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 September 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 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)
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 ___
7,318,900
(Outstanding shares of the issuer's common shares,
$0.01 par value per share, as of November 4, 1998)
ELDERTRUST
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
INDEX
PART I - FINANCIAL INFORMATION
Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1998 (unaudited)
and December 31, 1997....................................................................... 3
Condensed Consolidated Statements of Operations for the
three months ended September 30, 1998 and for the
period from January 30, 1998 to September 30, 1998 (unaudited).............................. 4
Condensed Consolidated Statement of Cash Flows
for the period from January 30, 1998 to September 30, 1998 (unaudited)...................... 5
Notes to Condensed 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................................................................. 21
Signatures................................................................................................ 22
-2-
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ELDERTRUST
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollar amounts in thousands, except share amounts)
September 30, 1998 December 31, 1997
(Unaudited) (Note)
------------------ -----------------
ASSETS
Real estate properties, at cost $151,870 --
Less - accumulated depreciation (3,012) --
-------- -----
Net real estate properties 148,858 --
Real estate loans receivable 47,486 --
Cash and cash equivalents 1,431 --
Accounts receivable, net of allowances 1,064 --
Prepaid expenses 1,911 --
Investment in and advances to unconsolidated entities 27,208 --
Other assets, net of accumulated
amortization and depreciation of $229 3,351 --
-------- -----
Total assets $231,309 --
======== =====
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank credit facility borrowings $ 65,435 --
Accounts payable and accrued expenses 1,302 --
Mortgages payable 36,485 --
Other liabilities 3,022 --
-------- -----
Total liabilities 106,244 --
Minority interest 8,589 --
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
7,369,900 shares outstanding 74 --
Capital in excess of par value 118,170 --
Cumulative distributions in excess
of net income (1,489) --
Treasury stock at cost (279) --
-------- -----
Total shareholders' equity 116,476 --
-------- -----
Total liabilities and shareholders' equity $231,309 --
======== =====
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 condensed consolidated financial
statements are an integral part of these statements.
-3-
ELDERTRUST
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and dollars in thousands, except per share amounts)
Three months For the period
ended January 30 (inception) to
September 30, 1998 September 30, 1998
------------------ ------------------------
Revenues:
Rental revenues $3,869 $10,114
Interest, net of amortization of deferred loan costs 1,152 2,746
Financial services fee income 793 1,018
Other income 488 1,019
------ -------
Total revenues 6,302 14,897
Expenses:
Property operating expenses 288 704
Interest expense, including amortization of deferred
finance costs 1,694 3,944
Depreciation and amortization 1,246 3,135
General and administrative 454 1,204
Start-up expenses - 2,645
------ -------
Total expenses 3,682 11,632
Net income before equity in earnings of
unconsolidated entities and minority interest 2,620 3,265
Equity in earnings (losses) of unconsolidated entities (105) (54)
Minority interest (163) (205)
------ -------
Net income $2,352 $ 3,006
====== =======
Basic and diluted weighted average number of common shares outstanding (1)
7,388 7,390
====== =======
Net income per share - basic and diluted $0.32 $0.41
===== =====
(1) Options to purchase 529,000 common shares of beneficial interest were
outstanding at September 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 during the period. The
options expire during the year 2008.
The accompanying notes to condensed consolidated financial
statements are an integral part of these statements.
-4-
ELDERTRUST
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
PERIOD FROM JANUARY 30, 1998 TO SEPTEMBER 30, 1998
(unaudited and dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $3,006
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,352
Non-cash charges 2,018
Minority interest and equity in losses from unconsolidated entities 251
Net changes in assets and liabilities:
Accounts receivable and prepaid expenses (2,975)
Accounts payable and accrued expenses 1,302
Other assets and liabilities 3,101
--------
Net cash provided by operating activities 10,055
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition and cost of real estate investments (104,288)
Investment in real estate mortgages and development funding (47,486)
Investment in and advances to unconsolidated entities (28,186)
Proceeds from collection on advances to unconsolidated entities 924
Other (3,393)
--------
Net cash used in investing activities (182,429)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering, net of offering costs of $11,222 114,213
Loan origination costs (265)
Borrowings under Bank Credit Facility 65,435
Principal payments on mortgages payable (511)
Distributions to shareholders (4,495)
Distributions to minority interests (293)
Purchase of treasury stock (279)
--------
Net cash provided by financing activities 173,805
Net increase in cash and cash equivalents 1,431
Cash and cash equivalents, beginning of operations 0
--------
Cash and cash equivalents, end of period $ 1,431
========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 3,370
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 36,996
Shares and units issued for the acquisition of real estate properties 10,511
Theaccompanying notes to condensed consolidated financial statements
are an integral part of these statements.
-5-
ELDERTRUST
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 September 30, 1998,
the Company's total assets consisted primarily of a 94% owned subsidiary,
ElderTrust Operating Limited Partnership (the "Operating Partnership"). At that
date, 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 $19.2
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, (v) a 95%
nonvoting equity interest in an unconsolidated entity which acquired a $7.5
million second mortgage loan and a $300,000 working capital term note and (vi) a
99% limited partnership interest in an unconsolidated entity which holds
leasehold and purchase option rights for seven skilled nursing 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 ends
on January 29, 1999, subject to extension. The Company has used the Bank Credit
Facility principally to fund its growth 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.
(See Note 4.)
Approximately 37.0% of the Company's total assets at September 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 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.
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.
-6-
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 (continued)
(unaudited)
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, 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 forty years for building and improvements and
seven years for machinery and equipment.
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 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 income taxes in the accompanying condensed 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 currently 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 September 30, 1998, the Company had investments in 20 leased
healthcare-related real estate properties totaling $151.9 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 September 30, 1998 is as follows (dollars
in thousands):
Adjustments and
Costs Capitalized
Cost at Subsequent to Cost at
Property Name January 30,1998 Acquisition September 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 10,978 629 11,607
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 6,065 593 6,658
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 4,000 413 4,413
DCMH Med. Off. Bldg. 7,923 215 8,138
Salisbury Med. Off. Bldg. 1,307 40 1,347
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 $12,989 $151,870
======== ======= ========
-8-
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 (continued)
(unaudited)
Real estate loans receivable are as follows (dollars in thousands):
Total Balance at
Commitment September 30,
Loan or Mortgage Interest Rate Amount 1998
---------------- ------------- ---------- -------------
Harbor Place 9.5% $ 4,828 $ 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% 5,380 1,500
Montchanin 10.5% 9,500 8,864
Mallard Landing 15.0% 6,407 2,103
Sanatoga 10.5% 6,716 6,716
Penn Mortgage 10.25% 800 800
------- -------
Total $56,306 $47,486
======= =======
4. Bank Credit Facility Borrowings
Concurrent with the IPO, the Company entered into a $140 million Bank Credit
Facility. The Bank Credit Facility enables 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 September 30, 1998, the spread
was 1.65%, for a total rate of 7.29%.
The Bank Credit Facility includes a letter of credit facility, with $1 million
outstanding as of September 30, 1998. In general, the maximum letters of credit
outstanding can be $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,
a total leverage ratio and minimum interest coverage ratio. The borrowing base
and balance outstanding under the Bank Credit Facility as of September 30, 1998
was $84.8 million and $65.4 million, respectively, reflecting additional
borrowing capacity at that date of approximately $19.4 million. Additional
borrowing capacity of approximately $8.7 million will be available upon the
completion of certain administrative requirements with respect to certain
properties. Because the Bank Credit Facility is floating rate debt, any increase
(decrease) in prevailing interest rates would increase (decrease) the Company's
interest payment obligations under the Bank Credit Facility.
At September 30, 1998, the unfunded portion of loan commitments made by the
Company totaled $8.8 million. At that date, the Company has obligations to
purchase seven healthcare facilities subject to term and construction loans
upon their reaching stabilized occupancy. The Company does not expect any such
facility to reach stabilized occupancy within the next six months. In addition,
expected repayments within the next six months on existing loans receivable
outstanding are expected to be $3.7 million.
The Bank Credit Facility will expire on January 29, 1999, unless extended by the
lender. The Company has begun discussions with the lender to extend the term of
the Bank Credit Facility for an additional 364 days. The Company also has
entered into discussions with other potential lenders to replace the existing
Bank Credit Facility with a new credit facility of a longer term and with a
greater borrowing availability. No assurance can be given that these
negotiations will be successful.
-9-
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 assumed debt 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 September 30,1998
-------- -------- ----------- ------------- --------------- -----------------
The Woodbridge
Bonds due 2005 8.00% $ 885 $ 13 $ 898 $ 897
Bonds due 2025 8.50% 9,060 1,724 10,784 10,742
Belvedere NRC/Chapel
NRC 11.00% 11,251 287 11,538 11,114
Highgate at Paoli
Pointe Series A
Bonds 8.05% 9,680 602 10,282 10,266
Riverview Ridge 9.00% 2,724 257 2,981 2,957
Lacey Branch Off.
Bldg. 8.25% 494 19 513 509
------- ------ ------- -------
Total $34,094 $2,902 $36,996 $36,485
======= ====== ======= =======
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 September 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. Additional options with respect to 25,000
common shares was granted to an officer of the Company during July 1998 at an
exercise price of $15.125 per share. These options vest ratably over five years
and terminate ten years from the date of grant.
-10-
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 from Genesis. The borrower
under the note is an operator of 11 skilled nursing facilities in Florida. 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 "ET Capital Note"). The ET Capital 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. On September 30,
1998, ET Capital Corp. purchased an additional $300,000 working capital term
note of the same borrower from Genesis increasing the outstanding balance from
that borrower to $7.8 million. In connection with the transaction, ET Capital
Corp. canceled a purchase option to acquire an additional $2.5 million loan from
Genesis. ET Capital Corp. borrowed the funds needed under a $300,000 demand
promissory note in favor of the Company (the "Additional Note"). The Additional
Note bears interest at 13% with interest only payable quarterly until the note
is paid in full. The Company's investment in ET Capital Corp. at September 30,
1998 was as follows (dollars in thousands):
Equity investment in ET Capital Corp. $1,883
Notes receivable from ET Capital Corp. 5,925
------
Total $7,808
======
On September 3, 1998, an unconsolidated entity, ET Sub-Meridian Limited
Partnership, L.L.P. ("Meridian"), purchased from Genesis leasehold and purchase
option rights (collectively, "Rights") for seven skilled nursing facilities for
$44.0 million. Five of the facilities are located in Maryland and two of the
facilities are located in New Jersey. The transaction was structured as follows:
Genesis (i) assigned the Rights held by Genesis to Meridian for approximately
$35.0 million in cash and a nonrecourse promissory note of approximately $9.0
million and (ii) subleased ("Subleases") 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 are guaranteed by
Genesis. The purchase options are exercisable by the limited partnership on
September 3, 2008 for a combined price of $66.5 million.
To finance the acquisition, Meridian borrowed $17.6 million from the Operating
Partnership and issued a demand promissory note with a face amount of $18.5
million in favor of the Operating Partnership (the "Meridian Note"). The
Meridian Note bears interest at 12% with interest only payable monthly until
the note is paid in full. In addition, the Rights were renegotiated with rent
due under the existing leases ("Leases") reduced and the option exercise date
extended to coincide with the ten-year term of the Subleases. Finally, the
current property owners loaned Meridian $17.7 million on a nonrecourse basis
("Fairmount Loan"). The Fairmount Loan bears interest at 7.06% and amortizes
over a ten-year term. The Leases and Fairmount Loan are secured by the lease
payments due under the Subleases. Ninety-nine percent of the remaining funds
required to purchase the Rights were contributed by the Company to Meridian for
a 99% limited partner equity interest in Meridian. The Company's President and
Chief Executive Officer holds the 1% general partner interest in Meridian.
As part of the transaction, the Operating Partnership entered into an
Indemnification Agreement (the "Indemnification Agreement") in favor of the
current property owners and guaranteed the $9 million promissory note of
Meridian payable to the subsidiary of Genesis. Under the Indemnification
Agreement, the Operating Partnership agreed to indemnify the current property
owners for the loss of deferral of tax benefits in the event that one or more of
the facilities were foreclosed upon prior to August 31, 2008 due to a default
under a Sublease or if a cure of a default by the Genesis subsidiary that
manages the properties results in a taxable event to the owners. The Operating
Partnership also entered into an agreement in favor of Genesis, pursuant to
which the Operating Partnership agreed to indemnify Genesis against any amounts
expended by Genesis under a back-up indemnity provided by Genesis to the current
owners against any such loss of deferral of tax benefits or default resulting in
a taxable event to the owners.
-11-
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 (continued)
(unaudited)
The Company's investment in Meridian at September 30, 1998 was as follows
(dollars in thousands):
Equity investment in Meridian ........................... $ 1,824
Note receivable from Meridian ........................... 17,576
-------
Total $19,400
=======
8. Distributions
On August 14, 1998 the Company paid a distribution of $0.365 per share to
shareholders of record on August 3, 1998. This distribution related to the
period April 1, 1998 through June 30, 1998.
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 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 Operating Partnership, which
represents an interest of approximately 1.5%, and received a cash distribution
of $43,300 for the three months ending September 30, 1998 and has received a
total cash distribution of $72,200 for the period January 30, 1998 through
September 30, 1998.
10. Share Repurchase Program
On August 17, 1998, the Company announced that its Board of Trustees had
authorized the Company to implement a Share Repurchase Program, pursuant to
which the Company from time to time may repurchase shares in open market
transactions up to an amount equal to the Company's excess cash flow on a
quarterly and cumulative basis. During the quarter ended September 30, 1998, the
Company repurchased 22,700 common shares at an aggregate purchase price of
$278,500.
11. Subsequent Event
On October 16, 1998, the Board of Trustees declared a distribution of $0.365
per share for the period July 1, 1998 through September 30, 1998. The
distribution will be paid on or about November 13, 1998 to shareholders of
record on November 2, 1998.
-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 five assisted living
facilities securing 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
September 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 September 30, 1998
For the three months ended September 30, 1998, the Company generated rental
revenues of $3.9 million from leasing 20 healthcare facilities. The Company
recognized interest income of $1.1 million during this period from term and
construction loans and a mortgage. Financial services fee income of $0.8 million
was earned from providing services to a third-party lender with respect to loans
made by the lender to the current owners of the properties subject to the
leasehold and purchase option rights acquired by Meridian on September 3, 1998.
Other income of $0.5 million was earned from miscellaneous working capital
investment activities. Rental and interest revenue increased as compared to the
period from April 1 through June 30, 1998 due to rent increases and additional
construction loan funding.
Depreciation totaled $1.2 million for the three months ended September 30, 1998.
General and administrative expenses incurred were approximately $0.5 million, or
12% of lease revenues, for the three months ended September 30, 1998, and
consisted primarily of management salaries and benefits, legal and other
administrative costs. Interest expense, which includes deferred financing cost
amortization, totaled $1.7 million, consisting of $0.7 million on mortgage
indebtedness and $1.0 million on the Company's Bank Credit Facility. Interest
expense increased due to the increased borrowings under the Bank Credit Facility
needed to finance the Operating Partnership's investment in Meridian.
Period from January 30, 1998 to September 30, 1998
For the period from January 30, 1998 to September 30, 1998, rental revenues of
$9.0 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 $0.8 million in lease revenues, and the Riverview Ridge
assisted living facility was acquired on March 27, 1998, and generated $0.3
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 $2.7 million was earned during the period from
January 30, 1998 through September 30, 1998 from term and construction loans and
a mortgage. Fee income of $1.0 million was earned from January 30, 1998 through
September 30, 1998 for financial services rendered.
Depreciation totaled $3.1 million for the period from January 30, 1998 to
September 30, 1998 and was calculated from the IPO closing date to period end
date. General and administrative expenses incurred for the period from January
30, 1998 to September 30, 1998 were approximately $1.2 million, or 12% of lease
revenues, and consisted primarily of management salaries and benefits, legal and
other administrative costs. Interest expense, which includes deferred financing
cost amortization, of $3.9 million was incurred for the period from January 30,
1998 to September 30, 1998, consisting of $1.8 million on mortgage indebtedness,
$2.0 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 $65.4 million
borrowed under the Bank Credit Facility, the $10.1 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 $151.9
million, (ii) fund loans totaling $47.5 million, (iii) fund the Company's $7.8
million investment in ET Capital Corp., (iv) purchase other assets of $3.6
million, (v) fund payment of the quarterly distributions of $4.8 million, (vi)
fund principal payments of $0.5 million, (vii) fund the Company's $19.4 million
investment in Meridian, (viii) repurchase shares of stock of $0.3 million and
(ix) provide cash on hand of $1.4 million.
Working capital was $2.4 million at September 30, 1998. Accounts receivable
totaled $1.1 million at that date. The Company's cash flow from operations for
the period January 30, 1998 to September 30, 1998, was approximately $10.1
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 entered into the Bank Credit Facility contemporaneously with the
closing of the IPO. The Bank Credit Facility enables the Company to borrow
generally 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 Bank Credit Facility includes a letter of credit facility, with $1
million outstanding as of September 30, 1998. In general, the maximum letters of
credit outstanding can be $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, a total leverage ratio and minimum interest coverage ratio. The
borrowing base and balance outstanding on the Bank Credit Facility at September
30, 1998 was $84.8 million and $65.4 million, respectively, reflecting
additional borrowing capacity of approximately $19.4 million at September 30,
1998. An additional $8.7 million of borrowing base will be available upon the
completion of certain administrative requirements with respect to properties.
Because the Bank Credit Facility is floating rate debt, any increase (decrease)
in prevailing interest rates would increase (decrease) the Company's interest
payment obligations under the Bank Credit Facility.
At September 30, 1998, the unfunded portion of loan commitments made by the
Company totaled $8.8 million. At that date, the Company has obligations to
purchase seven healthcare facilities subject to term or construction loans upon
their reaching stabilized occupancy. The Company does not expect any such
facility to reach stabilized occupancy within the next six months. In addition,
expected repayments within the next six months on existing loans receivable
outstanding are expected to be $3.7 million.
The Bank Credit Facility will expire on January 29, 1999, unless extended by the
lender. The Company has begun discussions with the lender to extend the term of
the Bank Credit Facility for an additional 364 days. The Company also has
entered into discussions with other potential lenders to replace the existing
Bank Credit Facility with a new credit facility of a longer term and with a
greater borrowing availability. No assurance can be given that these
negotiations will be successful.
-15-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Upon completion of the IPO, the Operating Partnership entered into loan
commitments to finance the development or expansion of additional assisted
living facilities. These loan commitments totaling $44.7 million have expired.
The Company expects to meet its long-term liquidity requirements for the funding
of real estate property development and acquisitions by borrowing and by issuing
equity or debt securities in public or private transactions. The Company
believes that it will be able to obtain financing for its long-term capital
needs. However, due to recent illiquidity in the capital markets and uncertainty
concerning the economy 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.
On August 17, 1998, the Company announced that its Board of Trustees had
authorized the Company to implement a Share Repurchase Program, pursuant to
which the Company from time to time may repurchase shares in open market
transactions up to an amount equal to the Company's excess cash flow on a
quarterly and cumulative basis. During the quarter ended September 30, 1998, the
Company repurchased 22,700 common shares at an aggregate purchase price of
$278,500.
Management believes that inflation and deflation 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.
Year 2000 Disclosure
The Company recognizes that the Year 2000 problem could effect its operations as
well as the proper functioning of the embedded systems included in the Company's
properties. In any particular property, the problem could effect the functioning
of elevators, heating and air conditioning systems, security systems and other
automated building systems. The nature of the Company's business is such that
most of its assets are subject to net lease arrangements with healthcare
facility operators under which the operators are obligated to remedy, at their
own expense, any Year 2000 problems pertaining to the properties. The Company is
currently discussing with these operators their plans to identify and address
any such problems in a manner that does not impair the operators' ability to
continuously operate the property involved. In addition, and as one operator,
Genesis, represents a significant source of the Company's rental and interest
revenue, the Company is discussing with Genesis its preparedness for the Year
2000 so as to assess their ability to meet its obligations, both in terms of
facility repairs and ability to generate payments, in a timely manner.
-16-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED
The Company has also begun to evaluate the Year 2000 readiness of those
properties not subject to such lease arrangements, through identifying and
contacting suppliers of building systems and other critical business partners to
determine if the building systems are affected and whether these entities have
an effective plan in place to address the Year 2000 issue. The Company is also
in the process of evaluating its own systems to determine the impact of the Year
2000. Due principally to the Company's small size and low transactional volume,
the problem is not expected to have a significant impact on corporate
operations.
The Company expects to complete this process of inventorying and evaluating its
and its properties systems by November 30, 1998. Thereafter, the Company will
develop a work plan detailing the tasks and resources required to ready its and
its properties' operations and systems for the Year 2000. This work plan will
likely include a timetable for remediation and testing of systems, as well as
contingency plans if readiness cannot be achieved. Because the Company is still
in the preliminary stages of its work to address the Year 2000 problem, it
currently does not have complete estimates as to the cost of achieving Year 2000
readiness and has not yet developed any contingency plans. Based on the
preliminary information received to date, however, the Company currently expects
that these costs will be less than $100,000.
Subsequent Event
The Board of Trustees declared a cash distribution on October 16, 1998. The cash
distribution of $0.365 per share will be paid on or about November 13, 1998, to
shareholders of record on November 2, 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.
-17-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Summary Consolidated Financial Data of Genesis
Approximately 37.0% of the Company's total assets at September 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 The following table sets forth certain
summary consolidated data for Genesis at and for the periods indicated. (Note:
Genesis has a September fiscal year-end. The following represents the most
recent financial summary data available.)
At or for the quarter At or for the quarter
ended 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.
-18-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
On Monday, November 2, 1998, Genesis issued a press release announcing, among
other things, that it expects its fourth quarter 1998 earnings to be
significantly below that of its prior quarter ended June 30, 1998, and the
negative impact of the Medicare Prospective Payment System ("PPS") will be
greater than previously anticipated. Genesis also announced that it expects its
fiscal 1999 cash flow from operations (or earnings before interest, taxes,
depreciation and amortization), excluding the impact of the recent Vitalink
transaction, to decline 3% to 5% due to PPS, but may increase up to 30%,
including the impact of the Vitalink acquisition.
The Company's management has reviewed Genesis' press release and notes:
o Of the 27 properties owned, directly or indirectly, by the Company, 15 are
skilled nursing facilities impacted by PPS, all of which are subject to
Fixed Rent Leases. No facilities impacted by PPS are subject to Percentage
Rent Leases.
o Review of the skilled nursing facility budgets prepared by Genesis has
shown no significant impact on the Company's properties' lease coverage
ratios. Management of the Company will continue to monitor these
properties' performance as PPS is fully implemented.
o The Company's lease base has more than nine years before it comes up for
renewal. As a result, no leases subject to PPS are contractually due for
renegotiation in the near term.
o In addition to skilled nursing facilities, the Company also leases assisted
living facilities and medical office buildings. These properties are not
impacted by PPS or other items in the Genesis announcement.
Further, while it appears that PPS may have a negative impact on the skilled
nursing industry, management does not believe it will have a material impact on
the Company.
-19-
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 September 30, 1998 (in thousands):
Funds from Operations:
Net income $3,006
Minority interest 205
------
Net income before minority interest $3,211
Adjustments to derive funds from operations:
Add:
Real estate depreciation and amortization 3,543
Nonrecurring items -start-up expenses 2,645
Funds from operations before allocation to minority interest 9,399
Less : Funds from operations allocable to minority interest (585)
------
Funds from operations attributable to the common shareholders $8,814
======
-20-
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 Subordinated Promissory Note of Meridian payable to the Operating
Partnership in the amount of $18.5 million (incorporated by reference to
the Company's Form 8-K filed on September 18, 1998)
10.2 Agreement of Limited Partnership of Meridian (incorporated by
reference to the Company's Form 8-K filed on September 18, 1998)
10.3 Indemnification Agreement dated September 3, 1998 in favor of the persons
and entities listed on Exhibit B thereto (incorporated by reference to the
Company's Form 8-K filed on September 18, 1998)
10.4 Indemnification Consent and Acknowledgment Agreement dated September 3,
1998 between the Operating Partnership and Genesis (incorporated by
reference to the Company's Form 8-K filed on September 18, 1998)
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
The Company filed a Form 8-K on August 24, 1998 to report the adoption of
its Share Repurchase Program.
The Company filed a Form 8-K on September 18, 1998 to report its investment
in Meridian.
-21-
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.
Senior Vice President and Chief Financial Officer
Date: November 16, 1998
-22-
EXHIBIT INDEX
Exhibit No. Exhibit Name Page
- - ----------- ------------ ----
10.1 Subordinated Promissory Note of ET Sub-Meridian payable to the Operating Partnership in
the amount of $18.5 million (incorporated by reference to the Company's Form 8-K filed on
September 18, 1998)
10.2 Agreement of Limited Partnership of ET Sub-Meridian (incorporated by reference to the
Company's Form 8-K filed on September 18, 1998)
10.3 Indemnification Agreement dated September 3, 1998 in favor of the persons and entities
listed on Exhibit B thereto (incorporated by reference to the Company's Form 8-K filed on
September 18, 1998)
10.4 Indemnification Consent and Acknowledgment Agreement dated September 3, 1998 between the
Operating Partnership and Genesis (incorporated by reference to the Company's Form 8-K
filed on September 18, 1998)
27 Financial Data Schedule (for SEC use only) 24
-23-