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 September 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 of (I.R.S. Employer Identification Number)
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 November 10, 1999
- --------------------------------------- --------------------------------
Common stock, $0.01 par value per share 7,201,100
Exhibit index is located on page 34
ELDERTRUST
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
Page
----
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998............................................... 1
Condensed Consolidated Statements of Operations for the three months
ended September 30, 1999 and 1998 and for the nine months ended
September 30, 1999 and the period from January 30, 1998 to
September 30, 1998.............................................. 2
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1999 and for the period from January
30, 1998 to September 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.................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 30
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................. 32
SIGNATURES.................................................................. 33
EXHIBIT INDEX.............................................................. 34
i
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
ELDERTRUST
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollar amounts in thousands, except share amounts)
September 30, 1999 December 31, 1998
---------------------- -----------------------
ASSETS
Assets:
Real estate properties, at cost $165,421 $163,783
Less - accumulated depreciation (8,753) (4,444)
Land 16,655 16,790
------ ------
Net real estate properties 173,323 176,129
Real estate loans receivable 48,748 47,899
Cash and cash equivalents 3,082 2,272
Restricted cash 6,159 3,549
Accounts receivable 657 4,412
Accounts receivable from unconsolidated entities 1,858 987
Prepaid expenses 1,151 1,002
Investments in and advances to unconsolidated entities 31,829 34,426
Other assets, net 1,086 641
-------- --------
Total assets $267,893 $271,317
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Bank credit facility $75,932 $90,204
Accounts payable and accrued expenses 1,821 1,571
Accounts payable to unconsolidated entities 185 14
Mortgages and bonds payable 71,071 49,594
Notes payable - 3,000
Notes payable to unconsolidated entities 1,093 1,134
Other liabilities 3,526 3,645
-------- --------
Total liabilities 153,628 149,162
Minority interest 8,144 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 (12,555) (3,204)
Note receivable from officer for common shares sold (1,000) (3,600)
-------- --------
Total shareholders' equity 106,121 113,296
-------- --------
Total liabilities and shareholders' equity $267,893 $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 nine Period from
September 30, months ended January 30 to
---------------------------- September 30, September 30,
1999 1998 1999 1998
------------ ------------ ------------------- -----------------
Revenues:
Rental revenues $4,662 $3,869 $13,884 $10,114
Interest, net of amortization of deferred
loan origination costs 1,350 1,209 4,368 3,032
Interest from unconsolidated equity
investees 959 343 2,850 626
Fee income - 793 - 1,018
Other income 51 88 90 107
------- ------- ------- ------
Total revenues 7,022 6,302 21,192 14,897
------- ------- ------- ------
Expenses:
Property operating expenses 277 288 848 704
Interest expense, including amortization
of deferred finance costs 3,422 1,694 9,578 3,944
Depreciation 1,439 1,146 4,332 3,035
General and administrative 564 454 2,026 1,204
Separation agreement expenses - - 2,800 -
Start-up expenses - 100 - 2,745
------- ------- -------- -------
Total expenses 5,702 3,682 19,584 11,632
------- ------- -------- -------
Net income before equity in losses of
unconsolidated entities, minority interest and
extraordinary items 1,320 2,620 1,608 3,265
Equity in losses of unconsolidated entities, net (657) (105) (1,877) (54)
Minority interest (46) (163) 13 (205)
------- ------- -------- -------
Net income (loss) before extraordinary item 617 2,352 (256) 3,006
Extraordinary Item:
Extinguishment of debt (1,296) - (1,296) -
Minority interest in extraordinary item 86 - 86 -
------- ------- -------- -------
Net income (loss) ($593) $2,352 ($1,466) $3,006
======= ======= ======== =======
Basic and diluted weighted average number of
common shares outstanding 7,201 7,388 7,206 7,390
======= ======= ======== =======
Net income (loss) per share before extraordinary
item - basic and diluted $0.09 $0.32 ($0.04) $0.41
===== ===== ======= =====
Net income (loss) per share - basic and
diluted ($0.08) $0.32 ($0.20) $0.41
===== ===== ======= =====
See accompanying notes to unaudited condensed consolidated financial statements.
2
ELDERTRUST
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
For the nine Period from January 30
months ended to
September 30, 1999 September 30, 1998
------------------- ------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($1,466) $3,006
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 5,707 3,352
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
Non-cash expense in connection with extraordinary item 139 -
Minority interest and equity in losses from unconsolidated
entities 1,778 259
Net changes in assets and liabilities:
Accounts receivable and prepaid expenses 2,735 (2,975)
Accounts payable and accrued expenses 421 1,302
Other (105) 3,044
------ -------
Net cash provided by operating activities 11,809 10,055
------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition and cost of real estate investments - (104,288)
Investments in real estate mortgages and development funding (5,096) (47,486)
Payments received on mortgage loans receivable 4,247 -
Investments in and advances to unconsolidated entities - (28,186)
Capital expenditures (1,656) (122)
Proceeds from collection on advances to unconsolidated entities 720 924
Net increase in reserve funds and deposits (restricted cash) (2,610) (2,665)
Other 161 (606)
------ -------
Net cash used in investing activities (4,234) (182,429)
------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering, net of offering costs - 114,213
Proceeds from mortgages payable 32,695 -
Payment of deferred financing fees (2,004) (265)
Borrowings under Credit Facility 9,518 65,435
Payments under Credit Facility (23,790) -
Principal payments on mortgages (11,218) (511)
Payments on notes payable (3,000) -
Distributions to shareholders (7,885) (4,495)
Distributions to minority interests (562) (293)
Repurchase of common shares (424) (279)
Other (95) -
------ -------
Net cash (used in) provided by financing activities (6,765) 173,805
------ -------
Net increase in cash and cash equivalents 810 1,431
Cash and cash equivalents, beginning of period 2,272 -
------ -------
Cash and cash equivalents, end of period $3,082 $1,431
====== =======
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 and
pursuant to the rules and regulations of the Securities and Exchange Commission.
The interim condensed consolidated financial statements do not include all of
the footnotes for complete financial statements. The December 31, 1998 condensed
consolidated balance sheet was derived from audited financial statements. 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 nine months ended September 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 as of and for the three months ended
September 30, 1998 and for the period from January 30, 1998 through September
30, 1998 have been reclassified for comparative purposes.
Results of operations for the interim period ended September 30, 1998
includes the Company's operations from January 30, 1998, the date of
consummation of the Company's initial public offering, to September 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 two investments in entities in which the controlling
interest is owned by Mr. D. Lee McCreary, Jr., the Company's 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, 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 September 30, 1999. As a
4
ELDERTRUST
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
result of the Company not having controlling or managing interest in the
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 nine months
ended September 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 $ 1,946 $485 $782 $885 $4,098
Real estate properties(1) 107,402 - 17,255 14,244 138,901
Notes receivable - 12,405 - - 12,405
Total assets 109,725 13,008 18,545 15,613 156,891
Current liabilities 1,869 402 1,235 1,322 4,828
Long-term debt(2) 107,308 9,616 17,022 13,900 147,846
Total equity (1,538) 2,989 18 164 1,633
Rental revenue 7,350 - 1,210 1,065 9,625
Interest income, ElderTrust - 495 - - 495
Interest income, other 13 769 20 21 823
Interest expense, ElderTrust 1,599 966 152 133 2,850
Interest expense, other 4,899 - 890 671 6,460
Depreciation/amortization 2,635 10 420 347 3,412
Net income (loss) (1,773) 185 (234) (67) (1,889)
Percent ownership 99% 95% 99% 99%
(1) Includes properties under capital lease.
(2) Includes capital lease obligations.
3. Credit Facility
At September 30, 1999, the Company had $75.9 million outstanding under
its bank credit facility (the "Credit Facility"). The interest rate on
borrowings outstanding under the Credit Facility at September 30, 1999 was
8.13%, 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 nine months ended September 30, 1999. Unamortized deferred financing
costs in connection with the Credit Facility aggregated approximately $380,000
at September 30, 1999. These financing costs will be fully amortized during the
fourth quarter of 1999 and included as a component of interest expense.
5
ELDERTRUST
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
On September 9, 1999, the Company completed a $32.7 million financing
arranged by J.P. Morgan on five properties. One of the loans is collateralized
by two of the properties. Approximately, $19.2 million of the debt proceeds were
used to pay-down the Company's outstanding Credit Facility to a balance of $75.9
million as of September 30, 1999. The remaining $13.5 million was used to
pay-off an existing mortgage on two of the properties of $10.4 million and a
prepayment penalty of $1.2 million on the existing mortgage, with the balance of
$1.9 million used to pay expenses, interest and required reserves. The J.P.
Morgan mortgages have a ten-year term, a twenty-five year amortization period
and a fixed weighted average interest rate of 8.37%. The Company incurred
approximately $525,000 in financing costs on this transaction, which will be
amortized over the mortgages' ten-year life.
On October 5, 1999, the Company completed an $8.5 million financing of
two medical office buildings arranged by J.P. Morgan. Approximately $7.9 million
of the debt proceeds were used to pay down the Company's Credit Facility to a
balance of $68.1 million. The remaining $592,000 of proceeds were used to pay
expenses, interest, and required reserves. These mortgage loans have a
ten-year term with a twenty-five year amortization period and a fixed interest
rate of 8.35%.
On October 25, 1999, the Company reached a tentative agreement with
German American Capital Corp., the lender on the Credit Facility, to extend the
facility term from January 1, 2000 through June 30, 2001. Finalization of the
extension is subject to, among other things, the lenders internal credit review
and document completion. The terms, in general, are:
Interest Rate: 30-day LIBOR plus a margin of 275 basis points if
the loan if less than 80% of the borrowing base (325
basis points if the loan is 80% or more of the
borrowing base).
Fees: A 100 basis point fee paid upon execution of the
extension plus 6.25 basis points per month on the
outstanding balance.
Principal Amortization: 22 basis points of the monthly balance.
Other: $5.75 million of additional borrowing capacity. A
dividend limitation of 95% of Funds from
Operations plus $3 million over the term of the
loan.
6
ELDERTRUST
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
On October 21, 1999, the Company executed loan applications
arranged by J.P. Morgan for up to $30 million of new mortgage loan financing,
which will be secured by four of the Company's skilled nursing facilities. One
of the loans will be collateralized by two of the properties. If successful, the
net proceeds, estimated by the Company to be not less than $25 million, will be
used to further reduce the balance of the Company's Credit Facility. The
applied-for mortgage debt has a three-year term and is interest-only with a
variable interest rate of 30-day LIBOR plus 300 basis points. A fee of 100 basis
points is due at closing. The Company would be obligated to hedge the variable
interest rate to a maximum fixed rate at closing. The Company can at its option
extend the term of the loan for one two-year period upon payment of a 50 basis
point extension fee.
The interest rate, loan extension fee and loan principal amortization
under the terms of the proposed Bank Credit Facility extension, as well as
higher interest expense under the proposed new mortgage financing, will reduce
the Company's cash flows and could affect its ability to maintain distributions
to its shareholders at current levels depending on the magnitude thereof. There
can be no assurance that the Company will be able to extend the term of its
existing Bank Credit Facility or obtain replacement financing thereof or that
the Company will be able to continue making distributions to its common
shareholders at current levels.
4. 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 nine months ended
September 30, September 30,
-------------------------- -------------------------
1999 1998 1999 1998 (1)
------------- ------------- ------------ -------------
Net income (loss) available for basic and diluted
earnings per share ($593) $2,352 ($1,466) $3,006
====== ====== ======== ======
Weighted average common shares outstanding for
basic and diluted net income (loss) per share
7,201 7,388 7,206 7,390
Basic and diluted net income (loss) per share ($0.08) $0.32 ($0.20) $0.41
======= ===== ======= =====
(1) Represents the period from January 30, 1998 to September 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.
7
ELDERTRUST
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Supplemental Cash Flow Information:
Supplemental cash flow information for the periods indicated is as
follows:
For the nine months
ended September 30,
-------------------------------
1999 1998 (1)
------------- --------------
(amounts in thousands)
Cash Paid For:
Interest $8,484 $3,370
============= ==============
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 September 30, 1998.
8
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 extend or 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, Inc. ("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.
9
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
primarily 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 September 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 70% of the Company's consolidated assets at September 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 $13.7 million for the nine months ended September 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."
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
September 30, 1999, the Company had $75.9 million outstanding under the Credit
Facility. On October 27, 1999, the Company announced that it had reached a
tentative agreement with the Credit Facility bank to
10
extend the Credit Facility from January 1, 2000 to June 30, 2001. 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
September 30, 1999 of approximately $351,000 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 include 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, amortization of its deferred loan origination costs
and deferred financing costs.
11
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 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 September 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 $176,000 and $102,000 related to the
portion of its equity interest in ET Capital's results of operations for the
nine months ended September 30, 1999 and the period from January 30, 1998 to
September 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 September
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 September
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 September 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 $966,000 and $456,000 in interest income
during the nine months ended September 30, 1999 and the period from January 30,
1998 to September 30, 1998, respectively, on the notes payable by ET Capital.
12
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 losses of $1.8 million and $156,000 related to the
portion of its equity interest in ET Sub-Meridian's results of operations for
the nine months ended September 30, 1999 and the period from January 30, 1998 to
September 30, 1998, respectively. ET Sub-Meridian has real estate investments
and long-term debt of $107.4 million and $107.3 million, respectively, at
September 30, 1999. See Note 2 to the Company's unaudited condensed consolidated
financial statements included herein. At September 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 $1.6 million in interest income on this loan during the nine months
ended September 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.
13
The Company is the sole member of ET Sub-Heritage Andover, LLC, which,
accordingly, is consolidated into the Company's consolidated financial
statements at September 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 September 30, 1999.
Three of the four limited liability companies have subordinated demand
loans in the aggregate amount of $5.1 million with the Company at September 30 ,
1999, bearing interest at 12% per annum. The Company recorded $285,000 in
interest income during the nine months ended September 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 $298,000 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 nine months ended September 30,
1999. These two entities have real estate investments and aggregate long-term
debt of $31.5 million and $30.9 million, respectively, at September 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 September 30, 1998 represent
only eight 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 nine months
ended September 30, 1999 are not comparable to those of the respective periods
of the prior year.
14
Three months ended September 30, 1999 compared with the three months
ended September 30, 1998
Revenues
Rental revenues of $4.7 million were generated during the three months
ended September 30, 1999. This represented a 20.5% increase from $3.9 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 $1.4 million, net of amortization of deferred loan
costs of $82,000 was earned during the three months ended September 30, 1999.
This represented a 11.7% increase from $1.2 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
$85,000 in interest on term and construction loans and an increase of $95,000 in
interest earned on excess invested funds and bond reserve funds, offset, by a
decrease of $21,000 in connection with a mortgage loan receivable that was paid
off in December 1998 and higher amortization of deferred loan costs of $19,000.
Interest from unconsolidated Equity Investees of $959,000 was earned
during the three months ended September 30, 1999. This represented a 179.6%
increase from $343,000 for the corresponding period in 1998. This increase was
primarily a result of the loans with these unconsolidated Equity Investees
increasing from $23.5 million at September 30, 1998 to $30.3 million at
September 30, 1999, primarily in connection with two 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 $277,000 for the three months ended September 30,
1999. This represented a 3.8% decrease from $288,000 for the corresponding
period in 1998. Property operating expenses as a percentage of total medical
office building rental revenues decreased to 44.1% for the three months ended
September 30, 1999 as compared to 49.8% 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 $449,000, was $3.4 million for the three months ended September 30,
1999. This represented a 102.0% increase in interest expense from $1.7 million
for the corresponding period in 1998. This increase was primarily due to
increased amortization of deferred financing costs of $421,000, increases in
third-party debt at various times during 1999 and 1998 to fund operating,
investing and financing activities and a higher interest rate on
15
the Credit Facility. Third-party debt, which includes the Credit Facility and
mortgages and notes payable to third parties, increased from $101.9 million at
September 30, 1998 to $147.0 million at September 30, 1999. The weighted average
interest rate on outstanding third-party debt increased from 7.5% at September
30, 1998 to 7.9% at September 30, 1999. The Company's interest expense increased
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% (8.13% at September 30, 1999, including the
margin adjustment versus 7.29% at September 30, 1998).
Depreciation was $1.4 million for the three months ended September 30,
1999. This represented a 25.6% 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 $564,000 for the three months
ended September 30, 1999. This represented a 24.2% increase from $454,000 for
the corresponding period in 1998. This increase was a result of additional
expenses and services required as the Company established its current internal
infrastructure. General and administrative expenses increased as a percentage of
total rental revenues to 12.1% for the three months ended September 30, 1999 as
compared to 11.7% for the corresponding period in 1998.
An extraordinary loss of $1.2 million, net of a minority interest
benefit of $86,000, was recorded during the three months ended September 30,
1999 in connection with the prepayment of an existing mortgage loan.
Nine months ended September 30, 1999 compared with the period from
January 30, 1998 to September 30, 1998
Revenues
Rental revenues of $13.9 million were generated during the nine months
ended September 30, 1999. This represented a 37.3% increase from $10.1 million
for the corresponding period in 1998. This increase was a result of 1998
including only eight months of operations and due to acquisitions of senior
housing and other healthcare-related properties at various times during 1998.
Interest income of $4.4 million, net of amortization of deferred loan
costs of $168,000, was earned during the nine months ended September 30, 1999.
This represented a 44.1% increase from $3.0 million for the corresponding period
in 1998. This increase was a result of 1998 including only eight 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 $1.1 million
in interest on term and construction loans and an increase of $342,000 in
interest earned on excess invested funds and bond
16
reserve funds, offset, in part, by a decrease of $55,000 in connection with a
mortgage loan receivable that was paid off in December 1998.
Interest from unconsolidated Equity Investees of $2.9 million was
earned during the nine months ended September 30, 1999. This represented a
355.3% increase from $626,000 for the corresponding period in 1998. This
increase was primarily a result of the loans with these unconsolidated Equity
Investees increasing from $23.5 million at September 30, 1998 to $30.3 million
at September 30, 1999, primarily in connection with two 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 $848,000 for the nine months ended September 30,
1999. This represented a 20.5% increase from $704,000 for the corresponding
period in 1998. This increase was a result of 1998 including less than eight
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 to 46.2% for the nine months ended September 30, 1999 as compared to
49.3% for the corresponding period in 1998.
Interest expense, which included amortization of deferred financing
costs of $1.2 million, was $9.6 million for the nine months ended September 30,
1999. This represented a 142.8% increase in interest expense from $3.9 million
for the corresponding period in 1998. This increase was primarily due to 1998
including only eight months of operations, increased amortization of deferred
financing costs of $1.1 million, increases in third-party debt at various times
during 1998 and 1999 to fund operating, investing and financing activities, and
a higher interest rate on the Credit Facility. Third-party debt, which includes
the Credit Facility and mortgages and notes payable to third parties, increased
from $101.9 million at September 30, 1998 to $147.0 million at September 30,
1999. The weighted average interest rate on outstanding third-party debt
increased from 7.5% at September 30, 1998 to 7.9% at September 30, 1999. The
Company's interest expense increased 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% (8.13% at September 30, 1999, including the margin
adjustment versus 7.29% at September 30, 1998).
Depreciation was $4.3 million for the nine months ended September 30,
1999. This represented a 42.7% increase from $3.0 million for the corresponding
period in 1998. This increase was a result of 1998 including only eight 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.
17
General and administrative expenses were $2.0 million for the nine
months ended September 30, 1999. This represented a 68.3% increase from $1.2
million for the corresponding period in 1998. This increase was a result of 1998
including only eight 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 14.6% for the
nine months ended September 30, 1999 as compared to 11.9% 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 1999.
These expenses consisted principally of management salaries and benefits and
legal and other administrative costs.
See "Three Months Ended September 30, 1999 Compared With The Three
Months Ended September 30, 1998" for discussion of amounts recorded in
connection with an extraordinary loss associated with debt extinguishment.
Start-up expenses were $2.7 million for the nine months ended September
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 $11.8 million for
the nine months ended September 30, 1999 compared to $10.1 million for the same
period in 1998. Net cash flows used in financing activities were $6.8 million
for the nine months ended September 30, 1999 compared to cash flows provided by
financing activities of $173.8 million for the same period in 1998. Net cash
flows used in financing activities for 1999 principally included borrowings
under the Credit Facility of $9.5 million and new mortgages payable issued of
$32.7 million, offset, in part, by (a) $23.8 million payment on the Credit
Facility (b) $2.0 million in deferred financing fees and other related costs in
connection with amendments to the Credit Facility during the period, (c) $7.9
million in distributions to shareholders, (d) $14.2 million in payments on
mortgage loans and notes payable , and (e) $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 $65.4 million, partially offset by distributions to
shareholders of $4.5 million.
Net cash flows used in investing activities were $4.2 million for the
nine months ended September 30, 1999 compared to $182.4 million for the same
period in 1998. The Company used its net cash flows provided by operating and
financing activities during the nine months ended September 30, 1999 principally
to fund its investing activities, including (a) $5.1 million in construction
loans, (b) $2.6 million in bond and operating reserve funds and deposits and (c)
$1.7 million in purchases of equipment and building renovations, partially
offset by $4.2 million in payments received on term and
18
construction loans receivable and $720,000 of proceeds received from
unconsolidated entities. Net cash flows provided by operating and financing
activities during the nine months ended September 30, 1998 were principally used
to fund investing activities, including (a) $104.3 million for the acquisition
of real estate properties, (b) $47.5 million of term and construction loans and
(c) $28.2 million to fund investments in the Company's Equity Investees.
At September 30, 1999, the Company's consolidated net real estate
investments in properties and loans aggregated $222.1 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, was $4.1 million and $3.1 million at September 30, 1999 and December
31, 1998, respectively. The increase in working capital was comprised of an
aggregate decrease in current assets of $1.8 million, offset by an aggregate
decrease in current liabilities of $2.8 million. The decrease in current assets
primarily related to a decrease in accounts receivable due to cash collections.
The decrease in current liabilities primarily related to payments of debt during
the period. Cash and cash equivalents were $3.1 million and $2.3 million, at
September 30, 1999 and December 31, 1998, respectively.
As of September 30, 1999, the Company had shareholders' equity of
$106.1 million and Credit Facility borrowings and mortgages, bonds and notes
payable to third-parties aggregating $147.0 million, which represents a debt to
equity ratio of 1.39 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 $4.2 million in such
indebtedness and a net decrease in shareholders' equity of $7.2 million. The net
increase in third-party indebtedness primarily resulted from borrowings of $9.5
million under the Credit Facility and new mortgages issued of $32.7 million
offset, in part, by repayments of third-party indebtedness aggregating $14.2
million and repayments under the Credit Facility of $23.8 million through
September 30, 1999. The net decrease in shareholders' equity primarily resulted
from the declaration and payment of $7.9 million in dividends to shareholders,
the repurchase of common shares for $424,000 and a net loss aggregating $1.5
million for the nine months ended September 30, 1999. These decreases were
offset 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.
The Company funded $5.1 million in construction loan commitments
through the nine months ended September 30, 1999. The remaining unfunded portion
of construction loan commitments made by the Company are approximately $351,000
million at September 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.
19
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 as early as the first quarter
of 2000. 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 September 30, 1999, the Company had $75.9 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 $133.8 million are included in the Credit Facility borrowing base and
pledged as collateral.
20
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 September
30, 1999 was 8.13%, including the 2.75% margin adjustment.
On September 9, 1999, the Company completed a $32.7 million financing
of five properties arranged by J.P. Morgan. One of the loans is collaterized by
two of the properties. Approximately $19.2 million of the debt proceeds were
used to pay-down the Company's outstanding Credit Facility to a balance of $75.9
million as of September 30, 1999. The remaining $13.5 million was used to
pay-off an existing mortgage secured by two of the properties of $10.4 million,
and a prepayment penalty of $1.2 million on the existing mortgage, with the
balance of $1.9 million used to pay expenses, interest and required reserves.
The J.P. Morgan mortgage loans have ten-year terms with a twenty-five year
amortization period and a fixed weighted average interest rate of 8.37%. The
deferred financing costs incurred through September for these mortgages was
approximately $525,000 and will be amortized over the ten-year life of the
mortgages.
On October 5, 1999, the Company completed an $8.5 million financing of
two medical office buildings arranged by J.P. Morgan. Approximately $7.9 million
of the debt proceeds were used to pay-down the Company's Credit Facility to a
balance of $68.1 million. The remaining $592,000 of proceeds was used to pay
expenses, interest and required reserves. The mortgage loans have a ten-year
term with a twenty-five year amortization period and a fixed interest rate of
8.35%.
On October 25, 1999, the Company reached a tentative agreement with
German American Capital Corp., the lender on the Credit Facility, to extend the
facility from January 1, 2000 through June 30, 2001. Finalization of the
extension is subject to, among other things, the lenders internal credit review
and document completion. The terms, in general are:
Interest Rate: 30-day LIBOR plus a margin of 275 basis points if
the loan if less than 80% of the borrowing base (325
basis points if the loan is 80% or more of the
borrowing base).
Fees: A 100 basis point fee paid upon execution of the
extension plus 6.25 basis points per month on the
outstanding balance.
Principal Amortization: 22 basis points of the monthly balance.
21
Other: $5.75 million of additional borrowing capacity. A
dividend limitation of 95% of Funds from
Operations plus $3 million over the term of the
loan.
On October 21, 1999, the Company executed loan applications
arranged by J.P. Morgan for up to $30 million of new mortgage loan financing,
which will be secured by four of the Company's skilled nursing facilities. One
of the loans will be collateralized by two of the properties. If successful, the
net proceeds, estimated by the Company to be not less than $25 million, will be
used to further reduce the balance of the Company's Credit Facility. The
applied-for mortgage debt has a three-year term and is interest-only with a
variable interest rate of 30-day LIBOR plus 300 basis points. A fee of 100 basis
points is due at closing. The Company would be obligated to hedge the variable
interest rate to a fixed rate at closing. The Company can at its option extend
the term of the loan for one two-year period upon payment of a 50 basis point
extension fee. The interest rate, loan extension fee and loan principal
amortization under the terms of the proposed Bank Credit Facility extension, as
well as higher interest expense under the proposed new mortgage financing, will
reduce the Company's cash flows and could affect its ability to maintain
distributions to its shareholders at current levels depending on the magnitude
thereof. There can be no assurance that the Company will be able to extend the
term of its existing Bank Credit Facility or obtain replacement financing
thereof or that the Company will be able to continue making distributions to its
common shareholders at current levels.
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.
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 finalize
22
and close the tentative agreement on the extension of the current credit
facility by January 1, 2000, 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.
The interest rate, loan extension fee and loan principal amortization
under the terms of the proposed Bank Credit Facility extension, as well as the
higher interest expense under the proposed new mortgage financing, will reduce
the Company's cash flows and could affect its ability to maintain distributions
to its shareholders at current levels depending on the magnitude thereof. Future
increases in interest rates also could adversely affect the Company's cash flow
and its ability to pay its obligations and make distributions at similar levels
as in previous periods. See "Item 3. Quantitative and Qualitative Disclosures
About Market Risk." There can be no assurance that the Company will be able to
extend the term of its existing Bank Credit Facility or obtain replacement
financing thereof or that the Company will be able to continue making
distributions to its common shareholders at current 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 September 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 and
effectively retired 43,700 common shares for an aggregate purchase price of
$424,000 during the nine months ended September 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.
23
Distributions to Shareholders Subsequent to September 30, 1999
The board of trustees declared a cash distribution on October 13, 1999.
The cash distribution of $0.365 per share will be paid on November 12, 1999, to
common shareholders of record on October 29, 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.
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):
24
For the three months ended For the nine months ended
September 30, September 30,
------------------------------ ----------------------------
1999 1998 1999 1998 (1)
------------ ------------ ------------ ------------
Net income (loss) ($593) $2,352 ($1,466) $3,006
Minority interest (40) 163 (99) 205
---- ---- ----- -----
Net income (loss) before minority interest (633) 2,515 (1,565) 3,211
Adjustments to derive Funds from Operations:
Add:
Real estate related depreciation and amortization:
Consolidated entities 1,517 1,202 4,477 3,168
Unconsolidated entities 1,122 275 3,367 275
Nonrecurring start-up expenses - 100 - 2,745
Nonrecurring separation agreement expenses - - 2,800 -
Extraordinary loss on debt extinguishment 1,296 - 1,296 -
----- ------- -------- --------
Funds from Operations before allocation of
minority interest 3,302 4,092 10,375 9,399
Less:
Funds from Operations allocable to minority
interest (221) (259) (695) (585)
----- ----- ----- -----
Funds from Operations attributable to the common
shareholders $3,081 $3,833 $9,680 $8,814
====== ====== ====== ======
(1) Represents the period from January 30, 1998 to September 30, 1998.
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 has discussed with these operators their plans to
identify and address any such problems in a manner that does not impair the
operators'
25
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 has discussed 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 evaluated 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. A formal 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.
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
26
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
June 30, 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.
27
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 nine months
June 30, ended June 30,
-------------------------- --------------------------
1999 1998 1999 1998
-------------------------- ---------------------------
(in thousands, except per share data)
Operations Data
- -----------------------------------------------------
Net revenues $465,088 $352,526 $1,408,911 $999,390
Operating income before capital costs (1) 60,430 66,840 183,794 185,048
Depreciation and amortization 18,887 13,632 55,453 37,985
Lease expense 6,655 8,497 19,641 23,008
Interest expense, net 29,515 20,679 85,295 59,010
Earnings (loss) before income taxes, equity in net
income (loss) of unconsolidated affiliates and
extraordinary items 5,373 24,032 23,405 65,045
Income taxes 2,901 8,771 10,851 23,741
Earnings (loss) before equity in net income (loss)
of unconsolidated affiliates and extraordinary
items 2,472 15,261 12,554 41,304
Equity in net income (loss) of unconsolidated
affiliates (3,475) 730 (8,626) 2,077
Extraordinary items, net of tax - - (2,100) (1,924)
Net income (loss) (1,003) 15,991 1,828 41,457
Net income (loss) attributed to common
shareholders(2) $(5,372) $15,991 $(11,278) $41,457
Per common share data:
Basic
Earnings (loss) before extraordinary items $(0.15) $0.46 $(0.26) $1.24
Net income (loss) $(0.15) $0.46 (0.32) $1.18
Weighted average shares and equivalents 35,371,494 35,133,022 35,268,910 35,107,983
Diluted
Earnings (loss) before extraordinary items $(0.15) $0.45 $(0.26) $1.22
Net income (loss) $(0.15) $0.45 $(0.32) $1.16
Weighted average shares and equivalents 35,371,494 35,719,840 35,268,910 35,701,210
(1) Capital costs include depreciation and amortization, lease expense and
interest expense.
(2) Net income (loss) reduced by preferred stock dividends.
June 30, September 30,
1999 1998
-------------------- ------------------
(dollars in thousands)
Balance Sheet Data
- --------------------------------------------------------
Working capital $370,016 $305,718
Total assets 2,698,426 2,627,368
Long-term debt 1,468,840 1,358,595
Shareholders' equity 866,968 875,072
28
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. This transaction was approved
by Genesis' shareholders on November 11, 1999 but is still subject to regulatory
approval.
On November 8, 1999, Moody's Investors Service issued a press release
announcing that it had downgraded the debt ratings of Genesis and Multicare. In
its press release, Moody's indicated that the ratings outlook for both companies
was negative. Moody's stated that its rating action reflected the deterioration
in the companies' operating results and debt protection measures which has
stemmed largely from the long term care industry's transition to the prospective
payment system ("PPS") for Medicare. According to Moody's, factors contributing
to the deterioration have included lower Medicare reimbursement rates, a decline
in the demand for contract therapy services and higher labor costs. The
institutional pharmacy operations of Genesis, which represent roughly one-half
of it's revenue, have also exhibited a decline in demand for certain services as
a result of PPS. Moody's further stated that the situation was exacerbated by
high leverage and tight liquidity at both companies, as well as the difficult
industry environment characterized by fundamental change and increased
regulatory scrutiny. Moody's also noted that both companies have implemented
extensive cost reduction initiatives in response to PPS and have begun a
de-leveraging plan that includes significant asset dispositions. The negative
rating outlook, according to Moody's, reflects the risk that the companies may
be unable to complete their deleveraging initiatives as planned.
Impact of Prospective Payment System
The Balanced Budget Act of 1997 mandated establishment of 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.
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
29
rely on its lessees and borrowers to monitor and comply with all reporting
requirements and to insure appropriate payments are being received. In June
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 June 30, 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 currently does not utilize interest rate swaps, forward or option
contracts on foreign currencies or commodities, or other types of
30
derivative financial instruments; however, the Company will be required to hedge
the variable interest rate to a fixed rate at the closing of the additional $30
million of new mortgage financing being pursued by the Company.
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 the
previous margin adjustment. The weighted average interest rate on borrowings
outstanding under the Credit Facility was 8.13% at September 30, 1999. Assuming
the Credit Facility balance outstanding at September 30, 1999 of $75.9 million
remains constant, each one percentage point increase in interest rates from
8.13% at September 30, 1999 would result in an increase in interest expense for
the next twelve months of approximately $759,000. The Company had unamortized
deferred financing costs in connection with the Credit Facility aggregating
approximately $380,000 at September 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 decrease fourth
quarter interest expense, from approximately $445,000 for the three months
ended September 30, 1999 to approximately $380,000.
The Company expects to incur additional deferred financing costs in the
future in connection with the proposed extension 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."
31
PART II - OTHER INFORMATION
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.
(b) Reports on Form 8-K
The registrant filed a report on Form 8-K dated July 29, 1999 announcing
the resignation of Edward B. Romanov, Jr. as President and Chief Executive
Officer and as a trustee of ElderTrust.
32
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 November 12, 1999.
ElderTrust
/s/ D. Lee McCreary, Jr.
----------------------------------------------------
D. Lee McCreary, Jr.
President, Chief Executive Officer,
Chief Financial Officer, Treasurer and Secretary
(Principal Financial and Accounting Officer)
33
EXHIBIT INDEX
Exhibit No. Description
10.1 Separation Agreement and Release dated July 29, 1999 by and
among 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 nine months ended September 30, 1999 and for
the three months ended September 30, 1998 and the period from
January 30, 1998 through September 30, 1998.
27.1 Financial Data Schedule for the nine months ended
September 30, 1999.
34