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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 JUNE 30, 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 AUGUST 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 AUGUST 7, 1996 -- 2,084,282.
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AMERICAN HEALTH PROPERTIES, INC.
JUNE 30, 1996
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE
CONSOLIDATED COMPANY
Item 1. Consolidated Condensed Financial Statements:
Balance sheets as of June 30, 1996 and December 31, 1995 ............ 2
Statements of operations for the three and six months
ended June 30, 1996 and 1995......................................... 3
Statements of cash flows for the six months ended June 30,
1996 and 1995........................................................ 4
Notes to financial statements........................................ 5
Item 2. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations........................ 9
CORE GROUP
Item 1. Core Group Combined Condensed Financial Statements:
Balance sheets as of June 30, 1996 and December 31, 1995 ............ 17
Statements of operations for the three and six months ended
June 30, 1996 and 1995............................................... 18
Statements of cash flows for the six months ended June 30,
1996 and 1995........................................................ 19
Notes to financial statements ....................................... 20
Item 2. Management's Discussion and Analysis of Core Group
Combined Financial Condition and Results of Operations .............. 23
PSYCHIATRIC GROUP
Item 1. Psychiatric Group Combined Condensed Financial Statements:
Balance sheets as of June 30, 1996 and December 31, 1995 ............ 28
Statements of operations for the three and six months ended
June 30, 1996 and 1995 .............................................. 29
Statements of cash flows for the six months ended June 30,
1996 and 1995 ....................................................... 30
Notes to financial statements ....................................... 31
Item 2. Management's Discussion and Analysis of Psychiatric Group
Combined Financial Condition and Results of Operations .............. 36
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders ................. 43
Item 6. Exhibits and Reports on Form 8-K .................................... 43
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AMERICAN HEALTH PROPERTIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
June 30, December 31,
1996 1995
- --------------------------------------------------------------- ------------- -------------
(Unaudited)
ASSETS
Real estate investments
Real property and mortgage notes $ 626,568 $ 633,727
Construction in progress 14,659 6,016
Accumulated depreciation (82,630) (82,435)
------------- -------------
558,597 557,308
Notes receivable and financing leases 8,947 11,145
Other assets 9,502 10,292
Cash and short-term investments 1,313 7,571
- --------------------------------------------------------------- ------------- -------------
$ 578,359 $ 586,316
=============================================================== ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank loans payable $ 27,000 $ --
Notes and bonds payable 178,487 207,378
Accounts payable and accrued liabilities 6,997 7,957
Dividends payable 13,196 13,506
Deferred income 4,062 4,415
- --------------------------------------------------------------- ------------- -------------
229,742 233,256
- --------------------------------------------------------------- ------------- -------------
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 481,337 480,703
Cumulative net income 233,732 212,312
Cumulative dividends (366,688) (340,191)
- --------------------------------------------------------------- ------------- -------------
348,617 353,060
- --------------------------------------------------------------- ------------- -------------
$ 578,359 $ 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 June 30, Six Months Ended June 30,
--------------------------- ---------------------------
1996 1995 1996 1995
- ----------------------------------------- ------------ ------------ ------------ ------------
REVENUES
Rental income $ 17,080 $ 16,681 $ 34,378 $ 33,295
Mortgage interest income 1,493 1,469 2,986 2,939
Additional rental and interest income 3,063 2,717 6,011 5,353
Other interest income 291 1,106 673 2,117
- ----------------------------------------- ------------ ------------ ------------ ------------
21,927 21,973 44,048 43,704
- ----------------------------------------- ------------ ------------ ------------ ------------
EXPENSES
Depreciation and amortization 3,718 3,523 7,443 6,993
Interest expense 5,513 6,906 11,279 13,734
General and administrative 1,969 1,642 3,791 3,303
Targeted stock issuance costs -- 300 -- 300
- ----------------------------------------- ------------ ------------ ------------ ------------
11,200 12,371 22,513 24,330
- ----------------------------------------- ------------ ------------ ------------ ------------
Minority interest 58 57 115 162
- ----------------------------------------- ------------ ------------ ------------ ------------
NET INCOME $ 10,669 $ 9,545 $ 21,420 $ 19,212
========================================= ============ ============ ============ ============
ATTRIBUTABLE TO -
CORE GROUP COMMON STOCK
Net Income $ 9,435 $ 8,206 $ 18,754 $ 16,182
Net Income Per Share $ 0.40 $ 0.39 $ 0.80 $ 0.77
Weighted Average Shares Outstanding 23,510 20,913 23,505 20,906
Dividends Declared Per Share $ 0.5050 $ 0.4950 $ 1.0100 $ 0.9900
PSYCHIATRIC GROUP DEPOSITARY SHARES
Net Income $ 1,234 $ 1,339 $ 2,666 $ 3,030
Net Income Per Share $ 0.59 $ 0.64 $ 1.27 $ 1.45
Weighted Average Shares Outstanding 2,092 2,091 2,091 2,091
Dividends Declared Per Share $ 0.6500 $ 0.8000 $ 1.3500 $ 1.6000
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)
Six Months Ended June 30,
----------------------------
1996 1995
- ------------------------------------------------------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 21,420 $ 19,212
Depreciation, amortization and other non-cash items 8,577 8,179
Deferred income (255) (51)
Change in other assets 453 107
Change in accounts payable and accrued liabilities (1,058) (361)
- ------------------------------------------------------------- ------------ ------------
29,137 27,086
- ------------------------------------------------------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition and construction of real estate properties (8,699) (29,951)
Proceeds from sale of properties -- 10,825
Principal payments on mortgage notes receivable 31 --
Construction loan fundings -- (4,901)
Other notes receivable 101 4,416
Direct financing leases 2,097 (2,776)
Administrative capital expenditures (38) (81)
- ------------------------------------------------------------- ------------ ------------
(6,508) (22,468)
- ------------------------------------------------------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on bank loans payable 27,000 43,000
Principal payments on notes payable (29,000) (24,000)
Financing costs paid (80) (260)
Dividends paid (26,807) (23,995)
- ------------------------------------------------------------- ------------ ------------
(28,887) (5,255)
- ------------------------------------------------------------- ------------ ------------
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS (6,258) (637)
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF PERIOD 7,571 1,838
- ------------------------------------------------------------- ------------ ------------
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ 1,313 $ 1,201
============================================================= ============ ============
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 directly 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.
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
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AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
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 $10,718,000 and $12,919,000 for the six months ended June 30, 1996 and
1995, respectively. The Company had $531,000 and $15,000 of capitalized
interest for the six months ended June 30, 1996 and 1995, respectively.
2. STOCKHOLDERS' EQUITY
Stock Incentive Plans During the six months ended June 30, 1996, options
to purchase 161,651 shares of Core Group Common Stock at a weighted average
exercise price of $22.76 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 June 30,
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 June 30, 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 June 30, 1996, the Company had funded $12.1 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. Construction funding of the
Walla Walla, Washington facility was completed in July 1996 at which time the
lease commenced.
As of June 30, 1996, the Company had funded less than $1 million of a $4.4
million commitment to finance the construction of a 96-bed Alzheimer's care
facility in southwest Houston, Texas. The Company will own the facility upon
completion and enter into a long-term lease with the developer. The facility
will be operated by an experienced operator of long-term care facilities.
4. REAL ESTATE EXCHANGE
In the second quarter of 1996, the Company acquired an acute care property
in West Valley City, Utah (Pioneer Valley Hospital) in exchange for its acute
care properties in Jefferson, Louisiana (Elmwood Medical Center) and Halstead,
Kansas (Halstead Hospital). Pioneer Valley Hospital is leased to the same
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AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
operator that had leased the two exchanged properties under comparable terms
and at a lease rate equivalent to the combined lease rates of the two exchanged
properties. In connection with the transaction, the operator paid off the
$1,484,000 balance under a direct financing equipment lease related to the
Halstead Hospital. There was no gain or loss on the transaction.
5. STATUS OF PSYCHIATRIC GROUP PROPERTIES
The Company's two Florida psychiatric properties, The Manors and The
Retreat, 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. 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.
The Manors has not made its required rental and interest payments since
January 1996 and the Company is proceeding with formal documentation of an
agreement with the operator for the deferral of rent and interest payments
while certain restructuring and restaffing of the facility occurs. Pursuant to
the deferral arrangements, The Manors' monthly base rent payments of $50,000
are deferred from February 1996 through September 1996 and such deferred
payments become payable twelve months from the month of deferral. The Manors'
monthly interest payments of $16,600 are deferred from February 1996 until
March 1, 1997 on which date all such deferred interest will be payable in full.
The Manors' deferred obligations are not recognized as income by the Company
until such time as they are paid. During the second quarter and first six
months of 1996, The Manors' rent and interest deferrals amounted to
approximately $.10 and $.17 per Psychiatric Group Depositary Share,
respectively. The operator and Quorum, the contract facility manager, are both
highly experienced and the restructuring and restaffing measures appear
promising, however there can be no assurance as to the eventual outcome of such
changes.
Although The Retreat has made all required payments in 1996 through
August, The Retreat did not pay its July rent until August. The Company
continues to monitor the situation while the operator and Quorum, the contract
facility manager, restructure and restaff the facility, and there can be no
assurance that some measure of rent and interest relief will not be necessary
in the future.
Rock Creek Center (RCC) in Illinois has experienced certain payor
reimbursement issues, which combined with a lower than expected census in 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. Quarterly
base rent and interest obligations of RCC total approximately $324,000 ($.15
per Psychiatric Group Depositary Share). The Company has advanced $214,000 on
behalf of the operator to pay property taxes on the facility, and is proceeding
with formal documentation of an agreement with the operator for the deferral of
base rent payments while the operator takes certain actions to stabilize
operations and implements its revised business plan. Pursuant to the deferral
arrangements, 100% of RCC's monthly base rent payments of $83,000 are deferred
for May and June of 1996 and 50% of such monthly payments are deferred from
July 1996 through October 1996, at which time monthly base rent is scheduled to
return to 100%. Deferred base rent is payable in the future only when the
facility's cash exceeds a specified level and the property tax advance is
payable in monthly installments. RCC's deferred obligations are not recognized
as income by the Company until such
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AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
time as they are paid. RCC's rent deferral amounted to approximately $.08 per
Psychiatric Group Depositary Share for both the second quarter and first six
months of 1996. Although the deferral arrangements provide interim financial
relief while the operator implements its strategy, there can be no assurance as
to the eventual outcome of these measures.
The Company has completed formal documentation of an agreement with the
operator of the two New York Four Winds facilities to release certain of its
security interests in the operator's short-term assets on a staged basis. The
release of this collateral will permit the operator to obtain the capital
required to develop an integrated behavioral health care delivery system in
lower and upper New York State, of which the two Four Winds facilities will be
an integral part. Although such a system 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, it is not
possible to predict the impact and timing of such changes and whether the
proposed system will be successful in that new environment.
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 or deferral 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. The
deferral of rental and interest obligations of The Manors and RCC in 1996 was
largely responsible for the reduction in the quarterly dividend on Psychiatric
Group Depositary Shares to $.70 per share in the first quarter of 1996 and $.65
per share in the second quarter of 1996 from $.80 per share in the fourth
quarter of 1995.
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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, changes in operators or ownership of
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 directly 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
Second Quarter and Year to Date 1996 Compared With 1995
For the second quarter of 1996, the Company reported net income of
$10,669,000 compared with net income of $9,545,000 for the second quarter of
1995. For the six months ended June 30, 1996, the Company reported net income
of $21,420,000 compared with net income of $19,212,000 for the first six months
of 1995. (See the Consolidated Condensed Statements 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 $17,080,000 for the second quarter of 1996, an increase
of $399,000 or 2% from $16,681,000 for the second quarter of 1995. Rental
income was $34,378,000 for the six months ended June 30, 1996, an increase of
$1,083,000 or 3%, from $33,295,000 for the comparable period in 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 $317,000 and $417,000 of
rent by two psychiatric operators during the second quarter and first six
months of 1996, respectively. The net property additions also resulted in a net
increase in depreciation and amortization of $195,000 to $3,718,000 for the
second quarter of 1996 compared with the second quarter of 1995 and a net
increase of $450,000 to $7,443,000 for the six months ended June 30, 1996
compared with the same period in 1995.
Additional rental and interest income was $3,063,000 for the second
quarter of 1996, an increase of $346,000 or 13% from $2,717,000 for the second
quarter of 1995. Additional rental and interest income was $6,011,000 for the
six months ended June 30, 1996, an increase of $658,000 or 12% from $5,353,000
for the comparable period in 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 $815,000 to $291,000 for the second
quarter of 1996 from $1,106,000 for the second quarter of 1995. Other interest
income for the six months ended June 30, 1996 decreased $1,444,000 to $673,000
from $2,117,000 for the comparable period in 1995. Other interest income for
the second quarter and first six months of 1995 included approximately $780,000
and $1,465,000, respectively, of interest on a construction loan that was
subsequently paid off in October 1995. In addition, this variation was due to a
lower average balance of borrowings outstanding under revolving credit
facilities provided to psychiatric hospital operators and the nonpayment of
$50,000 and $100,000 of interest by a psychiatric operator during the second
quarter and first six months of 1996, respectively, partially offset by higher
investable cash balances and a higher average balance of direct financing
leases.
Interest expense was $5,513,000 for the second quarter of 1996, a decrease
of $1,393,000 or 20% from $6,906,000 for the second quarter of 1995. Interest
expense was $11,279,000 for the six months ended June 30, 1996, a decrease of
$2,455,000 or 18% from $13,734,000 for the comparable period in 1995. Interest
expense decreased as a result of a $24 million and $29 million senior notes
maturity in May 1995 and May 1996, respectively, lower average bank loan
borrowings during 1996 and an increase in capitalized interest in 1996 compared
to 1995.
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AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General and administrative expenses increased to $1,969,000 for the second
quarter of 1996 from $1,642,000 for the second quarter of 1995. For the first
half of 1996, general and administrative expenses increased to $3,791,000 from
$3,303,000 for the first half of 1995. This increase was primarily attributable
to higher shareholder reporting costs as a result of the Distribution,
financial advisory services provided primarily 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, higher legal
costs, higher expense from the Company's stock incentive plans and expenses
related to the hiring of a Chief Investment Officer, partially offset by a
reduction in compensation expense as a result of having fewer employees.
The $300,000 of targeted stock issuance costs in 1995 was an additional
accrual made in the second quarter of 1995 to reflect the increased costs of
the Distribution. The increased costs primarily reflected higher legal and
accounting fees and printing and shipping costs as a result of the extended
filing period.
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 by 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
11
13
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
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 not met 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 continue, it will negatively impact the
cash flow of the Company's Psychiatric Group and the dividend payments to the
holders of Psychiatric Group Depositary Shares.
12
14
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company currently is providing financing under revolving credit
agreements to the operators of three of its psychiatric hospitals. As of August
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 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, restructured the terms of its two Florida psychiatric
hospital investments in March 1995 and as discussed below, has recently
proceeded with various modifications to the terms of one of its Florida
psychiatric investments, as well as its psychiatric investments in Illinois and
New York. 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 Company's two Florida psychiatric properties, The Manors and The
Retreat, 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. 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.
13
15
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Manors has not made its required rental and interest payments since
January 1996 and the Company is proceeding with formal documentation of an
agreement with the operator for the deferral of rent and interest payments
while certain restructuring and restaffing of the facility occurs. Pursuant to
the deferral arrangements, The Manors' monthly base rent payments of $50,000
are deferred from February 1996 through September 1996 and such deferred
payments become payable twelve months from the month of deferral. The Manors'
monthly interest payments of $16,600 are deferred from February 1996 until
March 1, 1997 on which date all such deferred interest will be payable in full.
The Manors' deferred obligations are not recognized as income by the Company
until such time as they are paid. During the second quarter and first six
months of 1996, The Manors' rent and interest deferrals amounted to
approximately $.10 and $.17 per Psychiatric Group Depositary Share,
respectively. The operator and Quorum, the contract facility manager, are both
highly experienced and the restructuring and restaffing measures appear
promising, however there can be no assurance as to the eventual outcome of such
changes.
Although The Retreat has made all required payments in 1996 through
August, The Retreat did not pay its July rent until August. The Company
continues to monitor the situation while the operator and Quorum, the contract
facility manager, restructure and restaff the facility, and there can be no
assurance that some measure of rent and interest relief will not be necessary
in the future.
Rock Creek Center (RCC) in Illinois has experienced certain payor
reimbursement issues, which combined with a lower than expected census in 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. Quarterly
base rent and interest obligations of RCC total approximately $324,000 ($.15
per Psychiatric Group Depositary Share). The Company has advanced $214,000 on
behalf of the operator to pay property taxes on the facility, and is proceeding
with formal documentation of an agreement with the operator for the deferral of
base rent payments while the operator takes certain actions to stabilize
operations and implements its revised business plan. Pursuant to the deferral
arrangements, 100% of RCC's monthly base rent payments of $83,000 are deferred
for May and June of 1996 and 50% of such monthly payments are deferred from
July 1996 through October 1996, at which time monthly base rent is scheduled to
return to 100%. Deferred base rent is payable in the future only when the
facility's cash exceeds a specified level and the property tax advance is
payable in monthly installments. RCC's deferred obligations are not recognized
as income by the Company until such time as they are paid. RCC's rent deferral
amounted to approximately $.08 per Psychiatric Group Depositary Share for both
the second quarter and first six months of 1996. Although the deferral
arrangements provide interim financial relief while the operator implements its
strategy, there can be no assurance as to the eventual outcome of these
measures.
The Company has completed formal documentation of an agreement with the
operator of the two New York Four Winds facilities to release certain of its
security interests in the operator's short-term assets on a staged basis. The
release of this collateral will permit the operator to obtain the capital
required to develop an integrated behavioral health care delivery system in
lower and upper New York State, of which the two Four Winds facilities will be
an integral part. Although such a system 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, it is not
possible to predict the impact and timing of such changes and whether the
proposed system will be successful in that new environment.
14
16
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 or deferral 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. The
deferral of rental and interest obligations of The Manors and RCC in 1996 was
largely responsible for the reduction in the quarterly dividend on Psychiatric
Group Depositary Shares to $.70 per share in the first quarter of 1996 and $.65
per share in the second quarter of 1996 from $.80 per share in the fourth
quarter of 1995.
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 88% of net additional rental and interest income for
the first six months of 1996, while rehabilitation and psychiatric investments
each accounted for 5% and 7%, 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.
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 August 7, 1996, the Company had commitments of $6.5 million to fund
construction obligations and capital expenditures over approximately the next
eight months. Aggregate unfunded commitments under revolving credit agreements
provided to psychiatric hospital operators totaled $1.2 million as of August 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. In December 1995, the Company closed on a new
$150 million unsecured revolving credit facility
15
17
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
which matures on December 27, 1998. As of August 7, 1996, the Company had $19
million of borrowings under its revolving credit facility and had $2.2 million
in cash and short-term investments. The Company's total indebtedness as of
August 7, 1996 was $197.5 million. The Company will utilize its revolving
credit facility to fund future acquisitions and its other commitments,
including the $20 million senior notes maturity on September 15, 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.
16
18
AMERICAN HEALTH PROPERTIES, INC.
CORE GROUP COMBINED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
June 30, December 31,
1996 1995
- --------------------------------------------------------------- ------------ ------------
(Unaudited)
ASSETS
Real estate investments
Real property $ 563,786 $ 570,914
Construction in progress 14,659 6,016
Accumulated depreciation (78,314) (78,491)
------------ ------------
500,131 498,439
Financing leases 4,133 6,230
Revolving loan to Psychiatric Group 5,400 5,263
Fixed rate loan to Psychiatric Group 9,175 9,175
Other assets 8,613 9,521
Cash and short-term investments 1,313 7,571
- --------------------------------------------------------------- ------------ ------------
$ 528,765 $ 536,199
=============================================================== ============ ============
ATTRIBUTED LIABILITIES AND TOTAL ATTRIBUTED EQUITY
Bank loans payable $ 27,000 $ --
Notes and bonds payable 178,487 207,378
Accounts payable and accrued liabilities 6,945 7,806
Dividends payable 11,841 11,838
Deferred income 3,904 4,230
- --------------------------------------------------------------- ------------ ------------
228,177 231,252
- --------------------------------------------------------------- ------------ ------------
Commitments and contingencies
Total Attributed Core Group Equity 300,588 304,947
- --------------------------------------------------------------- ------------ ------------
$ 528,765 $ 536,199
=============================================================== ============ ============
The accompanying notes are an integral part of these financial statements.
17
19
AMERICAN HEALTH PROPERTIES, INC.
CORE GROUP COMBINED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
1996 1995 1996 1995
- ----------------------------------------- ------------ ------------ ------------ ------------
REVENUES
Rental income $ 16,715 $ 16,000 $ 33,432 $ 31,604
Additional rental income 2,843 2,586 5,609 5,027
Other interest income 196 946 479 1,741
Interest on loans to Psychiatric Group 427 434 847 1,169
- ----------------------------------------- ------------ ------------ ------------ ------------
20,181 19,966 40,367 39,541
- ----------------------------------------- ------------ ------------ ------------ ------------
EXPENSES
Depreciation and amortization 3,532 3,337 7,071 6,563
Interest expense 5,513 6,906 11,279 13,734
General and administrative 1,643 1,460 3,148 2,900
- ----------------------------------------- ------------ ------------ ------------ ------------
10,688 11,703 21,498 23,197
- ----------------------------------------- ------------ ------------ ------------ ------------
Minority interest 58 57 115 162
- ----------------------------------------- ------------ ------------ ------------ ------------
NET INCOME $ 9,435 $ 8,206 $ 18,754 $ 16,182
========================================= ============ ============ ============ ============
NET INCOME PER COMMON SHARE $ 0.40 $ 0.39 $ 0.80 $ 0.77
========================================= ============ ============ ============ ============
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING 23,510 20,913 23,505 20,906
========================================= ============ ============ ============ ============
DIVIDENDS DECLARED PER COMMON SHARE $ 0.5050 $ 0.4950 $ 1.0100 $ 0.9900
========================================= ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
18
20
AMERICAN HEALTH PROPERTIES, INC.
CORE GROUP COMBINED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Six Months Ended June 30,
----------------------------
1996 1995
- ------------------------------------------------------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 18,754 $ 16,182
Depreciation, amortization and other non-cash items 8,142 7,667
Deferred income (228) (42)
Change in other assets 571 (63)
Change in accounts payable and accrued liabilities (959) (357)
- ------------------------------------------------------------- ------------ ------------
26,280 23,387
- ------------------------------------------------------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition and construction of real estate properties (8,699) (29,258)
Construction loan fundings -- (4,901)
Direct financing leases 2,097 (2,776)
Paydowns (fundings) on revolving loan to Psychiatric Group (137) 3,874
Paydowns on fixed rate loan to Psychiatric Group -- 10,825
Administrative capital expenditures (38) (81)
- ------------------------------------------------------------- ------------ ------------
(6,777) (22,317)
- ------------------------------------------------------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on bank loans payable 27,000 43,000
Principal payments on notes payable (29,000) (24,000)
Financing costs paid (80) (260)
Dividends paid (23,681) (20,447)
- ------------------------------------------------------------- ------------ ------------
(25,761) (1,707)
- ------------------------------------------------------------- ------------ ------------
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS (6,258) (637)
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF PERIOD 7,571 1,838
- ------------------------------------------------------------- ------------ ------------
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ 1,313 $ 1,201
============================================================= ============ ============
The accompanying notes are an integral part of these financial statements.
19
21
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 directly 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 Core Group financial statements are prepared using the
amounts included in the Company's consolidated financial statements.
20
22
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CORE GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
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 $10,718,000 and $12,919,000 for the three months ended June
30, 1996 and 1995, respectively. The Core Group had $531,000 and $15,000 of
capitalized interest for the six months ended June 30, 1996 and 1995,
respectively.
2. STOCKHOLDERS' EQUITY
Stock Incentive Plans During the six months ended June 30, 1996, options
to purchase 161,651 shares of Core Group Common Stock at a weighted average
exercise price of $22.76 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
21
23
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CORE GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
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 June 30, 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 June 30, 1996, the Core Group had funded $12.1 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. Construction
funding of the Walla Walla, Washington facility was completed in July 1996 at
which time the lease commenced.
As of June 30, 1996, the Core Group had funded less than $1 million of a
$4.4 million commitment to finance the construction of a 96-bed Alzheimer's
care facility in southwest Houston, Texas. The Company will own the facility
upon completion and enter into a long-term lease with the developer. The
facility will be operated by an experienced operator of long-term care
facilities.
4. REAL ESTATE EXCHANGE
In the second quarter of 1996, the Core Group acquired an acute care
property in West Valley City, Utah (Pioneer Valley Hospital) in exchange for
its acute care properties in Jefferson, Louisiana (Elmwood Medical Center) and
Halstead, Kansas (Halstead Hospital). Pioneer Valley Hospital is leased to the
same operator that had leased the two exchanged properties under comparable
terms and at a lease rate equivalent to the combined lease rates of the two
exchanged properties. In connection with the transaction, the operator paid off
the $1,484,000 balance under a direct financing equipment lease related to the
Halstead Hospital. There was no gain or loss on the transaction.
22
24
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, changes in operators or
ownership of 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
Second Quarter and Year to Date 1996 Compared With 1995
For the second quarter of 1996, the Core Group reported net income of
$9,435,000 or $.40 per share compared with net income of $8,206,000 or $.39 per
share for the second quarter of 1995. For the six months ended June 30, 1996,
the Core Group reported net income of $18,754,000 or $.80 per share compared
with net income of $16,182,000 or $.77 per share for the first six months of
1995.
Rental income was $16,715,000 for the second quarter of 1996, an increase
of $715,000 or 4% from $16,000,000 for the second quarter of 1995. Rental
income was $33,432,000 for the six months ended June 30, 1996, an increase of
$1,828,000 or 6% from $31,604,000 for the comparable period in 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 $195,000 to
$3,532,000 for the second quarter of 1996 compared with the second quarter of
1995 and an increase of $508,000 to $7,071,000 for the six months ended June
30, 1996 compared with the same period in 1995.
Additional rental income was $2,843,000 for the second quarter of 1996, an
increase of $257,000 or 10% from $2,586,000 for the second quarter of 1995.
Additional rental income was $5,609,000 for the six months ended June 30, 1996,
an increase of $582,000 or 12% from $5,027,000 for the comparable period in
1995. This positive variation was primarily attributable to increased
additional rent from six of the Company's original acute care properties.
23
25
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other interest income decreased $750,000 to $196,000 for the second
quarter of 1996 from $946,000 for the second quarter of 1995. Other interest
income decreased $1,262,000 to $479,000 for the six months ended June 30, 1996
from $1,741,000 for the comparable period in 1995. Other interest income for
the second quarter and first six months of 1995 included approximately $780,000
and $1,465,000, respectively, 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 second
quarter and first six months of 1996 compared with the same periods in 1995 as
a result of higher investable cash balances during both the second quarter and
first half of 1996 and a higher average balance of direct financing leases
during the first half of 1996.
Interest income on inter-Group loans to the Psychiatric Group was $427,000
for the second quarter of 1996, a decrease of $7,000 or 2% from $434,000 for
the second quarter of 1995. Interest income on inter-Group loans to the
Psychiatric Group was $847,000 for the six months ended June 30, 1996, a
decrease of $322,000 or 28% from $1,169,000 for the comparable period in 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 $5,513,000 for the second quarter of 1996, a decrease
of $1,393,000 or 20% from $6,906,000 for the second quarter of 1995. Interest
expense was $11,279,000 for the six months ended June 30, 1996, a decrease of
$2,455,000 or 18% from $13,734,000 for the comparable period in 1995. Interest
expense decreased as a result of a $24 million and $29 million senior notes
maturity in May 1995 and May 1996, respectively, lower average bank loan
borrowings during 1996 and an increase in capitalized interest in 1996 compared
to 1995.
General and administrative expenses increased to $1,643,000 for the second
quarter of 1996 from $1,460,000 for the second quarter of 1995. For the first
half of 1996, general and administrative expenses increased to $3,148,000 from
$2,900,000 for the first half 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.
24
26
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 by 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 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
25
27
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 care investments
accounted for 94% of net additional rental income for the first six months of
1996, while rehabilitation investments accounted for 6%. 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 June 30, 1996, the Core Group had $5,400,000 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 June 30,
1996, the Core Group had $9,175,000 in fixed rate inter-Group loans to the
Psychiatric Group.
As of August 7, 1996, the Core Group had commitments of $6.5 million to
fund construction obligations and capital expenditures over approximately the
next eight 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
26
28
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. In December
1995, the Company closed on a new $150 million unsecured revolving credit
facility which matures on December 27, 1998. As of August 7, 1996, the Company
had $19 million of borrowings under its revolving credit facility and had $2.2
million in cash and short-term investments. The Company's total indebtedness as
of August 7, 1996 was $197.5 million. The Company will utilize its revolving
credit facility to fund its future Core Group acquisitions and its other
commitments, including the $20 million senior notes maturity on September 15,
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.
27
29
AMERICAN HEALTH PROPERTIES, INC.
PSYCHIATRIC GROUP COMBINED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
June 30, December 31,
1996 1995
- --------------------------------------------------------------- ------------ ------------
(Unaudited)
ASSETS
Real estate investments
Real property and mortgage notes $ 62,782 $ 62,813
Accumulated depreciation (4,316) (3,944)
------------ ------------
58,466 58,869
Other notes receivable 4,814 4,915
Other assets 889 771
- --------------------------------------------------------------- ------------ ------------
$ 64,169 $ 64,555
=============================================================== ============ ============
ATTRIBUTED LIABILITIES AND TOTAL ATTRIBUTED EQUITY
Revolving loan from Core Group $ 5,400 $ 5,263
Fixed rate loan from Core Group 9,175 9,175
Accounts payable and accrued liabilities 52 151
Dividends payable 1,355 1,668
Deferred income 158 185
- --------------------------------------------------------------- ------------ ------------
16,140 16,442
- --------------------------------------------------------------- ------------ ------------
Commitments and contingencies
Total Attributed Psychiatric Group Equity 48,029 48,113
- --------------------------------------------------------------- ------------ ------------
$ 64,169 $ 64,555
=============================================================== ============ ============
The accompanying notes are an integral part of these financial statements.
28
30
AMERICAN HEALTH PROPERTIES, INC.
PSYCHIATRIC GROUP COMBINED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
1996 1995 1996 1995
- ----------------------------------------- ------------ ------------ ------------ ------------
REVENUES
Rental income $ 365 $ 681 $ 946 $ 1,691
Mortgage interest income 1,493 1,469 2,986 2,939
Additional rental and interest income 220 131 402 326
Other interest income 95 160 194 376
- ----------------------------------------- ------------ ------------ ------------ ------------
2,173 2,441 4,528 5,332
- ----------------------------------------- ------------ ------------ ------------ ------------
EXPENSES
Depreciation and amortization 186 186 372 430
Interest on loans from Core Group 427 434 847 1,169
General and administrative 326 182 643 403
Targeted stock issuance costs -- 300 -- 300
- ----------------------------------------- ------------ ------------ ------------ ------------
939 1,102 1,862 2,302
- ----------------------------------------- ------------ ------------ ------------ ------------
NET INCOME $ 1,234 $ 1,339 $ 2,666 $ 3,030
========================================= ============ ============ ============ ============
NET INCOME PER DEPOSITARY SHARE $ 0.59 $ 0.64 $ 1.27 $ 1.45
========================================= ============ ============ ============ ============
WEIGHTED AVERAGE
DEPOSITARY SHARES OUTSTANDING 2,092 2,091 2,091 2,091
========================================= ============ ============ ============ ============
DIVIDENDS DECLARED PER DEPOSITARY SHARE $ 0.6500 $ 0.8000 $ 1.3500 $ 1.6000
========================================= ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
29
31
AMERICAN HEALTH PROPERTIES, INC.
PSYCHIATRIC GROUP COMBINED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Six Months Ended June 30,
----------------------------
1996 1995
- ------------------------------------------------------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,666 $ 3,030
Depreciation, amortization and other non-cash items 435 512
Deferred income (27) (9)
Change in other assets (118) 170
Change in accounts payable and accrued liabilities (99) (4)
- ------------------------------------------------------------- ------------ ------------
2,857 3,699
- ------------------------------------------------------------- ------------ ------------
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 31 --
Other notes receivable 101 4,416
- ------------------------------------------------------------- ------------ ------------
132 14,548
- ------------------------------------------------------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on revolving loan from Core Group 137 (3,874)
Payments on fixed rate loan from Core Group -- (10,825)
Dividends paid (3,126) (3,548)
- ------------------------------------------------------------- ------------ ------------
(2,989) (18,247)
- ------------------------------------------------------------- ------------ ------------
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.
30
32
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 directly 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.
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
31
33
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
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 $847,000 and $1,169,000 for the six months ended June
30, 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 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.
32
34
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
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 June 30, 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 June 30, 1996.
4. STATUS OF PSYCHIATRIC GROUP PROPERTIES
During the past year, the owner of the two Florida psychiatric hospitals
has been monitoring the status of potential wide-ranging objections by several
large insurance companies and other payors with respect to claims presented for
services rendered. Periodically, there also have been 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.
Legislative hearings have been held in Florida on these issues, and it is
likely that various regulatory investigations have been conducted or initiated.
In addition, the hospitals continue to experience operational and cash flow
difficulties which negatively impact their ability to fund their rental and
interest obligations to the Psychiatric Group as they become due. 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 June 30,
1996 totaled $7,278,000 and $9,862,000, 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 Manors has not made its required rental and interest payments since
January 1996 and the Psychiatric Group is proceeding with formal documentation
of an agreement with the owner for the deferral of rent and interest payments
while certain restructuring and restaffing of the facility occurs. Pursuant to
the deferral arrangements, The Manors' monthly base rent payments of $50,000
are deferred from February 1996 through September 1996 and such deferred
payments become payable twelve months from the month of deferral. The Manors'
monthly interest payments of $16,600 are deferred from February 1996 until
March 1, 1997 on which date all such deferred interest will be payable in full.
The Manors' deferred obligations are not recognized as income by the
Psychiatric Group until such time as they are paid. During the second quarter
and first six months of 1996, The Manors' rent and interest deferrals amounted
to approximately $.10 and $.17 per Psychiatric Group Depositary Share,
respectively. The operator and Quorum are both highly
33
35
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
experienced and the restructuring and restaffing measures appear promising,
however there can be no assurance as to the eventual outcome of such changes.
Although The Retreat has made all required payments in 1996 through
August, The Retreat did not pay its July rent until August. The Psychiatric
Group continues to monitor the situation while the operator and Quorum
restructure and restaff the facility, and there can be no assurance that some
measure of rent and interest relief will not be necessary in the future.
Rock Creek Center (RCC) in Illinois has experienced certain documentation
and procedural deficiencies that resulted in the denial of a substantial amount
of Medicare receivables and a substantial negative adjustment to the hospital's
1995 Medicare cost report and 1996 interim Medicare reimbursement rate, which
combined with a lower than expected census in 1996 have had an adverse impact
on RCC's cash flow and its ability to fund its rental and interest obligations
to the Psychiatric Group as they become due. The net book value of the
Psychiatric Group's investment in RCC, including advances under existing
revolving credit agreements and other receivables, as of June 30, 1996 totaled
$8,195,000, and quarterly base rent and interest obligations of RCC total
approximately $324,000 ($.15 per Psychiatric Group Depositary Share). The
Psychiatric Group has advanced $214,000 on behalf of the operator to pay
property taxes on the facility, and is proceeding with formal documentation of
an agreement with the operator for the deferral of base rent payments while the
operator takes certain actions to stabilize operations and implements its
revised business plan. Pursuant to the deferral arrangements, 100% of RCC's
monthly base rent payments of $83,000 are deferred for May and June of 1996 and
50% of such monthly payments are deferred from July 1996 through October 1996,
at which time monthly base rent is scheduled to return to 100%. Deferred base
rent is payable in the future only when the facility's cash exceeds a specified
level and the property tax advance is payable in monthly installments. RCC's
deferred obligations are not recognized as income by the Psychiatric Group
until such time as they are paid. RCC's rent deferral amounted to approximately
$.08 per Psychiatric Group Depositary Share for both the second quarter and
first six months of 1996. Although the deferral arrangements provide interim
financial relief while the operator implements its strategy, there can be no
assurance as to the eventual outcome of these measures.
The Psychiatric Group has completed formal documentation of an agreement
with the operator of the two New York Four Winds facilities to release certain
of its security interests in the operator's short-term assets on a staged
basis. The release of this collateral will permit the operator to obtain the
capital required to develop an integrated behavioral health care delivery
system in lower and upper New York State, of which the two Four Winds
facilities will be an integral part. Although such a system 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, it is not possible to predict the impact and timing of such changes and
whether the proposed system will be successful in that new environment.
The Psychiatric Group's dividend is determined quarterly based upon each
quarter's operating results. 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 or deferral of such
obligations as they become due likely will have an adverse impact on the
Psychiatric Group results of operations and cash flows, as well as the
quarterly dividend payment on Psychiatric Group Depositary Shares. The deferral
of rental
34
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AMERICAN HEALTH PROPERTIES, INC.
NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
and interest obligations of The Manors and RCC in 1996 was largely responsible
for the reduction in the quarterly dividend on Psychiatric Group Depositary
Shares to $.70 per share in the first quarter of 1996 and $.65 per share in the
second quarter of 1996 from $.80 per share in the fourth quarter of 1995.
35
37
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,
changes in operators or ownership of 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
Second Quarter and Year to Date 1996 Compared With 1995
For the second quarter of 1996, the Psychiatric Group reported net income
of $1,234,000 or $.59 per share compared with net income of $1,339,000 or $.64
per share for the second quarter of 1995. For the six months ended June 30,
1996, the Psychiatric Group reported net income of $2,666,000 or $1.27 per
share compared with net income of $3,030,000 or $1.45 per share for the first
six months of 1995. The decrease in net income for the second quarter and first
six months 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 two psychiatric operators at
various times during the first six months of 1996.
Rental income was $365,000 for the second quarter of 1996, a decrease of
$316,000 or 46% from $681,000 for the second quarter of 1995. Rental income was
$946,000 for the six months ended June 30, 1996, a decrease of $745,000 or 44%
from $1,691,000 for the comparable period in 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 $317,000 and
$417,000 of rent by two psychiatric operators during the second quarter and
first six months of 1996, respectively. The property sales resulted in a
decrease in depreciation and amortization of $58,000 to $372,000 for the first
half of 1996 compared with the first half of 1995.
Additional rental and interest income was $220,000 for the second quarter
of 1996, an increase of $89,000 from $131,000 for the second quarter of 1995.
Additional rental and interest income was $402,000 for the six months ended
June 30, 1996, an increase of $76,000 from $326,000 for the comparable period
in 1995. This increase is primarily attributable to variations in revenues upon
which such additional rent and interest is based.
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38
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other interest income decreased $65,000 to $95,000 for the second quarter
of 1996 from $160,000 for the second quarter of 1995. Other interest income
decreased $182,000 to $194,000 for the six months ended June 30, 1996 from
$376,000 for the comparable period in 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 and
$100,000 of interest by a psychiatric operator during the second quarter and
first six months of 1996, respectively.
Interest expense on inter-Group loans from the Core Group was $427,000 for
the second quarter of 1996, a decrease of $7,000 or 2% from $434,000 for the
second quarter of 1995. Interest expense on inter-Group loans from the Core
Group was $847,000 for the six months ended June 30, 1996, a decrease of
$322,000 or 28% from $1,169,000 for the comparable period in 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 $326,000 for the second
quarter of 1996 from $182,000 for the second quarter of 1995. For the first
half of 1996, general and administrative expenses increased to $643,000 from
$403,000 for the first half 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
second quarter and first half of 1996, the Psychiatric Group was specifically
charged for $145,000 and $285,000 of costs in the second quarter and first six
months of 1996, respectively, for financial advisory services provided
primarily 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.
The $300,000 of targeted stock issuance costs in 1995 was an additional
accrual made in the second quarter of 1995 to reflect the increased costs of
the Distribution. The increased costs primarily reflected higher legal and
accounting fees and printing and shipping costs as a result of the extended
filing period.
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.
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AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 by 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, 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 not met 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 continue, it will 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
August 7, 1996, outstanding borrowings under such
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AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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 has sold
three of its psychiatric properties since September 1994, restructured the
terms of its two Florida psychiatric hospital investments in March 1995 and as
discussed below, has recently proceeded with various modifications to the terms
of one of its Florida psychiatric investments, as well as its psychiatric
investments in Illinois and New York. 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.
During the past year, the owner of the two Florida psychiatric hospitals
has been monitoring the status of potential wide-ranging objections by several
large insurance companies and other payors with respect to claims presented for
services rendered. Periodically, there also have been 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.
Legislative hearings have been held in Florida on these issues, and it is
likely that various regulatory investigations have
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AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
been conducted or initiated. In addition, the hospitals continue to experience
operational and cash flow difficulties which negatively impact their ability to
fund their rental and interest obligations to the Psychiatric Group as they
become due. 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 June 30, 1996 totaled $7,278,000 and $9,862,000,
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 Manors has not made its required rental and interest payments since
January 1996 and the Psychiatric Group is proceeding with formal documentation
of an agreement with the owner for the deferral of rent and interest payments
while certain restructuring and restaffing of the facility occurs. Pursuant to
the deferral arrangements, The Manors' monthly base rent payments of $50,000
are deferred from February 1996 through September 1996 and such deferred
payments become payable twelve months from the month of deferral. The Manors'
monthly interest payments of $16,600 are deferred from February 1996 until
March 1, 1997 on which date all such deferred interest will be payable in full.
The Manors' deferred obligations are not recognized as income by the
Psychiatric Group until such time as they are paid. During the second quarter
and first six months of 1996, The Manors' rent and interest deferrals amounted
to approximately $.10 and $.17 per Psychiatric Group Depositary Share,
respectively. The operator and Quorum are both highly experienced and the
restructuring and restaffing measures appear promising, however there can be no
assurance as to the eventual outcome of such changes.
Although The Retreat has made all required payments in 1996 through
August, The Retreat did not pay its July rent until August. The Psychiatric
Group continues to monitor the situation while the operator and Quorum
restructure and restaff the facility, and there can be no assurance that some
measure of rent and interest relief will not be necessary in the future.
Rock Creek Center (RCC) in Illinois has experienced certain documentation
and procedural deficiencies that resulted in the denial of a substantial amount
of Medicare receivables and a substantial negative adjustment to the hospital's
1995 Medicare cost report and 1996 interim Medicare reimbursement rate, which
combined with a lower than expected census in 1996 have had an adverse impact
on RCC's cash flow and its ability to fund its rental and interest obligations
to the Psychiatric Group as they become due. The net book value of the
Psychiatric Group's investment in RCC, including advances under existing
revolving credit agreements and other receivables, as of June 30, 1996 totaled
$8,195,000, and quarterly base rent and interest obligations of RCC total
approximately $324,000 ($.15 per Psychiatric Group Depositary Share). The
Psychiatric Group has advanced $214,000 on behalf of the operator to pay
property taxes on the facility, and is proceeding with formal documentation of
an agreement with the operator for the deferral of base rent payments while the
operator takes certain actions to stabilize operations and implements its
revised business plan. Pursuant to the deferral arrangements, 100% of RCC's
monthly base rent payments of $83,000 are deferred for May and June of 1996 and
50% of such monthly payments are deferred from July 1996 through October 1996,
at which time monthly base rent is scheduled to return to 100%. Deferred base
rent is payable
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AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
in the future only when the facility's cash exceeds a specified level and the
property tax advance is payable in monthly installments. RCC's deferred
obligations are not recognized as income by the Psychiatric Group until such
time as they are paid. RCC's rent deferral amounted to approximately $.08 per
Psychiatric Group Depositary Share for both the second quarter and first six
months of 1996. Although the deferral arrangements provide interim financial
relief while the operator implements its strategy, there can be no assurance as
to the eventual outcome of these measures.
The Psychiatric Group has completed formal documentation of an agreement
with the operator of the two New York Four Winds facilities to release certain
of its security interests in the operator's short-term assets on a staged
basis. The release of this collateral will permit the operator to obtain the
capital required to develop an integrated behavioral health care delivery
system in lower and upper New York State, of which the two Four Winds
facilities will be an integral part. Although such a system 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, it is not possible to predict the impact and timing of such changes and
whether the proposed system will be successful in that new environment.
The Psychiatric Group's dividend is determined quarterly based upon each
quarter's operating results. 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 or deferral of such
obligations as they become due likely will have an adverse impact on the
Psychiatric Group results of operations and cash flows, as well as the
quarterly dividend payment on Psychiatric Group Depositary Shares. The deferral
of rental and interest obligations of The Manors and RCC in 1996 was largely
responsible for the reduction in the quarterly dividend on Psychiatric Group
Depositary Shares to $.70 per share in the first quarter of 1996 and $.65 per
share in the second quarter of 1996 from $.80 per share in the fourth quarter
of 1995.
LIQUIDITY AND CAPITAL RESOURCES
As of August 7, 1996, the Psychiatric Group had aggregate unfunded
commitments under revolving credit agreements provided to psychiatric hospital
operators of $1.2 million.
At June 30, 1996, the Psychiatric Group had $5,400,000 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
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AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders of American Health Properties,
Inc. was held on May 23, 1996 ("Annual Meeting").
(b) Not applicable.
(c) (i) At the Annual Meeting, Sheldon S. King, Walter J. McNerney and
Louis T. Rosso were elected as Class III directors to serve for a
three-year term until the 1999 Annual Meeting of Shareholders. Voting
results for these directors are summarized as follows:
Sheldon S. King Votes For--22,779,477; Votes Withheld--128,543
Walter J. McNerney Votes For--22,778,612; Votes Withheld--129,408
Louis T. Rosso Votes For--22,781,552; Votes Withheld--126,468
Class I directors whose term of office continues until the 1997
Annual Meeting of Shareholders include Norman Barker, Jr. and James
L. Fishel. Class II directors whose term of office continues until
the 1998 Annual Meeting of Shareholders include Royce Diener, Charles
M. Haar and Joseph P. Sullivan.
(ii) At the Annual Meeting, shareholders approved the appointment of
the accounting firm of Arthur Andersen LLP as the auditors and
as independent public accountants for the Company for the fiscal
year ending December 31, 1996. Votes For--22,658,405; Votes
Against--100,625; Votes Abstained--148,981.
(d) Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
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SIGNATURE
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: August 7, 1996
AMERICAN HEALTH PROPERTIES, INC.
By: /s/ JOSEPH P. SULLIVAN
------------------------------------
Joseph P. Sullivan
President & Chief Executive Officer
By: /s/ MICHAEL J. McGEE
------------------------------------
Michael J. McGee
Senior Vice President & Chief
Financial Officer (Principal Financial
and Accounting Officer)
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EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule