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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
CHANGE ACT OF 1934
FOR THE PERIOD ENDED JUNE 30, 1996
Commission file number: 000-26572
NHP INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 52-1445137
- -------- ----------
State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification No.
8065 LEESBURG PIKE, SUITE 400, VIENNA, VIRGINIA 22182-2738
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Address of principal executive offices Zip Code
Registrant's telephone number including area code (703) 394-2400
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1225 EYE STREET, N.W., WASHINGTON, D.C. 20005-3945
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Former Address, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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At July 31, 1996, there were 12,490,675 shares of common stock outstanding.
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NHP INCORPORATED
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Operations
- Three Months Ended June 30, 1996 and 1995 1
Consolidated Statements of Operations
- Six Months Ended June 30, 1996 and 1995 2
Consolidated Balance Sheets
- June 30, 1996 and December 31, 1995 3
Consolidated Statements of Cash Flows
- Six Months ended June 30, 1996 and 1995 4
Notes to Unaudited Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
SIGNATURES 21
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PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NHP INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED JUNE 30
--------------------------
1996 1995
-------- --------
Revenue
Property management services $13,282 $11,843
On-Site personnel, general and administrative
cost reimbursement 31,214 29,153
Financial services 6,595 -
Financial services interest income 1,114 -
Administrative and reporting fees 942 924
Other 1,309 996
------- -------
Total revenue 54,456 42,916
Expenses
Salaries and benefits
On-Site employees 30,532 28,048
Off-Site employees 8,885 5,260
Other general and administrative 5,282 3,334
Costs charged to the Real Estate Companies 682 1,105
Financial services operating interest 420 -
Provision for loan servicing losses 256 -
Amortization of purchased management contracts 1,014 773
Amortization of acquired servicing rights 951 -
Other depreciation and amortization 570 147
Other non-recurring expenses (income) - (425)
------- -------
Total expenses 48,592 38,242
------- -------
Operating income 5,864 4,674
Interest income 136 60
Interest expense (999) (1,989)
------- -------
Income from continuing operations before
income taxes 5,001 2,745
Provision for income taxes (2,076) -
------- -------
Income from continuing operations 2,925 2,745
Income from discontinued real estate operations,
net of income taxes - 504
------- -------
Net income $ 2,925 $ 3,249
======= =======
Net income per common share:
Continuing operations 0.23 0.34
Discontinued operations - .06
------- -------
Net income $ 0.23 $ 0.40
======= =======
Weighted average common and equivalent shares
outstanding (in thousands) 12,783 8,042
======= =======
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of
these statements.
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NHP INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED JUNE 30
--------------------------
1996 1995
-------- --------
Revenue
Property management services $ 26,565 $23,162
On-Site personnel, general and administrative
cost reimbursement 61,746 57,857
Financial services 6,595 -
Financial services interest income 1,114 -
Administrative and reporting fees 1,884 1,848
Other 2,357 2,051
-------- -------
Total revenue 100,261 84,918
Expenses
Salaries and benefits
On-Site employees 60,407 55,531
Off-Site employees 14,904 10,878
Other general and administrative 8,383 5,984
Costs charged to the Real Estate Companies 1,339 2,326
Financial services operating interest 420 -
Provision for loan servicing losses 256 -
Amortization of purchased management contracts 1,893 1,474
Amortization of acquired servicing rights 951 -
Other depreciation and amortization 764 301
Other non-recurring expenses - 45
-------- -------
Total expenses 89,317 76,539
-------- -------
Operating income 10,944 8,379
Interest income 284 152
Interest expense (1,556) (3,904)
-------- -------
Income from continuing operations before
income taxes 9,672 4,627
Provision for income taxes (3,944) -
-------- -------
Income from continuing operations 5,728 4,627
Loss from discontinued real estate operations,
net of income taxes - (2,053)
-------- -------
Net income $ 5,728 $ 2,574
======== =======
Net income (loss) per common share:
Continuing operations 0.45 0.57
Discontinued operations - (0.25)
-------- -------
Net income $ 0.45 $ 0.32
======== =======
Weighted average common and equivalent shares
outstanding (in thousands) 12,684 8,052
======== =======
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of
these statements.
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NHP INCORPORATED
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
June 30, 1996 December 31,
(Unaudited) (Unaudited)
------------- ------------
ASSETS
Cash and cash equivalents $ 4,515 $ 5,996
Receivables, substantially all from related
parties, net of allowance for doubtful
accounts of $2,271 and $1,613 in 1996 and
1995, respectively 9,973 12,809
Mortgage loans held for sale, pledged 45,880 -
On-Site cost reimbursement receivable,
substantially all from related parties 4,086 2,747
Principal, interest and other servicing advances 4,697 -
Current portion of net deferred tax asset 6,686 5,916
Investment in Real Estate held for sale 13,608 -
Other current assets 803 277
-------- --------
Total current assets 90,248 27,745
Purchased management contracts, net of
accumulated amortization of $9,707 and
$8,409 in 1996 and 1995, respectively 40,459 34,568
Acquired mortgage servicing rights, net of
accumulated amortization of $6,500 21,961 -
Goodwill 5,031 -
Property, equipment and capitalized software,
net of accumulated depreciation and
amortization of $3,280 and $1,780 in 1996
and 1995, respectively 8,673 3,523
Deferred costs and other 9,664 4,483
Net deferred tax asset 7,836 14,451
-------- --------
$183,872 $ 84,770
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current portion of long-term debt, including
amounts payable to related parties of $356
in 1996 and 1995 $ 3,086 $ 412
Warehouse lines of credit - financial services 43,774 -
Accounts payable 3,776 4,545
Accrued expenses, including amounts associated
with related parties of $2,392 and $3,365
in 1996 and 1995, respectively 13,041 9,552
Accrued on-site salaries and benefits 4,086 2,747
Deferred revenues and other 6,101 2,199
-------- --------
Total current liabilities 73,864 19,455
Long-term debt, including amounts payable to
related parties of $139 in 1996 and 1995 52,976 23,278
Other long-term liabilities 8,370 2,883
-------- --------
Total liabilities 135,210 45,616
Commitments and contingencies (Note 5)
Shareholders' equity (deficit)
Common stock, $0.01 par value, 25,000,000
shares authorized; 12,474,675 and
12,264,675 shares issued and outstanding
in 1996 and 1995, respectively 125 123
Additional paid-in capital 130,071 126,293
Accumulated deficit (81,534) (87,262)
-------- --------
Total shareholders' equity 48,662 39,154
-------- --------
$183,872 $ 84,770
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of
these statements.
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NHP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED JUNE 30
------------------------
1996 1995
-------- --------
Cash Flows From Operating Activities:
Net income $ 5,728 $ 2,574
Loss from discontinued operations, net of
income taxes - 2,053
--------- --------
Income from continuing operations 5,728 4,627
Depreciation and amortization 3,608 1,775
Income on originated mortgage servicing rights (1,308) -
Amortization of deferred financing costs 110 282
Income taxes 2,202 -
Provision for doubtful accounts 659 -
Provision for loan servicing losses 256 -
Decrease in receivables, substantially all from
related parties 1,054 1,444
Increase in Financial Services principal,
interest and servicing advances (977) -
Increase in deferred costs and other (2,196) (1,564)
Decrease in accounts payable and accrued expenses (2,695) (1,069)
Increase in deferred revenues and other 4,609 179
Increase in warehouse line of credit, net 29,793 -
Mortgage loans originated (211,725) -
Mortgage loans sold 180,282 -
Other (2) 441
--------- --------
Net cash provided by continuing operations 9,398 6,115
Net cash used in discontinued operations - (7,654)
--------- --------
Net cash provided by (used in) operating
activities 9,398 (1,539)
--------- --------
Cash Flows From Investing Activities:
Purchase of NHP Financial Services, Ltd., net
of cash acquired (11,192) -
Investment in real estate held for sale (13,608) -
Purchase of management contracts (3,685) (11,440)
Purchase of servicing rights (2,469) -
Purchase of fixed assets (3,098) (1,197)
--------- --------
Net cash used in investing activities (34,052) (12,637)
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of
these statements.
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NHP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED JUNE 30
------------------------
1996 1995
-------- --------
Cash Flows From Financing Activities:
Additional borrowings 38,547 7,207
Repayments of debt (15,094) (250)
Repurchase of common stock from related parties - (375)
Borrowings from related parties - 1,119
Repayments of note payable to related parties - (373)
Payment of financing, offering and disposition
costs (280) (586)
--------- --------
Net cash provided by financing activities 23,173 6,742
--------- --------
Decrease in cash and cash equivalents (1,481) (7,434)
Cash and Cash Equivalents, beginning of period 5,996 12,090
--------- --------
Cash and Cash Equivalents, end of period $ 4,515 $ 4,656
========= ========
Supplemental Disclosures of Cash Flow Information:
Cash interest payments $ 876 $ 2,647
Cash income tax payments $ 1,742 $ 28
Non-cash items:
Notes payable given as consideration for
the purchase of property management rights $ 2,293 $ -
Stock issued for acquisition of NHP Financial
Services, Ltd. $ 3,780 $ -
The accompanying Notes to Unaudited Consolidated Financial Statements are an
integral part of
these statements.
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NHP INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission and include the accounts of NHP Incorporated (the "Company") and its
wholly-owned subsidiaries. Although certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, the Company believes that the disclosures included herein
are adequate to make the information presented not misleading. Operating results
for the three and six month periods ended June 30, 1996, are not necessarily
indicative of the results that may be expected for the year ended December 31,
1996. These unaudited consolidated financial statements should be read in
conjunction with the financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995 and in
conjunction with the financial statements and notes thereto for WMF Holdings,
Ltd., filed as Exhibit 99.1 of the Company's 8-K/A filed with the Securities and
Exchange Commission on May 29, 1996, for the years ended December 31, 19954 and
1994. In the opinion of the Company, the unaudited consolidated financial
statements contain all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the results for the three and six
month periods ended June 30, 1996 and 1995. Certain prior year amounts have been
reclassified to conform to current year presentation.
On August 18, 1995, the Company sold those of its subsidiaries which held
all of the Company's direct and indirect interests in property-owning
partnerships, along with its captive insurance subsidiary and certain other
related assets (collectively referred to as the "Real Estate Companies") to the
two controlling shareholders of the Company, Demeter Holdings Corporation
("Demeter") and Capricorn Investors, L.P. ("Capricorn"), and J. Roderick Heller,
III, the Chairman, President and CEO of the Company ("Mr. Heller"). The
financial statements include the accounts of the Real Estate Companies through
August 18, 1995, presented as discontinued operations. The Company continues to
provide services to the Real Estate Companies and, therefore, revenues and
expenses between the Company and the Real Estate Companies have not been
eliminated from the Company's revenues and expenses in the accompanying
unaudited consolidated financial statements. All other material intercompany
accounts and transactions have been eliminated in consolidation.
(2) ACQUISITIONS
NHP FINANCIAL SERVICES
As of April 1, 1996, NHP Incorporated closed the acquisition of all of the
outstanding capital stock of WMF Holdings, Ltd., which was subsequently renamed
NHP Financial Services, Ltd. ("NHP Financial Services"), for consideration of
approximately $21 million in the form of $16.8 million in cash and 210,000
shares of the Company's common stock. NHP Financial Services is the owner of
Washington Mortgage Financial Group, Ltd. ("Washington Mortgage Financial") of
Fairfax County, Virginia, one of the nation's leading multifamily mortgage
originators and servicers. Included in Washington Mortgage Financial is
WMF/Huntoon, Paige Associates Limited ("WMF/Huntoon, Paige"), a leading FHA
mortgage originator and servicer located in Edison, New Jersey. The transaction
has been accounted for under the purchase method of accounting. All assets
acquired were recorded at their estimated fair value which resulted in recording
an identifiable intangible asset of approximately $19.1 million related to
acquired servicing rights. In addition, the Company also recorded approximately
$5.2 of goodwill related to the transaction. The goodwill is being amortized
over seven years. The acquired servicing rights are being amortized over periods
up to seven years. Operating results of NHP Financial Services are included
with those of the Company from the closing date.
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NHP INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following pro forma combined financial information presents the
historical results of operations for the Company and NHP Financial Services for
the three and six month periods ended June 30, 1996 and 1995, with pro forma
adjustments as if NHP Financial Services had been acquired as of the beginning
of the periods presented. The pro forma information is based upon certain
estimates and assumptions that the Company believes are reasonable in the
circumstances. The pro forma information is not necessarily indicative of what
the results of operations actually would have been if the transaction had
occurred on the dates indicated, or of future operations.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1996 1995 1996 1995
-------- -------- --------- --------
Total revenues $54,456 $48,497 $106,649 $94,399
======= ======= ======== =======
Operating income $ 5,864 $ 5,363 $ 11,850 $ 8,945
======= ======= ======== =======
Net income $ 2,925 $ 3,362 $ 6,018 $ 2,313
======= ======= ======== =======
Net income per share $ 0.23 $ 0.41 $ 0.47 $ 0.28
======= ======= ======== =======
AMERICAN CAPITAL RESOURCE, INC.
On May 13, 1996, WMF/Huntoon, Paige, a subsidiary of NHP Financial
Services, purchased the loan production system and pipeline, as well as certain
other assets, of American Capital Resource, Inc. for approximately $2.2 million,
plus potential future payments based on realization of the pipeline. The
purchase has been accounted for under the purchase method of accounting and
results in WMF/Huntoon, Paige becoming the nation's largest FHA-insured
multifamily loan originator.
(3) INVESTMENT IN REAL ESTATE HELD FOR SALE
On May 16, 1996, the Company acquired 12 of 13 multifamily properties
containing 3,145 apartment units, including the right to manage the units on a
long-term basis, from affiliates of Great Atlantic Management, Inc. for a
purchase price (including transaction costs) of approximately $86.8 million (the
"Great Atlantic Acquisition"), in the form of approximately $71.2 million in
debt and $15.6 million in cash. In addition, one property was closed in escrow
subject to lender consent. The Company intends to hold this investment in real
estate only until such time as a third-party investor acquires the ownership
interests in the properties and, accordingly, the net investment, less amounts
allocated to purchased management contracts, is recorded on the Consolidated
Balance Sheet at the lower of carrying value or fair value less estimated cost
to sell. In addition, no earnings were recognized in the period from the
properties. Any earnings will be considered an adjustment to the Company's basis
in the properties. Upon disposition of its ownership interests, the Company
intends to retain the long-term rights to manage the properties. The Company
currently has a signed term sheet with a potential third-party investor and is
continuing discussions, but there can be no assurance that these continued
discussions will result in the sale of the Company's investment.
(4) LONG-TERM DEBT
As a result of the acquisition of NHP Financial Services acquisition and
the Great Atlantic Acquisition described in Notes 2 and 3 above, the Company had
additional borrowings under its credit facility as of June 30, 1996, net of
repayments during the period, of approximately $20.0 million. Balance due on the
Company's credit facility as of June 30, 1996 was $43.0 million.
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NHP INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In conjunction with the Real Estate Companies completing the purchase from
Southport Financial Corporation of the general partner interests in partnerships
that own 14 properties containing 2,140 units, the Company completed its
acquisition of the management rights for these properties. As consideration for
the acquisition of the management rights, the Company issued additional non-
interest bearing notes in the amount of $2.3 million which are due in various
quarterly installments through the year 2000. These notes were recorded net of
an unamortized discount of $0.5 million based on an imputed interest rate of
9.5%.
(5) COMMITMENTS AND CONTINGENCIES
As of June 30, 1996, the Company was committed to performance guarantees,
loan guarantees and other guarantees totaling $8.6 million, which largely relate
to transactions consummated by the Real Estate Companies prior to their sale in
August 1995. The Real Estate Companies have indemnified the Company for any
costs which might be incurred by the Company related to these guarantees. In the
opinion of management, future calls, if any, on these guarantees are not
expected to have a material adverse effect on the Company's financial position
or results of operations.
NHP Financial Services bears the Level I risk of loss associated with the
loans it services under the FNMA DUS program. The Level I risk of loss imposes a
lender deductible of 5 percent of the unpaid principal balance and limits the
maximum loss to 20 percent of the original mortgage. The unpaid principal
balance of the FNMA DUS loan servicing portfolio was approximately $697 million
at June 30, 1996. The DUS loans are secured by first liens on the underlying
multifamily properties and are concentrated primarily in Texas, Nevada, Arizona,
Ohio and New York. The Company has provided a reserve for losses of $3.7 million
as of June 30, 1996. This reserve represents management's estimate of losses
which may be incurred on loans underwritten to date that are currently being
serviced. Under the DUS program, NHP Financial Services has also established at
June 30, 1996, a $4.2 million irrevocable letter of credit on FNMA's behalf to
fund any loan losses.
(6) NET INCOME PER SHARE
On August 18, 1995, the Company completed an initial public offering
("IPO") of 4.3 million shares of its common stock for net proceeds of
approximately $52.0 million. Although application of the proceeds of the
offering reduced interest expense, net income per share subsequent to the IPO
decreased due to the increase in shares outstanding.
(7) NEW ACCOUNTING STANDARD
In May 1995, the Financial Accounting Standards Board issued SFAS No. 122,
"Accounting for Mortgage Servicing Rights" ("SFAS 122"), which is an amendment
to SFAS No. 65, "Accounting for Certain Mortgage Banking Activities" ("SFAS
65"). NHP Financial Services elected to adopt this statement as of January 1,
1996.
The primary difference between SFAS No. 122 and SFAS No. 65, as they relate
to NHP Financial Services, is the accounting treatment for originated mortgage
servicing rights ("OMSRs"). Substantially all of NHP Financial Services'
originations are in-house, whereby the underlying loans are funded and closed by
NHP Financial Services. SFAS No. 122, among other provisions, requires the
recognition of OMSRs, as well as purchased mortgage servicing rights (PMSRs), as
assets by allocating the total cost incurred between the loan and the servicing
rights based on their relative fair values if determinable based upon a liquid
market value. Under SFAS No. 65, the cost of OMSRs was included with the cost of
the related loans and was included in determining the gain or loss on sale of
the loans when the loans were sold. PMSRs were previously recorded as assets
under SFAS No. 65.
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NHP INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Also under SFAS 122, all capitalized mortgage servicing rights are
evaluated for impairment based on the excess of the carrying amount of the
mortgage servicing rights over their fair value. In measuring impairment, the
carrying amount must be stratified based on one or more predominant risk
characteristics of the underlying loans. Impairment is recognized through a
valuation allowance for each individual stratum. Under SFAS No. 65, the
impairment valuation could be made using either discounted or undiscounted cash
flows with no required level of disaggregation specified. Any impairment was
recorded directly against the asset.
Following is a summary of capitalized mortgage servicing rights, net of
accumulated amortization, included in the Consolidated Balance Sheet of
June 30, 1996:
CAPITALIZED MORTGAGE
(DOLLARS IN THOUSANDS) SERVICING RIGHTS
---------------------- --------------------
Balance as of April 1, 1996 (date of
acquisition) $19,135
Amortization expense (951)
Acquisitions 3,777
-------
Balance as of June 30, 1996 $21,961
=======
The value of PMSRs and OMSRs is established by allocating the total costs
incurred between the loan and the servicing rights based on their relative fair
value if determinable based upon a liquid market value. NHP Financial Services
has determined that only its FHA loan originations meet the criteria for market
determination. To determine the fair value of the servicing rights created, NHP
Financial Services uses a valuation model that calculates the present value of
future cash flows. Purchased and originated mortgage servicing rights are being
amortized using a straight line method over seven years. A quarterly value
impairment analysis is performed using a discounted methodology that groups the
servicing rights by predominant risk characteristics. NHP Financial Services has
determined those risk characteristics to include interest rate and loan type.
The book value of capitalized PMSRs and OMSRs at June 30, 1996 approximated
market value. No reserve was required for the PMSRs or OMSRs.
(8) SUBSEQUENT EVENTS
As of July 12, 1996, the Company, directly or through subsidiaries,
acquired the long-term management rights and certain notes receivable from two
Florida rental retirement communities as well as all of the outstanding stock of
Preferred Home Health, Inc. (the "Goldberg Acquisition"). In addition, a
subsidiary of NHP Partners, Inc. ("Partners"), an affiliate of the Company,
acquired certain other notes receivable from the two properties and agreed to
acquire all of the issued and outstanding stock of the corporate general
partners of the limited partnership owners of the two properties, subject to the
prior approval of a mortgage lender. The Company acquired and Partners will
acquire these assets from affiliates of the Stephen A. Goldberg Company of
Washington, D.C. and certain other individuals. Total consideration in the
transaction was approximately $16.3 million in cash and $4.0 million in long-
term notes. Preferred Home Health, Inc. is a provider of home health care
services to residents of multifamily rental retirement communities. The purchase
price was funded through additional borrowings under the Company's revolving
credit facility and a cash payment by Partners. The transaction will be
accounted for under the purchase method of accounting.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
On August 18, 1995, NHP Incorporated (the "Company") completed an initial
public offering (the "IPO") of 4.3 million shares of its common stock for net
proceeds of approximately $52.0 million. Prior to that date the Company had been
owned by various private investors. Concurrently with the closing of the IPO,
the Company sold those of its subsidiaries which held all of the Company's
direct and indirect interest in property-owning partnerships, along with its
captive insurance subsidiary and certain other related assets (collectively
referred to as the "Real Estate Companies") to the two controlling shareholders
of the Company, Demeter Holdings Corporation ("Demeter") and Capricorn
Investors, L.P. ("Capricorn"), and J. Roderick Heller, III, the Chairman,
President and Chief Executive Officer of the Company ("Mr. Heller").
Accordingly, operating results and cash flows attributable to the Real Estate
Companies have been presented as discontinued operations in the accompanying
financial statements in conformity with generally accepted accounting
principles. The following discussion, except where specifically stated
otherwise, relates only to the Company's continuing operations.
ACQUISITIONS AND NEW BUSINESSES
As of April 1, 1996, the Company closed the acquisition of all of the
outstanding capital stock of WMF Holdings, Ltd., which was subsequently renamed
NHP Financial Services, LTD. ("NHP Financial Services"), for consideration of
approximately $21 million, in the form of $16.8 million in cash and 210,000
shares of the Company's common stock. NHP Financial Services is the owner of
Washington Mortgage Financial Group, Ltd. ("Washington Mortgage Financial"),
located in Fairfax County, Virginia, one of the nation's leading multifamily
mortgage originators and servicers. Washington Mortgage Financial originated
approximately $805 million in multifamily and other commercial mortgages in
1995. Included in Washington Mortgage Financial is WMF/Huntoon, Paige Associates
Limited ("WMF/Huntoon, Paige"), a leading FHA mortgage originator and servicer
located in Edison, New Jersey.
As a result of the acquisition of NHP Financial Services, the Company is
now reporting on two business segments, Property Services and Financial
Services. Property Services includes the Company's property management and
related services. Financial Services includes mortgage financing and servicing
through NHP Financial Services.
On May 13, 1996, WMF/Huntoon, Paige, a subsidiary of NHP Financial
Services, completed the purchase of the loan production system and pipeline, as
well a certain other assets, of American Capital Resource, Inc. for
approximately $2.2 million plus potential future payments based on realization
of the pipeline. The purchase has been accounted for under the purchase method
of accounting and results in WMF/Huntoon, Paige becoming the nation's largest
FHA-insured multifamily loan originator.
On May 16, 1996, the Company acquired 12 of 13 multifamily properties
containing 3,145 apartment units, including the right to manage the units on a
long-term basis, from affiliates of Great Atlantic Management, Inc. for a
purchase price (including transaction costs) of approximately $86.8 million (the
"Great Atlantic Acquisition"), in the form of approximately $71.2 million in
debt and $15.6 million in cash. In addition, one property was closed in escrow
subject to lender consent. The Company intends to hold this investment in real
estate only until such time as a third-party investor acquires the ownership
interests in the properties and, accordingly, the net investment, less amounts
allocated to purchased management contracts, is recorded on the Consolidated
Balance Sheet at the lower of carrying value or fair value less estimated cost
to sell. In addition, no earnings were recognized in the period from the
properties. Any earnings will be considered an adjustment to the Company's basis
in the properties. Upon disposition of its ownership interests, the Company
intends to retain the long-term rights to manage the properties. The Company
currently has a signed term sheet with a potential third-party investor and is
continuing discussions, but there can be no assurance that these continued
discussions will result in the sale of the Company's investment.
On February 29, 1996, the Company entered into a three-year contract with
CRI, Inc., a Rockville, Maryland-based real estate investment firm, to provide
asset management, refinancing and disposition services for 286 affordable
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multifamily communities containing over 35,000 apartment units, which are owned
by 129 of CRI's public and private real estate partnerships. The transaction
increased the Company's total asset management portfolio by over 50% to
approximately 840 multifamily properties.
As of July 12, 1996, the Company, directly or through subsidiaries,
acquired the long-term management rights and certain notes receivable from two
Florida rental retirement communities as well as all of the outstanding stock of
Preferred Home Health, Inc. In addition, a subsidiary of NHP Partners, Inc., an
affiliate of the Company ("Partners"), acquired certain other notes receivable
from the two properties and agreed to acquire all of the issued and outstanding
stock of the corporate general partners of the limited partnership owners of the
two properties, subject to the prior approval of a mortgage lender (the
"Goldberg Acquisition"). The Company acquired and Partners will acquire these
assets from affiliates of the Stephen A. Goldberg Company of Washington, D.C.
and certain other individuals. Total consideration in the transaction was
approximately $16.3 million in cash and $4.0 million in long-term notes.
Preferred Home Health, Inc. is a provider of home health care services to
residents of multifamily rental retirement communities. The purchase price was
funded through additional borrowings under the Company's revolving credit
facility and a cash payment by Partners. The transaction will be accounted for
under the purchase method of accounting. Preferred Home Health, Inc., which the
Company currently intends to operate as a separate company, represents an
expansion of the Company's Customer Services division through which services are
provided to the residents and owners of approximately 500,000 units, including
the Company's portfolio of 722 properties containing 135,903 units.
On a going-forward basis, to the extent that the Company is successful in
acquiring new management contract rights or completing other acquisitions (such
as the acquisition of NHP Financial Services described above), the Company will
experience increased expenses associated with the amortization of the cost of
the acquired rights and, if the acquisitions are financed by additional
indebtedness, an increase in interest expense. Accordingly, acquisitions may
result in a decrease in income from continuing operations. However, the Company
intends to pursue acquisitions of property management rights and other
acquisitions that result in an increase in income from continuing operations
before interest expense, income taxes, depreciation and amortization ("EBITDA")
after all transition costs relating to the acquisition are absorbed. EBITDA is
widely used in the industry as a measure of a company's operating performance,
but should not be considered as an alternative either (i) to income from
continuing operations (determined in accordance with generally accepted
accounting principles) as a measure of profitability or (ii) to cash flows from
operating activities (determined in accordance with generally accepted
accounting principles). EBITDA does not take into account the Company's debt
service requirements and other commitments and, accordingly, is not necessarily
indicative of amounts that may be available for discretionary uses.
RESULTS OF OPERATIONS
SUMMARY
For the second quarter of 1996, the Company recorded pre-tax income of $5.0
million compared with $2.7 million for the second quarter of 1995, an
improvement of $2.3, or 82.2%. For the six months ended June 30, 1996, the
Company recorded pre-tax income of $9.7 million compared with $4.6 million for
the same period of 1995, an improvement of $5.1 million, or 109.0%. Both
revenues and expenses of the Company show increases in the three and six month
periods of 1996 over 1995, primarily as a result of the acquisition of NHP
Financial Services as of April 1, 1996, and the acquisition of additional
property management contracts. The Company's EBITDA for the second quarter of
1996 was $8.5 million compared with $5.7 million, including $0.4 million of non-
recurring income, for the second quarter of 1995, an improvement of $2.8
million, or 51.0%. EBITDA for the six months ended June 30, 1996, was $14.8
million compared with $10.3 million for the same period of 1995, an improvement
of $4.5 million, or 44.0%.
Net income for the second quarter of 1996 was $2.9 million, including a
$2.1 million provision for income taxes, compared with $3.2 million in the
second quarter of 1995. Net income for the first six months of 1996 was $5.7
million, including a $3.9 million provision for income taxes, compared with $2.6
million for the same period of 1995. No tax provision was recorded in the first
six months of 1995 due to NOLs generated by the Real Estate Companies
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in prior years. Net income for the three and six month periods of 1995 included
$0.5 million in income and $2.1 million in losses from discontinued operations,
respectively.
The following table sets forth the revenues and expenses by business
segment for the three and six month periods ending June 30, 1996. Property
Services includes the Company's property management and related services.
Financial Services includes mortgage financing and servicing. As NHP Financial
Services was acquired as of April 1, 1996, the Company's 1995 results for the
three and six month periods ended June 30, 1995, as presented in the
Consolidated Statements of Operations, represent Property Services only and a
separate table for 1995 is not presented below.
SUMMARY SEGMENT INFORMATION - 1996
(DOLLARS IN THOUSANDS)
Three Months Ended Six Months Ended
June 30, 1996 June 30, 1996
--------------------------- ---------------------------
Property Financial Property Financial
Services Services Total Services Services Total
-------- --------- ----- -------- --------- -----
REVENUES
Property management
services $13,282 $ - $13,282 $26,565 $ - $ 26,565
On-site personnel,
general and
administrative
cost
reimbursement 31,214 - 31,214 61,746 - 61,746
Financial services - 6,595 6,595 - 6,595 6,595
Financial services
interest income - 1,114 1,114 - 1,114 1,114
Administrative and
reporting fees 942 - 942 1,884 - 1,884
Other 1,309 - 1,309 2,357 - 2,357
------- ------ ------- ------- ------ --------
Total revenue 46,747 7,709 54,456 92,552 7,709 100,261
------- ------ ------- ------- ------ --------
EXPENSES
Salaries and
benefits
On-site employees 30,532 - 30,532 60,407 - 60,407
Off-site employees 6,069 2,816 8,885 12,088 2,816 14,904
Other general and
administrative 3,200 2,082 5,282 6,301 2,082 8,383
Costs charged to
the Real Estate
Companies 682 - 682 1,339 - 1,339
Financial services
operating interest - 420 420 - 420 420
Provision for loan
losses - 256 256 - 256 256
Amortization of
purchased
management
contracts 1,014 - 1,014 1,893 - 1,893
Amortization of
acquired servicing
rights - 951 951 - 951 951
Depreciation and
amortization 287 283 570 481 283 764
------- ------ ------- ------- ------ --------
Total expenses 41,784 6,808 48,592 82,509 6,808 89,317
------- ------ ------- ------- ------ --------
Operating income $ 4,963 $ 901 $ 5,864 $10,043 901 $ 10,944
======= ====== ======= ======= ====== ========
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PROPERTY SERVICES
Table 1 below sets forth the percentage of Property Services' total revenue
represented by each revenue and expense line presented. This table is presented
as supplemental information to enable the reader to better analyze the change in
revenues and expenses during the three and six months ended June 30, 1996 versus
the same period of 1995. The percent of revenue comparison is intended to make
the periods more comparable by removing the absolute effect of growth in
revenues and expenses which results from Property Services' additional property
management contracts.
TABLE 1 - PROPERTY SERVICES
SUMMARY FINANCIAL OPERATIONAL DATA - REVENUE AND EXPENSES
AS A PERCENTAGE OF TOTAL REVENUE
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1996 1995 1996 1995
-------- -------- --------- --------
REVENUES
Property management
services 28.4% 27.6% 28.7% 27.3%
On-site personnel,
general and
administrative
cost reimbursement 66.8% 67.9% 66.8% 68.1%
Administrative and
reporting fees 2.0% 2.2% 2.0% 2.2%
Other 2.8% 2.3% 2.5% 2.4%
----- ----- ----- -----
Total revenue 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
EXPENSES
Salaries and benefits
On-site employees 65.3% 65.4% 65.3% 65.4%
Off-site employees 13.0% 12.3% 13.1% 12.8%
Other general and
administrative 6.8% 7.8% 6.8% 7.0%
Costs charged to the
Real Estate Segment 1.5% 2.6% 1.4% 2.7%
Amortization of
purchased management
contracts 2.2% 1.8% 2.0% 1.7%
Depreciation and
amortization 0.6% 0.3% 0.5% 0.4%
Non-recurring expenses
(income) - (1.0)% - 0.1%
----- ----- ----- -----
Total expenses 89.4% 89.2% 89.1% 90.1%
----- ----- ----- -----
Operating Income 10.6% 10.8% 10.9% 9.9%
===== ===== ===== =====
Property Services' expenses include salaries and benefits with respect to
employees working at managed properties, that are fully reimbursed by the
property-owning partnerships, and certain general and administrative costs that
are fully reimbursed by the Real Estate Companies. The reimbursements, recorded
as revenue under "On-site personnel, general and administrative cost
reimbursement," fully offset the corresponding expenses, with no impact on the
segment's net income. Therefore, reimbursed expenses and related revenue are not
analyzed in any detail below. Table 2 below shows the Property Services'
adjusted revenue and expenses, which excludes on-site personnel, general and
administrative cost reimbursements, and related expenses.
Table 3 below sets forth the percentage of Property Services' total revenue
excluding on-site personnel, general and administrative cost reimbursement
("adjusted revenue") represented by each revenue and expense line presented.
This table is presented as supplemental information to enable the reader to
better analyze the change in revenues and expenses during the three and six
months ended June 30, 1996 versus the same period of 1995. The percent of
revenue comparison is intended to make the periods more comparable by removing
the absolute effect of growth in revenues and expenses which results from
Property Services' additional property management contracts. Such a presentation
would also reflect economies in operating expenses, to the extent they exist.
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TABLE 2 - PROPERTY SERVICES
SUMMARY FINANCIAL AND OPERATIONAL DATA - ADJUSTED REVENUE AND
ADJUSTED OPERATING EXPENSES (IN THOUSANDS)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1996 1995 1996 1995
-------- -------- --------- --------
REVENUES
Property management
services $13,282 $11,843 $26,565 $23,162
Administrative and
reporting fees 942 924 1,884 1,848
Other 1,309 996 2,357 2,051
------- ------- ------- -------
Adjusted revenue (1) 15,533 13,763 30,806 27,061
------- ------- ------- -------
EXPENSES
Salaries and benefits,
off-site employees 6,069 5,260 12,088 10,878
Other general and
administrative 3,200 3,334 6,301 5,984
Amortization of
purchased management
contracts 1,014 773 1,893 1,474
Depreciation and
amortization 287 147 481 301
Non-recurring expense
(income) - (425) - 45
------- ------- ------- -------
Adjusted operating
expenses (2) 10,570 9,089 20,763 18,682
------- ------- ------- -------
Operating Income $ 4,963 $ 4,674 $10,043 $ 8,379
======= ======= ======= =======
TABLE 3 - PROPERTY SERVICES
SUMMARY FINANCIAL AND OPERATIONAL DATA - ADJUSTED REVENUE AND
ADJUSTED OPERATING EXPENSES AS A PERCENTAGE OF ADJUSTED REVENUE
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1996 1995 1996 1995
-------- -------- --------- --------
REVENUES
Property management
services 85.5% 86.1% 86.2% 85.6%
Administrative and
reporting fees 6.1% 6.7% 6.1% 6.8%
Other 8.4% 7.2% 7.7% 7.6%
----- ----- ----- -----
Adjusted revenue (1) 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
EXPENSES
Salaries and benefits,
off-site employees 39.1% 38.2% 39.2% 40.2%
Other general and
administrative 20.6% 24.2% 20.5% 22.1%
Amortization of
purchased management
contracts 6.5% 5.6% 6.1% 5.4%
Depreciation and
amortization 1.8% 1.1% 1.6% 1.1%
Non-recurring expense
(income)Depreciation and amortization - (3.1)%
- - 0.2%
----- ----- ----- -----
Adjusted operating
expenses (2) 68.0% 66.0% 67.4% 69.0%
----- ----- ----- -----
Operating Income 32.0% 34.0% 32.6% 31.0%
===== ===== ===== =====
- ------------------
(1) Adjusted revenue excludes On-site personnel, general and administrative
cost reimbursement.
(2) Adjusted operating expenses exclude salaries and benefits for On-site
employees and costs charged to the Real Estate Companies.
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RESULTS OF OPERATIONS - PROPERTY SERVICES - SECOND QUARTER 1996 COMPARED WITH
SECOND QUARTER 1995
REVENUE
Total revenue of Property Services consists of property management services
fees, on-site personnel, general and administrative cost reimbursement,
administrative and reporting fees, and other revenue. Adjusted revenue equals
total revenue less on-site personnel, general and administrative cost
reimbursement. Property Services' total revenue increased $3.8 million, or 8.9%,
to $46.7 million in the second quarter of 1996 from $42.9 million in the second
quarter of 1995. Adjusted revenue increased $1.7 million, or 12.9%, to $15.5
million in the second quarter of 1996 from $13.8 million in second quarter of
1995. The reasons for these changes are set forth below.
PROPERTY MANAGEMENT SERVICES revenue increased $1.4 million, or 12.2%,
during the second quarter of 1996 versus 1995. As a percentage of total revenue,
property management revenue increased to 28.4% from 27.6%. As a percentage of
adjusted revenue, property management revenue decreased to 85.5% from 86.1%. The
increase in absolute terms and as a percentage of total revenue resulted
primarily from an increase in the average number of units managed, due primarily
to the acquisition of additional property management rights. The decrease as a
percentage of adjusted revenue reflects the more than proportional increase in
other revenue discussed below.
ADMINISTRATIVE AND REPORTING FEES increased $0.02 million, or 1.9%, during
the second quarter of 1996 versus 1995. As a percentage of total revenue,
administrative and reporting fees revenue decreased to 2.0% from 2.2%. As a
percentage of adjusted revenue, administrative and reporting fees revenue
decreased to 6.1% from 6.7%. This revenue is subject to fluctuations from year
to year and is recorded on an estimated basis throughout the year, subject to
adjustment depending on actual fees received during the year. The Company
expects administrative and reporting fees to continue to decline as a percentage
of adjusted revenue because these fees are not received with respect to
newly-acquired management contracts and as the properties which have
administrative and reporting fees are lost due to sale or other reasons.
OTHER REVENUE, which includes Buyers Access(registered trademark) fees, tax
credit investment fees and insurance advisory fees, increased $0.3 million, or
31.4%, during the second quarter of 1996 versus 1995. As a percentage of total
revenue, other revenue increased to 2.8% from 2.3%. As a percentage of adjusted
revenue, other revenue increased to 8.4% from 7.2%. The increase in absolute
terms and as a percentage of total and adjusted revenue resulted primarily from
an increase in the number of tax credit investment transactions being completed
during the second quarter of 1996 versus 1995 and an increase in the average
number of units enrolled in the Buyers Access(Registered Trademark) program.
EXPENSES
Total expenses of Property Services consist of salaries and benefits for
on-site and off-site employees, other general and administrative expenses, costs
charged to the Real Estate Companies, depreciation and amortization,
amortization of purchased management contracts and other non-recurring expenses.
Adjusted operating expenses equal total expenses less salaries and benefits for
on-site employees and costs charged to the Real Estate Companies. Total expenses
increased $3.6 million, or 9.3%, to $41.8 million in the second quarter of 1996
from $38.2 million in the second quarter of 1995. Total expenses as a percentage
of total revenue increased to 89.4% in the second quarter of 1996 from 89.2% in
the second quarter of 1995. Adjusted operating expenses increased $1.5 million,
or 16.3%, to $10.6 million in the second quarter of 1996 from $9.1 million in
the second quarter of 1995. Adjusted operating expenses as a percentage of
adjusted revenue increased to 68.0% from 66.0%. The reasons for these changes
are set forth below.
SALARIES AND BENEFITS - OFF-SITE EMPLOYEES expenses increased $0.8 million,
or 15.4%, in the second quarter of 1996 versus 1995. As a percentage of total
revenue, salary and benefits - off-site employees increased to 13.0% from 12.3%.
As a percentage of adjusted revenue, salary and benefits - off-site employees
expenses increased to 39.1% from 38.2%. The increase in absolute terms and as a
percentage of total and adjusted revenue resulted primarily from
15
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additional personnel cost incurred related to management of additional
properties and addition of personnel to expand the Company's customer services.
OTHER GENERAL AND ADMINISTRATIVE expenses decreased $0.1 million, or 4.0%,
in the second quarter of 1996 versus 1995. As a percentage of total revenue,
other general and administrative expenses decreased to 6.8% from 7.8%. As a
percentage of adjusted revenue, other general and administrative expenses
decreased to 20.6% from 24.2%. The decrease in absolute terms and as a
percentage of total and adjusted revenues resulted primarily from lower
professional fees in the second quarter of 1996.
AMORTIZATION OF PURCHASED MANAGEMENT CONTRACTS increased $0.2 million, or
31.2%, in the second quarter of 1996 versus 1995. As a percentage of total
revenue, amortization of purchased management contracts increased to 2.2% from
1.8%. As a percentage of adjusted revenue, amortization of purchased management
contracts increased to 6.5% from 5.6%. The increase in absolute terms and as a
percentage of total and adjusted revenues resulted primarily from acquisitions
of additional management contracts.
DEPRECIATION AND AMORTIZATION expense increased $0.1 million, or 95.2%, in
the second quarter of 1996 versus 1995. As a percentage of total revenue,
depreciation and amortization expense increased to 0.6% from 0.3%. As a
percentage of adjusted revenue, depreciation and amortization expense increased
to 1.8% form 1.1%. The increase in absolute terms and as a percentage of total
and adjusted revenue resulted primarily from increased depreciation on computer
hardware and software purchased in connection with the Company's move from
mainframe to client-server based technology and leasehold improvements,
furniture and equipment purchased in connection with the movement of the
Company's headquarters to Vienna, Virginia.
RESULTS OF OPERATIONS - PROPERTY SERVICES - SIX MONTHS OF 1996 COMPARED WITH SIX
MONTHS OF 1995
REVENUE
Property Services' total revenue increased $7.7 million, or 9.0%, to $92.6
million for the first six months of 1996 from $84.9 million for the first six
months of 1995. Adjusted revenue increased $3.7 million, or 13.8%, to $30.8
million in the six months of 1996 from $27.1 million for the six months of 1995.
The reasons for these changes are set forth below.
PROPERTY MANAGEMENT SERVICES revenue increased $3.4 million, or 14.7%,
during the first six months of 1996 versus 1995. As a percentage of total
revenue, property management revenue increased to 28.7% from 27.3%. As a
percentage of adjusted revenue, property management revenue increased to 86.2%
from 85.6%. The increase in absolute terms and as a percentage of total and
adjusted revenue resulted primarily from an increase in the average number of
units managed due primarily to the acquisition of additional property management
rights.
ADMINISTRATIVE AND REPORTING FEES increased $0.04 million, or 1.9%, during
the first six months of 1996 versus 1995. As a percentage of total revenue,
administrative and reporting fees revenue decreased to 2.0% from 2.2%. As a
percentage of adjusted revenue, administrative and reporting fees revenue
decreased to 6.1% from 6.8%. This revenue is subject to fluctuations from year
to year and is recorded on an estimated basis throughout the year, subject to
adjustment depending on actual fees received during the year. The Company
expects administrative and reporting fees to continue to decline as a percentage
of adjusted revenue because these fees are not received with respect to
newly-acquired management contracts and as the properties which have
administrative and reporting fees are lost due to sale or other reasons.
OTHER REVENUE, increased $0.3 million, or 14.9%, during the first six
months of 1996 versus 1995. As a percentage of total revenue, other revenue
increased to 2.5% from 2.4%. As a percentage of adjusted revenue, other revenue
increased to 7.7% from 7.6%. The increase in absolute terms and as a percentage
of total and adjusted revenue resulted primarily from an increase in the number
of tax credit investment transactions being completed during the first six
months of 1996 versus 1995 and an increase in the average number of units
enrolled in the Buyers Access(Registered Trademark) program.
16
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EXPENSES
Total expenses increased $6.0 million, or 7.8%, to $82.5 million for the
first six months of 1996 from $76.5 million for the first six months of 1995.
Total expenses as a percentage of total revenue decreased to 89.1% for the first
six months of 1996 from 90.1% for the first six months of 1995. Adjusted
operating expenses increased $2.1 million, or 11.1%, to $20.8 million for the
first six months of 1996 from $18.7 million for the first six months of 1995.
Adjusted operating expenses as a percentage of adjusted revenue decreased to
67.4% from 69.0%. The reasons for these changes are set forth below.
SALARIES AND BENEFITS - OFF-SITE EMPLOYEES expenses increased $1.2 million,
or 11.1%, for the first six months of 1996 versus 1995. As a percentage of total
revenue, salary and benefits - off-site employees increased to 13.1% from 12.8%.
As a percentage of adjusted revenue, salary and benefits - off-site employees
expenses decreased to 39.2% from 40.2%. The increase in absolute terms and as a
percentage of total revenue resulted primarily from additional personnel cost
incurred related to management of additional properties and addition of
personnel to expand customer services.
OTHER GENERAL AND ADMINISTRATIVE expenses increased $0.3 million, or 5.3%,
for the first six months of 1996 versus 1995. As a percentage of total revenue,
other general and administrative expenses decreased to 6.8% from 7.0%. As a
percentage of adjusted revenue, other general and administrative expenses
decreased to 20.5% from 22.1%. The increase in absolute terms resulted primarily
from a $0.7 million increase in allowance for doubtful accounts for the first
six months of 1996, partially offset by lower professional fees. The decrease as
a percentage of adjusted revenue reflects a lower average cost per unit.
AMORTIZATION OF PURCHASED MANAGEMENT CONTRACTS increased $0.4 million, or
28.4%, for the first six months of 1996 versus 1995. As a percentage of total
revenue, amortization of purchased management contracts increased to 2.0% from
1.7%. As a percentage of adjusted revenue, amortization of purchased management
contracts increased to 6.1% from 5.4%. The increase in absolute terms and as a
percentage of total and adjusted revenues resulted primarily from acquisitions
of additional management contracts.
DEPRECIATION AND AMORTIZATION expense increased $0.2 million, or 59.8%, for
the first six months of 1996 versus 1995. As a percentage of total revenue,
depreciation and amortization expense increased to 0.5% from 0.4%. As a
percentage of adjusted revenue, depreciation and amortization expense increased
to 1.6% form 1.1%. The increase in absolute terms and as a percentage of total
and adjusted revenue resulted primarily from increased depreciation on computer
hardware and software purchased in connection with the Company's move from
mainframe to client-server based technology and leasehold improvements,
furniture and equipment purchased in connection with the movement of the
Company's headquarters to Vienna, Virginia.
RESULTS OF OPERATIONS - FINANCIAL SERVICES
As previously discussed, the Financial Services business segment represents
the results of operations of the Company's newly acquired subsidiary NHP
Financial Services and its wholly owned subsidiary Washington Mortgage
Financial. NHP Financial Services' primary business activities are multifamily
loan servicing, multifamily loan origination and secondary marketing. NHP
Financial Services does not hold the mortgages it originates or purchases long-
term but resells them through various programs. NHP Financial Services' revenue
includes loan servicing fees, net gain on sale of mortgage loans, interest
income, placement fee income, origination fee income and other income. The
results of NHP Financial Services are included in the Company's results of
operations from the date of acquisition, April 1, 1996.
NHP Financial Services revenue is to a large degree activity driven and the
strong second quarter results reflect a relatively high level of activity, as
compared with historical levels, related to the origination and sales of
mortgage loans. Financial Services revenues are somewhat sensitive to economic
factors such as the general level of interest rates and future revenues may
fluctuate as a result of changes in these factors. Therefore, Financial
Services' second quarter results may not be indicative of future period results.
17
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NHP Financial Services results also reflect the impact of certain purchase
accounting adjustments. The purchase accounting adjustments relate primarily to
the write-up of acquired servicing rights to market value as of the date of
acquisition and the recording of the excess of purchase price over net assets
acquired ("goodwill"). These adjustments resulted in significantly increased
amortization expense related to acquired servicing rights and goodwill.
INTEREST INCOME AND INTEREST EXPENSE
Interest income increased $0.08 million, or 126.7%, and $0.1 million, or
86.8%, for the second quarter and first six months of 1996, respectively,
compared with the same periods of 1995. The increases are due primarily to a
higher average cash balance and interest earned on amounts due from the Real
Estate Companies. Prior to the sale of the Real Estate Companies in August of
1995, no interest was charged on amounts due from the Real Estate Companies
since they were part of NHP Incorporated.
Interest expense decreased $1.0 million, or 49.8%, and $2.3 million, or
60.1%, for the second quarter and first six months of 1996, respectively,
compared with the same periods of 1995. The decreases are due primarily to a
lower level of debt during 1996 following the application of the proceeds from
the Company's IPO to repay debt in August of 1995. Going forward, interest
expense is expected to increase as a result of additional borrowings related to
the previously discussed acquisitions.
PROVISION FOR INCOME TAXES
The Company recorded a $2.1 million and $3.9 million provision for income
taxes in the second quarter and first six months of 1996, respectively, versus
no tax provision in the comparable periods of 1995. The Company files a
consolidated Federal income tax return and prior to the third quarter of 1995
had recognized no provision or benefit for income taxes primarily because of net
operating losses generated in prior years by the discontinued real estate
operations. Prior to the sale of the Real Estate Companies, losses from
discontinued operations typically caused the Company to report no taxable
income, making realization of net operating loss carryforwards ("NOLs")
uncertain. As a result, historically, the Company had established a valuation
allowance for the full amount of the NOLs. Subsequent to the sale of the Real
Estate Companies, the Company reduced its valuation allowance in the third
quarter of 1995, resulting in the recognition of a net deferred tax asset and a
corresponding tax benefit. Since that time, the Company has recorded a tax
provision.
LIQUIDITY AND CAPITAL RESOURCES
Continuing operations, particularly property management operations, have
historically provided a steady, noncyclical source of cash flow to the Company.
The reported cash flows include three months of activity related to NHP
Financial Services. Cash flows related to NHP Financial Services tends to be
less predictable and depends largely on the level of loan origination activity.
Net cash provided by continuing operations for the first six months of 1996 was
$9.4 million compared with $6.1 million for the first six months of 1995. On
June 30, 1996, cash and cash equivalents totaled $4.5 million and the Company
had $32 million of available borrowings under its revolving credit facility with
a group of banks (the "Credit Facility"). In July, 1996, the Company borrowed an
additional $13 million under its Credit Facility as a portion of the purchase
price in the Goldberg Acquisition.
For the first six months of 1996, net cash used in investing activities was
$34.1 million, primarily reflecting the purchase of NHP Financial Services, an
investment in real estate held for sale, additional payments on the acquisition
of property management rights, cash used to purchase and develop software
related to the Company's move from mainframe technology to client-server based
technology and costs of leasehold improvements for the Company's new office
space. Net cash used in investing activities in the first six months of 1995 of
$12.6 million primarily reflects payments for acquisition of property management
rights.
For the first six months of 1996, net cash provided by financing activities
was $23.2 million, primarily reflecting borrowings on the Credit Facility to
purchase NHP Financial Services and the investment in real estate held
18
21
for sale, net of repayments on the Credit Facility. In the first six months of
1995, net cash provided by financing activities was $6.7 million, primarily
reflecting borrowings in connection with the acquisition of property management
rights.
The Company's future capital expenditures are expected to consist largely
of funds required in connection with the acquisition of property management
rights and other acquisitions. The Company intends to finance such acquisitions
primarily out of operating cash flow and bank or other borrowings, including
borrowings under the Credit Facility. The Company may also issue additional
common stock, either for cash to be used in connection with, or as consideration
for, acquisitions. The Company believes that it can repay its current
indebtedness out of operating cash flow, alternative debt arrangements or
additional equity offerings.
Future capital expenditures are also expected to include costs to acquire
additional computer hardware and software in connection with the Company's move
from mainframe technology to client-server based technology to serve its
information systems needs. As of June 30, 1996, the client-server software and
related hardware had been purchased with funds from operating cash flow. The
Company currently has no material commitments for capital expenditures other
than the Goldberg Acquisition previously discussed.
The Company has substantial unused NOLs for Federal tax purposes. In
addition, the Company estimates that, based on current projections, it has
sufficient Federal alternative minimum tax NOLs to offset the allowable limit of
Federal alternative minimum taxable income at least through 1996. Therefore, the
Company expects its combined Federal and state cash income tax rate to be
approximately 7% for 1996.
The Company has provided, and expects to continue to provide, working
capital advances to the Real Estate Companies. These advances, which are
included in receivables and totaled $1.4 million as of June 30, 1996, are
payable on demand and incur interest at the rate equal to prime plus 1%. The
Real Estate Companies repaid these working capital advances in July 1996 from
proceeds of certain real estate transactions.
DISCONTINUED OPERATIONS
Net cash used in discontinued operations for the first six months of 1995
was $7.7 million, primarily due to the acquisition of interests in real estate
assets by the Real Estate Companies.
NET INCOME PER SHARE
As previously discussed, on August 18, 1995, the Company completed an IPO
of 4.3 million shares of its common stock for net proceeds of approximately
$52.0 million. Although application of the proceeds of the offering reduced
interest expense, net income per share subsequent to the IPO decreased due to
the increase in shares outstanding. In addition, as of April 1, 1996, the
Company issued 210,000 shares of common stock in connection with the purchase of
WMF Holdings. This transaction impacted both earnings and net income per share
beginning with the second quarter of 1996.
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PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION
11.0 Statement regarding computation of per share earnings.
27.0 Financial Data Schedule.
(b) Reports on Form 8-K
On April 15, 1996, the Company reported to the Securities and Exchange
Commission under Item 2, Acquisition or disposition of Assets, that as of April
1, 1996, the Company closed the acquisition of all of the outstanding capital
stock of WMF Holdings, Ltd. for consideration of approximately $21 million, in
the form of $16.8 million in cash and 210,000 shares of the Company's common
stock. WMF Holdings Ltd. is the owner of Washington Mortgage Financial Group,
Ltd., located in Fairfax County, Virginia, one of the nation's leading
multifamily mortgage originators and servicers. Washington Mortgage Financial
originated approximately $805 million in multifamily and other commercial
mortgages in 1995. Included in Washington Mortgage Financial is WMF/Huntoon,
Paige Associates Limited, a leading FHA mortgage originator and servicer located
in Edison, New Jersey. The Company also reported that it was impracticable at
that time to provide the pro forma financial information and that such pro forma
financial information would be filed within 60 days of the date of the report.
On May 29, 1996, the Company filed an 8-K/A amendment to the 8-K filed on
April 15, 1996, that included the financial statements and exhibits related to
the acquisition of WMF Holdings, Ltd. The Company reported to the Securities
and Exchange Commission under Item 7, Financial Statements and Exhibits and
included as exhibits WMF Holdings, Ltd. and Subsidiaries Financial Statements
and Supplementary Information for the Years Ended December 31, 1994 and 1995,
With Independent Auditor's Report Thereon, and the Unaudited Pro Forma Combined
Condensed Financial Statements and Notes to Unaudited Pro Forma Combined
Condensed Financial Statements.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NHP INCORPORATED
(Registrant)
August 13, 1996 By: /S/ ANN TORRE GRANT
-------------------------------------
Ann Torre Grant
Executive Vice President,
Chief Financial Officer, and
Treasurer (Authorized Officer and
Principal Financial Officer)