UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period From _____ to _____
Commission File Number: 001-13807
ElderTrust
(Exact name of registrant as specified in its declaration of trust)
Maryland 23-2932973
(State or other jurisdiction) (I.R.S. Employer Identification No.)
of incorporation or organization)
101 East State Street, Suite 100, Kennett Square, Pennsylvania 19348
(Address of principal executive offices)
(zip code)
(610) 925-4200
(Registrant's telephone number, including area code)
415 McFarlan Road, Suite 202, Kennett Square, Pennsylvania 19348
(Former name, former address and former fiscal year,
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
----- -----
7,392,600
(Outstanding shares of the issuer's common shares,
$0.01 par value per share, as of May 12, 1998)
ELDERTRUST
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
INDEX
PART I - FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997..................................... 3
Consolidated Statement of Operations for the period
from January 30, 1998 to March 31, 1998................... 4
Consolidated Statement of Cash Flows
for the period from January 30, 1998 to March 31, 1998.... 5
Notes to Consolidated Financial Statements................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................... 16
Signatures.............................................................. 17
-2-
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ELDERTRUST
CONSOLIDATED BALANCE SHEETS
(dollars amounts in thousands, except share amounts)
March 31, 1998 December 31, 1997
(Unaudited) (Note)
ASSETS
Real estate properties, at cost $151,389 --
Less - accumulated depreciation (738) --
-------- -----
Net real estate properties 150,651 --
Real estate loans receivable 37,900 --
Cash and cash equivalents 2,079 --
Accounts receivable 1,316 --
Prepaid expenses 258 --
Investment in and advances to unconsolidated entities 7,402 --
Other assets, net of accumulated
amortization and depreciation of $49 3,413 --
-------- -----
Total assets $203,019 --
======== =====
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank Credit Facility borrowings $34,110 --
Accounts payable and accrued expenses 4,053 --
Mortgages payable 36,874 --
Other liabilities 2,544 --
-------- -----
Total liabilities 77,581 --
Minority interest 8,588 --
SHAREHOLDERS' EQUITY
Preferred shares, $.01 par value; 20,000,000 shares
authorized; none outstanding
Common shares, $.01 par value; 100,000,000 shares
authorized; 7,390,100 shares issued and outstanding 74 --
Capital in excess of par value 118,130 --
Cumulative deficit (1,354) --
-------- -----
Total shareholders' equity 116,850 --
-------- -----
Total liabilities and shareholders' equity $203,019 --
======== =====
Note: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
The accompanying notes to consolidated financial statements are an
integral part of these statements.
-3-
ELDERTRUST
CONSOLIDATED STATEMENT OF OPERATIONS
PERIOD FROM JANUARY 30, 1998 TO MARCH 31, 1998
(unaudited and dollars in thousands, except per share amounts)
Revenues:
Rental revenues $ 2,420
Interest 549
Other income 261
-------
Total revenues 3,230
Expenses:
Property operating expenses 150
Interest expense 779
Depreciation and amortization 743
General and administrative 379
Start-up expenses 2,617
-------
Total expenses 4,668
Net loss before equity in loss of
unconsolidated investments and minority interest (1,438)
Equity in loss of unconsolidated investments (4)
Minority interest 88
-------
Net loss ($1,354)
=======
Basic and diluted weighted average number of shares outstanding (1) 7,390
=======
Net loss per share - basic and diluted ($0.18)
=======
(1) Options to purchase 504,000 common shares of beneficial interest were
outstanding during the first quarter of 1998 but were not included in the
computation of diluted net loss per share because the exercise price of the
options was greater than the average market price of the shares. The options
expire on January 30, 2008.
The accompanying notes to consolidated financial statements are an
integral part of this statement.
-4-
ELDERTRUST
CONSOLIDATED STATEMENT OF CASH FLOWS
PERIOD FROM JANUARY 30, 1998 TO MARCH 31, 1998
(unaudited and dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($1,354)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 787
Non-cash charges 2,018
Other (85)
Net changes in assets and liabilities:
Accounts receivable and prepaid expenses (1,507)
Accounts payable and accrued expenses 4,053
Other assets and liabilities 2,612
--------
Net cash provided by operating activities 6,524
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition and cost of real estate investments (103,882)
Investment in real estate mortgages and development funding (37,900)
Investment in unconsolidated entities (7,406)
Other (3,322)
--------
Net cash used in investing activities (152,510)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering, net of offering costs
of $11,218 114,217
Loan origination costs (140)
Borrowings under Bank Credit Facility 34,110
Principal payments on mortgage loans (122)
--------
Net cash provided by financing activities 148,065
Net increase in cash and cash equivalents 2,079
Cash and cash equivalents, beginning of operations 0
--------
Cash and cash equivalents, end of period $ 2,079
========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 526
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Note receivable relating to officer stock purchase $ 3,600
Assumption of debts payable for acquisition of real
estate properties 34,094
Assumed debt valued at market interest rates 2,902
Shares and units issued for the acquisition of
real estate properties 10,511
The accompanying notes to consolidated financial statements are an
integral part of this statement.
-5-
ELDERTRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(unaudited)
1. Organization and Operations
ElderTrust was formed in the State of Maryland on September 23, 1997 and issued
a total of 100 shares to the Company's chief financial officer for a total
consideration of $100. The Company completed its initial public offering on
January 30, 1998 (the "IPO") pursuant to which it issued 6,957,500 common
shares. Net proceeds to the Company were approximately $114.2 million.
The Company had no operations prior to January 30, 1998. At March 31, 1998, the
Company's total assets consisted primarily of (i) a diversified portfolio of 20
healthcare properties, consisting primarily of assisted living and skilled
nursing facilities which are leased back to the prior owners or other third
parties, (ii) construction loans totaling $9.6 million collateralized by
healthcare properties under construction, (iii) term loans totaling $27.5
million collateralized by healthcare properties on which construction has been
recently completed but which are still in transition to occupancy levels
required under purchase/leaseback agreements, (iv) an $800,000 first mortgage
loan secured by an unoccupied personal care facility and (v) a 95% equity
interest in an entity which acquired a $7.5 million second mortgage loan. The
Company also has made loan commitments totaling $44.7 million to finance the
development or expansion of additional assisted living facilities.
Contemporaneously with the closing of the IPO, the Company entered into a $140
million bank credit facility (the "Bank Credit Facility") from a group of banks
led by an affiliate of Deutsche Bank. The term of the Bank Credit Facility is
364 days, subject to extension. The Company intends to use the Bank Credit
Facility principally to fund growth opportunities and for working capital
purposes. The Company's ability to borrow under the Bank Credit Facility is
subject to the Company's ongoing compliance with a number of financial and other
covenants.
2. Basis of Presentation and Summary of Significant Accounting Policies
The consolidated financial statements of the Company include all the accounts of
the Company, its 94% owned subsidiary, ElderTrust Operating Limited Partnership
(the "Operating Partnership"), and the Operating Partnership's wholly-owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated.
The accompanying interim consolidated financial statements are unaudited,
however, the financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") for interim financial
information and in conjunction with the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of the disclosures
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting solely of
normal recurring matters) necessary for a fair presentation of the financial
statements for this interim period have been included. The results of operations
for the interim period are not necessarily indicative of the results to be
obtained for the full fiscal year. These financial statements should be read in
conjunction with the Company's consolidated financial statement and the notes
thereto for the year ended December 31, 1997 included in the Company's 1997 Form
10-K.
Cash and Cash Equivalents
The Company considers all short-term, highly-liquid investments that are readily
convertible to cash and have an original maturity of three months or less at the
time of purchase to be cash equivalents.
Real Estate Properties
Real estate properties are recorded at cost. Acquisition costs and transaction
fees directly related to each property are capitalized as a cost of the
respective property. The cost of real estate properties acquired is allocated
between land, buildings and improvements, and machinery and equipment based upon
estimated market values at the time of acquisition. Depreciation is provided for
on a straight-line basis over an estimated useful life of 40 years for building
and improvements and seven years for machinery and equipment.
-6-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 (continued)
(unaudited)
Federal Income Taxes
The Company has elected to seek qualification as a REIT under the Internal
Revenue Code of 1986, as amended (the "Code"), commencing with its taxable
period ending December 31, 1998. As a result, the Company will generally not be
subject to federal income tax on its taxable income at corporate rates to the
extent it distributes annually at least 95% of its taxable income to its
shareholders and complies with certain other requirements. Accordingly, no
provision has been made for federal income taxes in the accompanying
consolidated financial statements.
Leases and Rental Income
Real estate properties are leased to operators primarily on a long term net
lease basis. Lease payments are recognized as revenue as earned. Certain of the
leases provide for scheduled annual rent increases. The Company reports base
rental revenue, on these leases, straight-line over the terms of the respective
leases. The Company records an unbilled rent receivable representing the amount
that the straight-line rental revenue exceeds rent collectible under the lease
agreements.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could vary from those
estimates.
Net Loss per Share
Basic loss per share is calculated by dividing net loss by the weighted average
number of common shares outstanding. Diluted loss per share is calculated by
dividing net loss by the addition of weighted average common shares and common
share equivalents outstanding.
3. Real Estate Properties and Loans Receivable
As of March 31, 1998, the Company had investments in 20 leased
healthcare-related real estate properties totaling $151.4 million which are
leased to operators. In addition, the Company has made 10 loans secured by
healthcare-related real estate properties and construction-in-progress.
-7-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 (continued)
(unaudited)
A reconciliation of the cost of real estate properties as of January 30, 1998
and the amount recorded is as follows (dollars in thousands):
Adjustments and
Costs Capitalized
Cost at Subsequent to Recorded Cost at
Property Name January 30,1998 Acquisition (1) March 31, 1998
------------- --------------- --------------- --------------
Initial Properties:
- -------------------
Heritage Woods $ 11,536 $ 936 $ 12,472
Willowbrook 5,894 542 6,436
Riverview Ridge 5,720 837 6,557
Highgate at Paoli Pointe 10,978 302 11,280
The Woodbridge 11,474 1,845 13,319
Pleasant View 3,742 332 4,074
Rittenhouse CC 8,855 995 9,850
Lopatcong CC 13,778 1,117 14,895
Phillipsburg CC 6,266 514 6,780
Wayne NRC 6,065 520 6,585
Belvedere NRC 10,413 1,379 11,792
Chapel Manor NRC 11,334 971 12,305
Harston Hall NCH 7,300 535 7,835
Pennsburg NRC 10,000 913 10,913
Professional Off. Bldg 1 4,000 385 4,385
DCMH Med. Off. Bldg. 7,923 210 8,133
Salisbury Med. Off. Bldg. 1,307 46 1,353
Windsor Off. Bldg. 313 13 326
Windsor Clinic/Trg.Fac. 1,438 36 1,474
Lacey Branch Off. Bldg. 545 80 625
---------- --------- ----------
Total $ 138,881 $ 12,508 $ 151,389
========== ========= ==========
(1) Includes legal fees, title insurance, transfer taxes, recording costs, due
diligence costs and other acquisition costs. Adjustments also include market
interest rate adjustments on assumed debt and subsequent capital expenditures.
-8-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 (continued)
(unaudited)
A reconciliation of loans and mortgages are as follows (dollars in thousands):
Balance at Balance at
Loan or Mortgage Interest Rate January 30, 1998 March 31, 1998
---------------- ------------- ---------------- --------------
Harbor Place (1) 9.5% $ 4,728 $ 4,828
Mifflin 9.5% 5,164 5,164
Coquina Center 9.5% 4,577 4,577
Lehigh 10.5% 6,665 6,665
Berkshire 10.5% 6,269 6,269
Oaks 9.0% 1,500 1,500
Montchanin (1) 10.5% 2,000 5,097
Mallard Landing (2) 15.0% 900 0
Sanatoga 10.5% 3,000 3,000
Penn Mortgage 10.25% 800 800
-------- --------
Total $ 35,603 $ 37,900
======== ========
(1) Includes subsequent advances.
(2) Loan did not close and fund until April 15, 1998.
4. Bank Credit Facility Borrowings
Concurrent with the IPO, the Company entered into a $140 million Bank Credit
Facility. The Bank Credit Facility will enable the Company to borrow funds at
floating rates based on a spread over LIBOR, as determined by the percentage of
the Bank Credit Facility outstanding as compared to the borrowing base. The
spread ranges from 1.50% to 1.80% over LIBOR. At March 31, 1998, the spread was
1.80%, for a total rate of 7.47%.
The Bank Credit Facility includes a letter of credit facility, with $1 million
outstanding as of March 31, 1998. In general, the maximum letters of credit
outstanding is $4.5 million, subject to certain other constraints and
conditions.
The Bank Credit Facility contains various financial and other covenants
including but not limited to, minimum equity value, minimum tangible net worth,
total leverage ratio and minimum interest coverage ratio. The balance
outstanding under the Bank Credit Facility as of March 31, 1998 was $34.1
million.
-9-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 (continued)
(unaudited)
5. Mortgages Payable
As part of the acquisition price paid for certain of the real estate properties,
the Company assumed certain mortgages to which the acquired properties were
subject. Due in large part to the significant decrease in long-term interest
rates since these mortgages were first incurred by the original borrower, the
interest rates on these mortgages are above the amounts that would have been
incurred under market borrowing rates in effect on the purchase date. In
accordance with GAAP, the recorded purchase price and acquisition debt incurred
have been adjusted to reflect these obligations at a market rate of 7.81% at
date of acquisition. The face amount and recorded amount of these obligations is
as follows (dollars in thousands):
Stated Stated Debt Interest Rate Adjusted Debt Balance at
Property Interest Rate Amount Adjustment Amount March 31,1998
-------- ------------- ----------- ------------- ------------- -------------
The Woodbridge
Bonds due 2005 8.00% $ 885 $ 13 $ 898 $ 898
Bonds due 2025 8.50% 9,060 1,724 10,784 10,774
Belvedere NRC/Chapel NRC 11.00% 11,251 287 11,538 11,434
Highgate at Paoli
Pointe Series A Bonds 8.05% 9,680 602 10,282 10,278
Riverview Ridge 9.00% 2,724 257 2,981 2,978
Lacey Branch Off. Bldg. 8.25% 494 19 513 512
-------- ------- -------- --------
Total $ 34,094 $ 2,902 $ 36,996 $ 36,874
======== ======= ======== ========
6. Share Option and Incentive Plan
The Company has established the 1998 share option and incentive plan for the
purpose of attracting and retaining qualified executive officers and key
employees, as well as non-employee trustees. A total of 779,340 common shares
were reserved for issuance under the plan at March 31, 1998. In conjunction with
the IPO, the Company granted options with respect to 504,000 common shares to
officers, employees and trustees. The exercise price for such options is the
initial public offering price of $18.00. The term of such options is ten years
from the date of grant. Of these options, 150,000 vested immediately, 322,500
vest ratably over three years from the date of grant and 31,500 vest ratably
over five years from date of grant.
-10-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 (continued)
(unaudited)
7. Investment in and Advances to Unconsolidated Entities
Upon completion of the IPO, an unconsolidated entity, ET Capital Corp.,
purchased a $7.5 million working capital term note. ET Capital Corp. borrowed
75% of the funds to purchase the working capital term note from the Company and
issued a $5.625 million demand promissory note in favor of the Company (the
"Note"). The Note bears interest at 12% with interest only payable quarterly
until the Note is paid in full. Ninety-five percent of the remaining funds
required to purchase the working capital term note were contributed by the
Company to ET Capital Corp. for a 95% nonvoting equity interest in ET Capital
Corp. The Company's President and Chief Executive Officer holds the voting
interest in ET Capital Corp. The Company's investment in ET Capital Corp. at
March 31, 1998 was as follows (dollars in thousands):
Equity investment in ET Capital Corp. $1,777
Note receivable from ET Capital Corp. 5,625
------
Total $7,402
======
8. Relationship with Genesis Health Ventures, Inc.
Approximately 45.7% of the Company's total assets at March 31, 1998 consisted of
properties leased to and loans made to consolidated subsidiaries of Genesis
Health Ventures, Inc. ("Genesis"), the co-registrant in the Company's IPO. In
addition, subsidiaries of Genesis operate or manage substantially all of the
Company's initial properties. As such, the Company's revenues and ability to
make expected distributions to shareholders depend, in significant part, upon
the revenues derived from, and Genesis' successful operation of, the facilities
leased to or managed by Genesis, as well as the ability of Genesis to complete
successfully and on schedule the development projects securing construction
loans and construction loan commitments made to Genesis. Michael R. Walker
serves as Chairman of the Board of Genesis and of the Company.
9. Related Party Transactions
In connection with the IPO, the Company issued and sold to Edward B. Romanov,
Jr., the Company's President and Chief Executive Officer, 200,000 common shares
in a private placement at a per share purchase price equal to the initial
offering price of $18.00 per share. Mr. Romanov paid for the shares with a
10-year recourse promissory note, with interest only payable until maturity at
an annual rate of 7%.
10. Subsequent Event
On April 10, 1998, the Board of Trustees declared an initial distribution of
$0.243 per share for the period January 30, 1998 through March 31, 1998. The
distribution will be paid on or about May 15, 1998 to shareholders of record on
May 1, 1998, and is based upon the anticipated initial regular per share
quarterly distribution rate of $0.365 per share.
-11-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations includes certain forward-looking statements about the Company's
business, revenues, prospects, expenditures and operating and capital
requirements. In addition, forward-looking statements may be included in various
other Company documents to be issued in the future and in various oral
statements by Company representatives to securities analysts and potential
investors from time to time. Any such statements are subject to risks that could
cause the actual results to vary materially. The risks and uncertainties
associated with the forward-looking information include, among other risks and
uncertainties, the financial condition of lessees and borrowers, factors
affecting the healthcare industry generally, development and construction risks,
competitive market conditions, occupancy levels at facilities with percentage
rent leases, the strength of the real estate markets in which the Company's
properties are located, general economic conditions, interest rates and capital
market conditions. The Company discusses such risks in detail in its 1997 Form
10-K.
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this report.
Overview
The Company was formed in Maryland on September 23, 1997, and intends to make an
election and to qualify under the Internal Revenue Code of 1986, as amended (the
"Code") as a real estate investment trust ("REIT") commencing with its taxable
year ending December 31, 1998.
Substantially all of the Company's revenues are derived from: (i) rents received
under leases of healthcare-related real estate; (ii) interest earned from short
and long-term construction and mortgage loans; and (iii) interest earned from
the temporary investment of funds in short-term instruments. Certain leases
("Percentage Rent Leases") provide for rents based on a specified percentage of
facility operating revenues with no required minimum rent. Certain other leases
("Minimum Rent Leases") provide for (i) base rent (increasing each year by 1.5%)
and additional rent based upon a specified percentage of annual revenues over
revenues for the first year of the lease, (ii) base rent, increasing each year
by the lesser of 5% of the increase in facility revenues for the immediately
preceding year or one-half of the increase in the Consumer Price Index for the
immediately preceding year, or (iii) in the case of the certain future leases on
assisted living facilities currently owned by The Multicare Companies, Inc., a
44% owned subsidiary of Genesis ("Multicare"), if the Company purchases and
leases back such facilities to Multicare, base rent, increasing each year by
2.5%. Both types of leases are triple net leases that require the lessees to pay
all operating expenses, taxes, insurance and other costs (including a portion of
capitalized expenditures). The remaining leases ("Fixed Rent Leases") are with
tenants in the medical and other office buildings and provide for specified
annual rents, subject to increase in certain of the leases.
The Company has agreed to or has options to purchase the five assisted living
facilities securing the short-term and construction loans, and these facilities
will generally be leased back to the sellers pursuant to Percentage Rent Leases
or Minimum Rent Leases. The Company also has agreed to purchase the three
assisted living facilities securing loans to Multicare, subject to certain terms
and conditions, and these facilities will be leased back to Multicare pursuant
to Minimum Rent Leases.
The Company has incurred operating and administrative expenses, including
principally compensation expense for its executive officers and other employees,
office rental and related occupancy costs. The Company is self-administered and
managed by its executive officers and staff, and has not engaged a separate
advisor or paid an advisory fee for administrative or investment services,
although the Company has engaged legal, accounting, tax and financial advisors
as needed from time to time. The primary non-cash expenses of the Company are
the depreciation of its healthcare facilities and amortization of its loan
acquisition costs.
The Company has incurred indebtedness to acquire its assets and may incur
additional long and short-term indebtedness, and related interest expense, from
time to time.
-12-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The Company intends to declare and pay distributions to its shareholders in
amounts not less than the amounts required to maintain REIT status under the
Code and, in general, in amounts exceeding taxable income. The Company's ability
to pay distributions will depend upon its cash available for distribution.
Nonrecurring Compensation Expense
The Company recognized nonrecurring compensation expense of approximately $2.0
million in the statement of operations for the period from January 30, 1998 to
March 31, 1998 relating to the issuance of units of beneficial interest of the
Operating Partnership to certain officers of the Company in connection with its
formation.
Results of Operations
For the period from January 30, 1998 to March 31, 1998, rental revenues of $2.2
million were generated from the immediate leaseback of 18 healthcare facilities
purchased with proceeds of the IPO on January 30, 1998. The acquisition of two
additional facilities was delayed pending receipt of necessary consents to
transfer the properties to the Company. The Delaware County Memorial Hospital
Medical Office Building was purchased on February 18, 1998, and generated $0.2
million in lease revenues, and the Riverview Ridge assisted living facility was
acquired on March 27, 1998. A third facility, Silverlake, was not acquired
because the required consent to transfer the property to the Company could not
be obtained. Interest income of $.5 million was earned during the period from
January 30, 1998 through March 31, 1998 from term and construction loans and a
mortgage.
Depreciation totaled $0.7 million for the period from January 30, 1998 to March
31, 1998 and was calculated from the IPO closing date to period end, as all
assets were considered immediately in use. Amortization expense of $12,000 for
the period from January 30, 1998, to March 31, 1998, related to the capitalized
costs incurred with the establishment of the Company's Bank Credit Facility.
General and administrative expenses incurred for the period from January 30,
1998 to March 31, 1998 were approximately $0.4 million, or 16% of lease
revenues, and consisted primarily of management salaries and benefits, legal and
other administrative costs. Interest expense of $0.8 million was incurred for
the period from January 30, 1998, to March 31,1 998, consisting of $0.5 million
on mortgage indebtedness and $0.3 million on the Company's Bank Credit Facility.
Liquidity and Capital Resources
Upon completion of the IPO, the Company received approximately $114.2 million in
net proceeds. The Company used these funds, together with the $34.1 million
borrowed under the Bank Credit Facility, the $6.5 million generated by
operations, the $37.0 million in debt assumed and the $10.5 million in shares
and units issued to: (i) purchase real estate properties with a cost of $151.4
million, (ii) fund loans totaling $37.9 million, (iii) fund the Company's $7.4
million investment in ET Capital Corp., (iv) purchase other assets of $3.5
million and (v) provide cash on hand of $2.1 million.
The Company expects to meet its short-term liquidity requirements generally
through net cash provided by operations and its Bank Credit Facility. The
Company believes that its net cash provided by operations will be sufficient to
allow the Company to make distributions necessary to enable the Company to
qualify as a REIT. All facilities owned by the Company are leased to third
parties under triple net leases, which require the lessee to pay substantially
all expenses associated with the operation of such facilities. As a result of
these arrangements, the Company does not believe it will be responsible for any
major expenses in connection with the facilities during the terms of the leases.
The Company anticipates entering into similar leases with respect to all
additional properties acquired.
The Company has reserved approximately $1.9 million in cash for the payment of
the prorated quarterly distribution declared by the Board of Trustees on April
10, 1998. The cash distribution of $0.243 per share will be paid on or about May
15, 1998, to shareholders of record on May 1, 1998. The distribution to the
Company shareholders is in accordance with the Code's requirements for
qualification as a REIT and will be paid from cash from operations.
The Company entered into the Bank Credit Facility contemporaneously with the
closing of the IPO. The Bank Credit Facility will enable the Company to borrow
generally at floating rates based on a spread over LIBOR determined by the
percentage of the Bank Credit Facility outstanding as compared to the borrowing
base. The Company's ability to borrow
-13-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
under the secured line of credit is subject to the Company's compliance with a
number of financial and other covenants. The balance outstanding on the Bank
Credit Facility at March 31, 1998 was $34.1 million.
The Company has no commitments with respect to other capital expenditures. The
Company has made loan commitments totaling $44.7 million to finance the
development or expansion of additional assisted living facilities.
The Company expects to meet its long-term liquidity requirements for the funding
of real estate property development and acquisitions by borrowing under the Bank
Credit Facility and by issuing equity or debt securities in public or private
transactions. The Company anticipates that it will be able to obtain financing
for its long-term capital needs. However, there can be no assurance that such
additional financing or capital will be available on terms acceptable to the
Company. The Company may, under certain circumstances, borrow additional amounts
in connection with the renovation or expansion of facilities, the acquisition of
additional properties, or as necessary, to meet certain distribution
requirements imposed on REITs under the Code.
Management believes that inflation should not have a material adverse effect on
the operating expenses of the Company because such expenses are relatively
insignificant as a percentage of revenues.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Summary Consolidated Financial Data of Genesis
Approximately 45.7% of the Company's total assets at March 31, 1998
consisted of properties leased to and loans made to consolidated subsidiaries of
Genesis, the co-registrant in the Company's IPO. In addition, subsidiaries of
Genesis operate or manage substantially all of the Company's initial properties.
As such, the Company's revenues and ability to make expected distributions to
shareholders depend, in significant part, upon the revenues derived from, and
Genesis' successful operation of, the facilities leased to or managed by
Genesis, as well as the ability of Genesis to complete successfully and on
schedule the development projects securing construction loans and construction
loan commitments made to Genesis. Michael R. Walker serves as Chairman of the
Board of Genesis and of the Company. In accordance with SEC staff accounting
bulletin 71, the following table sets forth certain summary consolidated data
for Genesis at and for the periods indicated.
At or for the At or for the
quarter ended quarter ended
March 31, 1998 March 31, 1997
-------------- --------------
(dollars in thousands,
except per share data)
Operations Data
Net revenues $344,299 $273,263
Operating income before capital costs (1) 61,022 48,075
Depreciation and amortization 12,667 10,620
Lease expense 7,868 7,244
Interest expense, net 18,688 8,960
Earnings before income taxes and earnings in
equity of unconsolidated affiliates 21,799 21,251
Income taxes 7,957 7,757
Net income before earnings in equity of
unconsolidated affiliates 13,842 13,494
Equity in net income of unconsolidated affiliates 726 --
Net income 14,568 13,494
Per share data:
Basic
Net income $0.42 $0.39
Weighted average shares 35,093,962 34,873,809
Diluted
Net income $0.41 $0.38
Weighted average shares 35,647,451 35,773,885
Balance Sheet Data
Working capital $ 260,787 $ 191,403
Total assets 1,917,012 1,341,213
Long-term debt 1,057,404 618,564
Shareholders' equity 629,568 582,966
- --------------
(1) Capital costs include depreciation and amortization, lease expense and
interest expense.
-15-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Funds from Operations
The White Paper on Funds from Operations approved by the Board of Governors of
the National Association of Real Estate Investment Trusts ("NAREIT") in March
1995 defines Funds from Operations as net income (loss) (computed in accordance
with GAAP), excluding gains (or losses) from debt restructuring and sales of
properties, plus real estate related depreciation and after adjustments for
unconsolidated partnerships and joint ventures. The Company believes that Funds
from Operations is helpful to investors as a measure of the performance of an
equity REIT because, along with cash flow from operating activities, financing
activities and investing activities, it provides investors with an indication of
the ability of the Company to incur and service debt, to make capital
expenditures and to fund other cash needs. The Company computes Funds from
Operations in accordance with standards established by NAREIT which may not be
comparable to Funds from Operations reported by other REITs that do not define
the term in accordance with the current NAREIT definition or that interpret the
current NAREIT definition differently than the Company. Funds from Operations
does not represent cash generated from operating activities in accordance with
GAAP and should not be considered as an alternative to net income (determined in
accordance with GAAP) as an indication of the Company's financial performance or
to cash flow from operating activities (determined in accordance with GAAP) as a
measure of the Company's liquidity, nor is it indicative of funds available to
fund the Company's cash needs, including its ability to make cash distributions.
The following table presents the Company's Funds from Operations for the period
from January 30, 1998 to March 31, 1998 (in thousands):
Funds from Operations:
Net loss ($1,354)
Minority interest (88)
Net loss before minority interest ($1,442)
Adjustments to derive funds from operations:
Add:
Real estate depreciation and amortization 769
Nonrecurring items --start-up expenses 2,617
Funds from operations before allocation to minority interest 1,944
Less : Funds from operations allocable to minority interest (119)
Funds from operations attributable to the common shareholders $1,825
======
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 1998.
-16-
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.
ELDERTRUST
(Registrant)
/s/ D. Lee McCreary, Jr.
----------------------------------
D. Lee McCreary, Jr.
Vice President and Chief Financial Officer
Date: May 14, 1998
-----------------------------
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EXHIBIT INDEX
Exhibit No. Exhibit Name Page
- ----------- ------------ ----
27 Financial Data Schedule (for SEC use only) 19
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