SHARE IS COMPUTED AS FOLLOWS:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ---------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000 2001 2000
--------- ---------- -------- --------
Income (loss) from continuing operations before extraordinary
item and cumulative effect of change in accounting principle $ 12,758 $(197,752) $ 12,554 $(250,570)
Preferred stock dividends (4,500) (4,500) (13,500) (13,500)
--------- --------- -------- ---------
Income (loss) from continuing operations before extraordinary item
and cumulative effect of change in accounting principle 8,258 (202,252) (946) (264,070)
--------- --------- -------- ---------
Gain on early extinguishments of debt 86 -- 86 1,403
Cumulative effect of a change in accounting principle -- -- 856 --
--------- --------- -------- ---------
Net income (loss) $ 8,344 $(202,252) $ (4) $(262,667)
========= ========= ======== =========
Weighted average outstanding shares of Paired Common Stock 144,382 143,426 144,319 142,901
Dilutive effect of stock options 283 -- 270 --
--------- --------- -------- ---------
Dilutive potential paired common stock 144,665 143,426 144,589 142,901
========= ========= ======== =========
EARNINGS PER SHARE
Basic:
Income (loss) available to Common Shareholders before extraordinary
item and cumulative effect of a change in accounting principle $ 0.06 $ (1.41) $ (0.01) $ (1.85)
Gain on early extinguishments of debt -- -- -- 0.01
Cumulative effect of a change in accounting principle -- -- 0.01 --
--------- --------- -------- ---------
Net income (loss) available to Common Shareholders $ 0.06 $ (1.41) $ -- $ (1.84)
========= ========= ======== =========
Diluted:
Income (loss) available to Common Shareholders before extraordinary
item and cumulative effect of a change in accounting principle $ 0.06 $ (1.41) $ (0.01) $ (1.85)
Gain on early extinguishments of debt -- -- -- 0.01
Cumulative effect of a change in accounting principle -- -- 0.01 --
--------- --------- -------- ---------
Net income (loss) available to Common Shareholders $ 0.06 $ (1.41) $ -- $ (1.84)
========= ========= ======== =========
LA QUINTA CORPORATION EARNINGS PER SHARE IS COMPUTED AS FOLLOWS:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000 2001 2000
--------- -------- --------- --------
Loss from continuing operations available to Common Shareholders $(19,342) $(20,052) $(43,783) $(40,430)
======== ======== ======== ========
Weighted average outstanding shares of Paired Common Stock 143,077 142,121 143,013 141,596
Dilutive effect of stock options -- -- -- --
--------- -------- -------- -------
Dilutive potential paired common stock 143,077 142,121 143,013 141,596
========= ======== ======== ========
Loss per share:
Basic $ (0.14) $ (0.14) $ (0.31) $ (0.29)
Diluted $ (0.14) $ (0.14) $ (0.31) $ (0.29)
24
LA QUINTA PROPERTIES, INC. AND SUBSIDIARIES
AND LA QUINTA CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11. TRANSACTIONS BETWEEN REALTY AND OPERATING
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 and
to fund certain capital expenditures. At September 30, 2001 and December 31,
2000, Operating owed Realty $158,633,000 and $58,567,000, respectively, related
to these hotel leases. Operating operates at a substantial loss due in part to
the lease payments required to be made under the intercompany leases. The
companies believe that the intercompany leases conformed with normal business
practices at the time they were entered into and were consistent with leases
entered into on an arm's length basis. Due to the unexpected shortfall in the
operating revenues generated by the leased hotels, Realty and Operating are
considering renegotiating substantially all of the intercompany leases.
Operating also has a royalty arrangement with Realty for the use of the
La Quinta tradename at a rate of approximately 2.5% of gross revenue, as defined
in the Agreement. At September 30, 2001 and December 31, 2000, Operating owed
Realty $7,870,000 and $3,275,000, respectively, related to the royalty
arrangement.
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.
During the nine months ended September 30, 2001, Realty contributed its
60% investment in a partnership for a 100% interest in a limited liability
company (the "LLC") created to hold the investment in the partnership. Operating
then exchanged a note payable due to Realty for $3,901,000 for 83% of Realty's
interest in the LLC. The transaction was recorded at historical balances as both
Realty and Operating are under common control and there was no change in
shareholder ownership percentages.
12. 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, income taxes and certain nonrecurring income
and expenses. The measurement of each of these segments is made on a combined
basis including revenue from external customers and excludes lease and royalty
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.
25
LA QUINTA PROPERTIES, INC. AND SUBSIDIARIES
AND LA QUINTA CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
12. SEGMENT REPORTING, CONTINUED
The following table presents information used by management by reported
segment. The Companies do not allocate interest expense, income taxes or unusual
items to segments.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------
(IN THOUSANDS) 2001 2000 2001 2000
---------- --------- ---------- ----------
Lodging:
Room revenue $ 135,131 $ 148,403 $ 425,715 $ 439,094
Other lodging revenue 5,818 5,759 17,350 17,708
Direct operating expenses (65,186) (71,536) (192,275) (199,820)
Other operating expenses (15,800) (15,455) (49,076) (45,504)
General and administrative expenses (7,943) (10,174) (24,560) (28,175)
--------- --------- --------- ---------
Lodging Contribution 52,020 56,997 177,154 183,303
--------- --------- --------- ---------
Healthcare:
Rental income 8,476 27,299 44,866 87,697
Interest income 6,391 22,752 23,327 83,622
General and administrative expenses (1,950) (3,954) (8,398) (11,394)
--------- --------- --------- ---------
Healthcare Contribution 12,917 46,097 59,795 159,925
--------- --------- --------- ---------
Other:(a)
Revenue 5,148 4,715 14,722 12,032
Operating expense (2,978) (3,015) (8,841) (7,170)
General and administrative expenses (1,058) (1,130) (3,117) (3,064)
--------- --------- --------- ---------
Other Contribution 1,112 570 2,764 1,798
--------- --------- --------- ---------
Combined Contribution 66,049 103,664 239,713 345,026
Reconciliation to Combined Consolidated Financial Statements:
Interest expense 22,170 45,786 81,796 152,443
Depreciation and amortization
Lodging 27,723 36,442 83,785 94,016
Healthcare 1,198 5,891 4,019 18,854
Other 201 167 562 459
Amortization of goodwill 5,296 5,689 16,508 17,076
(Gain) loss on sale of assets (7,657) 126,362 (9,948) 130,725
Impairment on real estate assets, mortgages and notes receivable 21,268 91,306 81,876 152,432
Provision for loss on equity securities -- -- -- 39,076
Other expenses 802 9,825 10,319 30,945
--------- --------- --------- ---------
71,001 321,468 268,917 636,026
--------- --------- --------- ---------
Loss before income taxes, extraordinary item and cumulative effect
of change in accounting principle (4,952) (217,804) (29,204) (291,000)
Income tax expense 1,632 -- 2,025 --
--------- --------- --------- ---------
Loss before extraordinary item and cumulative effect of
change in accounting principle (6,584) (217,804) (31,229) (291,000)
Gain on early extinguishments of debt 86 -- 86 1,403
Cumulative effect of change in accounting principle -- -- 856 --
--------- --------- --------- ---------
Net loss (6,498) (217,804) (30,287) (289,597)
Preferred stock dividends (4,500) (4,500) (13,500) (13,500)
--------- --------- --------- ---------
Net loss available to Paired Common Shareholders $ (10,998) $(222,304) $ (43,787) $(303,097)
========= ========= ========= =========
(a) Other Contribution includes TeleMatrix, a provider of telephones,
software and equipment for the lodging industry.
26
LA QUINTA PROPERTIES, INC. AND SUBSIDIARIES
AND LA QUINTA CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
13. SUBSEQUENT EVENTS
On October 1, 2001, Realty paid a dividend of $0.5625 per depository
share of preferred stock to holders of record on September 14, 2001 of its 9.00%
Series A Cumulative Redeemable Preferred Stock.
In October 2001, the Companies repaid $24,380,000 in notes payable
scheduled to mature in September 2026, which are also redeemable at the option
of the holders on September 10, 2003. This repayment resulted in a gain on early
extinguishments of debt of $839,000.
On October 17, 2001, the Companies repaid $48,200,000 of notes payable
at maturity.
During October 2001, Realty sold its investment in an acute care
hospital, sixteen assisted living facilities and a medical office building
for net proceeds of $82,041,000. The net book value of these investments
after impairment was $81,488,000, resulting in a net gain on the sale of
these investments of $553,000. Included in October healthcare asset sales was
the sale of the investment in leases operated by Assisted Living Concepts
("ALC") for gross proceeds of $23,500,000. The net book value of the ALC
assets sold was $23,000,000 (net of impairments of $5,400,000).
On October 16, 2001, the Companies announced that the Boards of
Directors of La Quinta Properties, Inc. and La Quinta Corporation unanimously
approved, subject to shareholder approval, a new corporate structure under which
La Quinta Properties, Inc. ("the REIT") will become a subsidiary of La Quinta
Corporation ("the Corporation"). The restructuring, which will enable La Quinta
Properties, Inc. to its maintain REIT status and the Companies to grow, will
result in the REIT becoming a subsidiary controlled by the Corporation. In
connection with the restructuring, the REIT will issue two new classes of
securities: Class A common stock, which will be issued exclusively to the
Corporation, and Class B common stock which will be exchanged for the REIT's
common stock currently held by its shareholders. In connection with the
restructuring, La Quinta Corporation will take a special non-cash charge
totaling approximately $400 million. This non-recurring charge will consist of
approximately $230 million in deferred tax liabilities and $170 million of
intangible write-offs. In addition, La Quinta Corporation will reclassify $200
million of preferred equity to minority.
In addition, in connection with the restructuring, the REIT will be
selling a portion of an economic interest in the La Quinta(R) brand to the
Corporation in exchange for shares of the Corporation's common stock. This
transaction will be structured as a tax-free transaction. The transfer of a
portion of the economic value of the La Quinta(R) brand from the REIT to the
Corporation is structured to ease the REIT's increasing difficulty in satisfying
the "income test" required to maintain its real estate investment trust status
by reducing the amount of "bad" income generated by the REIT as a result of the
royalty fees generated by the brand.
The Companies' Boards of Directors also approved, subject to
stockholder approval, the 2002 Stock Option and Incentive Plan. The 2002 Plan,
which will replace the equity award plans currently in place for each of the
REIT and the Corporation upon approval of the 2002 Plan, will provide for stock
options and other stock-based awards that the Companies believe will help to
attract, motivate and retain the caliber of directors, officers, employees and
other key persons necessary for La Quinta's future growth. In addition, the
Companies announced the Boards of Directors approval, subject to stockholder
approval, of a new Employee Stock Purchase Plan. This plan will authorize the
issuance and purchase by La Quinta's employees of paired shares through payroll
deductions.
The Companies' Boards of Directors have also approved a share
repurchase program that will authorize the Companies to purchase, in periodic
open market and privately negotiated share repurchases, up to $20 million of
La Quinta equity securities.
27
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 LA QUINTA
COMPANIES (THE "COMPANIES"), CONSISTING OF LA QUINTA PROPERTIES, INC.
("REALTY") AND LA QUINTA CORPORATION ("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, THE COMPLETION OF THE
CURRENTLY PROPOSED RESTRUCTURING AND THE REALIZATION OF THE ANTICIPATED
BENEFITS ASSOCIATED WITH THE PROPOSED RESTRUCTURING, THE SATISFACTION OF
CLOSING CONDITIONS TO THE PROPOSED RESTRUCTURING, INCLUDING RECEIPT OF
SHAREHOLDER AND REGULATORY APPROVAL, THE TAX-FREE NATURE OF THE PROPOSED
RESTRUCTURING, THE ADVERSE IMPACT ON BUSINESS AND CONSUMER CONFIDENCE AND
SPENDING RESULTING FROM THE SEPTEMBER 11, 2001 TERRORIST ATTACKS, THE
RESPONSES THERETO AND ANY SUBSEQUENT RELATED HOSTILITIES, THE EFFECTS OF
ADVERSE ECONOMIC AND REAL ESTATE CONDITIONS GENERALLY AND IN THE COMPANIES'
GEOGRAPHIC MARKETS, THE IMPACT OF THE ADOPTION OF ACCOUNTING PRONOUNCEMENTS,
THE CYCLICALITY OF THE HOTEL AND LEISURE BUSINESS, INCREASED CAPACITY AND
WEAK DEMAND, INCREASES IN ENERGY COSTS AND OTHER OPERATING COSTS RESULTING IN
LOWER OPERATING MARGINS, COMPETITION IN OUR FRANCHISING EFFORTS GENERALLY AND
THE GROWTH OF OUR FRANCHISE PROGRAM, 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 ULTIMATE OUTCOME OF CERTAIN
LITIGATION FILED AGAINST THE COMPANIES, 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
CONTINUED ABILITY OF REALTY TO QUALIFY FOR TAXATION 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
and the Santa Anita Racetrack) and $820 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 have completed healthcare asset
sales and received mortgage repayments totaling approximately $1.5 billion
between January 1, 2000 and September 30, 2001 and have applied substantially
all of the proceeds toward reduction of total indebtedness of $2.6 billion as of
December 31, 1999 to $1.1 billion as of September 30, 2001.
Also, consistent with the Companies' plan to focus on the lodging
division, the Companies made certain changes in its
28
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 Sales and 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.
On June 20, 2001, Meditrust changed its name to La Quinta to reflect
its focus on the lodging industry. Meditrust Corporation was renamed La Quinta
Properties, Inc. and Meditrust Operating Company was renamed La Quinta
Corporation. The renamed La Quinta Companies continue to trade as a paired share
REIT under the ticker symbol "LQI".
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 September 30, 2001 the Companies had opened seven franchise
hotels, executed an additional 43 franchise contracts and approved an additional
39 franchise contracts.
On October 16, 2001, the Companies announced that the Boards of
Directors of La Quinta Properties, Inc. and La Quinta Corporation unanimously
approved, subject to shareholder approval, a new corporate structure under which
La Quinta Properties, Inc. ("the REIT") will become a subsidiary of La Quinta
Corporation ("the Corporation"). The restructuring, which will enable the
Companies to maintain REIT status and to grow, will result in the REIT becoming
a subsidiary controlled by the Corporation. In connection with the
restructuring, the REIT will issue two new classes of securities: Class A common
stock, which will be issued exclusively to the Corporation, and Class B common
stock which will be exchanged for the REIT's common stock currently held by its
shareholders.
THE LA QUINTA COMPANIES - COMBINED CONSOLIDATED RESULTS OF OPERATIONS
The Companies earn revenue by (i) owning and operating 222 La Quinta
Inns and 71 La Quinta Inn & Suites; (ii) leasing 82 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 9 healthcare
facilities in which the interest is generally fixed with annual escalators
subject to certain conditions. The La Quinta Companies reported net loss
available to paired common shareholders of $10,998,000 or $0.08 per diluted
common share for the quarter ended September 30, 2001, compared to net loss of
$222,304,000 or $1.56 per diluted common share for the third quarter of 2000.
For the nine months ended September 30, 2001, The La Quinta Companies reported a
net loss available to paired common shareholders of $43,787,000 or $0.30 per
diluted share compared to net loss of $303,097,000 or $2.14 per diluted share
for the same period in 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 nine months ended September 30, 2001 and 2000. The Companies consider
contributions from each operating segment to include revenue from each business,
less 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
(IN THOUSANDS) 2001 2000 2001 2000
-------- -------- -------- --------
REVENUE:
Lodging $140,949 $154,162 $443,065 $456,802
Healthcare 14,867 50,051 68,193 171,319
Other 5,148 4,715 14,722 12,032
-------- -------- -------- --------
Total revenue 160,964 208,928 525,980 640,153
OPERATING EXPENSES:
Lodging 88,929 97,165 265,911 273,499
Healthcare 1,950 3,954 8,398 11,394
Other 4,036 4,145 11,958 10,234
-------- -------- -------- --------
Total operating expenses 94,915 105,264 286,267 295,127
CONTRIBUTIONS:
Lodging 52,020 56,997 177,154 183,303
Healthcare 12,917 46,097 59,795 159,925
Other 1,112 570 2,764 1,798
-------- -------- -------- --------
Total Contribution $ 66,049 $103,664 $239,713 $345,026
======== ======== ======== ========
29
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
The combined contribution from operating segments for the three months
ended September 30, 2001 was $66,049,000 compared to $103,664,000 for the three
months ended September 30, 2000. This represents a decrease of $37,615,000 or
36.3%. The decline in the combined contribution is primarily the result of the
sale of healthcare assets. The contribution is comprised of revenues of
$160,964,000 and $208,928,000, offset by operating expenses of $94,915,000 and
$105,264,000 for the three months ended September 30, 2001 and 2000,
respectively.
Lodging provided a contribution of $52,020,000 for the three months
ended September 30, 2001, a decrease of $4,977,000 or 8.7% from the same period
in 2000. The lodging segment contribution was comprised of revenues of
$140,949,000 and $154,162,000 offset by operating expenses of $88,929,000 and
$97,165,000 for the three months ended September 30, 2001 and 2000,
respectively. The decrease in the lodging contribution was due to the decrease
in lodging revenue of $13,213,000, partially offset by the decrease in lodging
operating expenses of $8,236,000, 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 September 30, 2001 and 2000:
2001 2000
------------ ------------
Number of Hotels In Operation 293 300
Number of Hotels Under Construction or Refurbishment 4 1
Occupancy Percentage 63.0% 66.5%
ADR (1) $60.62 $62.37
RevPAR (2) $38.20 $41.47
Available Rooms (3) 3,538 3,578
Comparable Hotels (4)
Occupancy Percentage 63.2% 66.7%
ADR (1) $60.73 $62.61
RevPAR (2) $38.37 $41.78
Available Rooms (3) 3,490 3,488
(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, decreased 7.9% (or 8.2%
for comparable hotels) to $38.20 in the third quarter of 2001 from $41.47 in the
third quarter of 2000. The occupancy percentage decreased 3.5 percentage points
to 63.0% in the third quarter of 2001 from 66.5% for the same period in 2000.
The decrease in occupancy is primarily due to the impact of reduced travel in
the month of September 2001 due to the terrorist attacks on the World Trade
Center and the Pentagon that occurred on September 11, 2001 compounded with a
slowing national economy. The ADR decreased to $60.62 in the third quarter of
2001 from $62.37 in the third quarter of 2000, a decrease of $1.75 or 2.8%. The
decrease in ADR reflected the change in the mix of business in response to
reduced demand during the three months ended September 30, 2001. The decrease in
RevPar is the combined result of the decreases in occupancy and ADR. A decrease
in direct expenses for the three month period ended September 30, 2001 compared
to the three month period ended September 30, 2000 included the impact of cost
control measures which resulted in a reduction in salaries and other inn
expenses partially offset by rising energy and insurance costs as well as an
increase in marketing costs. Direct hotel labor costs have continued to decline
due to policies, practices and efficiencies implemented during the nine months
ended September 30, 2001. Additionally, corporate overhead expense for the three
month period ended September 30, 2001 decreased $1,909,000 primarily due to
continued focus on cost control during 2001. This decrease was partially offset
by expenses related to the transitioning of certain information systems services
to a third-party provider.
30
Healthcare provided a contribution of $12,917,000 in the third quarter
of 2001, a decrease of $33,180,000 or 72.0% from the prior year's third quarter.
The decrease in contribution was primarily the result of the sale of certain
healthcare assets and repayment of healthcare mortgages made between the third
quarter of fiscal year 2000 and the third quarter of fiscal year 2001. The
healthcare contribution was comprised of revenues of $14,867,000 (including rent
income of $8,476,000, interest income from real estate mortgages of $5,527,000
and interest from investment of cash reserves of $864,000) for the three months
ended September 30, 2001 and $50,051,000 (including rent income of $27,299,000,
interest income from mortgage loans of $22,505,000 and interest from investment
of cash reserves of $247,000) for the three months ended September 30, 2000 and
operating expenses of $1,950,000 and $3,954,000 for the three month periods
ended September 30, 2001 and 2000, respectively. The decreases in healthcare
revenues and operating expenses are primarily a result of the impact of asset
sales and mortgage repayments over the last year. Healthcare segment expenses
decreased $2,004,000 from the same period in the prior year.
The following table summarizes the healthcare portfolio by type of
facility as of September 30, 2001 and December 31, 2000:
SEPTEMBER 30, 2001 DECEMBER 31, 2000
----------------------------------- -----------------------------------
Type of Facility FACILITIES BEDS/UNITS FACILITIES BEDS/UNITS
--------------------------------------- -------------- ------------------- ---------------- ----------------
Assisted Living 82 3,755 94 4,457
Long-Term Care 4 487 93 11,604
Medical Office Buildings and
Other Healthcare 4 - 11 625
Acute Care Hospital 1 492 1 492
-------------- ------------------- ----------------- -----------------
91 4,734 199 17,178
============== =================== ================= =================
The Companies had a remaining net investment of $83,130,000 and
$222,571,000 in the form of mortgages outstanding to operators of 9 and 36 of
the facilities listed above as of September 30, 2001 and December 31, 2000,
respectively. The Companies had a remaining net investment of $236,133,000 and
$681,714,000 in the form of leases with operators of 82 and 163 of the
facilities listed above at September 30, 2001 and December 31, 2000,
respectively.
TeleMatrix, a provider of telephones, software and equipment for the
lodging industry, contributed $1,112,000 for the three months ended September
30, 2001, an increase of 95.1% from the prior year's third quarter. This
contribution was comprised of revenues of $5,148,000 and $4,715,000 and expenses
of $4,036,000 and $4,145,000 for the three month periods ended September 30,
2001 and 2000, respectively. TeleMatrix expenses include operating expenses of
$2,978,000 and $3,015,000 and general and administrative expenses of $1,058,000
and $1,130,000 for the three months ended September 30, 2001 and 2000,
respectively. Operations of TeleMatrix have been included in lodging revenue and
expense categories of the combined and consolidated statements and are
separately disclosed as "Other Contribution" in Note 12 "Segment Reporting" of
the combined and consolidated statements.
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
The combined contribution from operating segments for the nine months
ended September 30, 2001 was $239,713,000, compared to $345,026,000 for the nine
months ended September 30, 2000. This represents a decrease of $105,313,000 or
30.5%. The decline in the combined contribution is primarily the result of the
sale of healthcare assets. The contribution is comprised of revenues of
$525,980,000 and $640,153,000, offset by operating expenses of $286,267,000 and
$295,127,000 for the nine months ended September 30, 2001 and 2000,
respectively.
Lodging provided a contribution of $177,154,000 for the nine months
ended September 30, 2001, a decrease of $6,149,000, or 3.4%, from the same
period in 2000. The lodging segment revenues were comprised of revenues of
$443,065,000 and $456,802,000 offset by operating expenses of $265,911,000 and
$273,499,000 for the nine months ended September 30, 2001 and 2000,
respectively. The decrease in the lodging contribution for the nine month period
was primarily due to a decrease in revenue and increases in hotel operating
expenses as more fully discussed below.
The following table summarizes statistical lodging data for the nine months
ended September 30, 2001 and 2000:
2001 2000
------------ -----------
Number of Hotels In Operation 293 300
Number of Hotels Under Construction or Refurbishment 4 1
Occupancy Percentage 65.2% 65.0%
ADR (1) $61.87 $63.26
RevPAR (2) $40.35 $41.13
Available Rooms (3) 10,549 10,677
Comparable Hotels (4)
Occupancy Percentage 65.4% 65.2%
ADR (1) $62.06 $63.53
RevPAR (2) $40.59 $41.45
Available Rooms (3) 10,361 10,396
(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
31
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, decreased 1.9% (or
decreased 2.1% for comparable hotels) to $40.35 in the first nine months of 2001
from $41.13 in the first nine months of 2000. The occupancy percentage increased
0.2 percentage points to 65.2% in the first nine months of 2001 from 65.0% for
the same period in 2000. The ADR decreased to $61.87 in the first nine months of
2001 from $63.26 in the first nine months of 2000, a decrease of $1.39 or 2.2%.
The decrease in RevPAR from the comparable 2000 nine month period primarily
resulted from changes in pricing strategy and by the impact of reduced travel
due to the terrorist attacks on September 11, 2001 compounded with a slowing
national economy. The increase in lodging operating expense is primarily the
result of rising energy costs and increases in insurance expense as well as
marketing costs. Increases in these cost components were partially offset by
decreases in certain direct expenses resulting from cost savings in salaries and
benefits, repairs and maintenance, bad debts, credit card costs and other inn
costs. Direct hotel labor costs have continued to decline as a result of
policies, practices and efficiencies implemented during the nine months ended
September 30, 2001. Additionally, corporate overhead expense for the nine month
period ended September 30, 2001 decreased $3,326,000 from the same period in the
prior year primarily due to additional expenses incurred during the nine month
period ended September 30, 2000 related to certain employment and severance
agreements as well as continued focus on cost control during 2001. This decrease
was partially offset by expenses related to the transitioning of certain
information systems services to a third-party provider.
Healthcare provided a contribution of $59,795,000 in the first nine
months of 2001, a decrease of $100,130,000 or 62.6% from the prior year's first
nine months. The healthcare contribution was comprised of revenues of
$68,193,000 (including rent of $44,866,000, interest from real estate mortgage
loans of $21,324,000 and interest from investment of cash reserves of
$2,003,000) for the nine months ended September 30, 2001 and $171,319,000
(including rent of $87,697,000, interest from real estate mortgage loans of
$82,855,000 and interest from investment of cash reserves of $767,000) for the
nine months ended September 30, 2000 and operating expenses of $8,398,000 and
$11,394,000 for the nine months ended September 30, 2001 and 2000, respectively.
The decreases in healthcare revenues and operating expenses are primarily a
result of the impact of asset sales and mortgage repayments over the last year.
Healthcare segment expenses decreased $2,996,000 from the same period in the
prior year.
TeleMatrix, a provider of telephones, software and equipment for the
lodging industry, contributed $2,764,000 for the nine months ended September 30,
2001, an increase of 53.7% from the prior year's first nine months. This
contribution was comprised of revenues of $14,722,000 and $12,032,000 and
expenses of $11,958,000 and $10,234,000 for the nine month periods ended
September 30, 2001 and 2000, respectively. TeleMatrix expenses include operating
expenses of $8,841,000 and $7,170,000 and general and administrative expenses of
$3,117,000 and $3,064,000 for the nine months ended September 30, 2001 and 2000,
respectively. Operations of TeleMatrix have been included in lodging revenue and
expense categories of the combined and consolidated statements and are
separately disclosed as "Other Contribution" in Note 12 "Segment Reporting" of
the combined and consolidated statements.
INTEREST EXPENSE
For the three and nine month periods ended September 30, 2001, interest
expense was $22,170,000 and $81,796,000, respectively, compared to $45,786,000
and $152,443,000 for the three and nine month period ended September 30, 2000,
respectively. The 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.
32
REAL ESTATE INVESTMENTS, DEPRECIATION, ASSET SALES, AND PROVISION FOR IMPAIRMENT
OF REAL ESTATE ASSETS, MORTGAGES AND NOTES RECEIVABLE
As of September 30, 2001 and 2000, the Companies had net investments in
real estate as summarized in the table below:
THREE MONTHS ENDED NINE MONTHS ENDED
(IN THOUSANDS) SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ---------------------------
INVESTMENT IN REAL ESTATE ASSETS, NET 2001 2000 2001 2000
---------------------------- ---------------------------
LODGING
Lodging assets net book value, beginning of period $2,423,168 $2,487,330 $2,448,391 $2,522,153
Funding of capital improvements 21,926 10,326 56,931 24,368
Depreciation expense and write-offs (24,351) (30,927) (72,743) (74,460)
Impairment of assets held for sale (18,342) -- (29,230) --
Net book value of assets sold and other adjustments (14,266) -- (15,214) (5,332)
---------- ---------- ---------- ----------
TOTAL INVESTMENT IN LODGING ASSETS, NET 2,388,135 2,466,729 2,388,135 2,466,729
---------- ---------- ---------- ----------
HEALTHCARE
Mortgage assets net book value, beginning of period 132,019 934,857 222,571 1,059,920
Principal payments (360) (1,429) (1,681) (6,026)
Construction loan funding -- -- -- 161
Partial principal prepayments (16,523) (1,586) (25,937) (1,586)
Impairment on real estate mortgages and notes receivable (2,000) (23,559) (22,597) (71,432)
Net book value of mortgages repaid (31,854) (684,932) (101,611) (757,800)
Increase in real estate mortgages net of participation
reduction -- 36 7 150
Other adjustments to mortgages 1,848 -- 12,378 --
---------- ---------- ---------- ----------
Mortgage assets net book value, end of period 83,130 223,387 83,130 223,387
---------- ---------- ---------- ----------
Sale/lease-back assets net book value, beginning of period 274,257 828,081 681,714 1,090,586
Construction funding -- 926 -- 4,039
Depreciation expense (1,172) (5,837) (3,945) (18,681)
Impairment on assets held for sale (926) (11,600) (9,515) (24,853)
Impairment on assets held for use -- (56,147) (20,534) (56,147)
Net book value of real estate assets sold (36,026) (48,212) (411,587) (285,751)
Other adjustments to real estate investments -- (997) -- (2,979)
---------- ---------- ---------- ----------
Sale/lease-back assets net book value, end of period 236,133 706,214 236,133 706,214
---------- ---------- ---------- ----------
TOTAL INVESTMENT IN HEALTHCARE REAL ESTATE ASSETS, NET 319,263 929,601 319,263 929,601
---------- ---------- ---------- ----------
TOTAL INVESTMENT IN REAL ESTATE ASSETS, NET $2,707,398 $3,396,330 $2,707,398 $3,396,330
========== ========== ========== ==========
DEPRECIATION AND AMORTIZATION
Depreciation and amortization for the three and nine month periods
ended September 30, 2001 were $34,418,000 and $104,874,000, respectively,
compared to $48,189,000 and $130,405,000 for the same periods in 2000,
respectively. The decreases are primarily the result of the sale of healthcare
properties and certain healthcare and lodging properties being classified as
held for sale.
ASSET SALES
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
During the three months ended September 30, 2001, the Companies
realized gains of $7,657,000 on the sale of healthcare assets and four hotels,
net of previous writedowns of $33,012,000, compared to losses on asset sales of
$126,362,000 during the same period in 2000.
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
During the nine months ended September 30, 2001, the Companies realized
gains of $9,948,000 on the sale of healthcare assets, equity securities, one
restaurant, one office building and four hotels, net of previous writedowns of
$197,357,000, compared to losses on asset sales of $130,725,000 during the same
period in 2000.
33
IMPAIRMENT OF REAL ESTATE ASSETS, MORTGAGES AND NOTES RECEIVABLE
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
During the three months ended September 30, 2001, the Companies
recorded an impairment on real estate assets, mortgages and notes receivable of
$21,268,000. The Companies recorded an impairment on assets held for sale of
$19,268,000 for the three months ended September 30, 2001. Additionally, during
the three months ended September 30, 2001, impairments on lodging assets held
for use of $3,197,000 were reclassified as impairments of assets held for sale
due to the reclassification of certain lodging assets as held for sale based on
management's expectation to sell such assets in the next twelve months. During
the three months ended September 30, 2001, the Companies recorded an impairment
related to the mortgage portfolio of $2,000,000.
During the three months ended September 30, 2000, the Companies
recorded an impairment on real estate assets, mortgages and notes receivable of
$91,306,000. During the three months ended September 30, 2000, the Companies
recorded an impairment on assets held for sale of $11,600,000, an impairment on
assets held for use of $56,147,000, and an impairment related to the mortgage
portfolio of $23,559,000.
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
During the nine months ended September 30, 2001, the Companies recorded
an impairment on real estate assets, mortgages and notes receivable of
$81,876,000. The Companies recorded an impairment on assets held for sale of
$38,745,000 and an impairment of $20,534,000 on real estate assets held for use
for the nine months ended September 30, 2001. Additionally, during the three
months ended September 30, 2001, impairments on lodging assets held for use of
$3,197,000 were reclassified as impairments of assets held for sale due to the
reclassification of certain lodging assets as held for sale based on
management's expectation to sell such assets in the next twelve months. During
the nine months ended September 30, 2001, the Companies recorded an impairment
related to the mortgage portfolio of $22,597,000 (of which $12,378,000 was
related to working capital and other notes receivables classified as fees,
interest and other receivables).
During the nine months ended September 30, 2000, the Companies recorded
an impairment on real estate assets, mortgages and notes receivable of
$152,432,000. The Companies recorded an impairment on assets held for sale of
$24,853,000 and an impairment on assets held for use of $56,147,000 for the nine
months ended September 30, 2000. During the nine months ended September 30,
2000, the Companies recorded an impairment related to the mortgage portfolio of
$71,432,000.
OTHER EXPENSE
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
During the three months ended September 30, 2001 and 2000, the
Companies recorded approximately $802,000 and $9,825,000 in other expense,
respectively, as described below.
In June 2000, the Boards approved a plan to reduce the number of
employees, primarily in the financial and legal groups, of Realty's Needham,
Massachusetts offices. For the three months ended September 30, 2001 and 2000,
the Companies recorded $617,000 and $3,500,000, respectively, of other expense
related to severance and retention incentive compensation earned by the
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.
Other expenses for the three months ended September 30, 2000 included
accelerated amortization on unearned compensation of $1,390,000 related to
certain restricted paired common shares which were part of this separation
agreement. In addition, during the three months ended September 30, 2001 and
2000, the Companies recorded a charge of $100,000 and $3,142,000, respectively,
related to accelerated amortization of debt issuance costs and certain other
expenses associated with the early repayment of debt and the reduction of the
Companies' revolving credit facility.
During the three months ended September 30, 2001, the Companies
recorded $796,000 of other expense related to professional fees incurred related
to a corporate restructuring approved by the Boards of Directors and proposed to
shareholders in the fourth quarter of 2001.
During the three months ended September 30, 2000, the Companies
recorded provisions and other expenses of approximately $1,843,000 on interest
and other receivables management considers uncollectable. The Companies also
recorded approximately $711,000 and $50,000, respectively, of bad debt
recoveries during the three months ended September 30, 2001 and 2000 related to
receivables written off in prior periods.
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
During the nine months ended September 30, 2001 and 2000, the Companies
recorded approximately $10,319,000 and $30,945,000, respectively, in other
expenses as described below.
34
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 nine months ended September 30, 2001 and
2000, the Companies recorded $1,840,000 and $20,272,000, respectively, of other
expense related to severance and retention incentive compensation earned by
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.
The amount for the nine months ended September 30, 2000 includes a cash payment
of approximately $9,460,000 made to the former Chief Executive Officer,
President and Treasurer of Realty pursuant to a separation and consulting
agreement executed in January 2000. In addition, other expenses for the nine
months ended September 30, 2000 included accelerated amortization on unearned
compensation of $3,851,000 related to certain restricted paired common shares
which were part of this separation agreement. Realty also incurred approximately
$280,000 of professional fees during the nine months ended September 30, 2000
related to the implementation of the Five Point Plan. In addition, during the
nine months ended September 30, 2001 and 2000, the Companies recorded a charge
of $100,000 and $3,142,000, respectively, related to accelerated amortization of
debt issuance costs and certain other expenses associated with the early
repayment of debt and the reduction of the Companies' revolving credit facility.
During the nine months ended September 30, 2001, the Companies recorded
$796,000 of other expense related to professional fees incurred related to a
corporate restructuring approved by the Boards of Directors and proposed to
shareholders in the fourth quarter of 2001.
During the nine months ended September 30, 2001 and 2000, the Companies
recorded provisions and other expenses of approximately $9,933,000 and
$4,645,000, respectively, on interest and other receivables management considers
uncollectable. The Companies also recorded approximately $2,350,000 and
$1,245,000, respectively, of bad debt recoveries during the nine months ended
September 30, 2001 and 2000 related to receivables written off in prior periods.
EXTRAORDINARY ITEM
During the nine months ended September 30, 2001, the Companies retired
$13,776,000 of debt at a discount prior to its maturity date. As a result of
these early repayments of debt, net gain of $86,000 was realized and is
reflected as an extraordinary item.
During the nine months ended September 30, 2000, the Companies retired
$58,496,000 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 $1,403,000 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, depending on the nature of the hedge, states that if a derivative is
a hedge, changes in the fair value of the derivative will either be offset
against the change in fair value of the hedged assets or liabilities 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. As of March 31, 2001, the Companies' 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. On June 27, 2001, the
interest rate swap was settled and $670,000 (the difference between the
settlement value, $566,000 and the fair value of the interest rate swap at March
31, 2001) was charged to earnings as a result.
REALTY - CONSOLIDATED RESULTS OF OPERATIONS
Realty reported net income available to paired common shareholders of
$8,344,000 or $0.06 per diluted share for the quarter ended September 30, 2001,
compared to a net loss of $202,252,000 or $1.41 per diluted share for the third
quarter of 2000. For the nine months ended September 30, 2001, Realty reported a
net loss available to paired common shareholders of $4,000 compared to net loss
of $262,667,000 or $1.84 per diluted share for the same period in 2000.
REVENUES AND EXPENSES
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
Revenue for the three months ended September 30, 2001 was $94,406,000,
compared to $132,992,000 for the three months ended September 30, 2000, a
decrease of $38,586,000. The revenue decrease was primarily attributable to a
decrease in interest revenue of $16,337,000 and a decrease in rental revenue of
$18,823,000 and a decrease in rent from Operating of $2,476,000. These
35
decreases are primarily the result of mortgage repayments and healthcare asset
sales over the past year and partially offset by increases in interest income of
$617,000 in 2001 over 2000 from investment of cash reserves.
For the three months ended September 30, 2001, total recurring expenses
were $65,603,000, compared to $103,244,000, for the three months ended September
30, 2000, a decrease of $37,641,000. This decrease was primarily attributable to
a decrease in interest expense of $23,492,000 due to reductions of debt
outstanding resulting from application of proceeds from various asset sales and
mortgage repayments over the past year. In addition, depreciation and
amortization expense for the three months ended September 30, 2001, decreased
$10,832,000 when compared to the third quarter of 2000. The decrease in
depreciation is primarily related to the sale of certain healthcare assets and
classification of certain real estate as held for sale.
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
Revenue for the nine months ended September 30, 2001 was $313,675,000,
compared to $415,940,000 for the nine months ended September 30, 2000, a
decrease of $102,265,000. The revenue decrease was primarily attributable to a
decrease in interest revenue of $60,217,000 and a decrease in rental revenue of
$42,831,000. These decreases primarily resulted from mortgage repayments and
healthcare assets sales over the last year and partially offset by increases in
interest income of $1,236,000 from investment of cash reserves in 2001 over
2000.
For the nine months ended September 30, 2001, total recurring expenses
were $216,849,000, compared to $312,355,000 for the nine months ended September
30, 2000, a decrease of $95,506,000. This decrease was primarily attributable to
a decrease in interest expense of $70,430,000 due to reductions of debt
outstanding resulting from application of proceeds from various asset sales and
mortgage repayments over the past year. In addition, depreciation and
amortization for the nine months ended September 30, 2001 decreased $21,575,000
when compared to the same period in 2000. The decrease in depreciation and
amortization is related to the sale of certain healthcare assets and
classification of certain assets as held for sale.
ASSET SALES
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
During the three months ended September 30, 2001, Realty realized gains
of $7,657,000 on the sale of healthcare assets and four hotels, net of previous
writedowns of $33,012,000, compared to losses on asset sales of $126,369,000
during the same period in 2000.
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
During the nine months ended September 30, 2001, Realty realized gains
of $9,948,000 on the sale of healthcare assets, equity securities, one
restaurant, one office building and four hotels, net of previous writedowns of
$197,357,000, compared to losses on asset sales of $131,702,000 during the same
period in 2000.
IMPAIRMENT OF REAL ESTATE ASSETS, MORTGAGES AND NOTES RECEIVABLE
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
During the three months ended September 30, 2001 and 2000, Realty
recorded an impairment on real estate assets, mortgages and notes receivable of
$21,268,000 and $91,306,000, respectively.
During the three months ended September 30, 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 an
impairment on assets held for sale of $19,268,000 during the three months ended
September 30, 2001. Additionally, during the three months ended September 30,
2001, impairments on lodging assets held for use of $3,197,000 were reclassified
as impairments of assets held for sale due to the reclassification of certain
lodging assets as held for sale based on management's expectation to sell such
assets in the next twelve months. During the three months ended September 30,
2001, Realty recorded an impairment on real estate mortgages and notes
receivable of $2,000,000.
The Companies recorded an impairment on assets held for sale of
$11,600,000 and $56,147,000 on assets held for use for the three months ended
September 30, 2000. During the three months ended September 30, 2000, Realty
recorded an impairment related to the mortgage portfolio of $23,559,000.
36
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
During the nine months ended September 30, 2001 and 2000, Realty
recorded an impairment on real estate assets, mortgages and notes receivable of
$81,876,000 and $152,432,000, respectively.
During the nine months ended September 30, 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 an
impairment on assets held for sale of $38,745,000 during the nine months ended
September 30, 2001. Additionally, during the three months ended September 30,
2001, impairments on lodging assets held for use of $3,197,000 were reclassified
as impairments of assets held for sale due to the reclassification of certain
lodging assets as held for sale based on management's expectation to sell such
assets in the next twelve months. During the nine months ended September 30,
2001, Realty recorded an impairment on real estate mortgages and notes
receivable of $22,597,000 (of which $12,378,000 related to working capital and
other notes receivables classified as fees, interest and other receivables). In
addition, during the nine months ended September 30, 2001, Realty recorded an
impairment of $20,534,000 on real estate assets held for use where current
facts, circumstances and analysis indicate that the assets might be impaired.
Realty recorded an impairment on assets held for sale of $24,853,000 and
an impairment on assets held for use of $56,147,000 for the nine months ended
September 30, 2000. During the nine months ended September 30, 2000, Realty
recorded an impairment related to the mortgage portfolio of $71,432,000.
OTHER EXPENSE
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
During the three months ended September 30, 2001 and 2000, Realty
recorded approximately $802,000 and $9,825,000 in other expense, respectively,
as described below.
In June 2000, the Boards approved a plan to reduce the number of
employees, primarily in the financial and legal groups, of the Realty Needham,
Massachusetts offices. For the three months ended September 30, 2001 and 2000,
Realty recorded $617,000 and $3,500,000, respectively, of other expense related
to severance and retention incentive compensation earned by the 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. Other expenses for
the three months ended September 30, 2000 included accelerated amortization on
unearned compensation of $1,390,000 related to certain restricted paired common
shares which were part of this separation agreement. In addition, during the
three months ended September 30, 2001 and 2000, Realty recorded a charge of
$100,000 and $3,142,000, respectively, related to accelerated amortization of
debt issuance costs and certain other expenses associated with the early
repayment of debt and the reduction of the Companies' revolving credit facility.
During the three months ended September 30, 2001, Realty recorded
$796,000 of other expense related to professional fees incurred related to a
corporate restructuring approved by the Boards of Directors and proposed to
shareholders in the fourth quarter of 2001.
During the three months ended September 30, 2000, Realty recorded
provisions and other expenses of approximately $1,843,000 on interest and other
receivables management considers uncollectable. Realty also recorded
approximately $711,000 and $50,000, respectively, of bad debt recoveries during
the three months ended September 30, 2001 and 2000 related to receivables
written off in prior periods.
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
During the nine months ended September 30, 2001 and 2000, Realty
recorded approximately $10,319,000 and $30,945,000, respectively, in other
expenses as described below.
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 nine months ended September 30, 2001 and
2000, Realty recorded $1,840,000 and $20,272,000, respectively, of other expense
related to severance and retention incentive compensation earned by the
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.
The amount for the nine months ended September 30, 2000 includes a cash payment
of approximately $9,460,000 made to the former Chief Executive Officer,
President and Treasurer of Realty pursuant to a separation and consulting
agreement executed in January 2000. In addition, other
37
expenses for the nine months ended September 30, 2000 included accelerated
amortization on unearned compensation of $3,851,000 related to certain
restricted paired common shares which were part of this separation agreement.
Realty also incurred approximately $280,000 of professional fees during the nine
months ended September 30, 2000 related to the implementation of the Five Point
Plan. In addition, during the three months ended September 30, 2001 and 2000,
Realty recorded a charge of $100,000 and $3,142,000, respectively, related to
accelerated amortization of debt issuance costs and certain other expenses
associated with the early repayment of debt and the reduction of the Companies'
revolving credit facility.
During the nine months ended September 30, 2001, Realty recorded
$796,000 of other expense related to professional fees incurred related to a
corporate restructuring approved by the Boards of Directors and proposed to
shareholders in the fourth quarter of 2001.
During the nine months ended September 30, 2001 and 2000, Realty
recorded provisions and other expenses of approximately $9,933,000 and
$4,645,000, respectively, on interest and other receivables management considers
uncollectible. The Companies also recorded approximately $2,350,000 and
$1,245,000, respectively, of bad debt recoveries during the nine months ended
September 30, 2001 related to receivables written off in prior periods.
EXTRAORDINARY ITEM
During the nine months ended September 30, 2001, Realty retired
$13,776,000 of debt at a discount prior to its maturity date. As a result of
these early repayments of debt, a net gain of $86,000 was realized and is
reflected as an extraordinary item.
During the nine months ended September 30, 2000, Realty retired
$58,496,000 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 $1,403,000 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, depending on the nature of the hedge, states that if the derivative is a
hedge, changes in the fair value of the derivative will either be offset against
the change in fair value of the hedged assets or liabilities 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. As
of 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. On June 27, 2001, the interest rate swap was
settled and $670,000 (the difference between the settlement value, $566,000, and
the fair value of the interest rate swap at March 31, 2001) was charged to
earnings as a result.
OPERATING--CONSOLIDATED RESULTS OF OPERATIONS
Operating reported a net loss available to paired shareholders of
$19,342,000 or $0.14 per diluted common share for the quarter ended September
30, 2001, compared to net loss of $20,052,000 or $0.14 per diluted common share
for the third quarter of 2000. For the nine months ended September 30, 2001,
Operating reported a net loss available to paired common shareholders of
$43,783,000 or $0.31 per diluted share compared to a net loss of $40,430,000 or
$0.29 per diluted share for the same period in 2000. The net loss per common
share amount increased primarily as a result a decrease in total revenue for the
nine months ended September 30, 2001 partially offset by a decrease in operating
expenses when compared to the same period in fiscal year 2000.
REVENUES AND EXPENSES
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
Lodging revenues for the three months ended September 30, 2001 and 2000
were $143,884,000 and $156,100,000, respectively. During the third quarter of
2001, approximately $135,131,000, or 93.9%, of lodging revenues were derived
from room rentals. Lodging operating revenues generally are measured as a
function of the ADR and occupancy. The ADR decreased to $60.62 during the three
months ended September 30, 2001 from $62.37 during the three months ended
September 30, 2000, a decrease of $1.75 or 2.8%. Occupancy decreased 3.5
percentage points to 63.0% in the three months ended September 30, 2001 from
66.5% for the three months ended September 30, 2000. Revenue per available room
("RevPAR"), which is the product of occupancy percentage and ADR, decreased 7.9%
(or 8.2% for comparable hotels) to $38.20 in the three months ended September
30, 2001 from $41.47 in the three months ended September 30, 2000. The decrease
in ADR reflected the change in the mix of business in response to reduced demand
during the three months ended September 30, 2001. The decrease in occupancy is
primarily due to the impact of reduced
38
travel in the month of September 2001 due to the terrorist attacks on the
World Trade Center and the Pentagon that occurred on September 11, 2001
compounded with the slowing national economy. The decrease in RevPAR is the
combined result of the decrease in occupancy and ADR. TeleMatrix sales are
included in lodging revenues and increased $433,000 to $5,148,000 for the
three month period ending September 30, 2001.
Total recurring expenses for the three months ended September 30, 2001
were $163,233,000 compared to $176,173,000 for the same period in 2000, a
decrease of $12,940,000. The decrease in recurring expenses is due to decreases
in direct expenses such as salaries and benefits, bad debt, other inn expenses
and certain variable expenses which decreased due to the decline in occupancy as
well as a decrease in general and administrative expenses. The decreases in
direct expense and general and administrative expenses were partially offset by
rising energy and insurance costs and increases in information services costs
related to the transition of certain information services to a third-party
provider during fiscal year 2001. Direct lodging labor decreased in the three
months ended September 30, 2001 due to implementation of certain cost control
measures. TeleMatrix costs of sales increased $76,000 to $2,767,000 for the
three months ended September 30, 2001 due to increases in sales activity in
business and residential product lines.
Operating experienced a decrease in rent to La Quinta Properties, Inc.
during the three months ended September 30, 2001 compared to the three months
ended September 30, 2000. The $2,476,000 decrease from $74,291,000 for the three
months ended September 30, 2000 to $71,815,000 for the three months ended
September 30, 2001 was primarily due to a decrease in contingent rent of
$4,612,000 as a result of the decrease in lodging revenues described above. This
decrease was partially offset by a $2,136,000 increase during the third quarter
of 2001 in the annual base rate Realty charges Operating to adjust for a change
in the Consumer Price Index.
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
Lodging revenues for the nine months ended September 30, 2001 and 2000
were $450,267,000 and $460,599,000, respectively. During the nine months ended
September 30, 2001, approximately $425,715,000, or 94.5%, of lodging revenues
were derived from room rentals. Lodging operating revenues generally are
measured as a function of the ADR and occupancy. The ADR decreased to $61.87
during the nine months ended September 30, 2001 from $63.26 during the nine
months ended September 30, 2000, a decrease of $1.39 or 2.2%. Occupancy
increased 0.2 percentage points to 65.2% in the nine months ended September 30,
2001 from 65.0% for the nine months ended September 30, 2000. Revenue per
available room ("RevPAR"), which is the product of occupancy percentage and ADR,
decreased 1.9% (or 2.1% for comparable hotels) to $40.35 in the nine months
ended September 30, 2001 from $41.13 in the nine months ended September 30,
2000. The decrease in RevPAR is primarily due to the decrease in ADR. TeleMatrix
sales are included in lodging revenues and increased $2,690,000 to $14,722,000
for the nine month period ending September 30, 2001.
Total recurring expenses for the nine months ended September 30,
2001 were $494,077,000 compared to $502,082,000 for the same period in 2000,
a decrease of $8,005,000. The decrease in recurring expenses is primarily due
to decreases in lodging operating expenses, depreciation and amortization and
general and administrative expenses. Lodging operating expenses decreased
$2,525,000 during the nine months ended September 30, 2001 over the lodging
operating expenses in the same period in 2000. The decrease was primarily due
decreases in salaries and benefits, bad debt and other inn expenses. These
decreases were partially offset by increases in utility and energy costs,
insurance expenses and marketing costs. Direct lodging labor costs decreased
due to implementation of policies, procedures and efficiencies during the
nine months ended September 30, 2001. The decrease in depreciation and
amortization expense is due to intangible assets that were fully amortized as
of December 2000 and July 2001, respectively. General and administrative
expense for the nine month period ended September 30, 2001 decreased
$2,985,000 from the same period in the prior year primarily due to additional
expenses incurred during the nine month period ended September 30, 2000
related to certain employment and severance agreements as well as continued
focus on cost control during 2001. This decrease was partially offset by
expenses related to the transitioning of certain information systems services
to a third-party provider. TeleMatrix operating expenses increased due to an
increase in cost of sales of $1,794,000 for the nine months ended September
30, 2001 due to increases in sales activity in business and residential
product lines in the nine months ended September 30, 2001.
Operating experienced an increase in rent to La Quinta Properties, Inc.
during the nine months ended September 30, 2001 compared to the nine months
ended September 30, 2000. The $1,335,000 increase from $219,812,000 for the nine
months ended September 30, 2000 to $221,147,000 for the nine months ended
September 30, 2001 was primarily due to a $4,819,000 increase in the annual base
rate Realty charges Operating to adjust for a change in the Consumer Price
Index. This increase was partially offset by a decrease in contingent rent which
is driven by lodging revenue.
THE LA QUINTA COMPANIES, REALTY, AND OPERATING--COMBINED LIQUIDITY AND CAPITAL
RESOURCES
The Companies earn revenue by (i) owning and operating 222 La Quinta
Inns and 71 La Quinta Inns and Suites; (ii) leasing 82 healthcare facilities
under long-term triple net leases in which the rental rate is generally fixed
with annual escalators; and
39
(iii) providing mortgage financing for 9 healthcare facilities in which the
interest is generally fixed with annual escalators subject to certain
conditions. At September 30, 2001, approximately $148,000,000 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 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. As of September 30, 2001,
the Companies have no interest rate swaps outstanding.
Operating does not have independent access to financing and is a
co-borrower on a portion of Realty's debt. As a result, the liquidity and
capital resources discussion related to Realty is also 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 and in the case of
Operating the deferral of rent and royalties payable to Realty. The Companies,
Realty and Operating anticipate that cash flow provided by operating activities
will provide the necessary funds on a short and long-term basis to meet
operating cash requirements, i.e., exclusive of debt maturities. Future interest
expense and distribution payments, if any, for the Companies and Realty will
also be funded with cash flow provided by operating activities.
CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES
The Companies, Realty and Operating provide funding for new investments
and costs associated with restructuring through a combination of long-term and
short-term financing including both debt and equity. The Companies and Realty
also provide funding for new investments and costs associated with restructuring
through the 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.
Effective June 8, 2001, the Companies entered into a new credit
agreement with a bank group which provided for a $350,000,000 credit facility
("the new Credit Facility"), consisting of a $200,000,000 revolving line of
credit and a $150,000,000 term loan. Borrowings under the new Credit Facility
bear interest at LIBOR plus 3.5% (approximately 6.1% at September 30, 2001). The
new Credit Facility matures on May 31, 2003 and may be extended under certain
conditions at the Companies option. Proceeds from the new facility were
immediately used to payoff existing bank term debt maturing on July 17, 2001 of
approximately $43,800,000.
On July 31, 2001, the revolving line of credit under the new Credit
Facility was increased from $200,000,000 to $225,000,000.
The new Credit Facility includes covenants with respect to maintaining
certain financial benchmarks, limitations on certain types of investment,
limitations on dividends and share repurchases of Realty and Operating Company
and other restrictions.
During the nine months ended September 30, 2001 the Companies borrowed
$95,000,000 on the Tranche A revolving line of credit under an amended credit
agreement entered into in July 1998 (the "1998 credit facility"). This borrowing
was fully repaid in April 2001 with proceeds from the sale of healthcare assets.
Also, during the nine months ended September 30, 2001, the Companies repaid
$400,000,000 on the Tranche D term loan of its 1998 credit facility with
proceeds from the sale of certain healthcare assets and proceeds drawn on the
new Credit Facility, as more fully described above.
The following is a summary of the Companies' future debt maturities as
of September 30, 2001:
(IN MILLIONS)
Year Notes Bank Bonds and Total
Payable Notes Mortgages
---------------------------------- ------- ----- --------- -----
2001 $ 48 (1) $ 2 $ 4 $ 54
2002 25 10 2 37
2003 202 (2) 135 2 339
2004 250 (3) -- 2 252
2005 116 -- -- 116
2006 and thereafter 287 -- 11 298
---- ---- --- ------
Total debt $928 $147 $21 $1,096
==== ==== === ======
(1) On October 17, 2001, the Companies repaid $48,200,000 in Notes at maturity.
(2) Assumes $172 million of Notes due in 2026 are put to the Companies. In
October 2001, the Companies repaid $24 million in Notes due in 2026.
(3) Assumes $150 million of Notes due in 2011 are put to the Companies.
40
At September 30, 2001, the Companies' gross real estate investments
totaled approximately $3,150,619,000 consisting of 293 lodging facilities in
service, 82 assisted living facilities, 4 long-term care facilities, one acute
care hospital campus, and 4 medical office buildings and other healthcare
facilities.
The Companies had shareholders' equity of $2,280,768,000 and debt
constituted 32.5% of the Companies' total capitalization as of September 30,
2001. At September 30, 2001, Realty had shareholders' equity of $2,366,620,000
and Operating had a shareholders' deficit of $48,020,000.
The Companies believe that their various sources of capital, including
cash on hand, availability under Realty's new Credit Facility maturing May 31,
2003, operating cash flows from both Realty and Operating, and proceeds from the
sale of certain healthcare assets as contemplated under the Five Point Plan are
adequate to finance their operations as well as their existing commitments,
including financial commitments related to certain healthcare facilities and
repayment of debt maturing during the remainder of 2001 and 2002.
Although the Companies intend to continue to sell healthcare assets,
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.
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 and pay down additional
debt will be successful.
Additionally, you should read the section entitled "Recent
Devlopments" set forth below for a discussion of the recent terrorist attacks
on our industry and the Companies.
41
INFORMATION REGARDING OPERATORS OF HEALTHCARE ASSETS
As of September 30, 2001, the healthcare portfolio comprised
approximately 15.4% of the net book value of the Companies' total real estate
investments before impairments. Alterra Healthcare Corporation, Balanced Care
Corporation, and Tenet Healthcare/Iasis currently operate approximately 9.1% of
the total real estate investments, or 59.3% of the healthcare portfolio before
impairments. A schedule of significant healthcare operators follows:
PORTFOLIO BY OPERATOR # of
(IN THOUSANDS, EXCEPT NUMBER OF Gross Net Book Operating % of # of # of
PROPERTIES AND PERCENTAGES) Investment Value (2) Properties Portfolio Mortgages Properties Leases Leases
----------------------------------------------------------------------------------------------
LODGING:
Hotel (1) $2,700,071 $2,388,135 293
HEALTHCARE PORTFOLIO:
Alterra 151,425 137,236 49 33% $ -- -- $137,236 49
Balanced Care Corporation 56,923 55,279 12 13% -- -- 55,279 12
Tenet Healthcare/Iasis 65,650 55,123 1 13% -- -- 55,123 1
Other Non-Public Operators 45,736 45,736 4 11% 45,736 4 -- --
CareMatrix Corporation 35,354 35,354 3 9% 35,354 3 -- --
Assisted Living Concepts 31,487 28,400 16 7% -- -- 28,400 16
Life Care Centers of America, Inc. 26,212 26,212 2 6% 26,212 2 -- --
Other Public Operators 28,005 25,554 3 6% -- -- 25,554 3
Paramount Real Estate Services 9,756 8,861 1 2% -- -- 8,861 1
---------- ---------- ----- ------ -------- ---- -------- ---
450,548 417,755 91 100% 107,302 9 310,453 82
Impairment (98,492) (24,172) (74,320)
---------- ---------- ----- -------- --------
450,548 319,263 91 $ 83,130 $236,133
---------- ---------- ----- ======== ========
Total Real Estate Portfolio $3,150,619 $2,707,398 384
========== ========== =====
(1) The lodging portfolio net book value is net of the impairment balance of
$24,670,000.
(2) Net book value shown above includes non-operating properties, including
undeveloped land and two flood-damaged hotels undergoing renovation.
Lodging assets comprise approximately 88.2% of the Companies' total
real estate portfolio. Companies in the assisted living sector of the healthcare
industry approximate 10.0% of the net book value of the Companies' total real
estate investments (and approximately 64.6% of the healthcare portfolio before
the impairment balance), while companies in the long term care sector
approximate 1.7% of the net book value of the Companies' total real estate
investments (and approximately 11.3% of the healthcare portfolio before the
impairment balance).
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 or loss, funds available from operations, its
ability to make distributions to its shareholders and meet debt obligations. The
operations of the long-term care companies have been negatively impacted by
changes in Medicare reimbursement rates, 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.
42
OPERATORS IN BANKRUPTCY
As of September 30, 2001, the Companies had exposure to two operators,
CareMatrix Corporation ("CareMatrix") and Assisted Living Concepts ("ALC"), who
have filed for bankruptcy protection under Chapter 11. The following table
describes the number of facilities, net assets by lease/mortgage and the
lease/mortgage income for the operators that are in Chapter 11 proceedings:
(IN THOUSANDS, EXCEPT
FOR NUMBER OF FACILITIES) Leases Mortgages September 30, 2001
------------------------- --------------------------- -----------------------
Total Rental Interest
Operator Date filed Facilities Facilities Net Assets Facilities Net Assets Income Income
- -----------------------------------------------------------------------------------------------------------------------------------
CareMatrix 11/9/2000 3 -- $ -- 3 $35,354 N/A $2,574 (1)
Assisted Living Concepts (2) 10/1/2001 16 16 28,400 -- -- $2,500 N/A
---------- ------------ ----------- -------------- ------------ ------------ -----------
Totals 19 16 $28,400 3 $35,354 $2,500 $2,574
========== ============ =========== ============== ============ ============ ===========
(1) Mortgages related to CareMatrix have been placed on non-accrual status
and interest income is recorded only as payments are received.
(2) On October 24, 2001, the Companies sold its investment in leases
operated by ALC (see Note 13)
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.
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 losses based on its assessment of current circumstances. However,
upon changes in circumstances, including but not limited to, possible
foreclosure, lease termination, or further declines in operating results or
capital market changes, 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
$121,435,000 and $131,688,000 for the nine months ended September 30, 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 impairment on owned properties, mortgages and
real estate related equity securities, and extraordinary items.
FFO should not be considered an alternative to net income or other
measurements under generally accepted accounting principles, as an indicator of
operating performance or to cash flows from operating, investing, or financing
activities as a measure of liquidity. FFO does not reflect working capital
changes, cash expenditures for capital improvements or principal payments on
indebtedness.
43
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 nine months ended September 30, 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.
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
(IN THOUSANDS) 2001 2000
------------ -----------
Net loss available to common shareholders $(43,787) $(303,097)
Depreciation of real estate and intangible amortization 93,195 115,200
Other capital gains and losses (9,948) 130,725
Other expenses (a) 80,892 190,263
Income tax expense 2,025 --
Extraordinary item (86) (1,403)
Cumulative effect of change in accounting principle (856) --
-------- ---------
Funds from Operations $121,435 $ 131,688
======== =========
(a) Other expenses include provisions for assets and mortgages of
$81,876,000 (of which $12,378,000 relates to working capital
and other notes receivables) offset by recoveries on prior year
impairments of $984,000 for the nine months ended September 30,
2001.
Weighted average paired common shares outstanding:
Basic 143,013 141,596
Diluted 143,013 141,596
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 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
44
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. On October 16, 2001, the Companies announced that the Boards
of Directors of La Quinta Properties, Inc. and La Quinta Corporation unanimously
approved, subject to shareholder approval, a new corporate structure under which
La Quinta Properties, Inc. ("the REIT") will become a subsidiary of La Quinta
Corporation ("the Corporation"). The restructuring, which will enable La Quinta
Properties, Inc. to maintain REIT status and to grow, will result in the REIT
becoming a subsidiary controlled by the Corporation. In connection with the
restructuring, the REIT will issue two new classes of securities: Class A common
stock, which will be issued exclusively to the Corporation, and Class B common
stock which will be exchanged for the REIT's common stock currently held by its
shareholders.
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.
NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("FASB")
approved Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." The Statement
requires that long-lived assets to be disposed of other than by sale be
considered held and used until they are disposed of. The Statement requires that
long-lived assets to be disposed of by sale be accounted for under the
requirements of SFAS No. 121 which requires that such assets be measured at the
lower of carrying amounts or fair value less cost to sell and to cease
depreciation (amortization). SFAS No. 144 describes a probability-weighted cash
flow estimation approach to deal with situations in which alternative courses of
action to recover the carrying amount of a long-lived asset are under
consideration or a range is estimated for the amount of possible future cash
flows. As a result, discontinued operations are no longer measured on a net
realizable basis, and future operating losses are no longer recognized before
they occur. Additionally, goodwill is removed from the scope SFAS No. 144 and as
a result is no longer required to be allocated to long-lived assets to be tested
for impairment. The Statement is effective for financial statements issued for
fiscal years beginning after December 15, 2001, and interim periods within those
fiscal years. The Companies will adopt SFAS No. 144 on January 1, 2002 and have
not yet determined what the impact of SFAS No. 144 will be on the Companies'
results of operations and financial position.
On August 15, 2001, the FASB issued SFAS No. 143, "Accounting for
Asset Retirement Obligations". SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying
amount of the long-lived asset. SFAS No. 143 will be effective for financial
statements issued for fiscal years beginning after June 15, 2002. An entity
shall recognize the cumulative effect of adoption of SFAS No. 143 as a change
in accounting principal. The Companies have not determined whether SFAS No.
143 will have an impact on the Companies' results of operations and financial
position.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations",
and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires
that the purchase method of accounting be used for all business combinations
initiated after September 30, 2001. SFAS No. 141 became effective for all
business combinations initiated after June 30, 2001 and SFAS No. 142 will be
effective for fiscal years beginning after December 15, 2001 and will require 1)
intangible assets (as defined in SFAS No. 141) to be reclassified into goodwill,
2) the ceasing of amortization of goodwill, and 3) the testing of goodwill for
impairment at transition and on an annual basis (more frequently if the
occurrence of an event or circumstance indicates an impairment). The Companies
will adopt SFAS No. 142 on January 1, 2002. The Companies are currently
evaluating the impact of the goodwill assessment on the Companies' results of
operations and financial position.
In January 2001, the Emerging Issues Task Force of the Financial
Accounting Standards Board (the "EITF") reached a consensus ("the Consensus") on
a portion of the EITF Issue No. 00-22 "Accounting for `Points' and Certain Other
Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products
or Services to Be Delivered in the Future." The Consensus addresses the
recognition of a cash rebate or refund obligation as a reduction of revenue
based on a systematic and rational allocation of cost. In January 2001,
Operating implemented a customer retention program which provides a cash rebate.
In accordance with the consensus, Operating classified such cash rebates or
refunds as a reduction of revenues. In addition, the EITF will address incentive
or loyalty programs such as the "La Quinta Returns Club." Operating has
historically reported the cost that it would refund the hotel for the free night
as offsetting components of marketing expense and lodging revenues and reflected
a zero economic impact of the "free night stay." In 2001, Operating has netted
these revenues and costs resulting in no financial statement impact of the
transaction. The 2000 comparable marketing expense and lodging revenue
components have been reclassified to conform with the fiscal year 2001 financial
statement presentation. The Companies will re-evaluate the impact of the final
consensus of the EITF on the Companies' accrual of the "minimal" value of a
night's stay award and will make any necessary adjustments and revision to
accounting policy upon implementation of EITF issue No. 00-22.
45
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.
RECENT DEVELOPMENTS
The terrorist attacks of September 11, 2001 have negatively impacted
general economic, market and political conditions. These terrorist attacks,
compounded with the slowing national economy, have resulted in substantially
reduced demand for lodging for both business and leisure travelers across all
lodging segments. Following the terrorist attacks, we experienced significant
decreases in occupancy, as compared to the comparable period last year.
Although we continually and actively manage the operating costs of our hotels
in order to respond to changes in the demand at our lodging properties, we
must also continue to provide the level of service that our guests expect.
While we currently cannot project the precise impact of the terrorist
attacks, any future responses to these attacks or any other related
hostilities on La Quinta, we do expect that diminished business and consumer
confidence, and the attendant decrease in lodging demand will result in
significant declines in revenue per available room (RevPAR) and earnings
before interest, taxes, depreciation and amortization for the full year
compared to last year.
46
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Companies' results from its lodging segment have been impacted by
the decline in travel as a result of the terrorist attacks on the World Trade
Center and the Pentagon, compounded with a slowing national economy. The reduced
lodging demand has resulted in declines in revenue per available room (RevPAR)
and earnings before interest, taxes, depreciation and amortization in the three
months ended September 30, 2001 and is expected to have a negative impact on
results for the 2001 year. The Companies continue to focus on improving lodging
operations; however, the precise impact of these events on future operations
cannot currently be projected and will remain dependent on changes in travel
patterns.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(b) Reports on Form 8-K
The Companies filed a Joint Current Report on Form 8-K for event dated
October 16, 2001.
47
LA QUINTA PROPERTIES, INC. AND LA QUINTA CORPORATION
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.
NOVEMBER 14, 2001 LA QUINTA PROPERTIES, INC.
- ----------------- --------------------------
(Date)
/s/ David L. Rea
----------------
David L. Rea
Chief Financial Officer and Treasurer
(duly authorized officer and principal financial officer)
NOVEMBER 14, 2001 LA QUINTA CORPORATION
- ----------------- ---------------------
(Date)
/s/ David L. Rea
----------------
David L. Rea
Chief Financial Officer and Treasurer
(duly authorized officer and principal financial officer)
48