SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: MAY 1, 2002
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(Date of Earliest Event Reported)
CAPSTEAD MORTGAGE CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
MARYLAND 1-8896 75-2027937
(State of Incorporation) (Commission File No.) I.R.S. Employer
Identification No.)
8401 NORTH CENTRAL EXPRESSWAY
SUITE 800
DALLAS, TEXAS 75225
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (214) 874-2323
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ITEM 5. OTHER MATTERS
CAPSTEAD MORTGAGE CORPORATION ACQUIRES SENIOR LIVING PROPERTIES
On May 1, 2002 Capstead Mortgage Corporation, through its wholly-owned
subsidiaries, (collectively, "Capstead" or the "Company"), closed on its first
direct investment in real estate, a portfolio of seven senior living properties
in five states (the "Properties"). Six of the seven Properties are primarily
independent senior living facilities wherein the operator of the facility
provides the tenants little, if any, medical care. The smallest property in the
portfolio is primarily a skilled nursing facility. This acquisition is in
keeping with the Company's strategy of making suitable real estate-related
investments that can produce attractive returns over the long term, with less
sensitivity to changes in interest rates than most investments in residential
mortgage-backed securities. The following table summarizes the properties
acquired:
<Table>
<Caption>
YEAR
PROPERTY LOCATION UNITS OCCUPANCY OPENED
-------- -------- ----- --------- ------
(a) (b)
Chambrel at Roswell Roswell, GA 280 (256 IL; 24 AL) 96.8% 1987
Chambrel at Pinecastle Ocala, FL 161 (120 IL; 41 AL) 95.0 1986
Chambrel at Island Lake Longwood, FL 269 (229 IL; 40 AL) 95.5 1985
Chambrel at Montrose Akron, OH 168 (136 IL; 32 AL) 94.6 1987
Windsong at Chambrel Akron, OH 83 (75 SNF; 8 AL) 83.1 1997
Chambrel at Williamsburg Williamsburg, VA 256 (201 IL; 55 AL) 96.5 1987
Chambrel at Club Hill Garland, TX 260 (192 IL; 68 AL) 89.2 1987
Total 1,477 (1,134 IL; 268 AL; 75 SNF) 93.8
</Table>
(a) IL refers to Independent Living units, AL refers to Assisted Living
units and SNF refers to Skilled Nursing Facility units.
(b) As of January 27, 2002.
The aggregate purchase price of the Properties was $144.1 million including
approximately $3.4 million in closing costs, and includes the assumption by
Capstead of $120.8 million of related mortgage and tax-exempt bond debt
resulting in an initial equity investment of $23.3 million. The Properties were
acquired from an affiliate of Apartment Investment and Management Company
("AIMCO") pursuant to a purchase contract negotiated by a subsidiary of
Brookdale Living Communities, Inc. (collectively with its subsidiaries,
"Brookdale"), and assigned to Capstead. Brookdale, an operator of senior living
facilities and a provider of senior living services, is a majority-owned
affiliate of Fortress Investment Group, LLC (together with its affiliates,
"Fortress"). Fortress is Capstead's largest stockholder and Wesley R. Edens
(Fortress' chairman of the board and chief executive officer) serves as
Capstead's chairman and chief executive.
The Company has entered into a long-term 'triple-net' lease arrangement with
Brookdale under which Brookdale is responsible for the ongoing operation and
management of the Properties. A triple-net lease typically requires the lessee
to pay substantially all expenses associated with the operation of a real estate
property, including taxes, other governmental charges, insurance, utilities and
maintenance, in addition to rent sufficient to pay debt service and provide a
reasonable return to the property owner. The lease agreements negotiated with
Brookdale consist of a master lease covering all Properties and individual
property-level leases (referred to collectively as the "Lease"). The Lease has
an initial term of 20 years and provides for two 10-year renewal periods.
Beginning at the end of five years, Brookdale will have
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the option of purchasing all of the Properties from Capstead at the greater of
fair market value or Capstead's original cost, after certain adjustments. Under
the terms of the Lease, Brookdale is responsible for paying the 'triple-net'
expenses described above, all debt service and an amount representing an
attractive cash return on Capstead's equity in the Properties. After an initial
three-month rent concession period, the cash return on Capstead's equity is
expected to exceed 15% on an annualized basis and is subject to annual increases
based upon increases (capped at 3%) in the Consumer Price Index.
The Lease qualifies as an operating lease for financial reporting purposes. As
such, the Properties will be recorded as real estate and the assumed debt
recorded as borrowings on the Company's balance sheet. The majority of the
purchase price will be allocated to buildings, with land, equipment and fixtures
representing smaller components. The buildings, equipment and fixtures will be
depreciated over their estimated useful lives (see "New Critical Accounting
Policies"). Future minimum rentals are expected to exceed $10 million per year
including debt service payments of over $6 million per year (assuming the
expected refinancing of the tax-exempt bonds - see below). In keeping with
Capstead's strategy of reinvesting a portion of its capital into investments
that can produce attractive returns over the long term with less sensitivity to
changes in interest rates, any future changes in debt service requirements are
the responsibility of Brookdale under the terms of the Lease.
Concurrent with executing the purchase agreements for the Properties, Brookdale
also entered into an agreement with AIMCO to acquire from AIMCO $71.4 million
face amount of tax-exempt bonds secured by four of the Properties (the "Bonds")
for a purchase price of $60.7 million. With Capstead's May 1, 2002 acquisition
of the Properties and assumption of the Bonds and all other related debt,
Brookdale agreed to release AIMCO from its obligation to deliver the Bonds
pursuant to the bond purchase agreement in exchange for which AIMCO paid
Brookdale $4.6 million and Brookdale simultaneously entered into a two-year
total return swap agreement with respect to the Bonds with a notional swap
strike price of $65.4 million. Brookdale posted a $17 million bank letter of
credit for the benefit of the swap counterparty to secure its obligations
thereunder. The swap counterparty is a financial institution affiliated with a
tax-exempt bond fund that holds the Bonds. Upon termination of the swap,
Brookdale is obligated to pay the swap counterparty $65.4 million and will
receive an amount equal to the proceeds from either a sale or refinancing of the
bonds, as the case may be.
The Lease contemplates Capstead causing the refinancing of the Bonds through the
issuance of new credit-enhanced floating-rate tax-exempt bonds to unaffiliated
investors. Capstead has agreed to provide credit enhancement on up to $12.0
million of the new bonds by arranging for a letter of credit from a rated
lending institution. Brookdale will compensate Capstead for arranging the letter
of credit by paying additional base rent. The refinancing is expected to enhance
the value of the Properties by significantly lowering interest costs and should
be completed by year-end. In connection with its assumption of the Bonds,
Capstead deposited $8.4 million in mortgage securities with the bond trustee
(which securities will be returned to Capstead on the refinancing date).
NEW CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions in certain circumstances that affect amounts reported in the
Company's consolidated financial statements and related notes. In preparing
these financial statements, management has made its best estimates and
assumptions that affect the reported assets and liabilities. Included in
Capstead's Annual Report on Form 10-K is a description of the Company's critical
accounting policies related to the Company's existing investments in mortgage
securities. Relative to directly owning real estate for the first time, the most
significant assumptions and
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estimates relate to recognizing revenue, depreciating improvements and valuing
real estate for impairment purposes. Application of these assumptions requires
the exercise of judgment as to future uncertainties and, as a result, actual
results could differ from these estimates and have a direct impact on the
Company's net income.
REVENUE RECOGNITION -- Base rents are recognized on a straight-line basis over
the 20-year term of the Lease, and the base rent escalation is recognized when
earned. The base rent escalation is dependent upon increases in the Consumer
Price Index and accordingly, management does not include any future base rent
escalation amounts in current revenue.
REAL ESTATE USEFUL LIVES -- Land, buildings, equipment and fixtures are recorded
at cost less accumulated depreciation. Depreciation is provided on the
straight-line method over the useful lives of the assets, as follows:
<Table>
Buildings 40 years
Equipment and fixtures 5 years
</Table>
IMPAIRMENT OF REAL ESTATE VALUES -- On a periodic basis, management assesses if
the value of real estate properties may be impaired. A property is considered
impaired only if management's estimate of current and projected operating cash
flows (undiscounted and without interest charges) of the property over its
remaining useful life is less than the net carrying value of the property. To
the extent impairment has occurred, the carrying value of the property would be
written down to fair value.
RISK FACTORS
There are many risks and uncertainties that can affect Capstead's future
business, financial performance or share price. Some of these are beyond the
Company's control. Included in Capstead's Annual Report on Form 10-K are
descriptions of how changes in interest rates and credit risk can affect the
Company. Although the Company's direct ownership of triple-net leased real
estate is currently limited to the Properties, new risks and uncertainties
associated with owning real estate as described below in general terms could
become increasingly important should additional acquisitions be made. Should
Capstead acquire real estate that is not triple-net leased, other risks of
ownership may also apply.
RISKS ASSOCIATED WITH OWNING TRIPLE-NET LEASED REAL ESTATE
Investing in triple-net leased real estate involves a number of risks,
including:
o The risk that lessees will not perform under their leases,
reducing the owner's income from the leases or requiring the
owner to assume the cost of performing obligations (such as
debt service, taxes, insurance and maintenance) that are the
lessees' responsibility under triple-net leases. In the case
of special-purpose real estate such as senior living
facilities, compliance with licensing requirements could
complicate or delay the transfer and operational control of
such properties. This could lead to a significant cash flow
burden for the owner to service the debt and otherwise
maintain the properties.
o The risk that changes in economic conditions or real estate
markets may adversely affect the value of the properties.
o During inflationary periods, which are generally accompanied
by rising interest rates, increases in operating costs and
borrowing rates may be greater than increases in lessee
revenues from operating properties. Over an extended period of
time, this could result in lessee defaults.
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o The risk that a deterioration of local conditions could
adversely affect the ability of a lessee to profitably operate
a property. For instance, an oversupply of senior living
properties could hamper the leasing of senior living units at
favorable rates. This could ultimately affect the value of the
properties.
o Changes in tax, zoning or other laws could make properties
less attractive or less profitable.
o An owner cannot be assured that lessees will elect to renew
their leases when the terms expire. If a lessee does not renew
its lease or otherwise defaults on its lease obligations,
there is no assurance the owner could obtain a substitute
lessee on acceptable terms. If the owner cannot obtain another
qualified operator to lease a property, the owner may be
required to modify the property for a different use, which may
involve significant capital expenditures and delays in
re-leasing the property.
o Triple-net leases generally require the lessee to carry
comprehensive liability, casualty, workers' compensation and
rental loss insurance. The required coverage is typically of
the type, and amount, customarily obtained by an owner of
similar properties. However, there are some types of losses,
such as catastrophic acts of nature, for which insurance
cannot be obtained at a commercially reasonable cost. If there
is an uninsured loss or a loss in excess of insurance limits,
the owner could lose both the revenues generated by the
affected property and the capital invested in the property.
The owner would, however, remain obligated to repay any
mortgage indebtedness or other obligations related to the
property.
o Investments in real estate are subject to various federal,
state and local regulatory requirements including the
Americans with Disabilities Act (the "ADA"). The ADA requires
that public accommodations reasonably accommodate individuals
with disabilities and that new construction or alterations be
made to commercial facilities to conform to accessibility
guidelines. Failure to comply with the ADA can result in
injunctions, fines, and damage awards to private parties and
additional capital expenditures to remedy noncompliance.
Existing requirements may change and compliance with future
requirements may involve significant unanticipated
expenditures. Although typically these expenditures would be
the responsibility of the lessee under the terms of triple-net
leases, if lessees fail to perform these obligations, the
owner may be required to do so.
o Under federal, state and local environmental laws, the owner
may be required to investigate and clean up any release of
hazardous or toxic substances or petroleum products at its
properties, regardless of its knowledge or actual
responsibility, simply because of current or past ownership of
the real estate. If unidentified environmental problems arise,
the owner may have to make substantial payments, which could
adversely affect cash flow and the ability to make
distributions to stockholders. This is so because:
1. The owner may have to pay for property
damage and for investigation and clean-up
costs incurred in connection with the
contamination.
2. The law may impose clean-up responsibility
and liability regardless of whether the
owner or operator knew of or caused the
contamination. Even if more than one person
is responsible for the contamination, each
person who shares legal liability under
environmental laws may be held responsible
for all of the clean-up costs.
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3. Governmental entities and third parties may
sue the owner or operator of a contaminated
site for damages and costs.
In investigating the acquisition of real estate, environmental
studies are typically performed to establish the existence of
any contamination. In addition, triple-net leases generally
require lessees to operate properties in compliance with
environmental laws and to indemnify the owner against
environmental liability arising from the operation of such
properties.
o An owner may desire to sell a property in the future because
of changes in market conditions or poor lessee performance or
to avail itself of other opportunities. An owner may also be
required to sell a property in the future to meet debt
obligations or avoid a default. Unlike investments in mortgage
securities, real estate cannot always be sold quickly, and
there can be no assurance that the properties can be sold at a
favorable price or that a prospective buyer will view existing
lease or operating arrangements favorably. In addition, a
property may require restoration or modification before it is
sold.
FORWARD LOOKING STATEMENTS
This document contains "forward-looking statements" (within the meaning of the
Private Securities Litigation Reform Act of 1995) that inherently involve risks
and uncertainties. The Company's actual results and liquidity can differ
materially from those anticipated in these forward-looking statements because of
changes in the level and composition of the Company's investments and unforeseen
factors. Relative to the Company's investments in financial assets, these
factors may include, but are not limited to, changes in general economic
conditions, the availability of suitable investments, fluctuations in, and
market expectations for fluctuations in, interest rates and levels of mortgage
prepayments, deterioration in credit quality and ratings, the effectiveness of
risk management strategies, the impact of leverage, liquidity of secondary
markets and credit markets, increases in costs and other general competitive
factors. Relative to direct investments in real estate, these factors may
include, but are not limited to, lessee performance under lease agreements,
changes in general as well as local economic conditions and real estate markets,
increases in competition and inflationary pressures, changes in the tax and
regulatory environment including zoning and environmental laws, uninsured losses
or losses in excess of insurance limits and the availability of adequate
insurance coverage at reasonable costs.
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 hereunto duly authorized.
CAPSTEAD MORTGAGE CORPORATION
June 14, 2002 By: /s/ Phillip A. Reinsch
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Phillip A. Reinsch, Senior Vice President
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