UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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 charter)
Maryland 23-2932973
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or
organization)
101 East State Street, Suite 100, Kennett Square PA 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
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Class Outstanding at August 13, 1999
- --------------------------------------- ------------------------------
Common stock, $0.01 par value per share 7,201,100
Exhibit index is located on page 31
ELDERTRUST
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
TABLE OF CONTENTS
Page
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1998........................................ 1
Condensed Consolidated Statements of Operations for the
three months ended June 30, 1999 and 1998 and for the
six months ended June 30, 1999 and the period from
January 30, 1998 to
June 30, 1998............................................ 2
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 1999 and for the period from
January 30, 1998 to June 30, 1998........................ 3
Notes to Unaudited Condensed Consolidated Financial Statements.. 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 27
PART II: OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............ 28
Item 6. Exhibits and Reports on Form 8-K............................... 29
SIGNATURES.................................................................. 30
EXHIBIT INDEX............................................................... 31
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
ELDERTRUST
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollar amounts in thousands, except share amounts)
June 30, 1999 December 31, 1998
------------- -----------------
ASSETS
Assets:
Real estate properties, at cost $ 164,726 $ 163,783
Less - accumulated depreciation (7,318) (4,444)
Land 16,642 16,790
--------- ---------
Net real estate properties 174,050 176,129
Real estate loans receivable 52,070 47,899
Cash and cash equivalents 4,755 2,272
Restricted cash 5,018 3,549
Accounts receivable 1,098 4,412
Accounts receivable from unconsolidated entities 433 987
Prepaid expenses 1,338 986
Investments in and advances to unconsolidated entities 33,142 34,426
Other assets, net 1,190 657
--------- ---------
Total assets $ 273,094 $ 271,317
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Bank credit facility $ 99,122 $ 90,204
Accounts payable and accrued expenses 2,008 1,571
Accounts payable to unconsolidated entities 149 14
Mortgages and bonds payable 49,026 49,594
Notes payable -- 3,000
Notes payable to unconsolidated entities 1,107 1,134
Other liabilities 3,967 3,645
--------- ---------
Total liabilities 155,379 149,162
Minority interest 8,372 8,859
Shareholders' Equity:
Preferred shares, $.01 par value; 20,000,000 shares
authorized; none outstanding -- --
Common shares, $.01 par value; 100,000,000 shares authorized;
7,201,100 and 7,244,800 shares issued and outstanding,
respectively 72 72
Capital in excess of par value 119,604 120,028
Distributions in excess of earnings (9,333) (3,204)
Note receivable from officer for common shares sold (1,000) (3,600)
--------- ---------
Total shareholders' equity 109,343 113,296
--------- ---------
Total liabilities and shareholders' equity $ 273,094 $ 271,317
========= =========
See accompanying notes to unaudited condensed
consolidated financial statements.
1
ELDERTRUST
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(dollars in thousands, except per share amounts)
For the three months ended For the six Period from
June 30, months ended January 30 to
------------------------------ June 30, June 30,
1999 1998 1999 1998
------------- ------------- ------------------ ----------------
Revenues:
Rental revenues $ 4,599 $ 3,825 $ 9,222 $ 6,244
Interest, net of amortization of deferred
loan origination costs 1,553 1,148 3,018 1,823
Interest from unconsolidated equity
investees 950 171 1,891 283
Other income 20 222 39 245
-------- -------- -------- --------
Total revenues 7,122 5,366 14,170 8,595
-------- -------- -------- --------
Expenses:
Property operating expenses 273 266 572 416
Interest expense, including amortization
of deferred finance costs 3,221 1,472 6,156 2,250
Depreciation 1,453 1,145 2,893 1,889
General and administrative 709 371 1,462 750
Separation agreement expenses 2,800 -- 2,800 --
Start-up expenses -- 28 -- 2,645
-------- -------- -------- --------
Total expenses 8,456 3,282 13,883 7,950
-------- -------- -------- --------
Net income (loss) before equity in income
(losses) of unconsolidated entities and
minority interest (1,334) 2,084 287 645
Equity in income (losses) of unconsolidated
entities, net (627) 55 (1,219) 51
Minority interest 129 (131) 59 (43)
-------- -------- -------- --------
Net income (loss) ($ 1,832) $ 2,008 ($ 873) $ 653
======== ======== ======== ========
Basic and diluted weighted average number of
common shares outstanding 7,201 7,393 7,208 7,391
======== ======== ======== ========
Net income (loss) per share - basic and diluted ($ 0.25) $ 0.27 ($ 0.12) $ 0.09
======== ======== ======== ========
See accompanying notes to unaudited condensed
consolidated financial statements.
2
ELDERTRUST
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
For the six Period from January
months ended 30 to
June 30, 1999 June 30, 1998
------------------ ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($ 873) $ 653
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 3,735 2,014
Non-cash separation expense from debt forgiveness to officer 2,600 --
Non-cash compensation expense to officers -- 2,018
Non-cash expense in connection with stock issued to trustees -- 49
Minority interest and equity in losses from unconsolidated entities 1,160 (8)
Net changes in assets and liabilities:
Accounts receivable and prepaid expenses 3,516 (1,833)
Accounts payable and accrued expenses 572 1,160
Other 349 2,725
--------- ---------
Net cash provided by operating activities 11,059 6,778
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition and cost of real estate investments -- (103,964)
Investments in real estate mortgages and development funding (5,096) (44,801)
Payments received on mortgage loans receivable 925 --
Investments in and advances to unconsolidated entities -- (7,406)
Capital expenditures (980) (116)
Proceeds from collection on advances to unconsolidated entities 65 --
Net increase in bond and operating reserve funds (restricted cash) (1,469) (2,657)
Other 222 (651)
--------- ---------
Net cash used in investing activities (6,333) (159,595)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering, net of offering costs -- 114,213
Payment of deferred financing fees (1,458) (177)
Borrowings under Credit Facility 9,518 43,347
Payments under Credit Facility (600) --
Principal payments on mortgages (568) (313)
Payments on notes payable (3,000) --
Distributions to shareholders (5,256) (1,796)
Distributions to minority interests (375) (118)
Repurchase of common shares (424) --
Other (80) --
--------- ---------
Net cash (used in) provided by financing activities (2,243) 155,156
--------- ---------
Net increase in cash and cash equivalents 2,483 2,339
Cash and cash equivalents, beginning of period 2,272 --
--------- ---------
Cash and cash equivalents, end of period $ 4,755 $ 2,339
========= =========
See accompanying notes to unaudited condensed
consolidated financial statements.
3
ELDERTRUST
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
of ElderTrust and its consolidated subsidiaries (the "Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. Additionally, although the December 31, 1998
condensed consolidated balance sheet was derived from audited financial
statements, it does not include all disclosures required by generally accepted
accounting principles. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
of the financial statements for the interim periods presented have been
included. Operating results for the three and six months ended June 30, 1999 are
not necessarily indicative of the results that may be expected for the full
fiscal year ending December 31, 1999. Certain amounts included in the unaudited
condensed consolidated financial statements for the three months ended June 30,
1998 and for the period from January 30, 1998 through June 30, 1998 have been
reclassified for comparative purposes.
Results of operations for the interim period ended June 30, 1998
includes the Company's operations from January 30, 1998, the date of
consummation of the Company's initial public offering, to June 30, 1998. The
accompanying unaudited condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
for the year ended December 31, 1998 included in the Company's Form 10-K filed
with the Securities and Exchange Commission.
2. Investments in Unconsolidated Entities
The Company has several investments in entities in which the
controlling interest is owned by Mr. D. Lee McCreary, Jr., the Company's Acting
President and Chief Executive Officer and Chief Financial Officer. Mr. McCreary
acquired the controlling interest in these entities from Mr. Edward B. Romanov,
the Company's former Chief Executive Officer (See Note 4), on July 29, 1999. As
a result, Mr. McCreary owns all of the voting interest in ET Capital Corp.,
representing a 5% equity interest. Additionally, Mr. McCreary owns a 1% general
partner interest in ET Sub-Meridian, LLP, through a limited liability company of
which he is the sole member. Also, upon obtaining pending approval from the
Massachusetts Housing Finance Agency, Mr. McCreary will own a 1% managing member
interest in ET Sub-Vernon Court, LLC, ET Sub-Cabot Park, LLC and ET
Sub-Cleveland Circle, LLC. As the Company also has an option to acquire the 1%
managing interest in ET Sub-Vernon Court, LLC, this company is consolidated into
the Company's condensed consolidated financial statements at June 30, 1999. As a
result of the Company not having controlling or managing interest in the
4
ELDERTRUST
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
remaining entities, the Company records its investments in and results of
operations from these entities using the equity method of accounting in its
condensed consolidated financial statements.
Summary combined financial information as of and for the six months
ended June 30, 1999 for these unconsolidated entities is as follows (dollars in
thousands):
ET ET Sub- ET
Sub-Meridian, ET Capital Cabot Sub-Cleveland
LLP Corp. Park, LLC Circle, LLC Total
---------------- ---------------- ---------------------------------------------
Current assets $ 1,995 $ 190 $ 534 $ 622 $ 3,341
Real estate properties (1) 108,280 -- 17,394 14,359 140,033
Notes receivable -- 12,449 -- -- 12,449
Total assets 110,653 12,761 18,440 15,466 157,320
Current liabilities 1,608 1 1,002 1,086 3,697
Long-term debt (2) 107,405 9,649 17,067 13,965 148,086
Total equity (445) 3,110 96 184 2,945
Rental revenue 4,900 -- 806 710 6,416
Interest income, ElderTrust -- 330 -- -- 330
Interest income, other 7 510 12 12 541
Interest expense, ElderTrust 1,060 642 99 90 1,891
Interest expense, other 3,238 -- 595 447 4,280
Depreciation/amortization 1,757 6 280 231 2,274
Net income (loss) (1,147) 124 (156) (47) (1,226)
Percent ownership 99% 95% 99% 99%
(1) Includes properties under capital lease.
(2) Includes capital lease obligations.
In connection with ET Sub-Meridian's 1998 acquisition of seven skilled
nursing facilities from Genesis Health Ventures, Inc. ("Genesis"), the Company
agreed to indemnify the property owners for any loss of deferral of tax benefits
prior to August 31, 2008 due to a default under a sublease or if a cure to a
default by Genesis resulted in a taxable event to the owners. The Company also
agreed to indemnify Genesis against any amounts expended by Genesis under a
back-up indemnity provided by Genesis to the previous owners against any such
loss of deferral of tax benefits or default resulting in a taxable event to
them.
3. Credit Facility
At June 30, 1999, the Company had $99.1 million outstanding under its
bank credit facility (the "Credit Facility"). The original expiration date of
the Credit Facility was extended on January 29, 1999 to April 30, 1999, and the
availability under the Credit Facility was reduced from $140 million to $100.5
million. In addition, the letters of credit originally available under the
Credit Facility were canceled. During the extension period, the Company notified
the bank that it was in violation of certain restrictive covenants under the
Credit Facility which occurred as a result of the Company's equity value (market
value of outstanding shares) being less than $70 million as of February 4, 1999
and due to the Company declaring and paying shareholder distributions during
this violation period. The Company also borrowed additional funds for working
capital during February 1999, prior to the determination that the Company was in
violation of the minimum equity value covenant. Additional borrowings were not
permitted under the Credit Facility during this period while the Company was in
default.
5
On March 31, 1999, the term of the Credit Facility was extended from
April 30, 1999 to January 1, 2000 through an amendment which also waived the
Company's defaults under the Credit Facility and provided for available
borrowings up to an aggregate of $100.5 million. The Credit Facility contains
various financial and other covenants, including, but not limited to, minimum
net asset value, minimum tangible net worth, a total leverage ratio and minimum
interest coverage ratio. The covenant requiring maintenance of a minimum equity
value is no longer required under the Credit Facility, as amended. The Company's
owned properties and properties underlying loans receivable with an aggregate
cost of $152.8 million are included in the Credit Facility borrowing base and
pledged as collateral.
Amounts outstanding under the Credit Facility bear interest at floating
rates based on a margin over the London Interbank Offered Rate ("LIBOR"), as
determined by the percentage of the Credit Facility outstanding as compared to
the borrowing base. Effective June 1, 1999, the interest rate on borrowings
outstanding under the Credit Facility increased from a margin of 1.80% over
one-month LIBOR to a margin of 2.75%. The interest rate on borrowings
outstanding under the Credit Facility at June 30, 1999 was 7.69%, including the
2.75% margin adjustment.
The Company paid financing fees and other related costs of
approximately $1.5 million in connection with amendments to the Credit Facility
for the six months ended June 30, 1999. Unamortized deferred financing costs in
connection with the Credit Facility aggregated approximately $975,000 at June
30, 1999. These financing costs will be fully amortized during the remaining two
quarters of 1999 and included as a component of interest expense.
4. Separation Agreement
Mr. Edward B. Romanov, Jr. resigned all positions with the Company and
its subsidiaries, including as President, Chief Executive Officer and a trustee
of the Company, in order to pursue other business interests. In connection with
Mr. Romanov's resignation, the Company, among other things, canceled
indebtedness in the amount of $2.6 million owed by Mr. Romanov to the Company.
The Company recorded a nonrecurring charge of $2.8 million during the second
quarter ended June 30, 1999 in connection with the cancellation of the $2.6
million of indebtedness and $200,000 in estimated costs payable to third parties
in connection with a separation agreement. This nonrecurring charge is reflected
as an expense in the Company's statements of operations for the three and six
month periods ended June 30, 1999.
6
5. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share for the periods indicated (in thousands, except per share
data):
For the three months ended For the six months ended
June 30, June 30,
------------- -- ------------- ------------ -- -------------
1999 1998 1999 1998 (1)
------------- ------------- ------------ -------------
Net income (loss) available for basic and diluted
earnings per share ($1,832) $2,008 ($873) $ 653
======== ====== ====== =====
Weighted average common shares outstanding for
basic and diluted net income (loss) per share
7,201 7,393 7,208 7,391
===== ===== ===== =====
Basic and diluted net income (loss) per share ($0.25) $0.27 ($0.12) $ 0.09
======= ===== ======= ======
(1) Represents the period from January 30, 1998 to June 30, 1998.
The effect of outstanding share options is antidilutive and thus not
reflected in the determination of weighted average common shares outstanding.
The operating partnership units are not included in the determination of
weighted average common shares outstanding since they are not considered to be
common share equivalents as they are redeemable for cash. Options for 300,000
common shares previously held by Mr. Romanov were cancelled as part of his
separation agreement.
6. Supplemental Cash Flow Information:
Supplemental cash flow information for the periods indicated is as
follows:
For the six months
ended June 30,
-------------------------------
1999 1998 (1)
-------------- -------------
(amounts in thousands)
Non-Cash Investing and Financing Transactions:
Note receivable relating to officer share purchase - $3,600
============== =============
Assumption of debt in connection with acquisition of real
estate properties - 36,996
============== =============
Units issued in connection with acquisition of real estate
properties - 10,511
============== =============
(1) Represents the period from January 30, 1998 to June 30, 1998.
7
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements
Management's Discussion and Analysis of Financial Condition and Results
of Operations contains certain forward-looking statements with respect to
results of operations and financial condition of ElderTrust and its consolidated
subsidiaries (collectively, the "Company"). 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. In general, these
statements are identified by the use of forward-looking words or phrases,
including "intended," "will," "should," "may," "continues," "estimates,"
"expects," and "anticipates" or the negative or variations thereof or similar
terminology. These statements are not guarantees of the Company's future
performance and are subject to risks and uncertainties, and other important
factors that could cause the Company's actual performance or achievements to be
materially different from those expressed or implied by these forward-looking
statements. These risks, uncertainties and factors include, but are not limited
to:
o general economic, business and regulatory conditions,
o the ability to refinance the Company's existing credit facility,
o availability, terms and use of capital,
o federal and state government regulation,
o changes in Medicare and Medicaid reimbursement programs,
o relationship with Genesis Health Ventures ("Genesis"),
o competition, and
o Year 2000 readiness.
Refer to the Company's annual report on Form 10-K for the year ended
December 31, 1998 for a discussion of these and other factors which management
believes may impact the Company. The forward-looking statements included herein
represent the Company's judgment as of the date of this Form 10-Q and should be
read in conjunction with the consolidated financial statements and notes thereto
appearing elsewhere in this report. Although the Company believes that the
expectations reflected in these forward-looking statements are reasonable, there
can be no assurance that such expectations will prove to be correct. All
subsequent written and oral forward-looking statements attributable to the
Company are expressly qualified in their entirety by the cautionary statements.
The Company disclaims, however, any intent or obligation to update its
forward-looking statements.
8
General
The Company is a self-managed and self-administered real estate
investment trust ("REIT") that invests principally in senior housing and other
healthcare facilities, including skilled nursing facilities, assisted and
independent living facilities and medical office buildings. The Company conducts
all of its operations through ElderTrust Operating Limited Partnership (the
"Operating Partnership"), of which ElderTrust is the sole general partner. The
Company's consolidated assets consist primarily of the assets of the Operating
Partnership and its consolidated subsidiaries. As of June 30, 1999, skilled
nursing, assisted and independent living facilities comprised approximately 93%
of the Company's consolidated investments in real estate properties and loans.
Approximately 69% of the Company's consolidated assets at June 30, 1999
consisted of real estate properties leased to and loans on real estate
properties made to Genesis or entities in which Genesis accounts for its
investment using the equity method of accounting ("Genesis Equity Investees").
Revenues recorded by the Company in connection with these leases and borrowings
aggregated $9.1 million for the six months ended June 30, 1999. In addition, the
Company's investments in unconsolidated entities which it accounts for using the
equity method of accounting (the Company's "Equity Investees") also have leased
properties or provided mortgages on properties to Genesis or Genesis Equity
Investees. As a result of these relationships, the Company and its Equity
Investees' revenues and ability to meet their obligations depends, in
significant part, upon:
o the ability of Genesis and Genesis Equity Investees to meet their
lease and loan obligations;
o the revenues derived from, and the successful operation of, the
facilities leased to or managed by Genesis or Genesis Equity
Investees; and
o the ability of these entities to complete successfully and on
schedule the development projects securing construction loans made
by the Company to them.
Neither the Company nor its Equity Investees has control over these
entities and can provide no assurance that any of these entities will have
sufficient income or assets to enable them to satisfy their obligations under
the leases or loans made to them. See "Summary Condensed Consolidated Financial
Data of Genesis."
Mr. Edward B. Romanov, Jr. resigned all positions with the Company and
its subsidiaries, including as President, Chief Executive Officer and a trustee
of the Company, in order to pursue other business interests. In connection with
Mr. Romanov's resignation, the Company , among other things, canceled
indebtedness in the amount of $2.6 million owed by Mr. Romanov to the Company.
The Company recorded a nonrecurring charge of $2.8 million during the second
quarter ended June 30, 1999 in connection with the cancellation of the $2.6
million of indebtedness and $200,000 in estimated costs payable to third parties
in connection with a separation agreement. This nonrecurring charge is reflected
as an expense in the Company's statements of operations for the three and six
month periods ended June 30, 1999.
9
On March 31, 1999, the term of the bank credit facility (the "Credit
Facility") was extended from April 30, 1999 to January 1, 2000 through an
amendment which also waived certain defaults under the Credit Facility and
provided for available borrowings up to an aggregate of $100.5 million. At June
30, 1999, the Company had $99.1 million outstanding under the Credit Facility.
See "Liquidity and Capital Resources."
The Company has incurred indebtedness to acquire its assets and may
incur additional short and long-term indebtedness, and related interest expense,
from time to time. The Company has unfunded construction loan commitments at
June 30, 1999 of approximately $1.5 million which it expects to fund with cash
flow from operations and funds available under the Credit Facility. The Company
is also obligated, or has an option, to purchase eight assisted living
facilities underlying term or construction loans, which will generally be leased
back to the sellers pursuant to long-term leases. A portion or all of the
purchase price for these acquisitions will be satisfied by any remaining balance
outstanding under the related term or construction loans. The Company will need
to fund the remainder of the purchase prices through borrowings under the
existing or any future credit facilities or through other funding alternatives.
Due to the limited availability of funds under the existing credit facility, the
Company may be required to finance any required purchases or exercise of its
purchase option by using other borrowing sources, the sale of other assets or
issuance of equity. See "Liquidity and Capital Resources."
The Company intends to declare and pay distributions to its
shareholders in amounts not less than the amounts required to maintain REIT
status. The amount and timing of distributions will depend upon the Company's
cash available for distribution and limitations or restrictions under the
existing and any future credit facilities on payment of shareholder
distributions. See "Liquidity and Capital Resources."
Substantially all of the Company's revenues are derived from:
o rents received under long-term leases of healthcare-related real
estate;
o interest earned from term and construction loans; and
o interest earned from the temporary investment of funds in short-term
instruments.
The Company has incurred operating and administrative expenses, which
principally included 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.
10
The primary non-cash expenses of the Company are the depreciation of
its healthcare facilities, amortization of its deferred loan origination costs
and deferred financing costs.
Investments in Equity Investees
The Company's Equity Investees represent entities in which the
controlling interest is owned by Mr. D. Lee McCreary, the Company's Acting
President and Chief Executive Officer and Chief Financial Officer, or which will
be owned by Mr. McCreary upon obtaining approval from the Massachusetts Housing
Finance Agency. As a result, the Company records its investments in and results
of operations from these entities using the equity method of accounting in the
unaudited condensed consolidated financial statements included herein.
ET Capital Corp.
The Company has a nonvoting 95% equity interest in ET Capital Corp.
("ET Capital"). The remaining voting 5% equity interest in ET Capital is owned
by Mr. McCreary. As of June 30, 1999, ET Capital owned a $7.8 million second
mortgage note with AGE Institute of Florida, which it acquired from Genesis
during 1998. This note is secured by a second lien on 11 Florida skilled nursing
facilities owned by AGE Institute of Florida and a second lien on accounts
receivable and other working capital assets. This note matures on September 30,
2008 with payments of interest only, at a fixed annual rate of 13% due quarterly
until the note is paid in full.
The Company recorded income of $118,000 and $51,000 related to the
portion of its equity interest in ET Capital's results of operations for the six
months ended June 30, 1999 and the period from January 30, 1998 to June 30,
1998, respectively. ET Capital has notes receivable of $12.4 million and
long-term debt payable to the Company of $9.6 million at June 30, 1999. See Note
2 to the Company's unaudited condensed consolidated financial statements
included herein.
ET Capital has notes receivable aggregating $4.6 million at June 30,
1999 from two of the Company's Equity Investees and one of the Company's
consolidated subsidiaries. These loans mature in December 2001 and bear interest
at 12% per annum with interest and principal payable monthly. ET Capital's
long-term debt includes two demand promissory notes payable to the Company
aggregating $5.9 million at June 30, 1999 in connection with the above second
mortgage note transaction. These notes bear interest at a weighted average rate
of 12.1% per annum with interest only payable quarterly. In addition, ET Capital
has loans payable to the Company aggregating $3.7 million, bearing interest at
15% and maturing at various dates from April 2008 to December 2011. The Company
recorded $642,000 and $283,000 in interest income during the six months ended
June 30, 1999 and the period from January 30, 1998 to June 30, 1998,
respectively, on the notes payable to the Company by ET Capital.
11
ET Sub-Meridian Limited Partnership, L.L.P.
The Company has a 99% limited partnership interest in ET Sub-Meridian
Limited Partnership, L.L.P. ("ET Sub-Meridian"). The 1% general partner interest
is owned by a limited liability company of which Mr. McCreary is the sole
member. ET Sub-Meridian owns the leasehold and purchase option rights to seven
skilled nursing facilities located in Maryland and New Jersey, which it
purchased from Genesis during September 1998. The purchase options are
exercisable by ET Sub-Meridian in September 2008 for a cash exercise price of
$66.5 million. ET Sub-Meridian subleased the facilities to Genesis for an
initial ten-year period with a ten-year renewal exercisable by that entity.
Genesis has guaranteed the subleases.
As part of the transaction, the Company agreed to indemnify the
property owners for any loss of deferral of tax benefits prior to August 31,
2008 due to a default under a sublease or if a cure to a default by the Genesis
subsidiary leasing the facilities resulted in a taxable event to the owners. The
Company also 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.
The Company recorded a loss of $1.1 million related to the portion of
its equity interest in ET Sub-Meridian's results of operations for the six
months ended June 30, 1999. ET Sub-Meridian has real estate investments and
long-term debt of $108.3 million and $107.4 million, respectively, at June 30,
1999. See Note 2 to the Company's unaudited condensed consolidated financial
statements included herein. At June 30, 1999, ET Sub-Meridian had a $17.6
million subordinated demand loan bearing interest at 12% per annum payable to
the Company in connection with the above transaction. The Company recorded $1.1
million in interest income on this loan during the six months ended June 30,
1999.
ET Sub-Heritage Andover, LLC
ET Sub-Vernon Court, LLC
ET Sub-Cabot Park, LLC
ET Sub-Cleveland Circle, LLC
The Company, through four limited liability companies (ET Sub-Heritage
Andover, LLC, ET Sub-Vernon Court, LLC, ET Sub-Cabot Park, LLC, and ET
Sub-Cleveland Circle, LLC), has member interests in three assisted living
facilities and one independent living facility which it acquired during December
1998 from an unrelated third party. A Genesis Equity Investee leases each of the
facilities.
12
The Company is the sole member of ET Sub-Heritage Andover, LLC, which,
accordingly, is consolidated into the Company's consolidated financial
statements at June 30, 1999. In each of the remaining three limited liability
companies, the Company has a 99% member interest. The 1% managing member
interest in these three companies will be owned by Mr. McCreary upon receiving
pending approval from the Massachusetts Housing Finance Agency of a transfer of
ownership from Mr. Edward B. Romanov, the Company's former President and Chief
Executive Officer. The Company currently has the option to acquire the 1%
managing member interest in ET Sub-Vernon Court, LLC from Mr. Romanov, which
option will continue after transfer of ownership of this company to Mr.
McCreary. The option exercise price is $3,244 and expires on November 30, 1999.
As the Company has the ability to acquire the 1% managing member interest in ET
Sub-Vernon Court, LLC, this company is consolidated into the Company's
consolidated financial statements at June 30, 1999.
These four limited liability companies have $12.8 million of
subordinated demand loans with the Company bearing interest at 12% per annum.
The Company recorded $189,000 in interest income during the six months ended
June 30, 1999 in connection with the demand loans payable aggregating $3.1
million payable to the Company by two of the unconsolidated limited liability
companies. Additionally, three of the limited liability companies have loans
aggregating $4.6 million payable to ET Capital, maturing December 2001 and
bearing interest at 12% per annum with interest and principal payable monthly.
The Company recorded aggregate losses of $201,000 related to the
portion of its equity interest in ET-Sub-Cabot Park, LLC and ET Sub-Cleveland
Circle, LLC's results of operations for the six months ended June 30, 1999.
These two entities have real estate investments and aggregate long-term debt of
$31.8 million and $31.0 million, respectively, at June 30, 1999. See Note 2 to
the Company's unaudited condensed consolidated financial statements included
herein.
Results of Operations
The Company had no real estate investment operations prior to
consummation of its initial public offering on January 30, 1998. Thus, results
of operations for the year to date period ended June 30, 1998 represent only
five months of operations. Additionally, the Company acquired its real estate
investments at various times during 1998 through acquisitions of senior housing
and other healthcare-related properties and term and construction loans. The
Company also made investments in its Equity Investees at various times during
1998. The revenues and expenses generated by the Company's investments were
included in its results of operations from the dates of acquisition or
investment. Accordingly, the operating results for the three and six months
ended June 30, 1999 are not comparable to those of the respective periods of the
prior year.
13
Three months ended June 30, 1999 compared with the three months ended
June 30, 1998
Revenues
Rental revenues of $4.6 million were generated during the three months
ended June 30, 1999. This represented a 20.2% increase from $3.8 million for the
corresponding period in 1998. This increase was primarily due to acquisitions of
senior housing and other healthcare-related properties at various times during
1998.
Interest income of $1.6 million, net of amortization of deferred loan
costs of $57,000 was earned during the three months ended June 30, 1999. This
represented a 35.3% increase from $1.1 million for the corresponding period in
1998. This increase was due to additional funding of construction loans at
various times during 1998 and 1999. The increase was comprised of an increase of
$272,000 in interest on term and construction loans and an increase of $154,000
in interest earned on excess invested funds and bond reserve funds, offset,
in part, by a decrease of $21,000 in connection with a mortgage loan receivable
that was paid off in December 1998.
Interest from unconsolidated Equity Investees of $950,000 was earned
during the three months ended June 30, 1999. This represented a 455.6% increase
from $171,000 for the corresponding period in 1998. This increase was primarily
a result of the loans with these unconsolidated Equity Investees increasing from
$5.6 million at June 30, 1998 to $30.4 million at June 30, 1999, primarily in
connection with two investment transactions which occurred in September and
December 1998.
Expenses
Property operating expenses principally relate to medical office
buildings which are not subject to leases that require the lessees to pay all
operating expenses of the related property. Property operating expenses for
these leased properties were $273,000 for the three months ended June 30, 1999.
This represented a 2.6% increase from $266,000 for the corresponding period in
1998. Property operating expenses as a percentage of total medical office
building rental revenues decreased to 42.1% for the three months ended June 30,
1999 as compared to 44.7% for the corresponding period in 1998. This decrease as
a percentage of total medical office building rental revenues is due primarily
to increased rental revenues in 1999 as compared to 1998.
Interest expense, which included amortization of deferred financing
costs of $445,000, was $3.2 million for the three months ended June 30, 1999.
This represented a 118.8% increase in interest expense from $1.5 million for the
corresponding period in 1998. This increase was primarily due to increased
amortization of deferred financing costs of $423,000 and increases in
third-party debt at various times during 1999 and 1998 to fund operating,
investing and financing activities. Third-party debt, which includes the Credit
Facility and mortgages and notes payable to third parties, increased from $80.0
million at June 30, 1998 to $148.1 million at June 30, 1999. The weighted
average interest rate on outstanding third-party debt decreased from 7.6% at
June 30, 1998 to 7.5% at June 30, 1999.
14
The Company's interest expense will increase in future quarters as a
result of the increase in the interest rate on the Credit Facility in June 1999
from a margin of 1.80% over the one-month London Interbank Offered Rate
("LIBOR") to a margin of 2.75% (7.69% at June 30, 1999, including the margin
adjustment). Additionally, the Company expects interest expense to increase as a
result of the amortization of deferred financing costs of approximately $975,000
during the remaining two quarters of 1999. The Company expects to incur
additional deferred financing costs in the future in connection with refinancing
of the Credit Facility.
Depreciation was $1.5 million for the three months ended June 30, 1999.
This represented a 26.9% increase from $1.1 million for the corresponding period
in 1998. This increase was a result of increases in real estate properties and
other depreciable assets which were placed in service at various times during
1998 and 1999.
General and administrative expenses were $709,000 for the three months
ended June 30, 1999. This represented a 91.1% increase from $371,000 for the
corresponding period in 1998. This increase was a result of additional expenses
as the Company established its current internal infrastructure. General and
administrative expenses increased as a percentage of total rental revenues to
15.4% for the three months ended June 30, 1999 as compared to 9.7% for the
corresponding period in 1998. This increase was due to the growth in the
Company's infrastructure throughout 1998 to support the Company's expansion of
its operations. These expenses consisted principally of management salaries and
benefits and legal and other administrative costs.
Separation agreement expenses of $2.8 million were recorded during the
three months ended June 30, 1999 in connection with Mr. Romanov's resignation
from the Company. These expenses are comprised of cancellation of indebtedness
payable by Mr. Romanov to the Company of $2.6 million and $200,000 in estimated
costs payable to third parties in connection with a separation agreement with
Mr. Romanov.
Six months ended June 30, 1999 compared with the period from
January 30, 1998 to June 30, 1998
Revenues
Rental revenues of $9.2 million were generated during the six months
ended June 30, 1999. This represented a 47.7% increase from $6.2 million for the
corresponding period in 1998. This increase was a result of 1998 including only
five months of operations and due to acquisitions of senior housing and other
healthcare-related properties at various times during 1998.
15
Interest income of $3.0 million, net of amortization of deferred loan
costs of $86,000, was earned during the six months ended June 30, 1999. This
represented a 65.6% increase from $1.8 million for the corresponding period in
1998. This increase was a result of 1998 including only five months of
operations and due to additional funding of construction loans at various times
during 1998 and 1999. The increase was comprised of an increase of $977,000 in
interest on term and construction loans and an increase of $252,000 in interest
earned on excess invested funds and bond reserve funds, offset by a decrease of
$34,000 in connection with a mortgage loan receivable that was paid off in
December 1998.
Interest from unconsolidated Equity Investees of $1.9 million was
earned during the six months ended June 30, 1999. This represented a 568.2%
increase from $283,000 for the corresponding period in 1998. This increase was
primarily a result of the loans with these unconsolidated Equity Investees
increasing from $5.6 million at June 30, 1998 to $30.4 million at June 30, 1999,
primarily in connection with two investment transactions which occurred in
September and December 1998.
Expenses
Property operating expenses principally relate to medical office
buildings which are not subject to leases that require the lessees to pay all
operating expenses of the related property. Property operating expenses for
these leased properties were $572,000 for the six months ended June 30, 1999.
This represented a 37.5% increase from $416,000 for the corresponding period in
1998. This increase was a result of 1998 including less than five months of
operations for the Company's medical office buildings due to one of these
buildings being acquired during the last half of February 1998. Property
operating expenses as a percentage of medical office building rental revenues
decreased slightly to 44.3% for the six months ended June 30, 1999 as compared
to 44.9% for the corresponding period in 1998.
Interest expense, which included amortization of deferred financing
costs of $756,000, was $6.2 million for the six months ended June 30, 1999. This
represented a 173.6% increase in interest expense from $2.3 million for the
corresponding period in 1998. This increase was primarily due to 1998 including
only five months of operations, increased amortization of deferred financing
costs of $722,000 and increases in third-party debt at various times during 1998
to fund operating, investing and financing activities. Third-party debt, which
includes the Credit Facility and mortgages and notes payable to third parties,
increased from $80.0 million at June 30, 1998 to $148.1 million at June 30,
1999. The weighted average interest rate on outstanding third-party debt
decreased from 7.6% at June 30, 1998 to 7.5% at June 30, 1999.
16
The Company's interest expense will increase in future quarters as a
result of the increase in the interest rate on the Credit Facility in June 1999
from a margin of 1.80% over the one-month LIBOR to 2.75% (7.69% at June 30,
1999, including the margin adjustment). Additionally, the Company expects
interest expense to increase as a result of the amortization of deferred
financing costs of approximately $975,000 during the remaining two quarters of
1999. The Company expects to incur additional deferred financing costs in the
future in connection with refinancing of the Credit Facility.
Depreciation was $2.9 million for the six months ended June 30, 1999.
This represented a 53.1% increase from $1.9 for the corresponding period in
1998. This increase was a result of 1998 including only five months of
operations and increases in real estate properties and other depreciable assets
which were placed in service at various times during 1998 and 1999.
General and administrative expenses were $1.5 million for the six
months ended June 30, 1999. This represented a 94.9% increase from $750,000 for
the corresponding period in 1998. This increase was a result of 1998 including
only five months of operations and additional expenses as the Company
established its current internal infrastructure. General and administrative
expenses increased as a percentage of total rental revenues to 15.9% for the six
months ended June 30, 1999 as compared to 12.0% for the corresponding period in
1998. This increase was due to the growth in the Company's infrastructure to
support the Company's expansion of its operations in 1998. These expenses
consisted principally of management salaries and benefits and legal and other
administrative costs.
See "Three Months Ended June 30, 1999 Compared With The Three Months
Ended June 30, 1998" for discussion of amounts recorded in connection with
separation agreement expenses.
Start-up expenses were $2.6 million for the six months ended June 30,
1998. These expenses were principally comprised of nonrecurring compensation
expense of $2.0 million recorded in connection with the issuance of units of
beneficial interest of the operating partnership to certain officers of the
Company and approximately $500,000 of amounts reimbursed to Genesis for certain
formation expenses.
Liquidity and Capital Resources
Net cash flows provided by operating activities were $11.1 million for
the six months ended June 30, 1999 compared to $6.8 million for the same period
in 1998. Net cash flows used in financing activities were $2.2 million for the
six months ended June 30, 1999 compared to cash flows provided by financing
activities of $155.2 million for the same period in 1998. Net cash flows used in
financing activities for 1999 principally included net borrowings under the
Credit Facility of $8.9 million, offset in part by (a) $1.5 million in deferred
financing fees and other related costs in connection with amendments to the
Credit Facility during the period, (b) $5.3 million in distributions to
shareholders, (c) $3.6 million in payments on mortgage loans and notes payable ,
and (d) $424,000 in common share repurchases. Net cash flows provided by
financing activities for 1998 included $114.2 million of net proceeds from the
Company's initial public offering and borrowings under the Credit Facility of
$43.3 million.
17
Net cash flows used in investing activities were $6.3 million for the
six months ended June 30, 1999 compared to $159.6 million for the same period in
1998. The Company used its net cash flows provided by operating and financing
activities during the six months ended June 30, 1999 principally to fund its
investing activities, including (a) $5.1 million in construction loans, (b) $1.5
million in bond and operating reserve funds and (c) $980,000 in purchases of
equipment and building renovations, offset by $925,000 in payments received on
term and construction loans receivable. Net cash flows provided by operating and
financing activities during the six months ended June 30, 1998 were principally
used to fund investing activities, including (a) $104.0 million for the
acquisition of real estate properties, (b) $44.8 million of term and
construction loans and (c) $7.4 million to fund investments in the Company's
Equity Investees.
At June 30, 1999, the Company's consolidated net real estate
investments in properties and loans aggregated $226.1 million. The Company
funded its investments through a combination of long-term and short-term
financing, utilizing both debt and equity. Working capital, excluding the
balance outstanding under the Credit Facility which was classified as a current
liability at June 30, 1999, was $4.4 million and $3.1 million at June 30, 1999
and December 31, 1998, respectively. The increase in working capital was
comprised of an aggregate decrease in current assets of $1.0 million, offset by
an aggregate decrease in current liabilities of $2.3 million. The decrease in
current assets primarily related to a decrease in accounts receivable due to
cash collections, offset, in part, by a net increase in cash. The decrease in
current liabilities primarily related to payments of debt during the period.
Cash and cash equivalents were $4.8 million and $2.3 million, at June 30, 1999
and December 31, 1998, respectively.
As of June 30, 1999, the Company had shareholders' equity of $109.3
million and Credit Facility borrowings and mortgages, bonds and notes payable to
third-parties aggregating $148.1 million, which represents a debt to equity
ratio of 1.35 to 1. This was an increase from 1.26 to 1 at December 31, 1998.
This increase was due primarily to a net increase of $5.4 million in such
indebtedness and a net decrease in shareholders' equity of $4.0 million. The net
increase in third-party indebtedness primarily resulted from net borrowings of
$8.9 million under the Credit Facility offset by repayments of third-party
indebtedness aggregating $3.5 million through June 30, 1999. The net decrease in
shareholders' equity primarily resulted from the declaration and payment of $5.3
million in dividends to shareholders, the repurchase of common shares for
$424,000 and a net loss aggregating $873,000 for the six months ended June 30,
1999. These decreases were offset, in part, by a decrease of $2.6 million in a
note receivable from a former officer of the Company as a result of debt
forgiveness in connection with a separation agreement between the former officer
and the Company. This note receivable is classified as a reduction of
shareholders' equity in the accompanying unaudited condensed consolidated
balance sheet.
The Company funded $5.1 million in construction loan commitments
through the six months ended June 30, 1999. The remaining unfunded portion of
construction loan commitments made by the Company are approximately $1.5 million
at June 30, 1999. The Company expects to continue to fund its remaining
construction loan commitments during 1999 with cash flows from operations and
funds available under the Credit Facility.
18
The Company is obligated to purchase and leaseback five facilities
under term loans and two facilities under construction loans to Genesis or
Genesis Equity Investees upon the earlier of the maturity of the related loan or
at such time as the facilities reach average monthly occupancy of at least 90%
for three consecutive months. The aggregate purchase price for these facilities
is based upon each facility's net operating income at the acquisition date and a
formula agreed to on the transaction's original commencement date. These amounts
cannot be estimated at this time due to the status of the operations of the
facilities underlying the related term and construction loans. The Company also
has the option to purchase and leaseback one facility from an unaffiliated
company for $13.0 million upon the earlier of the maturity of the related
construction loan or at such time as the facility achieves average monthly
occupancy of at least 90% for three consecutive months. The Company may be
required to purchase certain of these facilities during the fourth quarter of
1999. A portion or all of the purchase price for these acquisitions will be
satisfied by any remaining balance outstanding under the related term or
construction loans. The Company will need to fund the remainder of the purchase
prices through borrowings under the existing or any future credit facilities or
through other funding alternatives. Due to the limited availability of funds
under the existing credit facility, the Company may be required to finance any
required purchases or exercise of its purchase option by using other borrowing
sources, the sale of other assets or issuance of equity.
At June 30, 1999, the Company had $99.1 million outstanding under the
Credit Facility. The original expiration date of the Credit Facility was
extended on January 29, 1999 to April 30, 1999, and the availability under the
Credit Facility was reduced from $140 million to $100.5 million. In addition,
the letters of credit originally available under the Credit Facility were
canceled. During the extension period, the Company notified the bank that it was
in violation of certain restrictive covenants under the Credit Facility which
occurred as a result of the Company's equity value (market value of outstanding
shares) being less than $70 million as of February 4, 1999 and due to the
Company declaring and paying shareholder distributions during this violation
period. The Company also borrowed additional funds for working capital during
February 1999, prior to the determination that the Company was in violation of
the minimum equity value covenant. Additional borrowings were not permitted
under the Credit Facility during this period while the Company was in default.
On March 31, 1999, the term of the Credit Facility was extended from
April 30, 1999 to January 1, 2000 through an amendment which also waived the
Company's defaults under the Credit Facility and provided for available
borrowings up to an aggregate of $100.5 million. The Credit Facility contains
various financial and other covenants, including, but not limited to, minimum
net asset value, minimum tangible net worth, a total leverage ratio and minimum
interest coverage ratio. The covenant requiring maintenance of a minimum equity
value is no longer required under the Credit Facility, as amended. The Company's
owned properties and properties underlying loans receivable with an aggregate
cost of $152.8 million are included in the Credit Facility borrowing base and
pledged as collateral.
19
Amounts outstanding under the Credit Facility bear interest at floating
rates based on a margin over one-month LIBOR, as determined by the percentage of
the Credit Facility outstanding as compared to the borrowing base. Effective
June 1, 1999, the interest rate on borrowings outstanding under the Credit
Facility increased from a margin of 1.80% over one-month LIBOR to 2.75%. The
interest rate on borrowings outstanding under the Credit Facility at June 30,
1999 was 7.69%, including the 2.75% margin adjustment. Future increases in
interest rates would result in increases in interest expenses, which could
adversely affect the Company's cash flow and its ability to pay its obligations
and make distributions to shareholders at similar levels as in prior periods.
See "Item 3. Quantitative and Qualitative Disclosures About Market Risk."
The Company expects net cash provided by operations and funds available
under the Credit Facility to be sufficient to enable it to meet its short-term
cash flow requirements through December 31, 1999, including the funding of
construction commitments and shareholder distributions.
The Company expects to meet its long-term cash flow requirements for
the funding of future construction commitments, purchase commitments or options
regarding facilities underlying term or construction loans, real estate property
development and other acquisitions by borrowing, issuing equity or debt
securities in public or private transactions or through the sale of other
assets. 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 in the health care industry, there can be no assurance
that additional financing or capital will be available on terms acceptable to
the Company. Subject to the availability of capital in the credit markets, 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 Internal Revenue Code.
The Company has entered into discussions with potential sources to
replace the Credit Facility with new financing which would provide longer term
funding to support the Company's objectives. If the Company is unable to raise
additional capital through equity financing, or is unable to increase its
borrowing capacity, the Company may be limited in its ability to fully fund its
long-term capital needs. Additionally, if the Company is unable to obtain
replacement financing by January 1, 2000, or is unable to negotiate a further
extension to the current credit facility at that time, the bank could exercise
its right to foreclose on the collateral securing the Credit Facility, which
would have a significant adverse affect on the Company's ability to continue its
operations and meet its obligations, including payment of quarterly shareholder
distributions.
20
The interest rate on replacement financing may be significantly higher
than the interest rate on the existing credit facility. Additionally, the
Company may be required to pay significant financing fees in the future in
connection with replacement financing or negotiating a further extension with
Deutsche Bank. Increased interest rates or significant financing fees would
reduce the Company's cash flow and affect its ability to continue to maintain
distributions to its shareholders at current levels. There can be no assurance
that the Company will be able to obtain replacement financing on acceptable
terms or at all, or that, if obtained, it will be able to continue making
distributions to its common shareholders at previous levels.
To qualify as a REIT, the Company must distribute to its shareholders
each year at least 95% of its net taxable income, excluding any net capital
gain. If the Company is unable to make required shareholder distributions, then
the Company may be unable to qualify as a REIT and be subject to federal income
taxes.
Facilities owned by the Company and leased to third parties under
percentage and minimum rent triple net leases require the lessee to pay
substantially all expenses associated with the operation of such facilities.
Facilities owned by the Company and subject to percentage and minimum rent
leases represent approximately 91% of the Company's investments in owned
facilities at June 30, 1999. As a result of these arrangements, the Company does
not believe it will be responsible for significant expenses in connection with
the facilities during the terms of the leases. The Company anticipates entering
into similar leases with respect to additional properties acquired. However,
there can be no assurance the Company will not be responsible for significant
expenses of its leased properties in the event one or more of its lessees
default on their leases with the Company.
In August 1998, the Company implemented a share repurchase program.
Under the share repurchase program, 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. The Company repurchased 43,700
common shares for an aggregate purchase price of $424,000 during the six months
ended June 30, 1999. These shares are reflected as a reduction of shares issued
and outstanding in the accompanying 1999 balance sheet. In April 1999, the Board
of Trustees temporarily suspended the share repurchase program.
Distributions to Shareholders Subsequent to June 30, 1999
The board of trustees declared a cash distribution on July 14, 1999.
The cash distribution of $0.365 per share will be paid on August 13, 1999, to
common shareholders of record on July 30, 1999. There can be no assurance that
distributions will continue to be made or that the level of distributions will
be maintained in future periods at the same level as prior periods.
21
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 generally accepted accounting principles, excluding
gains (or losses) from debt restructuring and sales of properties, plus real
estate related depreciation and after comparable adjustments for the Company's
portion of these items related to 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 using standards
established by NAREIT which may not be comparable to Funds from Operations
reported by other REITs that do not define the term using 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 using generally accepted accounting principles and should not be
considered as an alternative to net income as an indication of the Company's
financial performance, or to cash flow from operating activities 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 periods
presented below (in thousands):
For the three months ended For the six months ended
June 30, June 30,
-------------------------- -------------------------
1999 1998 1999 1998 (1)
------- ------- ------- --------
Net income (loss) $(1,832) $ 2,008 $ (873) $ 653
Minority interest (129) 131 (59) 43
------- ------- ------- -------
Net income (loss) before minority interest (1,961) 2,139 (932) 696
Adjustments to derive Funds from Operations:
Add:
Real estate related depreciation and amortization:
Consolidated entities 1,494 1,196 2,960 1,966
Unconsolidated entities 1,121 -- 2,246 --
Nonrecurring start-up expenses -- 28 -- 2,645
Nonrecurring separation agreement expenses
2,800 -- 2,800 --
------- ------- ------- -------
-------
Funds from Operations before allocation of
minority interest 3,454 3,363 7,074 5,307
Less:
Funds from Operations allocable to minority
interest (231) (206) (474) (325)
------- ------- ------- -------
Funds from Operations attributable to the common
shareholders $ 3,223 $ 3,157 $ 6,600 $ 4,982
======= ======= ======= =======
(1) Represents the period from January 30, 1998 to June 30, 1998.
22
Impact of Inflation
Earnings of the Company are primarily long-term investments with fixed
interest rates. These investments are mainly financed with a combination of
equity, long-term mortgages and borrowings under the revolving lines of credit.
During inflationary periods, which generally are accompanied by rising interest
rates, the Company's ability to grow may be adversely affected because the yield
on new investments may increase at a slower rate than new borrowing costs.
Year 2000 Considerations
The Company recognizes that the Year 2000 problem could affect 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 affect
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 triple 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, as 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 their obligations, both in
terms of facility repairs and ability to generate payments, in a timely manner.
The Company has also begun to evaluate the Year 2000 readiness of those
properties not subject to triple net lease arrangements, which principally
includes the Company's medical and other office buildings, 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 has evaluated its own internal systems to determine the impact of Year
2000. Due principally to the Company's small size and low transactional volume,
the Year 2000 issue is not expected to have a significant impact on corporate
operations. The Company does not expect its costs of achieving Year 2000
compliance to exceed $200,000. The Company has not developed a formal
contingency plan for Year 2000 issues which may arise. However, a contingency
plan will be established prior to December 31, 1999 once the Company has
completed its Year 2000 evaluation of its properties and lessees.
With respect to the Year 2000 compliance of critical third parties, the
Company's lessees and borrowers who operate skilled nursing facilities derive a
substantial portion of their revenues from the Medicare and Medicaid programs.
Congress' General Accounting Office ("GAO") concluded in September 1998 that it
would be highly unlikely that all Medicare systems will be compliant on time to
ensure the delivery of uninterrupted benefits and services into the Year 2000.
While these operators do not receive payments directly from Medicare, but from
intermediaries, the GAO statement is interpreted to apply as well to these
intermediaries. Recently, the Health Care Financing Administration ("HCFA")
Administrator asserted that all systems necessary to make payments to fiscal
intermediaries would be compliant. The HCFA Administrator provided further
assurance that intermediary systems would also be compliant well in advance of
the deadline. Any delays in these operators receiving payments in connection
with Year 2000 issues could impact their ability to make required rent and debt
payments to the Company. However, based upon discussions with some of these
operators, including Genesis, these companies intend to actively confirm the
Year 2000 readiness status for each intermediary and to work cooperatively to
ensure appropriate continuing payments for services rendered to all
government-insured patients.
23
There can be no assurance the Company has adequately assessed or
identified all aspects of its business which may be impacted by Year 2000 issues
which may arise after December 31, 1999. Additionally, there can be no assurance
that the Company's lessees or borrowers or other third parties, such as Medicare
intermediaries, will adequately address and correct any and all Year 2000 issues
that may arise after December 31, 1999. A failure by the Company's lessees or
borrowers to be Year 2000 compliant, or significant delays in them receiving
payments for services from other third parties could significantly impact the
Company's ability to collect its rent and debt payments, which could have a
material adverse impact on the Company's financial condition or results of
operations. As a result of the foregoing, there can be no assurance that Year
2000 computer problems which may impact the Company or its lessees or borrowers
will not have a material adverse effect on the Company's financial condition or
results of operations.
Summary Condensed Consolidated Financial Data of Genesis
As leases with and loans to Genesis represent a significant portion of
the Company's consolidated assets and revenues, the Company has included certain
summary condensed consolidated financial data of Genesis for the periods
discussed below. The summary condensed consolidated financial data of Genesis
was extracted from Genesis' quarterly report on Form 10-Q for the quarter ended
March 31, 1999 as filed with the Securities and Exchange Commission (the "SEC").
The Genesis financial data presented includes only the most recent
interim reporting period. The Company can make no representation as to the
accuracy and completeness of Genesis' public filings. It should be noted that
Genesis has no duty, contractual or otherwise, to advise the Company of any
events subsequent to such dates which might affect the significance or accuracy
of such information.
Genesis is subject to the information filing requirements of the
Securities Exchange Act of 1934, and in accordance therewith, is obligated to
file periodic reports, proxy statements and other information with the SEC
relating to its business, financial condition and other matters. Such reports,
proxy statements and other information may be inspected at the offices of the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and should also be
available at the following Regional Offices of the SEC: 7 World Trade Center,
New York, N.Y. 10048, and 500 West Madison Street, Suite 1400, Chicago, IL
60661. Such reports and other information concerning Genesis can also be
inspected at the offices of the New York Stock Exchange, Inc., 20 Broad Street,
Room 1102, New York, New York 10005.
24
The following table sets forth certain summary condensed consolidated
financial data for Genesis as of and for the periods indicated.
For the three
months ended For the six months
March 31, ended March 31,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(in thousands, except per share data)
Operations Data
- -----------------------------------------------------
Net revenues $ 464,619 $ 344,299 $ 943,823 $ 646,864
Operating income before capital costs (1) 52,210 61,022 123,364 118,208
Depreciation and amortization 18,759 12,667 36,566 24,353
Lease expense 6,619 7,868 12,986 14,511
Interest expense, net 28,457 18,688 55,780 38,331
Earnings (loss) before income taxes, equity in net
income (loss) of unconsolidated affiliates and
extraordinary items (1,625) 21,799 18,032 41,013
Income taxes 572 7,957 7,950 14,970
Earnings (loss) before equity in net income (loss)
of unconsolidated affiliates and extraordinary
items (2,197) 13,842 10,082 26,043
Equity in net income (loss) of unconsolidated
affiliates (4,259) 726 (5,151) 1,347
Extraordinary items, net of tax (301) -- (2,100) (1,924)
Net income (loss) (6,757) 14,568 2,831 25,466
Net income (loss) attributed to common
shareholders(2) $ (11,077) $ 14,568 $ (5,906) $ 25,466
Per common share data:
Basic
Earnings (loss) before extraordinary items $ (0.31) $ 0.42 $ (0.11) $ 0.78
Net income (loss) $ (0.31) $ 0.42 $ (0.17) $ 0.73
Weighted average shares and equivalents 35,219 35,094 35,217 35,085
Diluted
Earnings (loss) before extraordinary items $ (0.31) $ 0.41 $ (0.11) $ 0.77
Net income (loss) $ (0.31) $ 0.41 $ (0.17) $ 0.71
Weighted average shares and equivalents 35,219 35,647 35,217 35,658
(1) Capital costs include depreciation and amortization, lease expense and
interest expense.
(2) Net income (loss) reduced by preferred stock dividends.
25
March 31, September 30,
1999 1998
--------- -------------
(dollars in thousands)
Balance Sheet Data
- --------------------------------------------
Working capital $375,968 $305,718
Total assets 2,678,215 2,627,368
Long-term debt 1,455,731 1,358,595
Shareholders' equity 868,597 875,072
On August 2, 1999, Genesis announced that it had entered into an
agreement in principle relating to a proposed restructuring of financial
arrangements used for its 1997 investment in The Multicare Companies
("Multicare"). Genesis initially acquired a 43% interest in Multicare and was to
become sole owner of Multicare at a later date through a cash payment or the
issuance of additional Genesis common shares at equivalent value. In the
proposed restructuring, Genesis will complete the Multicare acquisition through
the issuance of convertible preferred shares. The restructuring also includes a
$50 million cash investment in Genesis by the Multicare financial partners in
exchange for Genesis common shares and warrants. The transaction is subject to,
among other things, regulatory approval and Genesis shareholder approval.
On August 4, 1999, Genesis announced its third quarter fiscal 1999
results. Genesis reported that it had a net loss of $5.4 million for the quarter
ended June 30, 1999 compared to net income of $16.0 million for the quarter
ended June 30, 1998. Earnings before interest, taxes, depreciation and rent
("EBITDAR") were $60.4 million for the quarter ended June 30, 1999 compared to
$66.8 million for the comparable year ago period. The Genesis earnings release
indicates that Genesis had a net loss of $11.3 million for the nine months ended
June 30, 1999 compared to net income of $41.5 million for the nine months ended
June 30, 1998, and EBITDAR of $183.8 million for the nine months ended June 30,
1999 compared to $185.1 million for the comparable year ago period. Genesis also
announced on August 4, 1999 that it was in discussions with its senior bank
group regarding amendments to its senior bank facility which, in part, would
make certain financial covenants as of June 30, 1999 and prospectively less
restrictive. Upon entering into the amendments, Genesis said that it would be in
compliance with the provisions of its senior bank credit facility upon the
filing of its Form 10-Q for the quarter ended June 30, 1999 which it expected to
be delayed to the end of August, 1999.
Impact of Prospective Payment System
The Balanced Budget Act of 1997 mandated establishment of a prospective
payment system ("PPS") for Medicare skilled nursing facilities under which such
facilities will be paid a federal per diem rate for most covered nursing
facility services. Pursuant to the Balanced Budget Act, PPS began to be phased
in for skilled nursing facilities commencing with cost reporting periods
beginning on or after July 1, 1998. Under PPS, reimbursement rates initially
will be based on a blend of a facility's historic reimbursement rate and a newly
prescribed federal per diem rate. In subsequent periods, and for facilities
first receiving payments for Medicare services on or after October 1, 1995, the
federal per diem rate will be used without regard to historic reimbursement
levels.
26
It is unclear the impact the Balanced Budget Act will have on the
Company's lessees and borrowers abilities to make lease and debt payments to the
Company. The Company does not employ Medicaid and Medicare reimbursement
specialists and must rely on its lessees and borrowers to monitor and comply
with all reporting requirements and to insure appropriate payments are being
received. In May 1999, Genesis reported the estimated future impact of PPS on
its Medicare revenue per patient day in its Form 10-Q for the quarter ended
March 31, 1999. In connection with the Company's review of the properties leased
to Genesis or Genesis Equity Investees, management notes:
o Of the 31 properties the Company owns or that are owned by its
Equity Investees, 15 are skilled nursing facilities impacted by PPS
which are subject to fixed rent leases. No facilities impacted by
PPS are subject to percentage rent leases.
o An aggregate review of the skilled nursing facilities' operations
did not indicate a significant impact on the properties' lease
coverage ratios. Management of the Company will continue to monitor
the performance of these properties as PPS is fully implemented.
o The Company's lease base has approximately nine years before it is
subject to 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 directly impacted by PPS.
As a result, while it appears that PPS may have a negative impact on
the skilled nursing industry, including Genesis, management does not believe it
will have a material adverse impact on the Company's cash flows, results of
operations or financial condition. However, there can be no assurances that the
Company's lessees or borrowers will not be further negatively impacted by the
provisions or interpretations of the Balanced Budget Act, including PPS, or by
future changes in regulations or interpretations of such regulations. See
"Business - Reimbursement," "Business - Government Regulation" and "Business -
Risk Factors" in the Company's Form 10-K for the year ended December 31, 1998.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The Company provides fixed rate mortgage loans to operators of
healthcare facilities as part of its normal operations. The Company also has
mortgages and bonds payable which bear interest at fixed rates. Changes in
interest rates generally affect the fair market value of the underlying fixed
interest rate loans receivable or payable, but not earnings or cash flows. Refer
to the Company's annual report on Form 10-K for the year ended December 31, 1998
for discussion of the market risk associated with these financial instruments.
The Company does not utilize interest rate swaps, forward or option contracts on
foreign currencies or commodities, or other types of derivative financial
instruments.
27
The Company is exposed to market risks related to fluctuations in
interest rates on its Credit Facility as it represents variable rate debt. For
variable rate debt, changes in interest rates generally do not impact fair
market value, but do affect future earnings and cash flows. Effective June 1,
1999, the interest rate under the Credit Facility was increased to a margin
adjustment of 2.75% over one-month LIBOR, which was 0.95% higher than at March
31, 1999. The weighted average interest rate on borrowings outstanding under the
Credit Facility was 7.69% at June 30, 1999. Assuming the Credit Facility balance
outstanding at June 30, 1999 of $99.1 million remains constant, each one
percentage point increase in interest rates from 7.69% at June 30, 1999 would
result in an increase in interest expense for the coming year of approximately
$991,000. The Company had unamortized deferred financing costs in connection
with the Credit Facility aggregating approximately $975,000 at June 30, 1999
that are required to be fully amortized by December 31, 1999. Amortization of
these financing costs, which is included as a component of interest expense, is
expected to increase quarterly interest expense from approximately $445,000 for
the three months ended June 30, 1999 to approximately $487,000 per quarter for
the remainder of 1999.
The Company expects to incur additional deferred financing costs in the
future in connection with refinancing of the Credit Facility. The Company
expects that some or all of any replacement financing of the existing credit
facility may have a variable interest rate. Additionally, the Company may borrow
additional money with variable interest rates in the future. Increases in
interest rates, therefore, would result in increases in interest expense, which
could adversely affect the Company's cash flow and its ability to pay its
obligations and make distributions to shareholders at similar levels as in prior
periods. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operations" and "- Liquidity and Capital
Resources."
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders on May 20, 1999. At
the meeting, shareholders elected one trustee and approved the 1999 share option
and incentive plan.
28
The following nominee for trustee, who was elected to serve for a three
year term and until his successor is duly elected and qualified, received the
following votes at the meeting:
For Withhold Authority
--------- ------------------
Kent P. Dauten 6,420,954 82,862
The term of office of each of the following trustees continued after
the meeting: Edward B. Romanov, Jr., Rodman W. Moorhead, III, Michael R. Walker
and Timothy Weglicki. Mr. Romanov resigned as trustee effective July 29, 1999.
The following sets forth the number of votes cast for or against the
1999 share option and incentive plan, as well as the number of abstentions and
broker non-votes:
For Against Abstentions Broker Non-votes
--------- ------- ----------- ----------------
5,721,059 735,199 46,158 1,400
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits filed with this report are listed in the exhibit index on
page 31.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30,
1999.
29
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 on August 13, 1999.
ElderTrust
/s/ D. Lee McCreary, Jr.
---------------------------------------------
D. Lee McCreary, Jr.
Acting President and Chief Executive Officer
Chief Financial Officer
(Principal Financial and Accounting Officer)
30
EXHIBIT INDEX
Exhibit No. Description
10.1 Separation Agreement and Release dated July 29, 1999 by and among
ElderTrust, ElderTrust Operating Limited Partnership and Edward
B. Romanov, Jr. (incorporated by reference to Exhibit 10.1 to
ElderTrust's Form 8-K dated July 29, 1999).
11.1 Computation of basic and diluted income (loss) per share for the
three and six months ended June 30, 1999 and for the three months
ended June 30, 1998 and the period from January 30, 1998 through
June 30, 1998
27.1 Financial Data Schedule for the six months ended June 30, 1999
31