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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 MARCH 31, 1996
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 1-9381
AMERICAN HEALTH PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4084878
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6400 SOUTH FIDDLER'S GREEN CIRCLE 80111
SUITE 1800 (Zip Code)
ENGLEWOOD, CO
(Address of principal executive offices)
(303) 796-9793
(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
----- -----
SHARES OF REGISTRANT'S COMMON STOCK, $.01 PAR VALUE PER SHARE,
OUTSTANDING AT MAY 7, 1996 -- 23,446,973
SHARES OF REGISTRANT'S PSYCHIATRIC GROUP DEPOSITARY SHARES, EACH
REPRESENTING ONE-TENTH OF ONE SHARE OF PSYCHIATRIC GROUP PREFERRED STOCK, $.01
PAR VALUE, OUTSTANDING AT MAY 7, 1996 -- 2,084,282.
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AMERICAN HEALTH PROPERTIES, INC.
MARCH 31, 1996
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
PAGE
CONSOLIDATED COMPANY
Item 1. Consolidated Condensed Financial Statements:
Balance sheets as of March 31, 1996 and December 31, 1995...................... 2
Statements of operations for the three months ended March 31, 1996 and 1995.... 3
Statements of cash flows for the three months ended March 31, 1996 and 1995 ... 4
Notes to financial statements ................................................. 5
Item 2. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations ................................. 8
CORE GROUP
Item 1. Core Group Combined Condensed Financial Statements:
Balance sheets as of March 31, 1996 and December 31, 1995...................... 15
Statements of operations for the three months ended March 31, 1996 and 1995.... 16
Statements of cash flows for the three months ended March 31, 1996 and 1995 ... 17
Notes to financial statements ................................................. 18
Item 2. Management's Discussion and Analysis of Core Group
Combined Financial Condition and Results of Operations ........................ 21
PSYCHIATRIC GROUP
Item 1. Psychiatric Group Combined Condensed Financial Statements:
Balance sheets as of March 31, 1996 and December 31, 1995...................... 26
Statements of operations for the three months ended March 31, 1996 and 1995.... 27
Statements of cash flows for the three months ended March 31, 1996 and 1995.... 28
Notes to financial statements.................................................. 29
Item 2. Management's Discussion and Analysis of Psychiatric Group
Combined Financial Condition and Results of Operations.......................... 34
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................ 41
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AMERICAN HEALTH PROPERTIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
March 31, December 31,
1996 1995
-------------- --------------
ASSETS (UNAUDITED)
Real estate investments
Real property and mortgage notes $ 633,768 $ 633,727
Construction in progress 10,615 6,016
Accumulated depreciation (86,127) (82,435)
-------------- --------------
558,256 557,308
Notes receivable and financing leases 10,773 11,145
Other assets 10,257 10,292
Cash and short-term investments 2,092 7,571
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$ 581,378 $ 586,316
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank loans payable $ 1,000 $ --
Notes and bonds payable 207,432 207,378
Accounts payable and accrued liabilities 4,546 7,957
Dividends payable 13,300 13,506
Deferred income 4,274 4,415
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230,552 233,256
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Commitments and contingencies
Stockholders' equity
Preferred stock $.01 par value; 1,000 shares authorized;
208 shares issued and outstanding 2 2
Common stock $.01 par value; 100,000 shares authorized;
23,447 and 23,443 shares issued and outstanding 234 234
Additional paid-in capital 481,020 480,703
Cumulative net income 223,063 212,312
Cumulative dividends (353,493) (340,191)
-------------- --------------
350,826 353,060
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$ 581,378 $ 586,316
============== ==============
The accompanying notes are an integral part of these financial statements.
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AMERICAN HEALTH PROPERTIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Three Months Ended
March 31,
-----------------------------------------
1996 1995
------------------- -------------------
REVENUES
Rental income $ 17,298 $ 16,614
Mortgage interest income 1,493 1,470
Additional rental and interest income 2,948 2,636
Other interest income 382 1,011
------------------- -------------------
22,121 21,731
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EXPENSES
Depreciation and amortization 3,725 3,470
Interest expense 5,766 6,828
General and administrative 1,822 1,661
------------------- -------------------
11,313 11,959
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Minority interest 57 105
------------------- -------------------
NET INCOME $ 10,751 $ 9,667
=================== ===================
ATTRIBUTABLE TO -
CORE GROUP COMMON STOCK
Net Income $ 9,319 $ 7,976
Net Income Per Share $ 0.40 $ 0.38
Weighted Average Shares Outstanding 23,500 20,899
Dividends Declared Per Share $ 0.505 $ 0.495
PSYCHIATRIC GROUP DEPOSITARY SHARES
Net Income $ 1,432 $ 1,691
Net Income Per Share $ 0.68 $ 0.81
Weighted Average Shares Outstanding 2,091 2,090
Dividends Declared Per Share $ 0.70 $ 0.80
The accompanying notes are an integral part of these financial statements.
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AMERICAN HEALTH PROPERTIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Three Months Ended March 31,
---------------------------------
1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 10,751 $ 9,667
Depreciation, amortization and other non-cash items 4,291 4,056
Deferred income (144) (113)
Change in other assets (104) 379
Change in accounts payable and accrued liabilities (3,408) (3,611)
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11,386 10,378
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CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition and construction of real estate properties (4,655) (995)
Proceeds from sale of properties - 10,825
Principal payments on mortgage notes receivable 15 -
Construction loan fundings - (3,250)
Other notes receivable 50 4,385
Direct financing leases 322 167
Administrative capital expenditures (16) (27)
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(4,284) 11,105
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CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on bank loans payable 1,000 (10,500)
Financing costs paid (73) (50)
Dividends paid (13,508) (11,997)
----------- -----------
(12,581) (22,547)
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INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS (5,479) (1,064)
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF PERIOD 7,571 1,838
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CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ 2,092 $ 774
=========== ===========
The accompanying notes are an integral part of these financial statements.
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AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
American Health Properties, Inc., a Delaware corporation (the Company,
which term refers to the Company and its subsidiaries unless the context
otherwise requires), is a self-administered real estate investment trust (REIT)
that commenced operations in 1987. The Company has investments in health care
properties, including acute care, rehabilitation and psychiatric hospitals,
long-term care, assisted living and Alzheimer's care facilities and a medical
office building.
Distribution of Psychiatric Group Depositary Shares On July 25, 1995, the
Company completed the distribution of 2,085,675 Psychiatric Group Depositary
Shares to holders of its common stock (the Distribution). Shareholders received
one Psychiatric Group Depositary Share for every ten shares of common stock
held of record at the close of business on July 14, 1995. Each Psychiatric
Group Depositary Share represents one-tenth of a share of Psychiatric Group
Preferred Stock, a new series of preferred stock, par value $.01 per share. The
Distribution was designed to separate the economic attributes of the Company's
investments in psychiatric hospitals (the Psychiatric Group) and its
investments in acute care and rehabilitation hospitals, long-term care,
assisted living and Alzheimer's care facilities and a medical office building
(the Core Group) into two distinct portfolios, with two distinct classes of
publicly-traded shares intended to represent those portfolios. In connection
with the Distribution, the Company specifically assigned or, if not directly
assigned, allocated its assets, liabilities and stockholders' equity, and its
revenues, expenses and cash flow items, between the Core Group and Psychiatric
Group. The Psychiatric Group Depositary Shares are intended to reflect the
separate financial performance of the Psychiatric Group. The Company's common
stock (the Core Group Common Stock) is intended to reflect the separate
financial performance of the Core Group. However, the change in the capital
structure of the Company effected by the Distribution does not affect the
respective legal title to assets or responsibility for liabilities of the
Company, and each holder of Core Group Common Stock or Psychiatric Group
Depositary Shares is a holder of an issue of capital stock of the entire
Company and is subject to the risks associated with an investment in the
Company and all of its businesses, assets and liabilities.
Basis of Presentation The consolidated condensed financial statements of
the Company included herein have been prepared by the Company without audit and
include all normal, recurring adjustments which are, in the opinion of
management, necessary for a fair presentation of the results of operations
pursuant to the rules and regulations of the Securities and Exchange
Commission. These financial statements should be read in conjunction with
those included in the Company's annual report on Form 10-K for the year ended
December 31, 1995. The financial statements of the Core Group and the
Psychiatric Group also are included elsewhere herein. For purposes of
computing per share data for periods prior to the Distribution, the number of
shares of Core Group Common Stock are assumed to be the same as the
corresponding number of shares of the Company's common stock prior to the
Distribution, while the number of Psychiatric Group Depositary Shares are
assumed to be one-tenth of the corresponding number of shares of the Company's
common stock prior to the Distribution.
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AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Interest Paid Interest paid by the Company, net of interest capitalized,
was $7,896,000 and $8,979,000 for the three months ended March 31, 1996 and
1995, respectively. The Company had $210,000 of capitalized interest for the
three months ended March 31, 1996 and no capitalized interest for the three
months ended March 31, 1995.
2. STOCKHOLDERS' EQUITY
Stock Incentive Plans During the three months ended March 31, 1996,
options to purchase 135,503 shares of Core Group Common Stock at a weighted
average exercise price of $23.03 per share and 3,910 shares of restricted Core
Group Common Stock were issued pursuant to the Company's stock incentive plans.
3. COMMITMENTS
Other Notes Receivable The Company provides financing at variable rates
to certain psychiatric hospital operators under revolving credit agreements.
The aggregate commitment under these credit agreements was $5.7 million at
March 31, 1996 of which $1.2 million was unfunded.
Real Estate Properties The Company has the right to approve capital
expenditures at all of its properties, the option to fund certain capital
expenditures and, in certain situations, is obligated to fund approved capital
expenditures on terms comparable to the original investment. At March 31,
1996, the Company had remaining commitments to fund less than $1 million of
capital expenditures pursuant to these rights and obligations. The base and
additional rent provisions of the leases are amended when such capital
expenditures are funded to reflect the Company's increased investment.
As of March 31, 1996, the Company had funded $8.8 million of commitments
totaling $16 million to finance the construction of three separate 80-unit
assisted living facilities located in El Paso, Texas ($5.2 million), Odessa,
Texas ($5.1 million) and Walla Walla, Washington ($5.6 million). The Company
will own the facilities upon completion and enter into long-term leases with an
experienced operator of assisted living facilities.
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AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
4. STATUS OF PSYCHIATRIC GROUP PROPERTIES
The Company's two Florida psychiatric properties, The Retreat and The
Manors, continue to experience operational and cash flow difficulties which
negatively impact these hospitals' ability to fund their rental and interest
obligations to the Company as they become due. Although The Retreat has made
all required payments in 1996 through May, The Manors has not made its required
rental and interest payments since January 1996 and such unpaid obligations have
not been recognized as income. Additionally, Rock Creek Center (RCC) in
Illinois is experiencing certain payor reimbursement issues, which combined with
a lower than expected census in the first quarter of 1996, have had an adverse
impact on RCC's cash flow and its ability to fund its rental and interest
obligations to the Company as they become due. Although RCC had made all of its
rental and interest payments through April 1996, RCC has not paid its May rent.
In addition, the Company has advanced $214,000 on behalf of the operator to pay
property taxes on the facility and has been requested by the operator to make an
additional advance to meet certain other immediate cash requirements. The
Company has active dialogues with the operators of these hospitals regarding the
operators' plans to address their financial and operational issues. It is likely
that some relief will be granted by the Company to one or more of these
operators, although the extent and duration of such relief has not been
determined. In addition, there can be no assurance that any operator not
granted relief currently will be able to continue to meet its obligations to the
Company or that some measure of relief will not be necessary in the future. The
dividend on the Company's Psychiatric Group Depositary Shares is determined each
quarter based upon the operating results of the Company's Psychiatric Group. Any
significant advance of additional funds to these psychiatric hospital operators,
modification of terms covering the rental or interest obligations of these
properties or nonpayment of such obligations as they become due likely will have
an adverse impact on the Company's Psychiatric Group results of operations and
cash flows, as well as the quarterly dividend payment on Psychiatric Group
Depositary Shares. Quarterly base rent and interest obligations of The Manors,
The Retreat and RCC total approximately $200,000, $285,000 and $324,000 ($.10,
$.14 and $.15 per Psychiatric Group Depositary Share), respectively. The
Manors' failure to meet all of its obligations to the Company in the first
quarter of 1996 was largely responsible for the reduction in the quarterly
dividend on Psychiatric Group Depositary Shares to $.70 per share from $.80 per
share in the preceding quarter.
The Company continues to be in active dialogue with the operator of the
two New York Four Winds psychiatric facilities regarding the operator's desire
to create an integrated behavioral health care delivery system in lower and
upper New York State. Such a system likely will include these hospitals as the
base for delivery systems in their respective markets and is intended to
address the potential negative consequences of the expected changes in Medicaid
reimbursement and the increase in managed care penetration in the State of New
York. The Company is supportive of the operator's strategy and has agreed in
principle to release certain of its security interests in the operator's
short-term assets on a staged basis to permit the operator to obtain the
capital required to develop this system.
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AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Following is a discussion of the consolidated financial condition and
results of operations of the Company which should be read in conjunction with
the consolidated financial statements and accompanying notes. For discussions
of the financial condition and results of operations of the Core Group and the
Psychiatric Group, see the management's discussion and analysis of financial
condition and results of operations of the Core Group and the Psychiatric Group
included elsewhere herein.
"Safe Harbor" Statement Under the United States Private Securities
Litigation Reform Act of 1995 Statements that are not historical facts
contained in Management's Discussion and Analysis are forward-looking
statements that involve risks and uncertainties that could cause actual results
to differ from projected results. Factors that could cause actual results to
differ materially include, among others: the financial strength of the
operators of the Company's facilities as it affects the continuing ability of
such operators to meet their obligations to the Company under the terms of the
Company's agreements with such operators, government policy relating to the
health care industry including changes in reimbursement levels under the
Medicare and Medicaid programs, operators' continued eligibility to participate
in the Medicare or Medicaid programs, changes in reimbursement by other third
party payors, occupancy levels at the Company's facilities, the availability
and cost of capital, the strength and financial resources of the Company's
competitors, the Company's ability to make additional real estate investments
at attractive yields and changes in tax laws and regulations affecting real
estate investment trusts.
Distribution of Psychiatric Group Depositary Shares On July 25, 1995, the
Company completed the distribution of 2,085,675 Psychiatric Group Depositary
Shares to holders of its common stock (the Distribution). Shareholders received
one Psychiatric Group Depositary Share for every ten shares of common stock
held of record at the close of business on July 14, 1995. Each Psychiatric
Group Depositary Share represents one-tenth of a share of Psychiatric Group
Preferred Stock, a new series of preferred stock, par value $.01 per share. The
Distribution was designed to separate the economic attributes of the Company's
investments in psychiatric hospitals (the Psychiatric Group) and its
investments in acute care and rehabilitation hospitals, long-term care,
assisted living and Alzheimer's care facilities and a medical office building
(the Core Group) into two distinct portfolios, with two distinct classes of
publicly-traded shares intended to represent those portfolios. In connection
with the Distribution, the Company specifically assigned or, if not directly
assigned, allocated its assets, liabilities and stockholders' equity, and its
revenues, expenses and cash flow items, between the Core Group and Psychiatric
Group. The Psychiatric Group Depositary Shares are intended to reflect the
separate financial performance of the Psychiatric Group. The Company's common
stock (the Core Group Common Stock) is intended to reflect the separate
financial performance of the Core Group. However, the change in the capital
structure of the Company effected by the Distribution does not affect the
respective legal title to assets or responsibility for liabilities of the
Company, and each holder of Core Group Common Stock or Psychiatric Group
Depositary Shares is a holder of an issue of capital stock of the entire
Company and is subject to the risks associated with an investment in the
Company and all of its businesses, assets and liabilities.
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AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATING RESULTS
First Quarter 1996 Compared With 1995
For the first quarter of 1996, the Company reported net income of
$10,751,000 compared with net income of $9,667,000 for the first quarter of
1995. (See the Consolidated Condensed Statement of Operations for the
net income and net income per share attributable to the Core Group Common
Stock and the Psychiatric Group Depositary Shares.)
Rental income was $17,298,000 for the first quarter of 1996, an increase
of $684,000 or 4% from $16,614,000 for the first quarter of 1995. This net
increase was primarily attributable to rental income from new properties
acquired subsequent to the first quarter of 1995, which was partially offset by
a reduction in rental income due to the sale of two psychiatric properties
during the first quarter of 1995 and the nonpayment of $100,000 of rent by a
psychiatric operator during the first quarter of 1996. The net property
additions also resulted in a net increase in depreciation and amortization of
$255,000 to $3,725,000 for the first quarter of 1996 compared with the first
quarter of 1995.
Additional rental and interest income was $2,948,000 for the first quarter
of 1996, an increase of $312,000 or 12% from $2,636,000 for the first quarter
of 1995. This positive variation was primarily attributable to increased
additional rent from six of the Company's original acute care properties.
Other interest income decreased $629,000 to $382,000 for the first quarter
of 1996 from $1,011,000 for the first quarter of 1995. Other interest income
for the first quarter of 1995 included approximately $680,000 of interest on a
construction loan that was subsequently paid off in October 1995. Excluding
the effect of this construction loan interest, other interest income increased
during the first quarter of 1996 compared with the first quarter of 1995 as a
result of higher investable cash balances and a higher average balance of
direct financing leases, partially offset by a lower average balance of
borrowings outstanding under revolving credit facilities provided to
psychiatric hospital operators and the nonpayment of $50,000 of interest by a
psychiatric operator during the first quarter of 1996.
Interest expense was $5,766,000 for the first quarter of 1996, a decrease
of $1,062,000 or 16% from $6,828,000 for the first quarter of 1995. Interest
expense decreased as a result of a $24 million senior notes maturity in May
1995, lower average bank loan borrowings during the first quarter of 1996 and
an increase in capitalized interest in 1996 compared to 1995.
General and administrative expenses increased to $1,822,000 for the first
quarter of 1996 from $1,661,000 for the first quarter of 1995. This increase
was primarily attributable to higher shareholder reporting costs as a result of
the Distribution, and financial advisory services provided by an investment
banking firm which included supplemental monitoring of the performance of the
Company's psychiatric properties and assistance in addressing operational and
cash flow difficulties of certain operators of the psychiatric properties.
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AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Future Operating Results
The operators of most of the Company's facilities derive a substantial
percentage of their total revenues from federal and state health care programs
such as Medicare and Medicaid and from other third-party payors such as private
insurance companies, self-insured employers and health maintenance
organizations. Such operators also are subject to extensive federal, state and
local government regulation relating to their operations, and the Company's
facilities are subject to periodic inspection by governmental and other
authorities to assure continued compliance with mandated procedures, licensure
requirements under state law and certification standards under the Medicare and
Medicaid programs. A change in reimbursement levels under the Medicare or
Medicaid programs, a reduction in reimbursement by other third-party payors or
an operator's failure to maintain its certification under Medicare or Medicaid
programs could adversely affect revenues to the Company's facilities.
The nature of health care delivery in the United States currently is
undergoing change and further review at both the national and state levels.
Generally accepted goals of reform continue to include controlling costs and
improving access to medical care. Various plans to decrease the growth in
Medicare spending have been proposed to both Houses of Congress. These plans
have generally included revisions and limits on federal programs providing
Medicaid reimbursement to state health care programs and potentially would have
an adverse impact on the level of funds available in the future to health care
facilities. The Company's Board and management are monitoring potential changes
closely. The Company believes that these potential changes may pose risks for
certain institutions that are unwilling or unable to respond. At the same time,
the Company believes that this changing health care environment will provide the
Core Group with new opportunities for investment.
The ongoing changes in the health care industry include trends toward
shorter lengths of hospital stay, increased use of outpatient services,
increased federal, state and third-party oversight of health care company
operations and business practices, and increased demand for discounted or
capitated health care services (delivery of services at a fixed price per
capita basis to a defined group of covered parties). Furthermore, federal,
state and third-party payors continue to propose and adopt various cost
containment measures that restrict the scope of reimbursable health care
services and limit increases in reimbursement rates for such services. Payors
also are continuing aggressively to enforce compliance with program
requirements and to pursue providers that they believe have not complied with
such requirements. Outpatient business is expected to increase as advances in
medical technologies allow more procedures to be performed on an outpatient
basis and as payors continue to direct more patients from inpatient care to
outpatient care. In addition, the entrance of insurance companies into managed
care programs is accelerating the introduction of managed care in new
localities, and states and insurance companies continue to negotiate actively
the amounts they will pay for services. Moreover, the percentage of health
care services that are reimbursed under the Medicare and Medicaid programs
continues to increase as the population ages and as states expand their
Medicaid programs. Continued eligibility to participate in these programs is
crucial to a provider's financial strength. As a result of the foregoing, the
revenues and margins may decrease at the Company's hospitals.
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AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Notwithstanding the potential for increasing government regulation, the
Company believes that health care will continue to be delivered on a local and
regional basis and that well-managed, high-quality, cost-controlled facilities
will continue to be an integral part of local and regional health care delivery
systems. The Company also believes that certain acute care hospitals will need
to reconfigure or expand existing facilities or to affiliate themselves with
other providers so as to become part of comprehensive and cost-effective health
care systems. Such systems likely will include lower cost treatment settings,
such as ambulatory care clinics, outpatient surgery centers, skilled nursing
facilities and medical office buildings. In general, the Core Group facilities
are part of local or regional health care delivery systems or are in the
process of becoming integrated into such systems.
The Company's future operating results could be affected by the operating
performance of the Company's lessees and borrowers. The rental and interest
obligations of its facility operators are primarily supported by the
facility-specific operating cash flow. Real estate investments in the
Company's portfolio are generally further supported by one or more credit
enhancements that take the form of cross-default provisions, letters of credit,
corporate and personal guarantees, security interests in cash reserve funds,
accounts receivable or other personal property and requirements to maintain
specified financial ratios.
Fundamental changes in the psychiatric industry continue to negatively
impact the facility-specific operating cash flow at the Company's psychiatric
properties. Institutions responsible for providing insurance coverage to
patients who use inpatient psychiatric treatment services have directed efforts
toward decreasing their payments for such services, thereby reducing hospital
operating revenues. Some cost-cutting measures used by such institutions
include decreasing the inpatient length of stay, intensively reviewing
utilization, directing patients from inpatient care to outpatient care and
negotiating reduced reimbursement rates for services. In addition, such
institutions have extended the length of time for making payments, resulting in
increases in accounts receivable. The wider use of psychotropic drugs also has
resulted in significant declines in the average length of stay. Although the
operators of the psychiatric hospitals are responding by developing lower cost
outpatient and daypatient programs, increasing case management and reducing
operating costs, their efforts are generally not consistently mitigating the
negative impact of these fundamental psychiatric industry changes. As a result,
certain of the psychiatric hospital operators have had difficulty meeting their
payment obligations to the Company on a timely basis and there can be no
assurance that psychiatric hospital operators will be able to meet their
payment obligations in the future. Should this situation occur, it would
negatively impact the cash flow of the Company's Psychiatric Group and the
dividend payments to the holders of Psychiatric Group Depositary Shares.
The Company currently is providing financing under revolving credit
agreements to the operators of three of its psychiatric hospitals. As of May
7, 1996, outstanding borrowings under such agreements totaled $4,475,000, and
the Company has committed to fund an additional $1,225,000 of borrowings upon
request, subject to certain conditions. These borrowings, which are secured by
accounts receivable and certain personal property and which contain events of
default that would be triggered by defaults under the lease relating to the
relevant psychiatric hospital, are the primary source of financing for these
operators' operating and capital needs. These psychiatric hospitals have, from
time to time, been unable to generate sufficient cash flow for working capital
and the development of new programs. In certain cases, these psychiatric
hospitals
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AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
have not been able to pay down the outstanding borrowings under the revolving
credit agreements provided by the Company or to secure replacement financing
from third-party lenders. To the extent the psychiatric hospitals have
increased working capital needs in the future, the Psychiatric Group may be the
only source of such financing. In the event the Company's Board of Directors
determines that it is appropriate to provide additional working capital
financing to a psychiatric hospital operator, it may cause the Core Group to
make revolving inter-Group loans to the Psychiatric Group to fund such financing
(to the extent consistent with its then-existing policies), although the
Company's Board of Directors is under no obligation to do so.
The fundamental ongoing changes in the psychiatric industry and the
resulting impact on operator financial performance have resulted in the
restructuring of psychiatric operator payment obligations and significant
psychiatric investment write-downs, the most recent of which occurred during
1994 when the Company recorded a $30,000,000 write-down of its investments in
the psychiatric hospitals. Although management believes that the recorded
investments in the psychiatric hospitals are realizable, if the psychiatric
operators are unable to successfully adapt to the fundamental ongoing changes in
the psychiatric industry and consistently mitigate the negative impact of such
changes on their financial performance, the Company may be required to further
restructure payment obligations or make additional write-downs of the value of
its investments in the psychiatric hospitals. The Company does not intend to
make further investments in the psychiatric sector, and over time, may sell,
restructure or seek other means to reduce its investments in the psychiatric
sector. The Company has sold three of its psychiatric properties since
September 1994 and restructured the terms of its two Florida psychiatric
hospital investments in March 1995. The Psychiatric Group Depositary Shares were
distributed in July 1995 in an effort to effectively separate the economic
attributes of the Company's psychiatric investments (the Psychiatric Group) from
its core investments in acute care and rehabilitation hospitals, long-term care,
assisted living and Alzheimer's care facilities and a medical office building
(the Core Group). In September 1995, the Company retained an investment banking
firm for an initial one-year period to provide a broad range of financial
advisory services to the Psychiatric Group. These services include supplemental
monitoring of the performance of individual assets, assistance in potential
sales or restructurings of particular investments and continuing assessments of
available strategic alternatives for the portfolio.
The Company's two Florida psychiatric properties, The Retreat and The
Manors, continue to experience operational and cash flow difficulties which
negatively impact these hospitals' ability to fund their rental and interest
obligations to the Company as they become due. Although The Retreat has made
all required payments in 1996 through May, The Manors has not made its required
rental and interest payments since January 1996 and such unpaid obligations
have not been recognized as income. Additionally, Rock Creek Center (RCC) in
Illinois is experiencing certain payor reimbursement issues, which combined
with a lower than expected census in the first quarter of 1996, have had an
adverse impact on RCC's cash flow and its ability to fund its rental and
interest obligations to the Company as they become due. Although RCC had made
all of its rental and interest payments through April 1996, RCC has not paid
its May rent. In addition, the Company has advanced $214,000 on behalf of the
operator to pay property taxes on the facility and has been requested by the
operator to make an additional advance to meet certain other immediate cash
requirements. The Company has active dialogues with the operators of these
hospitals regarding the operators' plans to address their financial and
operational issues. It is likely that some relief will be granted by the Company
to one or more of these operators, although the extent and duration of such
relief has not been
12
14
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
determined. In addition, there can be no assurance that any operator not
granted relief currently will be able to continue to meet its obligations to the
Company or that some measure of relief will not be necessary in the future. The
dividend on the Company's Psychiatric Group Depositary Shares is determined each
quarter based upon the operating results of the Company's Psychiatric Group. Any
significant advance of additional funds to these psychiatric hospital operators,
modification of terms covering the rental or interest obligations of these
properties or nonpayment of such obligations as they become due likely will have
an adverse impact on the Company's Psychiatric Group results of operations and
cash flows, as well as the quarterly dividend payment on Psychiatric Group
Depositary Shares. Quarterly base rent and interest obligations of The Manors,
The Retreat and RCC total approximately $200,000, $285,000 and $324,000 ($.10,
$.14 and $.15 per Psychiatric Group Depositary Share), respectively. The Manors'
failure to meet all of its obligations to the Company in the first quarter of
1996 was largely responsible for the reduction in the quarterly dividend on
Psychiatric Group Depositary Shares to $.70 per share from $.80 per share in the
preceding quarter.
The Company continues to be in active dialogue with the operator of the two
New York Four Winds psychiatric facilities regarding the operator's desire to
create an integrated behavioral health care delivery system in lower and upper
New York State. Such a system likely will include these hospitals as the base
for delivery systems in their respective markets and is intended to address the
potential negative consequences of the expected changes in Medicaid
reimbursement and the increase in managed care penetration in the State of New
York. The Company is supportive of the operator's strategy and has agreed in
principle to release certain of its security interests in the operator's
short-term assets on a staged basis to permit the operator to obtain the capital
required to develop this system.
Additional rental income and interest income from the Company's existing
investments will be affected by changes in the revenues of the underlying
business operations upon which such income is based. The Company's acute care
investments accounted for 89% of net additional rental and interest income for
the first quarter of 1996, while rehabilitation and psychiatric investments
each accounted for 5% and 6%, respectively. Historically, a substantial portion
of the Company's additional rental and interest income has been attributable to
six of the Company's original acute care properties (the Original Properties).
With the significant revenue growth at a majority of the Original Properties in
recent years, four properties had reached the additional rent transition point
at the end of 1995 and it is anticipated that other properties may do so over
the next few years. The Company's revenue participation rate for the six
Original Properties declines from 5% to 1% when the additional rent transition
point is reached. At December 31, 1995, the amount of potential additional
rent at the 5% revenue participation rate for the six Original Properties was
approximately $2.1 million per annum.
The future operating results of the Company will be affected by additional
factors including the amount, timing and yield of additional real estate
investments and the competition for such investments. Operating results also
will be affected by the availability and terms of the Company's future equity
and debt financing. The Company's financing strategy includes the objective to
reduce its cost of capital over time and enhance its financial flexibility to
facilitate future growth. The Company believes that the distribution of the
Psychiatric Group Depositary Shares will facilitate achievement of this
objective.
13
15
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's senior debt carries an implied investment grade rating from
two rating agencies. In August 1994, the Company's BBB- implied senior debt
rating was affirmed by Standard & Poor's but the outlook was revised to
negative from stable. Duff & Phelps Credit Rating Co. assigned an initial
implied senior debt rating of BBB- in November 1994.
LIQUIDITY AND CAPITAL RESOURCES
As of May 7, 1996, the Company had commitments of $6.6 million to fund
construction obligations and capital expenditures over approximately the next
four months. Aggregate unfunded commitments under revolving credit agreements
provided to psychiatric hospital operators totaled $1.2 million as of May 7,
1996.
The Company has continued to increase its liquidity and enhance its
financial flexibility. In October 1995, the Company received $29.15 million as
proceeds from the payoff of its interest in a mortgage loan and completed an
offering of 2,500,000 additional shares of Core Group Common Stock resulting in
net proceeds of $50.3 million. Proceeds from the mortgage loan payoff and
equity offering were used to pay off the outstanding balance under the Company's
bank credit facility. In December 1995, the Company closed on a new $150
million unsecured revolving credit facility which matures on December 27, 1998.
As of May 7, 1996, the Company had no outstanding borrowings under its revolving
credit facility and had $10.4 million in cash and short-term investments. The
Company's total indebtedness as of May 7, 1996 was $207.5 million. The Company
will utilize its revolving credit facility to fund future acquisitions and its
other commitments, including the $29 million senior notes maturity on May 31,
1996. The Company may incur additional indebtedness or refinance existing
indebtedness if the Company determines that opportunities to pursue such
transactions would be attractive. The Company currently believes it has
sufficient capital to meet its commitments and that its cash flow and liquidity
will continue to be sufficient to fund current operations and to provide for the
payment of dividends to stockholders in compliance with the applicable sections
of the Internal Revenue Code governing real estate investment trusts.
14
16
AMERICAN HEALTH PROPERTIES, INC.
CORE GROUP COMBINED CONDENSED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
March 31, December 31,
1996 1995
--------------- --------------
ASSETS (Unaudited)
Real estate investments
Real property $ 570,970 $ 570,914
Construction in progress 10,615 6,016
Accumulated depreciation (81,997) (78,491)
--------------- --------------
499,588 498,439
Financing leases 5,908 6,230
Revolving loan to Psychiatric Group 5,436 5,263
Fixed rate loan to Psychiatric Group 9,175 9,175
Other assets 9,341 9,521
Cash and short-term investments 2,092 7,571
--------------- --------------
$ 531,540 $ 536,199
=============== ==============
ATTRIBUTED LIABILITIES AND TOTAL ATTRIBUTED EQUITY
Bank loans payable $ 1,000 $ --
Notes and bonds payable 207,432 207,378
Accounts payable and accrued liabilities 4,456 7,806
Dividends payable 11,841 11,838
Deferred income 4,103 4,230
--------------- --------------
228,832 231,252
--------------- --------------
Commitments and contingencies
Total Attributed Core Group Equity 302,708 304,947
--------------- --------------
$ 531,540 $ 536,199
=============== ==============
The accompanying notes are an integral part of these financial statements.
15
17
AMERICAN HEALTH PROPERTIES, INC.
CORE GROUP COMBINED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Three Months Ended
March 31,
-----------------------------------------
1996 1995
------------------- -------------------
REVENUES
Rental income $ 16,717 $ 15,604
Additional rental income 2,766 2,441
Other interest income 283 795
Interest on loans to Psychiatric Group 420 735
------------------- -------------------
20,186 19,575
------------------- -------------------
EXPENSES
Depreciation and amortization 3,539 3,226
Interest expense 5,766 6,828
General and administrative 1,505 1,440
------------------- -------------------
10,810 11,494
------------------- -------------------
Minority interest 57 105
------------------- -------------------
NET INCOME $ 9,319 $ 7,976
=================== ===================
NET INCOME PER COMMON SHARE $ 0.40 $ 0.38
=================== ===================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 23,500 20,899
=================== ===================
DIVIDENDS DECLARED PER COMMON SHARE $ 0.505 $ 0.495
=================== ===================
The accompanying notes are an integral part of these financial statements.
16
18
AMERICAN HEALTH PROPERTIES, INC.
CORE GROUP COMBINED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Three Months Ended March 31,
----------------------------------
1996 1995
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 9,319 $ 7,976
Depreciation, amortization and other non-cash items 4,073 3,767
Deferred income (130) (124)
Change in other assets 41 (273)
Change in accounts payable and accrued liabilities (3,347) (3,611)
------------ ------------
9,956 7,735
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition and construction of real estate properties (4,655) (302)
Construction loan fundings - (3,250)
Direct financing leases 322 167
Paydowns (fundings) on revolving loan to Psychiatric Group (173) 4,457
Paydowns on fixed rate loan to Psychiatric Group - 10,825
Administrative capital expenditures (16) (27)
------------ ------------
(4,522) 11,870
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on bank loans payable 1,000 (10,500)
Financing costs paid (73) (50)
Dividends paid (11,840) (10,119)
------------ ------------
(10,913) (20,669)
------------ ------------
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS (5,479) (1,064)
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF PERIOD 7,571 1,838
------------ ------------
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ 2,092 $ 774
============ ============
The accompanying notes are an integral part of these financial statements.
17
19
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CORE GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
American Health Properties, Inc., a Delaware corporation (the Company,
which term refers to the Company and its subsidiaries unless the context
otherwise requires), is a self-administered real estate investment trust (REIT)
that commenced operations in 1987. The Company has investments in health care
properties, including acute care, rehabilitation and psychiatric hospitals,
long-term care, assisted living and Alzheimer's care facilities and a medical
office building.
Distribution of Psychiatric Group Depositary Shares On July 25, 1995, the
Company completed the distribution of 2,085,675 Psychiatric Group Depositary
Shares to holders of its common stock (the Distribution). Shareholders received
one Psychiatric Group Depositary Share for every ten shares of common stock
held of record at the close of business on July 14, 1995. Each Psychiatric
Group Depositary Share represents one-tenth of a share of Psychiatric Group
Preferred Stock, a new series of preferred stock, par value $.01 per share. The
Distribution was designed to separate the economic attributes of the Company's
investments in psychiatric hospitals (the Psychiatric Group) and its
investments in acute care and rehabilitation hospitals, long-term care,
assisted living and Alzheimer's care facilities and a medical office building
(the Core Group) into two distinct portfolios, with two distinct classes of
publicly-traded shares intended to represent those portfolios. In connection
with the Distribution, the Company specifically assigned or, if not directly
assigned, allocated its assets, liabilities and stockholders' equity, and its
revenues, expenses and cash flow items, between the Core Group and Psychiatric
Group. The Psychiatric Group Depositary Shares are intended to reflect the
separate financial performance of the Psychiatric Group. The Company's common
stock (the Core Group Common Stock) is intended to reflect the separate
financial performance of the Core Group.
Basis of Presentation The combined condensed financial statements of the
Core Group included herein have been prepared by the Company without audit and
include all normal, recurring adjustments which are, in the opinion of
management, necessary for a fair presentation of the results of operations
pursuant to the rules and regulations of the Securities and Exchange
Commission. These financial statements should be read in conjunction with
those included in the Company's annual report on Form 10-K for the year ended
December 31, 1995.
The financial statements of the Core Group include the financial position,
results of operations and cash flows of the Company's core investments in acute
care and rehabilitation hospitals, long-term care, assisted living and
Alzheimer's care facilities and a medical office building, an allocated portion
of the Company's general and administrative expense, all corporate assets and
liabilities and related transactions associated with the ongoing operations of
the Company which are not separately identified with either operating group, an
attributed amount of inter-Group loans receivable from the Psychiatric Group
and an attributed amount of the Company's stockholders' equity. For purposes
of computing per share data for periods prior to the Distribution, the number
of shares of Core Group Common Stock are assumed to be the same as the
corresponding number of shares of the Company's common stock prior to the
Distribution. The
18
20
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CORE GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Core Group financial statements are prepared using the amounts included in the
Company's consolidated financial statements.
Although the financial statements of the Core Group and the Psychiatric
Group separately report the assets, liabilities (including contingent
liabilities), stockholders' equity and items of income, expense and cash flow
of the Company attributed to each such Group, such attribution does not affect
the respective legal title to assets or responsibility for liabilities of the
Company or any of its subsidiaries. Nor does such attribution affect the rights
of creditors of the Company or any subsidiary, including rights under financing
covenants.
Each holder of Core Group Common Stock or Psychiatric Group Depositary
Shares is a holder of an issue of capital stock of the entire Company and is
subject to risks associated with an investment in the Company and all of its
businesses, assets and liabilities. Financial effects arising from one Group
that affect the Company's consolidated results of operations, financial
condition, cash flows or borrowing costs can affect the results of operations,
financial condition, cash flows or borrowing costs of the other Group. Net
losses of either Group, as well as dividends and distributions on, and
repurchases of, Core Group Common Stock or Psychiatric Group Depositary Shares
will reduce the funds of the Company legally available for dividends on both
the Core Group Common Stock and Psychiatric Group Depositary Shares.
Furthermore, fundamental changes in the psychiatric industry continue to
negatively impact the facility-specific operating cash flow at the Psychiatric
Group hospitals. Accordingly, the Core Group's financial statements should be
read in conjunction with the Company's consolidated financial statements and
the financial statements of the Psychiatric Group.
These financial statements include the accounts of the Core Group
business. The Core Group and the Psychiatric Group financial statements, taken
together, comprise all of the accounts included in the Company's consolidated
financial statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Interest Paid Interest paid by the Core Group, net of interest
capitalized, was $7,896,000 and $8,979,000 for the three months ended March 31,
1996 and 1995, respectively. The Core Group had $210,000 of capitalized
interest for the three months ended March 31, 1996 and no capitalized interest
for the three months ended March 31, 1995.
19
21
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CORE GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
2. STOCKHOLDERS' EQUITY
Stock Incentive Plans During the three months ended March 31, 1996,
options to purchase 135,503 shares of Core Group Common Stock at a weighted
average exercise price of $23.03 per share and 3,910 shares of restricted Core
Group Common Stock were issued pursuant to the Company's stock incentive plans.
3. COMMITMENTS
Inter-Group Loans Repayment of inter-Group loans by the Psychiatric Group
is dependent upon the amount and timing of sales of the Psychiatric Group's
assets and paydowns received by the Psychiatric Group on borrowings provided to
psychiatric hospital operators under revolving credit agreements. The Company's
board of directors has established certain management policies relating to the
Core Group's inter-Group loans to the Psychiatric Group. Under the policies
currently in effect, which may be modified or rescinded in the sole discretion
of the Company's board of directors, the aggregate revolving inter-Group loans
owed by the Psychiatric Group to the Core Group are limited to a maximum of
$8,750,000 at any one time outstanding, which limit is to be reduced
dollar-for-dollar with any permanent repayment in the future of borrowings
under revolving credit agreements provided to Psychiatric Group hospital
operators. In addition, the limit on the aggregate revolving inter-Group loans
will not be reduced below $5,000,000, and except for such revolving inter-Group
loans, no additional fixed rate or other inter-Group loans will be advanced by
the Core Group to the Psychiatric Group.
Real Estate Properties The Core Group has the right to approve capital
expenditures at all of its properties, the option to fund certain capital
expenditures and, in certain situations, is obligated to fund approved capital
expenditures on terms comparable to the original investment. At March 31,
1996, the Core Group had remaining commitments to fund less than $1 million of
capital expenditures pursuant to these rights and obligations. The base and
additional rent provisions of the leases are amended when such capital
expenditures are funded to reflect the Core Group's increased investment.
As of March 31, 1996, the Company had funded $8.8 million of commitments
totaling $16 million to finance the construction of three separate 80-unit
assisted living facilities located in El Paso, Texas ($5.2 million), Odessa,
Texas ($5.1 million) and Walla Walla, Washington ($5.6 million). The Core Group
will own the facilities upon completion and enter into long-term leases with an
experienced operator of assisted living facilities.
20
22
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Following is a discussion of the combined financial condition and results
of operations of the Core Group which should be read in conjunction with (a)
the combined financial statements and accompanying notes of the Core Group and
(b) management's discussion and analysis of financial condition and results of
operations and the financial statements and accompanying notes of the Company
and the Psychiatric Group included elsewhere herein.
"Safe Harbor" Statement Under the United States Private Securities
Litigation Reform Act of 1995 Statements that are not historical facts
contained in Management's Discussion and Analysis are forward-looking
statements that involve risks and uncertainties that could cause actual results
to differ from projected results. Factors that could cause actual results to
differ materially include, among others; the financial strength of the
operators of the Core Group's facilities as it affects the continuing ability
of such operators to meet their obligations to the Core Group under the terms of
the Core Group's agreements with such operators, government policy relating to
the health care industry including changes in reimbursement levels under the
Medicare and Medicaid programs, operators' continued eligibility to participate
in the Medicare or Medicaid programs, changes in reimbursement by other third
party payors, occupancy levels at the Core Group's facilities, the availability
and cost of capital, the strength and financial resources of the Core Group's
competitors, the Core Group's ability to make additional real estate
investments at attractive yields and changes in tax laws and regulations
affecting real estate investment trusts.
OPERATING RESULTS
First Quarter 1996 Compared With 1995
For the first quarter of 1996, the Core Group reported net income of
$9,319,000 or $.40 per share compared with net income of $7,976,000 or $.38 per
share for the first quarter of 1995.
Rental income was $16,717,000 for the first quarter of 1996, an increase
of $1,113,000 or 7% from $15,604,000 for the first quarter of 1995. This
increase was primarily attributable to rental income from new properties
acquired subsequent to the first quarter of 1995. These property additions also
resulted in an increase in depreciation and amortization of $313,000 to
$3,539,000 for the first quarter of 1996 compared with the first quarter of
1995.
Additional rental income was $2,766,000 for the first quarter of 1996, an
increase of $325,000 or 13% from $2,441,000 for the first quarter of 1995. This
positive variation was primarily attributable to increased additional rent from
six of the Company's original acute care properties.
Other interest income decreased $512,000 to $283,000 for the first quarter
of 1996 from $795,000 for the first quarter of 1995. Other interest income for
the first quarter of 1995 included approximately $680,000 of interest on a
construction loan that was subsequently paid off in October 1995. Excluding the
effect of this construction loan interest, other interest income increased
during the first quarter of 1996 compared with the first quarter of 1995 as a
result of higher investable cash balances and a higher average balance of
direct financing leases.
21
23
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interest income on inter-Group loans to the Psychiatric Group was $420,000
for the first quarter of 1996, a decrease of $315,000 or 43% from $735,000 for
the first quarter of 1995. This decrease reflects a lower average balance
outstanding on loans to the Psychiatric Group, which was primarily attributable
to $15,150,000 of repayments by the Psychiatric Group from the proceeds of
asset sales and the paydown of borrowings under revolving credit agreements
provided to Psychiatric Group hospital operators during the first quarter of
1995.
Interest expense was $5,766,000 for the first quarter of 1996, a decrease
of $1,062,000 or 16% from $6,828,000 for the first quarter of 1995. Interest
expense decreased as a result of a $24 million senior notes maturity in May
1995, lower average bank loan borrowings during the first quarter of 1996 and
an increase in capitalized interest in 1996 compared to 1995.
General and administrative expenses increased to $1,505,000 for the first
quarter of 1996 from $1,440,000 for the first quarter of 1995. This variation
was attributable to an increase in the Company's consolidated general and
administrative expenses which are allocated between the Core Group and
Psychiatric Group primarily based on revenues, and an increase in Core Group
revenues relative to the Company's consolidated revenues.
Future Operating Results
The operators of most of the Company's facilities derive a substantial
percentage of their total revenues from federal and state health care programs
such as Medicare and Medicaid and from other third-party payors such as private
insurance companies, self-insured employers and health maintenance
organizations. Such operators also are subject to extensive federal, state and
local government regulation relating to their operations, and the Company's
facilities are subject to periodic inspection by governmental and other
authorities to assure continued compliance with mandated procedures, licensure
requirements under state law and certification standards under the Medicare and
Medicaid programs. A change in reimbursement levels under the Medicare or
Medicaid programs, a reduction in reimbursement by other third-party payors or
an operator's failure to maintain its certification under Medicare or Medicaid
programs could adversely affect revenues to the Company's facilities.
The nature of health care delivery in the United States currently is
undergoing change and further review at both the national and state levels.
Generally accepted goals of reform continue to include controlling costs and
improving access to medical care. Various plans to decrease the growth in
Medicare spending have been proposed to both Houses of Congress. These plans
have generally included revisions and limits on federal programs providing
Medicaid reimbursement to state health care programs and potentially would have
an adverse impact on the level of funds available in the future to health care
facilities. The Company's Board and management are monitoring potential changes
closely. The Company believes that these potential changes may pose risks for
certain institutions that are unwilling or unable to respond. At the same time,
the Company believes that this changing health care environment will provide
the Core Group with new opportunities for investment.
22
24
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The ongoing changes in the health care industry include trends toward
shorter lengths of hospital stay, increased use of outpatient services,
increased federal, state and third-party oversight of health care company
operations and business practices, and increased demand for discounted or
capitated health care services (delivery of services at a fixed price per capita
basis to a defined group of covered parties). Furthermore, federal, state and
third-party payors continue to propose and adopt various cost containment
measures that restrict the scope of reimbursable health care services and limit
increases in reimbursement rates for such services. Payors also are continuing
aggressively to enforce compliance with program requirements and to pursue
providers that they believe have not complied with such requirements.
Outpatient business is expected to increase as advances in medical technologies
allow more procedures to be performed on an outpatient basis and as payors
continue to direct more patients from inpatient care to outpatient care. In
addition, the entrance of insurance companies into managed care programs is
accelerating the introduction of managed care in new localities, and states and
insurance companies continue to negotiate actively the amounts they will pay for
services. Moreover, the percentage of health care services that are reimbursed
under the Medicare and Medicaid programs continues to increase as the population
ages and as states expand their Medicaid programs. Continued eligibility to
participate in these programs is crucial to a provider's financial strength. As
a result of the foregoing, the revenues and margins may decrease at the Core
Group's hospitals.
Notwithstanding the potential for increasing government regulation, the
Company believes that health care will continue to be delivered on a local and
regional basis and that well-managed, high-quality, cost-controlled facilities
will continue to be an integral part of local and regional health care delivery
systems. The Company also believes that certain acute care hospitals will need
to reconfigure or expand existing facilities or to affiliate themselves with
other providers so as to become part of comprehensive and cost-effective health
care systems. Such systems likely will include lower cost treatment settings,
such as ambulatory care clinics, outpatient surgery centers, skilled nursing
facilities and medical office buildings. In general, the Core Group facilities
are part of local or regional health care delivery systems or are in the
process of becoming integrated into such systems.
The Core Group's future operating results could be affected by the
operating performance of the Core Group's lessees and borrowers. The rental and
interest obligations of its facility operators are primarily supported by the
facility-specific operating cash flow. Real estate investments in the Core
Group's portfolio are generally further supported by one or more credit
enhancements that take the form of cross-default provisions, letters of credit,
corporate and personal guarantees, security interests in cash reserve funds,
accounts receivable or other personal property and requirements to maintain
specified financial ratios. In addition, financial effects arising from the
Psychiatric Group that affect the Company's consolidated results of operations,
financial condition or borrowing costs could affect the results of operations,
financial condition or borrowing costs of the Core Group. Fundamental changes
in the psychiatric industry continue to negatively impact the facility-specific
operating cash flow at the Psychiatric Group's properties. Accordingly, the
Core Group's financial statements should be read in conjunction with the
financial statements of the Psychiatric Group and the Company's consolidated
financial statements.
Additional rental income from the Core Group's existing investments will
be affected by changes in the revenues of the underlying business operations
upon which such income is based. The Core Group's acute
23
25
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
care investments accounted for 95% of net additional rental income for the first
quarter of 1996, while rehabilitation investments accounted for 5%.
Historically, a substantial portion of the Core Group's additional rental income
has been attributable to six of the Core Group's original acute care properties
(the Original Properties). With the significant revenue growth at a majority of
the Original Properties in recent years, four properties had reached the
additional rent transition point at the end of 1995 and it is anticipated that
other properties may do so over the next few years. The Core Group's revenue
participation rate for the six Original Properties declines from 5% to 1% when
the additional rent transition point is reached. At December 31, 1995, the
amount of potential additional rent at the 5% revenue participation rate for the
six Original Properties was approximately $2.1 million per annum.
The future operating results of the Core Group will be affected by
additional factors including the amount, timing and yield of additional real
estate investments and the competition for such investments. Operating results
also will be affected by the availability and terms of the Company's future
equity and debt financing. The Company's financing strategy includes the
objective to reduce its cost of capital over time and enhance its financial
flexibility to facilitate future growth. The Company believes that the
distribution of the Psychiatric Group Depositary Shares will facilitate
achievement of this objective.
The Company's senior debt carries an implied investment grade rating from
two rating agencies. In August 1994, the Company's BBB- implied senior debt
rating was affirmed by Standard & Poor's but the outlook was revised to
negative from stable. Duff & Phelps Credit Rating Co. assigned an initial
implied senior debt rating of BBB- in November 1994.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996, the Core Group had $5,436,000 outstanding under its
revolving inter-Group loan to the Psychiatric Group. Under management policies
currently in effect, the Core Group may provide the Psychiatric Group with
revolving inter-Group loans of up to $8,750,000. In addition, as of March 31,
1996, the Core Group had $9,175,000 in fixed rate inter-Group loans to the
Psychiatric Group.
As of May 7, 1996, the Core Group had commitments of $6.6 million to fund
construction obligations and capital expenditures over approximately the next
four months.
The Company has continued to increase its liquidity and enhance its
financial flexibility. In October 1995, the Company's Core Group received
$29.15 million as proceeds from the payoff of its interest in a mortgage loan
and completed an offering of 2,500,000 additional shares of Core Group Common
Stock resulting in net proceeds of $50.3 million. Proceeds from the mortgage
loan payoff and equity offering were used to pay off the outstanding balance
under the Company's bank credit facility. In December 1995, the Company closed
on a new $150 million unsecured revolving credit facility which matures on
December 27, 1998. As of May 7, 1996, the Company had no outstanding
borrowings under its revolving credit facility and had $10.4 million in cash
and short-term investments. The Company's total indebtedness as of May 7, 1996
was $207.5 million. The Company will utilize its revolving credit facility to
fund its future Core Group acquisitions and its other commitments, including
the $29 million senior notes maturity on May 31, 1996. The
24
26
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Company may incur additional indebtedness or refinance existing indebtedness if
the Company determines that opportunities to pursue such transactions would be
attractive. The Company currently believes it has sufficient capital to meet its
commitments and that its cash flow and liquidity will continue to be sufficient
to fund current operations and to provide for the payment of dividends to
stockholders in compliance with the applicable sections of the Internal Revenue
Code governing real estate investment trusts.
25
27
AMERICAN HEALTH PROPERTIES, INC.
PSYCHIATRIC GROUP COMBINED CONDENSED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
March 31, December 31,
1996 1995
--------------- ---------------
ASSETS (Unaudited)
Real estate investments
Real property and mortgage notes $ 62,798 $ 62,813
Accumulated depreciation (4,130) (3,944)
--------------- ---------------
58,668 58,869
Other notes receivable 4,865 4,915
Other assets 916 771
--------------- ---------------
$ 64,449 $ 64,555
=============== ===============
ATTRIBUTED LIABILITIES AND TOTAL ATTRIBUTED EQUITY
Revolving loan from Core Group $ 5,436 $ 5,263
Fixed rate loan from Core Group 9,175 9,175
Accounts payable and accrued liabilities 90 151
Dividends payable 1,459 1,668
Deferred income 171 185
--------------- ---------------
16,331 16,442
--------------- ---------------
Commitments and contingencies
Total Attributed Psychiatric Group Equity 48,118 48,113
--------------- ---------------
$ 64,449 $ 64,555
=============== ===============
The accompanying notes are an integral part of these financial statements.
26
28
AMERICAN HEALTH PROPERTIES, INC.
PSYCHIATRIC GROUP COMBINED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Three Months Ended
March 31,
-------------------------------------------
1996 1995
------------------- -------------------
REVENUES
Rental income $ 581 $ 1,010
Mortgage interest income 1,493 1,470
Additional rental and interest income 182 195
Other interest income 99 216
------------------- -------------------
2,355 2,891
------------------- -------------------
EXPENSES
Depreciation and amortization 186 244
Interest on loans from Core Group 420 735
General and administrative 317 221
------------------- -------------------
923 1,200
------------------- -------------------
NET INCOME $ 1,432 $ 1,691
=================== ===================
NET INCOME PER DEPOSITARY SHARE $ 0.68 $ 0.81
=================== ===================
WEIGHTED AVERAGE
DEPOSITARY SHARES OUTSTANDING 2,091 2,090
=================== ===================
DIVIDENDS DECLARED PER DEPOSITARY SHARE $ 0.70 $ 0.80
=================== ===================
The accompanying notes are an integral part of these financial statements.
27
29
AMERICAN HEALTH PROPERTIES, INC.
PSYCHIATRIC GROUP COMBINED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Three Months Ended March 31,
---------------------------------
1996 1995
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,432 $ 1,691
Depreciation, amortization and other non-cash items 218 289
Deferred income (14) 11
Change in other assets (145) 652
Change in accounts payable and accrued liabilities (61) -
------------ ------------
1,430 2,643
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition and construction of real estate properties - (693)
Proceeds from sale of properties - 10,825
Principal payments on mortgage notes receivable 15 -
Other notes receivable 50 4,385
------------ ------------
65 14,517
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on revolving loan from Core Group 173 (4,457)
Payments on fixed rate loan from Core Group - (10,825)
Dividends paid (1,668) (1,878)
------------ ------------
(1,495) (17,160)
------------ ------------
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS - -
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF PERIOD - -
------------ ------------
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ - $ -
============ ============
The accompanying notes are an integral part of these financial statements.
28
30
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
American Health Properties, Inc., a Delaware corporation (the Company,
which term refers to the Company and its subsidiaries unless the context
otherwise requires), is a self-administered real estate investment trust (REIT)
that commenced operations in 1987. The Company has investments in health care
properties, including acute care, rehabilitation and psychiatric hospitals,
long-term care, assisted living and Alzheimer's care facilities and a medical
office building.
Distribution of Psychiatric Group Depositary Shares On July 25, 1995, the
Company completed the distribution of 2,085,675 Psychiatric Group Depositary
Shares to holders of its common stock (the Distribution). Shareholders received
one Psychiatric Group Depositary Share for every ten shares of common stock
held of record at the close of business on July 14, 1995. Each Psychiatric
Group Depositary Share represents one-tenth of a share of Psychiatric Group
Preferred Stock, a new series of preferred stock, par value $.01 per share. The
Distribution was designed to separate the economic attributes of the Company's
investments in psychiatric hospitals (the Psychiatric Group) and its
investments in acute care and rehabilitation hospitals, long-term care,
assisted living and Alzheimer's care facilities and a medical office building
(the Core Group) into two distinct portfolios, with two distinct classes of
publicly-traded shares intended to represent those portfolios. In connection
with the Distribution, the Company specifically assigned or, if not directly
assigned, allocated its assets, liabilities and stockholders' equity, and its
revenues, expenses and cash flow items, between the Psychiatric Group and Core
Group. The Psychiatric Group Depositary Shares are intended to reflect the
separate financial performance of the Psychiatric Group. The Company's common
stock (the Core Group Common Stock) is intended to reflect the separate
financial performance of the Core Group.
Basis of Presentation The combined condensed financial statements of the
Psychiatric Group included herein have been prepared by the Company without
audit and include all normal, recurring adjustments which are, in the opinion
of management, necessary for a fair presentation of the results of operations
pursuant to the rules and regulations of the Securities and Exchange
Commission. These financial statements should be read in conjunction with
those included in the Company's annual report on Form 10-K for the year ended
December 31, 1995.
The financial statements of the Psychiatric Group include the financial
position, results of operations and cash flows of the Company's psychiatric
hospital investments, an allocated portion of the Company's general and
administrative expense, an attributed amount of inter-Group debt payable to the
Core Group and an attributed amount of the Company's stockholders' equity. For
purposes of computing per share data for periods prior to the Distribution, the
number of Psychiatric Group Depositary Shares are assumed to be one-tenth of
the corresponding number of shares of the Company's common stock prior to the
Distribution. The Psychiatric Group financial statements are prepared using the
amounts included in the Company's consolidated financial statements.
29
31
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Although the financial statements of the Psychiatric Group and the Core
Group separately report the assets, liabilities (including contingent
liabilities), stockholders' equity and items of income, expense and cash flow
of the Company attributed to each such Group, such attribution does not affect
the respective legal title to assets or responsibility for liabilities of the
Company or any of its subsidiaries. Nor does such attribution affect the rights
of creditors of the Company or any subsidiary, including rights under financing
covenants.
Each holder of Psychiatric Group Depositary Shares or Core Group Common
Stock is a holder of an issue of capital stock of the entire Company and is
subject to risks associated with an investment in the Company and all of its
businesses, assets and liabilities. Financial effects arising from one Group
that affect the Company's consolidated results of operations, financial
condition, cash flows or borrowing costs can affect the results of operations,
financial condition, cash flows or borrowing costs of the other Group. In
addition, net losses of either Group, as well as dividends and distributions
on, and repurchases of, Psychiatric Group Depositary Shares or Core Group
Common Stock will reduce the funds of the Company legally available for
dividends on both the Psychiatric Group Depositary Shares and Core Group Common
Stock. Accordingly, the Psychiatric Group's financial statements should be
read in conjunction with the Company's consolidated financial statements and
the financial statements of the Core Group.
These financial statements include the accounts of the Psychiatric Group
business. The Psychiatric Group and the Core Group financial statements, taken
together, comprise all of the accounts included in the Company's consolidated
financial statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Interest Paid Interest paid by the Psychiatric Group on inter-Group loans
from the Core Group was $420,000 and $735,000 for the three months ended March
31, 1996 and 1995, respectively.
2. DEBT
Inter-Group Loans Repayment of inter-Group loans from the Core Group is
dependent upon the amount and timing of sales of the Psychiatric Group's assets
and paydowns received by the Psychiatric Group on borrowings provided to
psychiatric hospital operators under revolving credit agreements. The Company's
board of directors has established certain management policies relating to the
Psychiatric Group's inter-Group loans from the Core Group. Under the policies
currently in effect, which may be modified or rescinded in the sole discretion
of the Company's board of directors, the aggregate revolving inter-Group loans
owed to the Core Group by the Psychiatric Group are limited to a maximum of
$8,750,000 at any one time outstanding, which limit is to be reduced
dollar-for-dollar with any permanent repayment in the future of borrowings
under revolving credit agreements provided to Psychiatric Group hospital
operators. In addition, the limit on the
30
32
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
aggregate revolving inter-Group loans will not be reduced below $5,000,000, and
except for such revolving inter-Group loans, no additional fixed rate or other
inter-Group loans will be advanced to the Psychiatric Group by the Core Group.
3. COMMITMENTS
Other Notes Receivable The Psychiatric Group provides financing at
variable rates to certain psychiatric hospital operators under revolving credit
agreements. The aggregate commitment under these credit agreements was $5.7
million at March 31, 1996 of which $1.2 million was unfunded.
Real Estate Properties The Psychiatric Group has the right to approve
capital expenditures at all of its properties and the option to fund certain
capital expenditures on terms comparable to the original investment. The base
and additional rent provisions of the leases are amended when such capital
expenditures are funded to reflect the Psychiatric Group's increased
investment. The Psychiatric Group had no commitments to fund such capital
expenditures at March 31, 1996.
4. STATUS OF PSYCHIATRIC GROUP PROPERTIES
The Psychiatric Group has received information from the owner of the two
Florida psychiatric hospitals regarding wide-ranging objections by several
large insurance companies and other payors with respect to claims presented for
services rendered. There also have been a series of negative stories in the
national media and the local press in Florida on psychiatric care provided in
Florida, including criticism of admissions policies and practice patterns at
psychiatric hospitals in the state generally, and at these two hospitals.
There have been legislative hearings in Florida on these issues, and the
Psychiatric Group believes that regulatory investigations are being conducted.
In addition, the hospitals are experiencing operational and cash flow
difficulties which have negatively impacted their ability to fund their rental
and interest obligations to the Psychiatric Group as they become due. Although
The Retreat has made all of its required rental and interest payments in 1996
through May, The Manors has not made its required rental and interest payments
since January 1996 and such unpaid obligations have not been recognized as
income. The net book values of the Psychiatric Group's investment in The
Manors and The Retreat, including advances under existing revolving credit
agreements, as of March 31, 1996 totaled $7,332,000 and $9,943,000,
respectively. Quarterly base rent and interest obligations of The Manors and
The Retreat total approximately $200,000 and $285,000 ($.10 and $.14 per
Psychiatric Group Depositary Share), respectively.
At the beginning of 1996, the owner of the Florida facilities retained the
Intensive Resource Division of Quorum Health Resources, Inc. (Quorum), a
subsidiary of Quorum Health Group, Inc., to operate both hospitals on a
contract basis. The Psychiatric Group has an active dialogue with the owner of
the two hospitals and Quorum regarding their revised plans for the hospitals
for 1996 and beyond. The owner has requested that the Psychiatric Group
consider an interim adjustment or deferral of the lease and interest
obligations and other aspects of its agreements with the Psychiatric Group
relating to The Manors while the owner and Quorum carry out certain
restructuring and restaffing of the hospital. The Psychiatric Group and
31
33
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
its financial advisors currently are evaluating the revised plans and the
proposed adjustments to The Manors' existing obligations to the Psychiatric
Group and it is likely that some relief will be formally granted. The extent
and duration of any formal rent and interest relief which likely will be
granted to the Manors has not been finalized, however any significant
modification of terms likely will have an adverse impact on the Psychiatric
Group's results of operations and cash flow. Although The Retreat has
continued to meet all of its obligations to the Psychiatric Group through May
1996, it is also undergoing significant restructuring and restaffing by the
owner and Quorum to address its operational and cash flow difficulties and
there can be no assurance that The Retreat will be able to continue to meet its
obligations to the Psychiatric Group or that some measure of relief will not be
necessary in the future. The Psychiatric Group's dividend is determined
quarterly based upon each quarter's operating results. Any significant
adjustment to either of the two Florida hospitals' rent and interest
obligations or nonpayment of such obligations as they become due likely will
have a negative impact on the Psychiatric Group's quarterly dividend payment.
The Manors' failure to meet all of its obligations to the Psychiatric Group
in the first quarter of 1996 was largely responsible for the reduction in the
quarterly dividend on Psychiatric Group Depositary Shares to $.70 per share
from $.80 per share in the preceding quarter.
The Psychiatric Group has been informed by the operator of Rock Creek
Center (RCC) in Lemont, Illinois that certain documentation and procedural
deficiencies have resulted in the denial of a substantial amount of Medicare
receivables and a substantial negative adjustment to the hospital's interim
Medicare reimbursement. The operator's ability to recover these amounts and the
timing of any recovery is uncertain at this time. These reimbursement issues,
combined with a lower than expected census in the first quarter of 1996, have
had an adverse impact on the hospital's cash flow. Although RCC had made all of
its rental and interest payments through April 1996, RCC has not paid its May
rent. In addition, the Psychiatric Group has advanced $214,000 on behalf of the
operator to pay property taxes on the facility and has been requested by the
operator to make an additional advance to meet certain other immediate cash
requirements. The net book value of the Psychiatric Group's investment in RCC,
including advances under existing revolving credit agreements and other
receivables, as of March 31, 1996 totaled $8,246,000. Quarterly base rent and
interest obligations of RCC total approximately $324,000 ($.15 per Psychiatric
Group Depositary Share).
The Psychiatric Group has an active dialogue with the operator of RCC
regarding options for repayment of the property taxes advanced, resolution of
the Medicare reimbursement issues and the impact of these matters on the
operator's near-term cash flows and financial and operational plans for the
remainder of 1996 and beyond. In addition to requesting an additional advance
to meet certain immediate cash requirements, the operator has requested that
the Psychiatric Group consider an interim adjustment or deferral of its rental
and interest obligations and other aspects of its agreements with the
Psychiatric Group while the operator implements its revised plans and takes
certain actions to stabilize operations. The Psychiatric Group and its
financial advisors currently are evaluating the operator's revised plans, the
request for a further advance of funds and the proposed adjustments to RCC's
existing obligations to the Psychiatric Group and it is likely that some relief
will be granted. Although the extent and duration of any relief which likely
will be granted has not been determined, any significant modification of terms
likely will have an adverse impact on the Psychiatric Group's results of
operations and cash flow. The Psychiatric Group's dividend is determined
32
34
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
quarterly based upon each quarter's operating results. Any significant advance
of additional funds to the operator, adjustment to RCC's rent and interest
obligations or nonpayment of such obligations as they become due likely will
have a negative impact on the Psychiatric Group's quarterly dividend payment.
The Psychiatric Group has an active dialogue with the operator of the two
New York Four Winds facilities regarding the operator's desire to create an
integrated behavioral health care delivery system in lower and upper New York
State. Such a system likely will include these hospitals as the base for
delivery systems in their respective markets and is intended to address the
potential negative consequences of the expected changes in Medicaid
reimbursement and the increase in managed care penetration in the State of New
York. The Psychiatric Group is supportive of the operator's strategy and has
agreed in principle to release certain of its security interests in the
operator's short-term assets on a staged basis to permit the operator to obtain
the capital required to develop this system.
33
35
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Following is a discussion of the combined financial condition and results
of operations of the Psychiatric Group which should be read in conjunction with
(a) the combined financial statements and accompanying notes of the Psychiatric
Group and (b) management's discussion and analysis of financial condition and
results of operations and the financial statements and accompanying notes of
the Company and the Core Group included elsewhere herein.
"Safe Harbor" Statement Under the United States Private Securities
Litigation Reform Act of 1995 Statements that are not historical facts
contained in Management's Discussion and Analysis are forward-looking
statements that involve risks and uncertainties that could cause actual
results to differ from projected results. Factors that could cause actual
results to differ materially include, among others: the financial strength of
the operators of the Psychiatric Group's facilities as it affects the
continuing ability of such operators to meet their obligations to the
Psychiatric Group under the terms of the Psychiatric Group's agreements with
such operators, government policy relating to the health care industry
including changes in reimbursement levels under the Medicare and Medicaid
programs, operators' continued eligibility to participate in the Medicare or
Medicaid programs, changes in reimbursement by other third party payors,
occupancy levels at the Psychiatric Group's facilities, the availability and
cost of capital and changes in tax laws and regulations affecting real estate
investment trusts.
OPERATING RESULTS
First Quarter 1996 Compared With 1995
For the first quarter of 1996, the Psychiatric Group reported net income
of $1,432,000 or $.68 per share compared with net income of $1,691,000 or $.81
per share for the first quarter of 1995. The decrease in net income for the
first quarter of 1996 was primarily attributable to a reduction in income due
to the sale of two psychiatric properties during the first quarter of 1995 and
the nonpayment of rental and interest obligations by a psychiatric operator
since January 1996.
Rental income was $581,000 for the first quarter of 1996, a decrease of
$429,000 or 42% from $1,010,000 for the first quarter of 1995. This decrease
was primarily attributable to a reduction in rental income due to the sale of
two psychiatric properties during the first quarter of 1995 and the nonpayment
of $100,000 of rent by a psychiatric operator during the first quarter of 1996.
The property sales resulted in a decrease in depreciation and amortization of
$58,000 to $186,000 for the first quarter of 1996 compared with the first
quarter of 1995.
Other interest income decreased $117,000 to $99,000 for the first quarter
of 1996 from $216,000 for the first quarter of 1995. This decrease was
primarily attributable to lower average borrowings under revolving credit
agreements provided to psychiatric hospital operators as a result of the sale
of two psychiatric properties and the lease restructurings of two psychiatric
investments during the first quarter of 1995 and the nonpayment of $50,000 of
interest by a psychiatric operator during the first quarter of 1996.
34
36
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interest expense on inter-Group loans from the Core Group was $420,000 for
the first quarter of 1996, a decrease of $315,000 or 43% from $735,000 for the
first quarter of 1995. This decrease reflects a lower average balance
outstanding on loans from the Core Group, which was primarily attributable to
$15,150,000 of repayments to the Core Group from the proceeds of the previously
mentioned property sales and restructurings.
General and administrative expenses increased to $317,000 for the first
quarter of 1996 from $221,000 for the first quarter of 1995. The Company's
consolidated general and administrative expenses are allocated between the Core
Group and Psychiatric Group primarily based on revenues, however significant
costs directly related to either Group are specifically charged to the
applicable Group. Although costs allocated to the Psychiatric Group based on
revenues decreased for the first quarter of 1996, the Psychiatric Group was
specifically charged for $140,000 of costs in the first quarter of 1996 for
financial advisory services provided by an investment banking firm which
included supplemental monitoring of the performance of the Psychiatric Group's
properties and assistance in addressing operational and cash flow difficulties
of certain operators of the properties.
Future Operating Results
The operators of most of the Company's facilities derive a substantial
percentage of their total revenues from federal and state health care programs
such as Medicare and Medicaid and from other third-party payors such as private
insurance companies, self-insured employers and health maintenance
organizations. Such operators also are subject to extensive federal, state and
local government regulation relating to their operations, and the Company's
facilities are subject to periodic inspection by governmental and other
authorities to assure continued compliance with mandated procedures, licensure
requirements under state law and certification standards under the Medicare and
Medicaid programs. A change in reimbursement levels under the Medicare or
Medicaid programs, a reduction in reimbursement by other third-party payors or
an operator's failure to maintain its certification under Medicare or Medicaid
programs could adversely affect revenues to the Company's facilities.
The nature of health care delivery in the United States currently is
undergoing change and further review at both the national and state levels.
Generally accepted goals of reform continue to include controlling costs and
improving access to medical care. Various plans to decrease the growth in
Medicare spending have been proposed to both Houses of Congress. These plans
have generally included revisions and limits on federal programs providing
Medicaid reimbursement to state health care programs and potentially would have
an adverse impact on the level of funds available in the future to health care
facilities. The Company's Board and management are monitoring potential changes
closely. The Company believes that these potential changes may pose risks for
certain institutions that are unwilling or unable to respond.
The ongoing changes in the health care industry include trends toward
shorter lengths of hospital stay, increased use of outpatient services,
increased federal, state and third-party oversight of health care company
operations and business practices, and increased demand for discounted or
capitated health care services (delivery of services at a fixed price per
capita basis to a defined group of covered parties). Furthermore,
35
37
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
federal, state and third-party payors continue to propose and adopt various cost
containment measures that restrict the scope of reimbursable health care
services and limit increases in reimbursement rates for such services. Payors
also are continuing aggressively to enforce compliance with program requirements
and to pursue providers that they believe have not complied with such
requirements. Outpatient business is expected to increase as advances in
medical technologies allow more procedures to be performed on an outpatient
basis and as payors continue to direct more patients from inpatient care to
outpatient care. In addition, the entrance of insurance companies into managed
care programs is accelerating the introduction of managed care in new
localities, and states and insurance companies continue to negotiate actively
the amounts they will pay for services. Moreover, the percentage of health care
services that are reimbursed under the Medicare and Medicaid programs continues
to increase as the population ages and as states expand their Medicaid programs.
Continued eligibility to participate in these programs is crucial to a
provider's financial strength.
Fundamental changes in the psychiatric industry continue to negatively
impact the facility-specific operating cash flow at the Psychiatric Group's
properties. Institutions responsible for providing insurance coverage to
patients who use inpatient psychiatric treatment services have directed efforts
toward decreasing their payments for such services, thereby reducing hospital
operating revenues. Some cost-cutting measures used by such institutions
include decreasing the inpatient length of stay, intensively reviewing
utilization, directing patients from inpatient care to outpatient care and
negotiating reduced reimbursement rates for services. In addition, such
institutions have extended the length of time for making payments, resulting in
increases in accounts receivable. The wider use of psychotropic drugs also has
resulted in significant declines in the average length of stay. Although the
operators of the psychiatric hospitals are responding by developing lower cost
outpatient and daypatient programs, increasing case management and reducing
operating costs, their efforts are generally not consistently mitigating the
negative impact of these fundamental psychiatric industry changes. As a
result, certain of the Psychiatric Group hospital operators have had difficulty
meeting their payment obligations to the Psychiatric Group on a timely basis
and there can be no assurance that Psychiatric Group operators will be able to
meet their payment obligations in the future. Should this situation occur, it
would negatively impact the cash flow of the Psychiatric Group and its dividend
payments to the holders of Psychiatric Group Depositary Shares.
The Psychiatric Group currently is providing financing under revolving
credit agreements to the operators of three of its psychiatric hospitals. As
of May 7, 1996, outstanding borrowings under such agreements totaled
$4,475,000, and the Psychiatric Group has committed to fund an additional
$1,225,000 of borrowings upon request, subject to certain conditions. These
borrowings, which are secured by accounts receivable and certain personal
property and which contain events of default that would be triggered by
defaults under the lease relating to the relevant psychiatric hospital, are the
primary source of financing for these operators' operating and capital needs.
These psychiatric hospitals have, from time to time, been unable to generate
sufficient cash flow for working capital and the development of new programs.
In certain cases, these psychiatric hospitals have not been able to pay down
the outstanding borrowings under the revolving credit agreements provided by
the Psychiatric Group or to secure replacement financing from third-party
lenders. To the extent the psychiatric hospitals have increased working
capital needs in the future, the Psychiatric Group may be the only source of
such financing. In the event the Company's Board of Directors determines that
it is appropriate to provide additional working capital financing to a
psychiatric hospital
36
38
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
operator, it may cause the Core Group to make revolving inter-Group loans to the
Psychiatric Group to fund such financing (to the extent consistent with its
then-existing policies), although the Company's Board of Directors is under no
obligation to do so.
The fundamental ongoing changes in the psychiatric industry and the
resulting impact on operator financial performance have resulted in the
restructuring of operator payment obligations and significant investment
write-downs, the most recent of which occurred during 1994 when the Psychiatric
Group recorded a $30,000,000 write-down of its investments in the psychiatric
hospitals. Although management believes that the recorded investments in the
psychiatric hospitals are realizable, if the psychiatric operators are unable to
successfully adapt to the fundamental ongoing changes in the psychiatric
industry and consistently mitigate the negative impact of such changes on their
financial performance, the Psychiatric Group may be required to further
restructure payment obligations or make additional write-downs of the value of
its investments in the psychiatric hospitals. The Psychiatric Group does not
intend to make further investments, and over time, may sell, restructure or seek
other means to reduce its investments. The Psychiatric Group sold its
psychiatric property in Torrance, California in October 1994 for $5,772,000 in
cash (at net book value), sold two of its psychiatric properties in
Massachusetts in February 1995 for $13,825,000 in cash (at net book value) and
restructured the terms of its two Florida psychiatric hospital investments in
March 1995. The Psychiatric Group Depositary Shares were distributed in July
1995 in an effort to effectively separate the economic attributes of the
Company's psychiatric investments (the Psychiatric Group) from its core
investments in acute care and rehabilitation hospitals, long-term care, assisted
living and Alzheimer's care facilities and a medical office building (the Core
Group). In September 1995, the Company retained an investment banking firm for
an initial one-year period to provide a broad range of financial advisory
services to the Psychiatric Group. These services include supplemental
monitoring of the performance of individual assets, assistance in potential
sales or restructurings of particular investments and continuing assessments of
available strategic alternatives for the portfolio. The cost of these services
are specifically charged to the operating results of the Psychiatric Group.
The Psychiatric Group has received information from the owner of the two
Florida psychiatric hospitals regarding wide-ranging objections by several
large insurance companies and other payors with respect to claims presented for
services rendered. There also have been a series of negative stories in the
national media and the local press in Florida on psychiatric care provided in
Florida, including criticism of admissions policies and practice patterns at
psychiatric hospitals in the state generally, and at these two hospitals.
There have been legislative hearings in Florida on these issues, and the
Psychiatric Group believes that regulatory investigations are being conducted.
In addition, the hospitals are experiencing operational and cash flow
difficulties which have negatively impacted their ability to fund their rental
and interest obligations to the Psychiatric Group as they become due. Although
The Retreat has made all of its required rental and interest payments in 1996
through May, The Manors has not made its required rental and interest payments
since January 1996 and such unpaid obligations have not been recognized as
income. The net book values of the Psychiatric Group's investment in The
Manors and The Retreat, including advances under existing revolving credit
agreements, as of March 31, 1996 totaled $7,332,000 and $9,943,000,
respectively. Quarterly base rent and interest obligations of The Manors and
The Retreat total approximately $200,000 and $285,000 ($.10 and $.14 per
Psychiatric Group Depositary Share), respectively.
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AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
At the beginning of 1996, the owner of the Florida facilities retained the
Intensive Resource Division of Quorum Health Resources, Inc. (Quorum), a
subsidiary of Quorum Health Group, Inc., to operate both hospitals on a contract
basis. The Psychiatric Group has an active dialogue with the owner of the two
hospitals and Quorum regarding their revised plans for the hospitals for 1996
and beyond. The owner has requested that the Psychiatric Group consider an
interim adjustment or deferral of the lease and interest obligations and other
aspects of its agreements with the Psychiatric Group relating to The Manors
while the owner and Quorum carry out certain restructuring and restaffing of the
hospital. The Psychiatric Group and its financial advisors currently are
evaluating the revised plans and the proposed adjustments to The Manors'
existing obligations to the Psychiatric Group and it is likely that some relief
will be formally granted. The extent and duration of any formal rent and
interest relief which likely will be granted to the Manors has not been
finalized, however any significant modification of terms likely will have an
adverse impact on the Psychiatric Group's results of operations and cash flow.
Although The Retreat has continued to meet all of its obligations to the
Psychiatric Group through May 1996, it is also undergoing significant
restructuring and restaffing by the owner and Quorum to address its operational
and cash flow difficulties and there can be no assurance that The Retreat will
be able to continue to meet its obligations to the Psychiatric Group or that
some measure of relief will not be necessary in the future. The Psychiatric
Group's dividend is determined quarterly based upon each quarter's operating
results. Any significant adjustment to either of the two Florida hospitals' rent
and interest obligations or nonpayment of such obligations as they become due
likely will have a negative impact on the Psychiatric Group's quarterly dividend
payment. The Manors' failure to meet all of its obligations to the Psychiatric
Group in the first quarter of 1996 was largely responsible for the reduction in
the quarterly dividend on Psychiatric Group Depositary Shares to $.70 per share
from $.80 per share in the preceding quarter.
The Psychiatric Group has been informed by the operator of Rock Creek
Center (RCC) in Lemont, Illinois that certain documentation and procedural
deficiencies have resulted in the denial of a substantial amount of Medicare
receivables and a substantial negative adjustment to the hospital's interim
Medicare reimbursement. The operator's ability to recover these amounts and the
timing of any recovery is uncertain at this time. These reimbursement issues,
combined with a lower than expected census in the first quarter of 1996, have
had an adverse impact on the hospital's cash flow. Although RCC had made all of
its rental and interest payments through April 1996, RCC has not paid its May
rent. In addition, the Psychiatric Group has advanced $214,000 on behalf of the
operator to pay property taxes on the facility and has been requested by the
operator to make an additional advance to meet certain other immediate cash
requirements. The net book value of the Psychiatric Group's investment in RCC,
including advances under existing revolving credit agreements and other
receivables, as of March 31, 1996 totaled $8,246,000. Quarterly base rent and
interest obligations of RCC total approximately $324,000 ($.15 per Psychiatric
Group Depositary Share).
The Psychiatric Group has an active dialogue with the operator of RCC
regarding options for repayment of the property taxes advanced, resolution of
the Medicare reimbursement issues and the impact of these matters on the
operator's near-term cash flows and financial and operational plans for the
remainder of 1996 and beyond. In addition to requesting an additional advance
to meet certain immediate cash requirements, the operator has requested that the
Psychiatric Group consider an interim adjustment or deferral of its rental and
interest obligations and other aspects of its agreements with the Psychiatric
Group while the
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AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
operator implements its revised plans and takes certain actions to stabilize
operations. The Psychiatric Group and its financial advisors currently are
evaluating the operator's revised plans, the request for a further advance of
funds and the proposed adjustments to RCC's existing obligations to the
Psychiatric Group and it is likely that some relief will be granted. Although
the extent and duration of any relief which likely will be granted has not been
determined, any significant modification of terms will likely have an adverse
impact on the Psychiatric Group's results of operations and cash flow. The
Psychiatric Group's dividend is determined quarterly based upon each quarter's
operating results. Any significant advance of additional funds to the operator,
adjustment to RCC's rent and interest obligations or nonpayment of such
obligations as they become due likely will have a negative impact on the
Psychiatric Group's quarterly dividend payment.
The Psychiatric Group has an active dialogue with the operator of the two
New York Four Winds facilities regarding the operator's desire to create an
integrated behavioral health care delivery system in lower and upper New York
State. Such a system likely will include these hospitals as the base for
delivery systems in their respective markets and is intended to address the
potential negative consequences of the expected changes in Medicaid
reimbursement and the increase in managed care penetration in the State of New
York. The Psychiatric Group is supportive of the operator's strategy and has
agreed in principle to release certain of its security interests in the
operator's short-term assets on a staged basis to permit the operator to obtain
the capital required to develop this system.
LIQUIDITY AND CAPITAL RESOURCES
As of May 7, 1996, the Psychiatric Group had aggregate unfunded
commitments under revolving credit agreements provided to psychiatric hospital
operators of $1.2 million.
At March 31, 1996, the Psychiatric Group had $5,436,000 and $9,175,000
outstanding under its revolving inter-Group loan from the Core Group and its
fixed rate inter-Group loan from the Core Group, respectively. The Psychiatric
Group is required to use the net proceeds from the disposition of Psychiatric
Group assets to pay down its outstanding revolving inter-Group loan (to the
extent of the psychiatric hospital operator borrowings under revolving credit
agreements associated with the asset or assets sold) with any excess used to
pay down the balance outstanding under the fixed rate inter-Group loan. The
Psychiatric Group reduced the combined balance of the revolving inter-Group and
fixed rate inter-Group loans by $15,150,000 in the first quarter of 1995 with
proceeds from such asset sales and operator borrowing paydowns. The Company's
Board of Directors has established certain management policies relating to the
Psychiatric Group's inter-Group loans from the Core Group. Under the policies
currently in effect, which may be modified or rescinded in the sole discretion
of the Company's Board of Directors, the aggregate revolving inter-Group loans
owed to the Core Group by the Psychiatric Group are limited to a maximum of
$8,750,000 at any one time outstanding, which limit is to be reduced
dollar-for-dollar with any permanent repayment in the future of borrowings
under revolving credit agreements provided to Psychiatric Group hospital
operators. In addition, the limit on the aggregate revolving inter-Group loans
will not be reduced below $5,000,000, and except for such revolving inter-Group
loans, no additional fixed rate or other inter-Group loans will be advanced to
the Psychiatric Group by the Core Group. The Psychiatric Group has no
third-party sources of additional financing and, as a result, will be dependent
on the Core Group for all such financing. Although the
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AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Core Group may make this financing available, there is no obligation of the
Company's Board of Directors to cause the Core Group to provide funds to the
Psychiatric Group if the Board of Directors determines that it is in the
Company's best interest not to do so.
The Psychiatric Group does not expect to make any additional acquisitions
or capital investments except to the extent of existing unfunded commitments
under revolving credit agreements provided to facility operators. Future
dividend payments will be determined quarterly and will be primarily dependent
upon the financial performance of the Psychiatric Group. The Psychiatric Group
expects to distribute a substantial portion of its funds from operations and
net proceeds from asset dispositions, after payments of inter-Group loan
obligations, to holders of Psychiatric Group Depositary Shares. In general,
the Psychiatric Group will not retain any significant amount of its cash flow,
and as discussed above, its sources of financing and liquidity will be limited.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
On January 5, 1996, the Company filed a Current Report on Form 8-K
pertaining to the establishment of a new $150,000,000 three-year
unsecured revolving credit facility that contained as an exhibit the
Credit Agreement dated as of December 27, 1995.
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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.
Date: May 7, 1996
AMERICAN HEALTH PROPERTIES, INC.
By: JOSEPH P. SULLIVAN
-----------------------------------------------
Joseph P. Sullivan
President & Chief Executive Officer
By: MICHAEL J. MCGEE
-----------------------------------------------
Michael J. McGee
Senior Vice President & Chief Financial Officer
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
Exhibit
Number Description
- ------- --------------------------------------------------
27 Financial Data Schedule