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 June 30, 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
of incorporation or organization) Identification No.)
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)
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 August 11, 1998)
ELDERTRUST
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
INDEX
PART I - FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1998 (unaudited)
and December 31, 1997........................................ 3
Consolidated Statements of Operations for the
three months ended June 30, 1998 and for the
period from January 30, 1998 to June 30, 1998
(unaudited).................................................. 4
Consolidated Statement of Cash Flows
for the period from January 30, 1998 to June 30, 1998
(unaudited).................................................. 5
Notes to Consolidated Financial Statements................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 13
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................. 18
Signatures................................................................. 19
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ELDERTRUST
CONSOLIDATED BALANCE SHEETS
(dollar amounts in thousands, except share amounts)
June 30, 1998 December 31, 1997
(Unaudited) (Note)
ASSETS
Real estate properties, at cost $151,471 --
Less - accumulated depreciation (1,873) --
------- -----
Net real estate properties 149,598 --
Real estate loans receivable 44,801 --
Cash and cash equivalents 2,339 --
Accounts receivable, net of allowances 1,223 --
Prepaid expenses 726 --
Investment in and advances to unconsolidated entities 7,457 --
Other assets, net of accumulated amortization and
depreciation of $141 3,456 --
-------- -----
Total assets $209,600 --
======== =====
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank credit facility borrowings $43,347 --
Accounts payable and accrued expenses 1,160 --
Mortgages payable 36,683 --
Other liabilities 2,707 --
-------- -----
Total liabilities 83,897 --
Minority interest 8,602 --
SHAREHOLDERS' EQUITY
Preferred shares, $.01 par value; 20,000,000 shares
authorized; none outstanding
Common shares, $.01 par value; 100,000,000 shares
authorized; 7,392,600 shares issued and outstanding 74 --
Capital in excess of par value 118,170 --
Cumulative distributions in excess
of net income (1,143) --
---------- -----
Total shareholders' equity 117,101 --
-------- -----
Total liabilities and shareholders' equity $209,600 --
======== =====
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 STATEMENTS OF OPERATIONS
(unaudited and dollars in thousands, except per share amounts)
Three months For the period
ended January 30 to
June 30, 1998 June 30, 1998
------------- -------------
Revenues:
Rental revenues $3,825 $6,244
Interest, net of amortization of deferred loan costs 1,045 1,594
Other income 496 757
------ ------
Total revenues 5,366 8,595
Expenses:
Property operating expenses 266 416
Interest expense, including amortization
of deferred finance costs 1,472 2,250
Depreciation and amortization 1,145 1,889
General and administrative 371 750
Start-up expenses 28 2,645
------- -----
Total expenses 3,282 7,950
Net income before equity in earnings of
unconsolidated entities and minority interest 2,084 645
Equity in earnings of unconsolidated entities 55 51
Minority interest (131) (43)
--------- ------
Net income $2,008 $653
====== ====
Basic and diluted weighted average number of common shares
outstanding (1) 7,393 7,391
======= =======
Net income per share - basic and diluted $0.27 $0.09
===== =====
(1) Options to purchase 504,000 common shares of beneficial interest were
outstanding during the period January 30 through June 30, 1998 but were not
included in the computation of diluted net income 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 these statements.
-4-
ELDERTRUST
CONSOLIDATED STATEMENT OF CASH FLOWS
PERIOD FROM JANUARY 30, 1998 TO JUNE 30, 1998
(unaudited and dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 653
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,014
Non-cash charges 2,018
Other (5)
Net changes in assets and liabilities:
Accounts receivable and prepaid expenses (1,833)
Accounts payable and accrued expenses 1,160
Other assets and liabilities 2,771
---------
Net cash provided by operating activities 6,778
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition and cost of real estate investments (103,964)
Investment in real estate mortgages and development funding (44,801)
Investment in unconsolidated entities (7,406)
Other (3,424)
---------
Net cash used in investing activities (159,595)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering, net of offering costs of $11,222 114,213
Loan origination costs (177)
Borrowings under Bank Credit Facility 43,347
Principal payments on mortgages payable (313)
Distributions to shareholders (1,796)
Distributions to minority interests (118)
---------
Net cash provided by financing activities 155,156
Net increase in cash and cash equivalents 2,339
Cash and cash equivalents, beginning of operations 0
---------
Cash and cash equivalents, end of period $ 2,339
=========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 1,869
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 these statements.
-5-
ELDERTRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(unaudited)
1. Organization and Operations
ElderTrust was formed in the State of Maryland on September 23, 1997 and
issued a total of 100 common 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 June 30, 1998, the
Company's total assets consisted primarily of a 94% owned subsidiary,
ElderTrust Operating Limited Partnership (the "Operating Partnership"). The
Operating Partnership's assets primarily consisted 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 $16.5 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% nonvoting equity interest in an unconsolidated 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, 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 GAAP 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.
-6-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 (continued)
(unaudited)
Real Estate Properties
Real estate properties are recorded at cost. Acquisition costs and transaction
fees, including legal fees, title insurance, transfer taxes, due diligence
costs, and market interest rate adjustments on assumed debt 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.
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 Income per Share
Basic income per share is calculated by dividing net income by the weighted
average number of common shares outstanding. Diluted income per share is
calculated by dividing net income by the addition of weighted average common
shares and common share equivalents outstanding.
3. Real Estate Properties and Loans Receivable
As of June 30, 1998, the Company had investments in 20 leased
healthcare-related real estate properties totaling $151.5 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
JUNE 30, 1998 (continued)
(unaudited)
A reconciliation of the acquisition cost of real estate properties as of
January 30, 1998 and the amount recorded as of June 30, 1998 is as follows
(dollars in thousands):
Adjustments and
Costs Capitalized
Cost at Subsequent to Cost at
Property Name January 30, 1998 Acquisition June 30, 1998
------------- --------------- ----------- -------------
Heritage Woods $ 11,536 $ 936 $ 12,472
Willowbrook 5,894 543 6,437
Riverview Ridge 5,720 878 6,598
Highgate at Paoli Pointe 10,978 305 11,283
The Woodbridge 11,474 1,848 13,322
Pleasant View 3,742 333 4,075
Rittenhouse CC 8,855 995 9,850
Lopatcong CC 13,778 1,117 14,895
Phillipsburg CC 6,266 514 6,780
Wayne NRC 6,065 528 6,593
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 4,000 400 4,400
DCMH Med. Off. Bldg. 7,923 212 8,135
Salisbury Med. Off. Bldg. 1,307 46 1,353
Windsor Off. Bldg. 313 15 328
Windsor Clinic/Trg.Fac. 1,438 42 1,480
Lacey Branch Off. Bldg. 545 80 625
------------- ----------- --------------
Total $ 138,881 $ 12,590 $ 151,471
========== ========= ==========
-8-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 (continued)
(unaudited)
Real estate loans receivable are as follows (dollars in thousands):
Balance at
Loan or Mortgage Interest Rate June 30, 1998
---------------- ------------- -------------
Harbor Place 9.5% $ 4,828
Mifflin 9.5% 5,164
Coquina Center 9.5% 4,577
Lehigh 10.5% 6,665
Berkshire 10.5% 6,269
Oaks 9.0% 1,500
Montchanin 10.5% 7,747
Mallard Landing 15.0% 535
Sanatoga 10.5% 6,716
Penn Mortgage 10.25% 800
----------
Total $ 44,801
========
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 June 30, 1998, the spread was
1.80%, for a total rate of 7.45%.
The Bank Credit Facility includes a letter of credit facility, with $1 million
outstanding as of June 30, 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 June 30, 1998 was $43.3
million.
-9-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 at the date of acquisition. The face amount and recorded amount of
these obligations is as follows (dollars in thousands):
Stated Adjusted Debt
Interest Stated Debt Interest Rate Amount at Balance at
Property Rate Amount Adjustment Assumption Date June 30, 1998
-------- ---- ------ ---------- --------------- ------------
The Woodbridge
Bonds due 2005 8.00% $ 885 $ 13 $ 898 $ 897
Bonds due 2025 8.50% 9,060 1,724 10,784 10,758
Belvedere NRC/Chapel
NRC 11.00% 11,251 287 11,538 11,276
Highgate at Paoli
Pointe Series A
Bonds 8.05% 9,680 602 10,282 10,272
Riverview Ridge 9.00% 2,724 257 2,981 2,969
Lacey Branch Off.
Bldg. 8.25% 494 19 513 511
------- ------ ------- -------
Total $34,094 $2,902 $36,996 $36,683
======= ====== ======= =======
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 June 30, 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
JUNE 30, 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 June 30, 1998 was as follows (dollars in thousands):
Equity investment in ET Capital Corp. $1,832
Note receivable from ET Capital Corp. 5,625
-----
Total $7,457
======
8. Distributions
On May 15, 1998, the Company paid a distribution of $0.243 per share to
shareholders of record on May 1, 1998. This distribution related to the period
January 30, 1998 through March 31, 1998.
9. Relationship with Genesis Health Ventures, Inc.
Approximately 44.0% of the Company's total assets at June 30, 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.
10. 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 from the Company, with interest only
payable until maturity at an annual rate of 7%.
In addition, Mr. Romanov owns 118,750 units in the ElderTrust Operating
Limited Partnership, which represents an interest of approximately 1.5%, and
received a cash distribution of $28.9 thousand for the three months ending
June 30, 1998.
11. Subsequent Events
On July 17, 1998, the Board of Trustees declared a distribution of $0.365 per
share for the period April 1, 1998 through June 30, 1998. The distribution
will be paid on or about August 14, 1998 to shareholders of record on August
3, 1998.
-11-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 (continued)
(unaudited)
On July 16, 1998, the Company entered into a non-binding letter of intent with
Genesis and the current owners of seven skilled nursing facilities currently
leased to Genesis relating to the assumption of the existing leases and
acquisition of the purchase options for the facilities. Five of the facilities
are located in Maryland and two of the facilities are located in New Jersey.
As currently structured, Genesis would (i) assign the existing leases and
purchase options held by Genesis to an unconsolidated limited partnership, in
which the Company would have a 99.9% limited partnership interest and the
Company's President and Chief Executive Officer would have a 0.1% general
partnership interest, for approximately $35.0 million in cash and a
nonrecourse promissory note of approximately $9.0 million and (ii) sublease
the properties from the limited partnership at an initial annual rental of
approximately $9.8 million for a ten-year term with one ten-year renewal
option. The subleases would be guaranteed by Genesis. The purchase options
would be exercisable by the limited partnership on the tenth anniversary of
the transaction closing at an exercise price to be determined at the closing
based upon the interest rate on U.S. Treasury securities then in effect. The
current property owners are refinancing certain existing indebtedness on the
facilities, and will lend the limited partnership approximately $15.0 million
on a nonrecourse basis from the proceeds of the refinancing to fund a portion
of the purchase price. The loan from the current owners would amortize over a
ten-year term and be secured by the lease payments due under the Genesis
subleases. The Company expects to fund its investment in the limited
partnership totaling approximately $20.0 million through borrowings under the
Company's Bank Credit Facility. The Company expects to earn a fee for
arranging certain of the financing for the existing owners in connection with
the transaction. The transaction is expected to close on or before August 31,
1998, although the limited partnership may acquire the existing leases and
purchase options for one or more of the facilities prior to that date
depending on the timing of receipt of all necessary consents and approvals.
Because all necessary documentation has not been finalized and all necessary
consents and approvals, including financing approvals, have not yet been
obtained, there can be no assurance that the transaction will be consummated.
-12-
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.
-13-
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
June 30, 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
Three months ended June 30, 1998
For the three months ended June 30, 1998, the Company generated rental
revenues of $3.8 million from leasing 20 healthcare facilities. The Company
recognized interest income of $1.0 million during this period from term and
construction loans and a mortgage. Other income of $0.5 million was earned
from providing financial structuring services and miscellaneous working
capital investment activities. Rental and interest revenue increased as
compared to the period from January 30 through March 31, 1998 due to the three
months ended June 30, 1998 being the Company's first full quarter of
operations, as well as including a full-quarter's revenue from two facilities
which were acquired during the period ended March 31, 1998.
Depreciation totaled $1.1 million for the three months ended June 30, 1998.
Amortization expense of $21 thousand for the period related to the capitalized
costs incurred with the establishment of the Company's Bank Credit Facility.
General and administrative expenses incurred were approximately $0.4 million,
or 10% of lease revenues, for the three months ended June 30, 1998, and
consisted primarily of management salaries and benefits, legal and other
administrative costs. Interest expense totaled $1.5 million, consisting of
$0.7 million on mortgage indebtedness and $0.8 million on the Company's Bank
Credit Facility. All expenses increased as compared to the period from January
30 through March 31, 1998, as a result of the three months ended June 30, 1998
being the Company's first full quarter of operations. Depreciation and
interest expense also increased due to the results of two facilities, which
were acquired during the prior period, being reported for a full quarter.
Period from January 30, 1998 to June 30, 1998
For the period from January 30, 1998 to June 30, 1998, rental revenues of $5.5
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 $0.5 million in lease revenues, and the Riverview Ridge
assisted living facility was acquired on March 27, 1998, and generated $0.2
million in lease revenues. 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 $1.6 million was earned during the period from
January 30, 1998 through June 30, 1998 from term and construction loans and a
mortgage.
Depreciation totaled $1.9 million for the period from January 30, 1998 to June
30, 1998 and was calculated from the IPO closing date to period end, as all
assets were considered immediately in use. Amortization expense of $33
thousand for the period from January 30, 1998 to June 30, 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 June 30, 1998 were approximately $0.75 million, or 12% of
lease revenues, and consisted primarily of management salaries and benefits,
legal and other administrative costs. Interest expense of $2.3 million was
incurred for the period from January 30, 1998, to June 30,1 998, consisting of
$1.1 million on mortgage indebtedness, $1.1 million on the Company's Bank
Credit Facility and $0.1 million on tenant's security deposits.
-14-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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 $43.3 million
borrowed under the Bank Credit Facility, the $6.8 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 $151.5
million, (ii) fund loans totaling $44.8 million, (iii) fund the Company's $7.5
million investment in ET Capital Corp., (iv) purchase other assets of $3.5
million, (v) fund payment of the quarterly distribution of $1.9 million, (vi)
fund principal payments of $0.3 million and (vii) provide cash on hand of $2.3
million.
Working capital was $2.4 million at June 30, 1998. Accounts receivable totaled
$1.2 million at that date. The Company's cash flow from operations for the
period January 30, 1998 to June 30, 1998, was approximately $6.8 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 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 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 June
30, 1998 was $43.3 million. Because the Bank Credit Facility is floating rate
debt, any increase in prevailing interest rates would increase the Company's
interest payment obligations under the Bank Credit Facility.
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.
-15-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Subsequent Events
The Board of Trustees declared a cash distribution on July 17, 1998. The cash
distribution of $0.365 per share will be paid on or about August 14, 1998, to
shareholders of record on August 3, 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.
On July 16, 1998, the Company entered into a non-binding letter of intent with
Genesis and the current owners of seven skilled nursing facilities currently
leased to Genesis relating to the assumption of the existing leases and
acquisition of the purchase options for the facilities. Five of the facilities
are located in Maryland and two of the facilities are located in New Jersey.
As currently structured, Genesis would (i) assign the existing leases and
purchase options held by Genesis to an unconsolidated limited partnership, in
which the Company would have a 99.9% limited partnership interest and the
Company's President and Chief Executive Officer would have a 0.1% general
partnership interest, for approximately $35.0 million in cash and a
nonrecourse promissory note of approximately $9.0 million and (ii) sublease
the properties from the limited partnership at an initial annual rental of
approximately $9.8 million for a ten-year term with one ten-year renewal
option. The subleases would be guaranteed by Genesis. The purchase options
would be exercisable by the limited partnership on the tenth anniversary of
the transaction closing at an exercise price to be determined at the closing
based upon the interest rate on U.S. Treasury securities then in effect. The
current property owners are refinancing certain existing indebtedness on the
facilities, and will lend the limited partnership approximately $15.0 million
on a nonrecourse basis from the proceeds of the refinancing to fund a portion
of the purchase price. The loan from the current owners would amortize over a
ten-year term and be secured by the lease payments due under the Genesis
subleases. The Company expects to fund its investment in the limited
partnership totaling approximately $20.0 million through borrowings under the
Company's Bank Credit Facility. The Company expects to earn a fee for
arranging certain of the financing for the existing owners in connection with
the transaction. The transaction is expected to close on or before August 31,
1998, although the limited partnership may acquire the existing leases and
purchase options for one or more of the facilities prior to that date
depending on the timing of receipt of all necessary consents and approvals.
Because all necessary documentation has not been finalized and all necessary
consents and approvals, including financing approvals, have not yet been
obtained, there can be no assurance that the transaction will be consummated.
-16-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Summary Consolidated Financial Data of Genesis
Approximately 44.0% of the Company's total assets at June 30, 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
June 30, 1998 June 30, 1997
------------- -------------
(dollars in thousands, except
per share data)
Operations Data
Net revenues $ 352,526 $ 284,463
Operating income before capital costs (1) 66,840 53,690
Depreciation and amortization 13,632 11,517
Lease expense 8,497 7,324
Interest expense, net 20,679 10,351
Earnings before income taxes and earnings in equity of unconsolidated affiliates 24,032 24,498
Income taxes 8,771 8,942
Net income before earnings in equity of unconsolidated affiliates 15,261 15,556
Equity in net income of unconsolidated affiliates 730 --
Net income 15,991 15,556
Per share data:
Basic
Net income $ 0.46 $ 0.44
Weighted average shares 35,133,022 34,973,202
Diluted
Net income $ 0.45 $ 0.43
Weighted average shares 35,719,840 35,917,642
Balance Sheet Data
Working capital $ 291,151 $ 220,827
Total assets 1,992,154 1,375,151
Long-term debt 1,089,460 644,725
Shareholders' equity 646,255 599,530
- --------------
(1) Capital costs include depreciation and amortization, lease expense and
interest expense.
-17-
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 June 30, 1998 (in thousands):
Funds from Operations:
Net income $653
Minority interest 43
------
Net income before minority interest $696
Adjustments to derive funds from operations:
Add:
Real estate depreciation and amortization 1,966
Nonrecurring items --start-up expenses 2,645
------
Funds from operations before allocation to minority interest 5,307
Less : Funds from operations allocable to minority interest (325)
------
Funds from operations attributable to the common shareholders $4,982
======
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 June 30, 1998.
-18-
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/ Edward B. Romanov, Jr.
-------------------------------------------
Edward B. Romanov, Jr.
President and Chief Executive Officer
Date: August 14, 1998
---------------
EXHIBIT INDEX
Exhibit No. Exhibit Name Page
27 Financial Data Schedule (for SEC use only) 21