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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 SEPTEMBER 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
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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
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SHARES OF REGISTRANT'S COMMON STOCK, $.01 PAR VALUE PER SHARE,
OUTSTANDING AT NOVEMBER 12, 1996 -- 23,459,473
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 NOVEMBER 12, 1996 -- 2,084,282.
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AMERICAN HEALTH PROPERTIES, INC.
SEPTEMBER 30, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
<S> <C> <C>
CONSOLIDATED COMPANY
Item 1. Consolidated Condensed Financial Statements:
Balance sheets as of September 30, 1996 and December 31, 1995 . . . . . . . . . . . . 2
Statements of operations for the three and nine months ended
September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Statements of cash flows for the nine months ended
September 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 September 30, 1996 and December 31, 1995 . . . . . . . . . . . . 17
Statements of operations for the three and nine months ended
September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Statements of cash flows for the nine months ended
September 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 September 30, 1996 and December 31, 1995 . . . . . . . . . . . . 28
Statements of operations for the three and nine months ended
September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Statements of cash flows for the nine months ended
September 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 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
</TABLE>
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AMERICAN HEALTH PROPERTIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
- ------------------------------------------------------------- --------------- ---------------
<S> <C> <C>
ASSETS (Unaudited)
Real estate investments
Real property and mortgage notes, net $ 642,416 $ 633,727
Construction in progress 3,137 6,016
Accumulated depreciation (86,359) (82,435)
--------------- ---------------
559,194 557,308
Notes receivable and financing leases 8,662 11,145
Other assets 8,940 10,292
Cash and short-term investments 2,331 7,571
- ------------------------------------------------------------- --------------- ---------------
$ 579,127 $ 586,316
============================================================= =============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank loans payable $ 51,500 $ -
Notes and bonds payable 158,544 207,378
Accounts payable and accrued liabilities 4,283 7,957
Dividends payable 13,202 13,506
Deferred income 4,473 4,415
- ------------------------------------------------------------- --------------- ---------------
232,002 233,256
- ------------------------------------------------------------- --------------- ---------------
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;
23,459 and 23,443 shares issued and outstanding 235 234
Additional paid-in capital 481,895 480,703
Cumulative net income 244,883 212,312
Cumulative dividends (379,890) (340,191)
- ------------------------------------------------------------- --------------- ---------------
347,125 353,060
- ------------------------------------------------------------- --------------- ---------------
$ 579,127 $ 586,316
============================================================= =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
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AMERICAN HEALTH PROPERTIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
- ------------------------------------------------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES
Rental income $ 17,315 $ 17,182 $ 51,693 $ 50,477
Mortgage interest income 1,493 2,079 4,479 5,018
Additional rental and interest income 3,092 2,769 9,103 8,122
Other interest income 238 375 911 2,492
- ------------------------------------------------------ ------------- ------------- ------------- -------------
22,138 22,405 66,186 66,109
- ------------------------------------------------------ ------------- ------------- ------------- -------------
EXPENSES
Depreciation and amortization 3,761 3,674 11,204 10,667
Interest expense 5,285 7,126 16,564 20,860
General and administrative 1,887 1,664 5,678 4,967
Targeted stock issuance costs - - - 300
- ------------------------------------------------------ ------------- ------------- ------------- -------------
10,933 12,464 33,446 36,794
- ------------------------------------------------------ ------------- ------------- ------------- -------------
Minority interest 54 57 169 219
- ------------------------------------------------------ ------------- ------------- ------------- -------------
NET INCOME $ 11,151 $ 9,884 $ 32,571 $ 29,096
====================================================== ============= ============= ============= =============
ATTRIBUTABLE TO -
CORE GROUP COMMON STOCK
Net Income $ 9,873 $ 8,235 $ 28,627 $ 24,417
Net Income Per Share $ 0.42 $ 0.39 $ 1.22 $ 1.17
Weighted Average Shares Outstanding 23,522 20,920 23,511 20,911
Dividends Declared Per Share $ 0.5050 $ 0.4950 $ 1.5150 $ 1.4850
PSYCHIATRIC GROUP DEPOSITARY SHARES
Net Income $ 1,278 $ 1,649 $ 3,944 $ 4,679
Net Income Per Share $ 0.61 $ 0.79 $ 1.89 $ 2.24
Weighted Average Shares Outstanding 2,093 2,091 2,092 2,091
Dividends Declared Per Share $ 0.6500 $ 0.8000 $ 2.0000 $ 2.4000
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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AMERICAN HEALTH PROPERTIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
1996 1995
- -------------------------------------------------------- --------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 32,571 $ 29,096
Depreciation, amortization and other non-cash items 12,908 12,410
Deferred income (283) (227)
Change in other assets 802 (309)
Change in accounts payable and accrued liabilities (3,333) (4,101)
- -------------------------------------------------------- --------------- ---------------
42,665 36,869
- -------------------------------------------------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition and construction of real estate properties (13,041) (41,949)
Proceeds from sale of properties - 10,825
Principal payments on mortgage notes receivable 47 10
Construction loan fundings - (5,136)
Other notes receivable 154 4,464
Direct financing leases 2,329 (2,455)
Administrative capital expenditures (52) (95)
- -------------------------------------------------------- --------------- ---------------
(10,563) (34,336)
- -------------------------------------------------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on bank loans payable 51,500 58,500
Principal payments on notes payable (49,000) (24,000)
Financing costs paid (80) (276)
Proceeds from exercise of stock options 241 -
Cash paid in lieu of fractional shares - (18)
Dividends paid (40,003) (35,993)
- -------------------------------------------------------- --------------- ---------------
(37,342) (1,787)
- -------------------------------------------------------- --------------- ---------------
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS (5,240) 746
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF PERIOD 7,571 1,838
- -------------------------------------------------------- --------------- ---------------
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ 2,331 $ 2,584
======================================================== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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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.
5
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AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Interest Paid Interest paid by the Company, net of interest
capitalized, was $18,736,000 and $22,854,000 for the nine months ended
September 30, 1996 and 1995, respectively. The Company had $781,000 and
$53,000 of capitalized interest for the nine months ended September 30, 1996
and 1995, respectively.
2. STOCKHOLDERS' EQUITY
Stock Incentive Plans During the nine months ended September 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. During the nine months ended September 30, 1996, options to
purchase 12,500 shares of Core Group Common Stock were exercised at a weighted
average exercise price of $19.28 per share resulting in additional equity of
$241,000.
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 September 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 September 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 September 30, 1996, the Company had funded $1.1 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.
On November 12, 1996, the Company funded $2 million of a $6.2 million
project for the acquisition and renovation of an existing property in Amarillo,
Texas to be operated as a long-term acute care facility by an experienced
operator. The Company has also agreed to provide another $13.8 million of real
estate
6
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AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
financing to the operator for other similar facilities. In addition, the
Company is considering making a $1.5 million equity investment in the operator
which would represent between 5% and 10% ownership.
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 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 Company has completed formal documentation of an agreement with
the operator for the deferral of rent and interest payments of the Manors while
certain restructuring and restaffing of the facility occurs. Pursuant to the
deferral arrangements, The Manors' monthly base rent payments of $50,000 were
deferred from February 1996 through September 1996 and such deferred payments
become payable twelve months from the month of deferral. In accordance with the
terms of the deferral arrangements, The Manors resumed making its full monthly
base rent payments of $50,000 on October 1, 1996. 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 third quarter and first nine months of 1996,
The Manors' rent and interest deferrals amounted to approximately $.09 and $.25
per Psychiatric Group Depositary Share, respectively. Although the operator
and Quorum, the contract facility manager, are both highly experienced and the
restructuring and restaffing measures appear promising, there can be no
assurance as to the eventual outcome of such changes or that the Manors will be
able to meet its restructured obligations.
Although The Retreat has made all required payments in 1996 through
November, The Retreat did not pay its July rent until August due to cash flow
constraints. 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.
7
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AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Rock Creek Center (RCC) in Illinois has experienced certain payor
reimbursement issues, which combined with a lower than expected census in the
first quarter of 1996, have had an adverse impact on RCC's cash flow and its
ability to fund its rental and interest obligations to the Company as they
become due. 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 were deferred for May and June of 1996 and 50% of
such monthly payments were deferred from July 1996 through October 1996, at
which time monthly base rent payments returned 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
rent obligations are not recognized as income by the Company until such time as
they are paid. The Company's property tax advance has been reduced by monthly
payments to $137,000 as of November 1, 1996. RCC's rent deferral amounted to
approximately $.06 and $.14 per Psychiatric Group Depositary Share for the
third quarter and first nine months of 1996, respectively. 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, that the deferred amounts will be paid or that RCC will be
able to meet its restructured obligations.
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 operator believes that the release of this collateral will permit it 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 and third quarter of 1996 from $.80 per share
in the fourth quarter of 1995.
8
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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 of financial condition and
results of operations 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,
including their access to alternative capital sources, 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.
9
<PAGE> 11
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATING RESULTS
Third Quarter and Year to Date 1996 Compared With 1995
For the third quarter of 1996, the Company reported net income of
$11,151,000, an increase of $1,267,000 or 13% compared with net income of
$9,884,000 for the third quarter of 1995. For the nine months ended September
30, 1996, the Company reported net income of $32,571,000, an increase of
$3,475,000 or 12% compared with net income of $29,096,000 for the first nine
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 $17,315,000 for the third quarter of 1996, an
increase of $133,000 or 1% from $17,182,000 for the third quarter of 1995.
Rental income was $51,693,000 for the nine months ended September 30, 1996, an
increase of $1,216,000 or 2% from $50,477,000 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
$275,000 and $692,000 of rent by two psychiatric operators during the third
quarter and first nine months of 1996, respectively. The net property additions
also resulted in a net increase in depreciation and amortization of $87,000 or
2% to $3,761,000 for the third quarter of 1996 compared with $3,674,000 for the
third quarter of 1995 and a net increase of $537,000 or 5% to $11,204,000 for
the nine months ended September 30, 1996 compared with $10,667,000 for the same
period in 1995.
Mortgage interest income was $1,493,000 for the third quarter of 1996,
a decrease of $586,000 or 28% from $2,079,000 for the third quarter of 1995.
Mortgage interest income was $4,479,000 for the nine months ended September 30,
1996, a decrease of $539,000 or 11% from $5,018,000 for the comparable period
in 1995. This net decrease was primarily attributable to the payoff of a
mortgage loan on a hospital located in Austin, Texas in October 1995.
Additional rental and interest income was $3,092,000 for the third
quarter of 1996, an increase of $323,000 or 12% from $2,769,000 for the third
quarter of 1995. Additional rental and interest income was $9,103,000 for the
nine months ended September 30, 1996, an increase of $981,000 or 12% from
$8,122,000 for the comparable period in 1995. This positive variation was
primarily attributable to increased additional rent from the Company's six
original acute care properties and its acute care property in Utah.
Other interest income decreased $137,000 or 37% to $238,000 for the
third quarter of 1996 from $375,000 for the third quarter of 1995. Other
interest income for the nine months ended September 30, 1996 decreased
$1,581,000 or 63% to $911,000 from $2,492,000 for the comparable period in
1995. Other interest income for the third quarter and first nine months of 1995
included approximately $35,000 and $1,500,000, respectively, of interest on a
construction loan that subsequently converted to a mortgage loan in the third
quarter of 1995. In addition, this variation was due to a lower average balance
of borrowings outstanding under revolving credit facilities provided to
psychiatric hospital operators, the nonpayment of $33,000 and
10
<PAGE> 12
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$132,000 of interest by a psychiatric operator during the third quarter and
first nine months of 1996, respectively, and a lower average balance of direct
financing leases, partially offset by higher investable cash balances.
Interest expense was $5,285,000 for the third quarter of 1996, a
decrease of $1,841,000 or 26% from $7,126,000 for the third quarter of 1995.
Interest expense was $16,564,000 for the nine months ended September 30, 1996,
a decrease of $4,296,000 or 21% from $20,860,000 for the comparable period in
1995. Interest expense decreased as a result of the $24 million, $29 million
and $20 million senior notes maturities in May 1995, May 1996 and September
1996, respectively, lower average bank loan borrowings during 1996 and an
increase in capitalized interest in 1996 compared to 1995.
General and administrative expenses were $1,887,000 for the third
quarter of 1996, an increase of $223,000 or 13% from $1,664,000 for the third
quarter of 1995. For the first nine months of 1996, general and administrative
expenses were $5,678,000, an increase of $711,000 or 14% from $4,967,000 for
the first nine months 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 compensation and benefits expense and expenses related to the
hiring of a Chief Investment Officer.
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 to and limits on
11
<PAGE> 13
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
federal programs providing Medicaid reimbursement to state health care programs
and potentially would have an adverse impact on the level of funds available in
the future to health care facilities. The Company's Board and management are
monitoring potential changes closely. The Company believes that these potential
changes may pose risks for certain institutions that are unwilling or unable to
respond. At the same time, the Company believes that this changing health care
environment will provide the Core Group with new opportunities for investment.
The ongoing changes in the health care industry include trends toward
shorter lengths of hospital stay, increased use of outpatient services,
increased federal, state and third-party oversight of health care company
operations and business practices, and increased demand for discounted or
capitated health care services (delivery of services at a fixed price per
capita basis to a defined group of covered parties). Furthermore, federal,
state and third-party payors continue to propose and adopt various cost
containment measures that restrict the scope of reimbursable health care
services and limit increases in reimbursement rates for such services. Payors
also are continuing aggressively to enforce compliance with program
requirements and to pursue providers that they believe have not complied with
such requirements. Outpatient business is expected to increase as advances in
medical technologies allow more procedures to be performed on an outpatient
basis and as payors continue to direct more patients from inpatient care to
outpatient care. In addition, the entrance of insurance companies into managed
care programs is accelerating the introduction of managed care in new
localities, and states and insurance companies continue to negotiate actively
the amounts they will pay for services. Moreover, the percentage of health
care services that are reimbursed under the Medicare and Medicaid programs
continues to increase as the population ages and as states expand their
Medicaid programs. Continued eligibility to participate in these programs is
crucial to a provider's financial strength. As a result of the foregoing, the
revenues and margins may decrease at the Company's hospitals.
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.
12
<PAGE> 14
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
The Company currently is providing financing under revolving credit
agreements to the operators of three of its psychiatric hospitals. As of
November 12, 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 significant
psychiatric investment write-downs in 1992 and 1994 and the restructuring of
psychiatric operator payment obligations. 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
13
<PAGE> 15
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 completed various modifications to the terms of
one of its Florida psychiatric investments and its New York psychiatric
investments and is proceeding with various modifications to the terms of its
psychiatric investment in Illinois. 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 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 quarterly fee for
supplemental monitoring was reduced from $75,000 to $25,000 effective October
1, 1996. The cost of the financial advisory 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.
The Company has completed formal documentation of an agreement with
the operator for the deferral of rent and interest payments of the Manors while
certain restructuring and restaffing of the facility occurs. Pursuant to the
deferral arrangements, The Manors' monthly base rent payments of $50,000 were
deferred from February 1996 through September 1996 and such deferred payments
become payable twelve months from the month of deferral. In accordance with the
terms of the deferral arrangements, The Manors resumed making its full monthly
base rent payments of $50,000 on October 1, 1996. 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 third quarter and first nine months of 1996,
The Manors' rent and interest deferrals amounted to approximately $.09 and $.25
per Psychiatric Group Depositary Share, respectively. Although the operator
and Quorum, the contract facility manager, are both highly experienced and the
restructuring and restaffing measures appear promising, there can be no
assurance as to the eventual outcome of such changes or that the Manors will be
able to meet its restructured obligations.
Although The Retreat has made all required payments in 1996 through
November, The Retreat did not pay its July rent until August due to cash flow
constraints. 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 the
first quarter of 1996, have had an adverse impact on
14
<PAGE> 16
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 were deferred for May and June of 1996
and 50% of such monthly payments were deferred from July 1996 through October
1996, at which time monthly base rent payments returned 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 rent obligations are not recognized as income by the Company until
such time as they are paid. The Company's property tax advance has been reduced
by monthly payments to $137,000 as of November 1, 1996. RCC's rent deferral
amounted to approximately $.06 and $.14 per Psychiatric Group Depositary Share
for the third quarter and first nine months of 1996, respectively. 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, that the deferred amounts will be paid or that RCC will be
able to meet its restructured obligations.
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 operator believes that the release of this collateral will permit it 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 and third 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 nine 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
15
<PAGE> 17
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
significant revenue growth at a majority of the Original Properties in recent
years, four properties had reached the additional rent transition point by the
end of 1995, one property has reached the additional rent transition point
during 1996 and it is anticipated that the other property 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 Original Properties that had not yet
reached the transition point 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. The Company has active
dialogues with Duff & Phelps Credit Rating Co. and Standard & Poor's regarding
an update of their ratings and with Moody's Investor Service regarding an
initial rating. The Company expects these ratings reviews to be completed in
the fourth quarter of 1996. There can be no assurance as to the ratings which
may be assigned to the Company.
LIQUIDITY AND CAPITAL RESOURCES
As of November 12, 1996, the Company had commitments of $21.4 million
to fund real estate investments over approximately the next fifteen months.
Aggregate unfunded commitments under revolving credit agreements provided to
psychiatric hospital operators totaled $1.2 million as of November 12, 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 which matures on December 27,
1998. As of November 12, 1996, the Company had $41.5 million of borrowings
under its revolving credit facility and had $1 million in cash and short-term
investments. The Company's total indebtedness as of November 12, 1996 was
$200.1 million. The Company will utilize its revolving credit facility to fund
future acquisitions and its other commitments. 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
<PAGE> 18
AMERICAN HEALTH PROPERTIES, INC.
CORE GROUP COMBINED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
- -------------------------------------------------------- --------------- ---------------
<S> <C> <C>
ASSETS (Unaudited)
Real estate investments
Real property $ 579,650 $ 570,914
Construction in progress 3,137 6,016
Accumulated depreciation (81,857) (78,491)
--------------- ---------------
500,930 498,439
Financing leases 3,901 6,230
Revolving loan to Psychiatric Group 5,131 5,263
Fixed rate loan to Psychiatric Group 9,175 9,175
Other assets 8,171 9,521
Cash and short-term investments 2,331 7,571
- -------------------------------------------------------- --------------- ---------------
$ 529,639 $ 536,199
======================================================== =============== ===============
ATTRIBUTED LIABILITIES AND TOTAL ATTRIBUTED EQUITY
Bank loans payable $ 51,500 $ -
Notes and bonds payable 158,544 207,378
Accounts payable and accrued liabilities 4,278 7,806
Dividends payable 11,847 11,838
Deferred income 4,328 4,230
- -------------------------------------------------------- --------------- ---------------
230,497 231,252
- -------------------------------------------------------- --------------- ---------------
Commitments and contingencies
Total Attributed Core Group Equity 299,142 304,947
- -------------------------------------------------------- --------------- ---------------
$ 529,639 $ 536,199
======================================================== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
17
<PAGE> 19
AMERICAN HEALTH PROPERTIES, INC.
CORE GROUP COMBINED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
- --------------------------------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES
Rental income $ 16,911 $ 16,501 $ 50,343 $ 48,105
Mortgage interest income - 609 - 609
Additional rental income 2,882 2,543 8,491 7,570
Other interest income 126 218 605 1,959
Interest on loans to Psychiatric Group 425 433 1,272 1,602
- --------------------------------------------------------- ------------- ------------- ------------- -------------
20,344 20,304 60,711 59,845
- --------------------------------------------------------- ------------- ------------- ------------- -------------
EXPENSES
Depreciation and amortization 3,575 3,488 10,646 10,051
Interest expense 5,285 7,126 16,564 20,860
General and administrative 1,557 1,398 4,705 4,298
- --------------------------------------------------------- ------------- ------------- ------------- -------------
10,417 12,012 31,915 35,209
- --------------------------------------------------------- ------------- ------------- ------------- -------------
Minority interest 54 57 169 219
- --------------------------------------------------------- ------------- ------------- ------------- -------------
NET INCOME $ 9,873 $ 8,235 $ 28,627 $ 24,417
========================================================= ============= ============= ============= =============
NET INCOME PER COMMON SHARE $ 0.42 $ 0.39 $ 1.22 $ 1.17
========================================================= ============= ============= ============= =============
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING 23,522 20,920 23,511 20,911
========================================================= ============= ============= ============= =============
DIVIDENDS DECLARED PER COMMON SHARE $ 0.5050 $ 0.4950 $ 1.5150 $ 1.4850
========================================================= ============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE> 20
AMERICAN HEALTH PROPERTIES, INC.
CORE GROUP COMBINED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
1996 1995
- --------------------------------------------------------- --------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 28,627 $ 24,417
Depreciation, amortization and other non-cash items 12,255 11,694
Deferred income (243) (205)
Change in other assets 800 (479)
Change in accounts payable and accrued liabilities (3,187) (4,092)
- --------------------------------------------------------- --------------- ---------------
38,252 31,335
- --------------------------------------------------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition and construction of real estate properties (13,041) (41,256)
Construction loan fundings - (5,136)
Direct financing leases 2,329 (2,455)
Paydowns (fundings) on revolving loan to Psychiatric Group 132 4,082
Paydowns on fixed rate loan to Psychiatric Group - 10,825
Administrative capital expenditures (52) (95)
- --------------------------------------------------------- --------------- ---------------
(10,632) (34,035)
- --------------------------------------------------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on bank loans payable 51,500 58,500
Principal payments on notes payable (49,000) (24,000)
Financing costs paid (80) (276)
Proceeds from exercise of stock options 241 -
Dividends paid (35,521) (30,778)
- --------------------------------------------------------- --------------- ---------------
(32,860) 3,446
- --------------------------------------------------------- --------------- ---------------
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS (5,240) 746
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF PERIOD 7,571 1,838
- --------------------------------------------------------- --------------- ---------------
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ 2,331 $ 2,584
========================================================= =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE> 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
<PAGE> 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 $18,736,000 and $22,854,000 for the nine months ended
September 30, 1996 and 1995, respectively. The Core Group had $781,000 and
$53,000 of capitalized interest for the nine months ended September 30, 1996
and 1995, respectively.
2. ATTRIBUTED EQUITY
Stock Incentive Plans During the nine months ended September 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.
During the nine months ended September 30, 1996, options to purchase 12,500
shares of Core Group Common Stock were exercised at a weighted average exercise
price of $19.28 per share resulting in additional equity of $241,000.
21
<PAGE> 23
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO CORE GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
3. COMMITMENTS
Inter-Group Loans Repayment of inter-Group loans by the Psychiatric
Group is dependent upon the amount and timing of sales of the Psychiatric
Group's assets and paydowns received by the Psychiatric Group on borrowings
provided to psychiatric hospital operators under revolving credit agreements.
The Company's board of directors has established certain management policies
relating to the Core Group's inter-Group loans to the Psychiatric Group. Under
the policies currently in effect, which may be modified or rescinded in the
sole discretion of the Company's board of directors, the aggregate revolving
inter-Group loans owed by the Psychiatric Group to the Core Group are limited
to a maximum of $8,750,000 at any one time outstanding, which limit is to be
reduced dollar-for-dollar with any permanent repayment in the future of
borrowings under revolving credit agreements provided to Psychiatric Group
hospital operators. In addition, the limit on the aggregate revolving
inter-Group loans will not be reduced below $5,000,000, and except for such
revolving inter-Group loans, no additional fixed rate or other inter-Group
loans will be advanced by the Core Group to the Psychiatric Group.
Real Estate Properties The Core Group has the right to approve
capital expenditures at all of its properties, the option to fund certain
capital expenditures and, in certain situations, is obligated to fund approved
capital expenditures on terms comparable to the original investment. At
September 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 September 30, 1996, the Core Group had funded $1.1 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.
On November 12, 1996, the Core Group funded $2 million of a $6.2
million project for the acquisition and renovation of an existing property in
Amarillo, Texas to be operated as a long-term acute care facility by an
experienced operator. The Core Group has also agreed to provide another $13.8
million of real estate financing to the operator for other similar facilities.
In addition, the Core Group is considering making a $1.5 million equity
investment in the operator which would represent between 5% and 10% ownership.
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
<PAGE> 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 of financial condition and
results of operations 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,
including their access to alternative capital sources, 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
Third Quarter and Year to Date 1996 Compared With 1995
For the third quarter of 1996, the Core Group reported net income of
$9,873,000 or $.42 per share, an increase of $1,638,000 or 20% compared with
net income of $8,235,000 or $.39 per share for the third quarter of 1995. For
the nine months ended September 30, 1996, the Core Group reported net income of
$28,627,000 or $1.22 per share, an increase of $4,210,000 or 17% compared with
net income of $24,417,000 or $1.17 per share for the first nine months of 1995.
Rental income was $16,911,000 for the third quarter of 1996, an
increase of $410,000 or 2% from $16,501,000 for the third quarter of 1995.
Rental income was $50,343,000 for the nine months ended September 30, 1996, an
increase of $2,238,000 or 5% from $48,105,000 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
$87,000 or 2% to $3,575,000 for the third quarter of 1996 compared with
$3,488,000 for the third quarter of 1995 and an increase of $595,000 or 6% to
$10,646,000 for the nine months ended September 30, 1996 compared with
$10,051,000 for the same period in 1995.
The Core Group had no mortgage interest income for the third quarter
and first nine months of 1996 compared to $609,000 for the same periods in 1995
as a result of the payoff of a mortgage loan on a hospital located in Austin,
Texas in October 1995.
23
<PAGE> 25
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Additional rental income was $2,882,000 for the third quarter of 1996,
an increase of $339,000 or 13% from $2,543,000 for the third quarter of 1995.
Additional rental income was $8,491,000 for the nine months ended September 30,
1996, an increase of $921,000 or 12% from $7,570,000 for the comparable period
in 1995. This positive variation was primarily attributable to increased
additional rent from the Core Group's six original acute care properties and
its acute care property in Utah.
Other interest income decreased $92,000 or 42% to $126,000 for the
third quarter of 1996 from $218,000 for the third quarter of 1995. Other
interest income decreased $1,354,000 or 69% to $605,000 for the nine months
ended September 30, 1996 from $1,959,000 for the comparable period in 1995.
Other interest income for the third quarter and first nine months of 1995
included approximately $35,000 and $1,500,000, respectively, of interest on a
construction loan that subsequently converted to a mortgage loan in the third
quarter of 1995. In addition, this variation was due to a lower average balance
of direct financing leases and higher investable cash balances during both the
third quarter and first nine months of 1996 compared with the same periods in
1995.
Interest income on inter-Group loans to the Psychiatric Group was
$425,000 for the third quarter of 1996, a decrease of $8,000 or 2% from
$433,000 for the third quarter of 1995. Interest income on inter-Group loans to
the Psychiatric Group was $1,272,000 for the nine months ended September 30,
1996, a decrease of $330,000 or 21% from $1,602,000 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 $5,285,000 for the third quarter of 1996, a
decrease of $1,841,000 or 26% from $7,126,000 for the third quarter of 1995.
Interest expense was $16,564,000 for the nine months ended September 30, 1996,
a decrease of $4,296,000 or 21% from $20,860,000 for the comparable period in
1995. Interest expense decreased as a result of the $24 million, $29 million
and $20 million senior notes maturities in May 1995, May 1996 and September
1996, respectively, lower average bank loan borrowings during 1996 and an
increase in capitalized interest in 1996 compared to 1995.
General and administrative expenses were $1,557,000 for the third
quarter of 1996, an increase of $159,000 or 11% from $1,398,000 for the third
quarter of 1995. For the first nine months of 1996, general and administrative
expenses were $4,705,000, an increase of $407,000 or 9% from $4,298,000 for the
first nine months 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. The increase in the Company's consolidated general and
administrative expenses affecting the Core Group was primarily attributable to
higher shareholder reporting costs as a result of the Distribution, higher
legal costs, higher compensation and benefits expense and expenses related to
the hiring of a Chief Investment Officer.
24
<PAGE> 26
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Future Operating Results
The operators of most of the Company's facilities derive a substantial
percentage of their total revenues from federal and state health care programs
such as Medicare and Medicaid and from other third-party payors such as private
insurance companies, self-insured employers and health maintenance
organizations. Such operators also are subject to extensive federal, state and
local government regulation relating to their operations, and the Company's
facilities are subject to periodic inspection by governmental and other
authorities to assure continued compliance with mandated procedures, licensure
requirements under state law and certification standards under the Medicare and
Medicaid programs. A change in reimbursement levels under the Medicare or
Medicaid programs, a reduction in reimbursement by other third- party payors or
an operator's failure to maintain its certification under Medicare or Medicaid
programs could adversely affect revenues to the Company's facilities.
The nature of health care delivery in the United States currently is
undergoing change and further review at both the national and state levels.
Generally accepted goals of reform continue to include controlling costs and
improving access to medical care. Various plans to decrease the growth in
Medicare spending have been proposed by both Houses of Congress. These plans
have generally included revisions to 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.
25
<PAGE> 27
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Notwithstanding the potential for increasing government regulation,
the Company believes that health care will continue to be delivered on a local
and regional basis and that well-managed, high-quality, cost-controlled
facilities will continue to be an integral part of local and regional health
care delivery systems. The Company also believes that certain acute care
hospitals will need to reconfigure or expand existing facilities or to
affiliate themselves with other providers so as to become part of comprehensive
and cost-effective health care systems. Such systems likely will include lower
cost treatment settings, such as ambulatory care clinics, outpatient surgery
centers, skilled nursing facilities and medical office buildings. In general,
the Core Group facilities are part of local or regional health care delivery
systems or are in the process of becoming integrated into such systems.
The Core Group's future operating results could be affected by the
operating performance of the Core Group's lessees and borrowers. The rental and
interest obligations of its facility operators are primarily supported by the
facility-specific operating cash flow. Real estate investments in the Core
Group's portfolio are generally further supported by one or more credit
enhancements that take the form of cross-default provisions, letters of credit,
corporate and personal guarantees, security interests in cash reserve funds,
accounts receivable or other personal property and requirements to maintain
specified financial ratios. In addition, financial effects arising from the
Psychiatric Group that affect the Company's consolidated results of operations,
financial condition or borrowing costs could affect the results of operations,
financial condition or borrowing costs of the Core Group. Fundamental changes
in the psychiatric industry continue to negatively impact the facility-specific
operating cash flow at the Psychiatric Group's properties. Accordingly, the
Core Group's financial statements should be read in conjunction with the
financial statements of the Psychiatric Group and the Company's consolidated
financial statements.
Additional rental income from the Core Group's existing investments
will be affected by changes in the revenues of the underlying business
operations upon which such income is based. The Core Group's acute care
investments accounted for 95% of net additional rental income for the first
nine months of 1996, while rehabilitation investments accounted for 5%.
Historically, a substantial portion of the Core Group's additional rental
income has been attributable to six of the Core Group's original acute care
properties (the Original Properties). With the significant revenue growth at a
majority of the Original Properties in recent years, four properties had
reached the additional rent transition point by the end of 1995, one property
has reached the additional rent transition point during 1996 and it is
anticipated that the other property 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 Original Properties that had not yet reached the
transition point 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.
26
<PAGE> 28
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CORE GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's senior debt carries an implied investment grade rating
from two rating agencies. In August 1994, the Company's BBB- implied senior
debt rating was affirmed by Standard & Poor's but the outlook was revised to
negative from stable. Duff & Phelps Credit Rating Co. assigned an initial
implied senior debt rating of BBB- in November 1994. The Company has active
dialogues with Duff & Phelps Credit Rating Co. and Standard & Poor's regarding
an update of their ratings and with Moody's Investor Service regarding an
initial rating. The Company expects these ratings reviews to be completed in
the fourth quarter of 1996. There can be no assurance as to the ratings which
may be assigned to the Company.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Core Group had $5,131,000 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
September 30, 1996, the Core Group had $9,175,000 in fixed rate inter-Group
loans to the Psychiatric Group.
As of November 12, 1996, the Core Group had commitments of $21.4
million to fund real estate investments over approximately the next fifteen
months.
The Company has continued to increase its liquidity and enhance its
financial flexibility. In October 1995, the Company's Core Group received
$29.15 million as proceeds from the payoff of its interest in a mortgage loan
and completed an offering of 2,500,000 additional shares of Core Group Common
Stock resulting in net proceeds of $50.3 million. In December 1995, the Company
closed on a new $150 million unsecured revolving credit facility which matures
on December 27, 1998. As of November 12, 1996, the Company had $41.5 million
of borrowings under its revolving credit facility and had $1 million in cash
and short-term investments. The Company's total indebtedness as of November
12, 1996 was $200.1 million. The Company will utilize its revolving credit
facility to fund its future Core Group acquisitions and its other commitments.
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
<PAGE> 29
AMERICAN HEALTH PROPERTIES, INC.
PSYCHIATRIC GROUP COMBINED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
- ------------------------------------------------------ --------------- ---------------
ASSETS (Unaudited)
<S> <C> <C>
Real estate investments
Real property and mortgage notes, net $ 62,766 $ 62,813
Accumulated depreciation (4,502) (3,944)
--------------- ---------------
58,264 58,869
Other notes receivable 4,761 4,915
Other assets 769 771
- ------------------------------------------------------ --------------- ---------------
$ 63,794 $ 64,555
====================================================== =============== ===============
ATTRIBUTED LIABILITIES AND TOTAL ATTRIBUTED EQUITY
Revolving loan from Core Group $ 5,131 $ 5,263
Fixed rate loan from Core Group 9,175 9,175
Accounts payable and accrued liabilities 5 151
Dividends payable 1,355 1,668
Deferred income 145 185
- ------------------------------------------------------ --------------- ---------------
15,811 16,442
- ------------------------------------------------------ --------------- ---------------
Commitments and contingencies
Total Attributed Psychiatric Group Equity 47,983 48,113
- ------------------------------------------------------ --------------- ---------------
$ 63,794 $ 64,555
====================================================== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE> 30
AMERICAN HEALTH PROPERTIES, INC.
PSYCHIATRIC GROUP COMBINED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
1996 1995 1996 1995
- ----------------------------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES
Rental income $ 404 $ 681 $ 1,350 $ 2,372
Mortgage interest income 1,493 1,470 4,479 4,409
Additional rental and interest income 210 226 612 552
Other interest income 112 157 306 533
- ----------------------------------------------------- ------------- ------------- ------------- -------------
2,219 2,534 6,747 7,866
- ----------------------------------------------------- ------------- ------------- ------------- -------------
EXPENSES
Depreciation and amortization 186 186 558 616
Interest on loans from Core Group 425 433 1,272 1,602
General and administrative 330 266 973 669
Targeted stock issuance costs - - - 300
- ----------------------------------------------------- ------------- ------------- ------------- -------------
941 885 2,803 3,187
- ----------------------------------------------------- ------------- ------------- ------------- -------------
NET INCOME $ 1,278 $ 1,649 $ 3,944 $ 4,679
===================================================== ============= ============= ============= =============
NET INCOME PER DEPOSITARY SHARE $ 0.61 $ 0.79 $ 1.89 $ 2.24
===================================================== ============= ============= ============= =============
WEIGHTED AVERAGE
DEPOSITARY SHARES OUTSTANDING 2,093 2,091 2,092 2,091
===================================================== ============= ============= ============= =============
DIVIDENDS DECLARED PER DEPOSITARY SHARE $ 0.6500 $ 0.8000 $ 2.0000 $ 2.4000
===================================================== ============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
29
<PAGE> 31
AMERICAN HEALTH PROPERTIES, INC.
PSYCHIATRIC GROUP COMBINED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------- ---------------
1996 1995
- -------------------------------------------------------- --------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,944 $ 4,679
Depreciation, amortization and other non-cash items 653 716
Deferred income (40) (22)
Change in other assets 2 170
Change in accounts payable and accrued liabilities (146) (9)
- -------------------------------------------------------- --------------- ---------------
4,413 5,534
- -------------------------------------------------------- --------------- ---------------
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 47 10
Other notes receivable 154 4,464
- -------------------------------------------------------- --------------- ---------------
201 14,606
- -------------------------------------------------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (payments) on revolving loan from Core Group (132) (4,082)
Payments on fixed rate loan from Core Group - (10,825)
Cash paid in lieu of fractional shares - (18)
Dividends paid (4,482) (5,215)
- -------------------------------------------------------- --------------- ---------------
(4,614) (20,140)
- -------------------------------------------------------- --------------- ---------------
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS - -
CASH AND SHORT-TERM INVESTMENTS, BEGINNING OF PERIOD - -
- -------------------------------------------------------- --------------- ---------------
CASH AND SHORT-TERM INVESTMENTS, END OF PERIOD $ - $ -
======================================================== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
30
<PAGE> 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
31
<PAGE> 33
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
flow of the Company attributed to each such Group, such attribution does not
affect the respective legal title to assets or responsibility for liabilities
of the Company or any of its subsidiaries. Nor does such attribution affect the
rights of creditors of the Company or any subsidiary, including rights under
financing covenants.
Each holder of Psychiatric Group Depositary Shares or Core Group
Common Stock is a holder of an issue of capital stock of the entire Company and
is subject to risks associated with an investment in the Company and all of its
businesses, assets and liabilities. Financial effects arising from one Group
that affect the Company's consolidated results of operations, financial
condition, cash flows or borrowing costs can affect the results of operations,
financial condition, cash flows or borrowing costs of the other Group. In
addition, net losses of either Group, as well as dividends and distributions
on, and repurchases of, Psychiatric Group Depositary Shares or Core Group
Common Stock will reduce the funds of the Company legally available for
dividends on both the Psychiatric Group Depositary Shares and Core Group Common
Stock. Accordingly, the Psychiatric Group's financial statements should be
read in conjunction with the Company's consolidated financial statements and
the financial statements of the Core Group.
These financial statements include the accounts of the Psychiatric
Group business. The Psychiatric Group and the Core Group financial statements,
taken together, comprise all of the accounts included in the Company's
consolidated financial statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Interest Paid Interest paid by the Psychiatric Group on inter-Group
loans from the Core Group was $1,272,000 and $1,602,000 for the nine months
ended September 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
32
<PAGE> 34
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
inter-Group loans, no additional fixed rate or other inter-Group loans will be
advanced to the Psychiatric Group by the Core Group.
3. COMMITMENTS
Other Notes Receivable The Psychiatric Group provides financing at
variable rates to certain psychiatric hospital operators under revolving credit
agreements. The aggregate commitment under these credit agreements was $5.7
million at September 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 September 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
September 30, 1996 totaled $7,224,000 and $9,781,000, 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 Psychiatric Group has completed formal documentation of an
agreement with the owner for the deferral of rent and interest payments of the
Manors while certain restructuring and restaffing of the facility occurs.
Pursuant to the deferral arrangements, The Manors' monthly base rent payments
of $50,000 were deferred from February 1996 through September 1996 and such
deferred payments become payable twelve months from the month of deferral. In
accordance with the terms of the deferral arrangements, The Manors
33
<PAGE> 35
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
resumed making its full monthly base rent payments of $50,000 on October 1,
1996. 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
third quarter and first nine months of 1996, The Manors' rent and interest
deferrals amounted to approximately $.09 and $.25 per Psychiatric Group
Depositary Share, respectively. Although the operator and Quorum are both
highly experienced and the restructuring and restaffing measures appear
promising, there can be no assurance as to the eventual outcome of such changes
or that the Manors will be able to meet its restructured obligations.
Although The Retreat has made all required payments in 1996 through
November, The Retreat did not pay its July rent until August due to cash flow
constraints. 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 the first quarter of 1996 have had an adverse impact on RCC's cash flow and
its ability to fund its rental and interest obligations to the 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 September 30, 1996 totaled $8,098,000,
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 were deferred for May and June of 1996 and 50% of such
monthly payments were deferred from July 1996 through October 1996, at which
time monthly base rent payments returned 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 rent
obligations are not recognized as income by the Psychiatric Group until such
time as they are paid. The Psychiatric Group's property tax advance has been
reduced by monthly payments to $137,000 as of November 1, 1996. RCC's rent
deferral amounted to approximately $.06 and $.14 per Psychiatric Group
Depositary Share for the third quarter and first nine months of 1996,
respectively. 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, that the deferred amounts will be
paid or that RCC will be able to meet its restructured obligations.
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 operator believes that the release of this collateral
will permit it to obtain the capital required to develop an integrated
behavioral health care delivery system in lower and upper New York
34
<PAGE> 36
AMERICAN HEALTH PROPERTIES, INC.
NOTES TO PSYCHIATRIC GROUP COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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 and third quarter of 1996 from $.80 per share in
the fourth quarter of 1995.
35
<PAGE> 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 of financial condition and
results of operations 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, including their access to alternative capital sources, 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
Third Quarter and Year to Date 1996 Compared With 1995
For the third quarter of 1996, the Psychiatric Group reported net
income of $1,278,000 or $.61 per share, a decrease of $371,000 or 22% compared
with net income of $1,649,000 or $.79 per share for the third quarter of 1995.
For the nine months ended September 30, 1996, the Psychiatric Group reported
net income of $3,944,000 or $1.89 per share, a decrease of $735,000 or 16%
compared with net income of $4,679,000 or $2.24 per share for the first nine
months of 1995. The decrease in net income for the third quarter and first
nine 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 nine months of 1996.
Rental income was $404,000 for the third quarter of 1996, a decrease
of $277,000 or 41% from $681,000 for the third quarter of 1995. Rental income
was $1,350,000 for the nine months ended September 30, 1996, a decrease of
$1,022,000 or 43% from $2,372,000 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 $275,000 and $692,000 of rent by two psychiatric operators during
the third quarter and first nine months of 1996, respectively. The property
sales resulted in a decrease in depreciation and amortization of $58,000 or 9%
to $558,000 for the first nine months of 1996 compared with $616,000 for the
first nine months of 1995.
36
<PAGE> 38
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Additional rental and interest income was $210,000 for the third
quarter of 1996, a decrease of $16,000 or 7% from $226,000 for the third
quarter of 1995. Additional rental and interest income was $612,000 for the
nine months ended September 30, 1996, an increase of $60,000 or 11% from
$552,000 for the comparable period in 1995. These differences were primarily
attributable to variations in revenues upon which such additional rent and
interest is based.
Other interest income decreased $45,000 or 29% to $112,000 for the
third quarter of 1996 from $157,000 for the third quarter of 1995. Other
interest income decreased $227,000 or 43% to $306,000 for the nine months ended
September 30, 1996 from $533,000 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
$33,000 and $132,000 of interest by a psychiatric operator during the third
quarter and first nine months of 1996, respectively.
Interest expense on inter-Group loans from the Core Group was $425,000
for the third quarter of 1996, a decrease of $8,000 or 2% from $433,000 for the
third quarter of 1995. Interest expense on inter-Group loans from the Core
Group was $1,272,000 for the nine months ended September 30, 1996, a decrease
of $330,000 or 21% from $1,602,000 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 were $330,000 for the third
quarter of 1996, an increase of $64,000 or 24% from $266,000 for the third
quarter of 1995. For the first nine months of 1996, general and administrative
expenses were $973,000, an increase of $304,000 or 45% from $669,000 for the
first nine months 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. Costs
allocated to the Psychiatric Group based on revenues increased slightly for the
third quarter of 1996 and decreased for the first nine months of 1996. The
Psychiatric Group was specifically charged for $157,000 and $442,000 of costs
in the third quarter and first nine months of 1996, respectively, compared with
$100,000 for the same periods in 1995 for financial advisory services. These
services were 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.
37
<PAGE> 39
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Future Operating Results
The operators of most of the Company's facilities derive a substantial
percentage of their total revenues from federal and state health care programs
such as Medicare and Medicaid and from other third-party payors such as private
insurance companies, self-insured employers and health maintenance
organizations. Such operators also are subject to extensive federal, state and
local government regulation relating to their operations, and the Company's
facilities are subject to periodic inspection by governmental and other
authorities to assure continued compliance with mandated procedures, licensure
requirements under state law and certification standards under the Medicare and
Medicaid programs. A change in reimbursement levels under the Medicare or
Medicaid programs, a reduction in reimbursement by other third- party payors or
an operator's failure to maintain its certification under Medicare or Medicaid
programs could adversely affect revenues to the Company's facilities.
The nature of health care delivery in the United States currently is
undergoing change and further review at both the national and state levels.
Generally accepted goals of reform continue to include controlling costs and
improving access to medical care. Various plans to decrease the growth in
Medicare spending have been proposed by both Houses of Congress. These plans
have generally included revisions to 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
38
<PAGE> 40
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 November 12, 1996, outstanding borrowings under such agreements totaled
$4,475,000, and the Psychiatric Group has committed to fund an additional
$1,225,000 of borrowings upon request, subject to certain conditions. These
borrowings, which are secured by accounts receivable and certain personal
property and which contain events of default that would be triggered by
defaults under the lease relating to the relevant psychiatric hospital, are the
primary source of financing for these operators' operating and capital needs.
These psychiatric hospitals have, from time to time, been unable to generate
sufficient cash flow for working capital and the development of new programs.
In certain cases, these psychiatric hospitals have not been able to pay down
the outstanding borrowings under the revolving credit agreements provided by
the Psychiatric Group or to secure replacement financing from third- party
lenders. To the extent the psychiatric hospitals have increased working
capital needs in the future, the Psychiatric Group may be the only source of
such financing. In the event the Company's Board of Directors determines that
it is appropriate to provide additional working capital financing to a
psychiatric hospital 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 significant
psychiatric investment write-downs in 1992 and 1994 and the restructuring of
psychiatric operator payment obligations. 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 completed various modifications to the terms of one of its Florida
psychiatric investments and its New York psychiatric investments and is
proceeding with
39
<PAGE> 41
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
various modifications to the terms of its psychiatric investment in Illinois.
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 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 quarterly fee for supplemental monitoring was reduced from
$75,000 to $25,000 effective October 1, 1996. The cost of the financial
advisory 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 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
September 30, 1996 totaled $7,224,000 and $9,781,000, 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 Psychiatric Group has completed formal documentation of an
agreement with the owner for the deferral of rent and interest payments of the
Manors while certain restructuring and restaffing of the facility occurs.
Pursuant to the deferral arrangements, The Manors' monthly base rent payments
of $50,000 were deferred from February 1996 through September 1996 and such
deferred payments become payable twelve months from the month of deferral. In
accordance with the terms of the deferral arrangements, The Manors resumed
making its full monthly base rent payments of $50,000 on October 1, 1996. 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 third quarter
and first nine months of 1996, The Manors' rent and interest deferrals amounted
to approximately $.09 and $.25 per Psychiatric Group Depositary Share,
respectively. Although the operator and Quorum are both highly experienced and
the
40
<PAGE> 42
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
restructuring and restaffing measures appear promising, there can be no
assurance as to the eventual outcome of such changes or that the Manors will be
able to meet its restructured obligations.
Although The Retreat has made all required payments in 1996 through
November, The Retreat did not pay its July rent until August due to cash flow
constraints. 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 the first quarter of 1996 have had an adverse impact on RCC's cash flow and
its ability to fund its rental and interest obligations to the 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 September 30, 1996 totaled $8,098,000,
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 were deferred for May and June of 1996 and 50% of such
monthly payments were deferred from July 1996 through October 1996, at which
time monthly base rent payments returned 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 rent
obligations are not recognized as income by the Psychiatric Group until such
time as they are paid. The Psychiatric Group's property tax advance has been
reduced by monthly payments to $137,000 as of November 1, 1996. RCC's rent
deferral amounted to approximately $.06 and $.14 per Psychiatric Group
Depositary Share for the third quarter and first nine months of 1996,
respectively. 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, that the deferred amounts will be
paid or that RCC will be able to meet its restructured obligations.
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 operator believes that the release of this collateral
will permit it 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
41
<PAGE> 43
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 and third quarter of 1996 from $.80 per share
in the fourth quarter of 1995.
LIQUIDITY AND CAPITAL RESOURCES
As of November 12, 1996, the Psychiatric Group had aggregate unfunded
commitments under revolving credit agreements provided to psychiatric hospital
operators of $1.2 million.
At September 30, 1996, the Psychiatric Group had $5,131,000 and
$9,175,000 outstanding under its revolving inter-Group loan from the Core Group
and its fixed rate inter-Group loan from the Core Group, respectively. The
Psychiatric Group is required to use the net proceeds from the disposition of
Psychiatric Group assets to pay down its outstanding revolving inter-Group loan
(to the extent of the psychiatric hospital operator borrowings under revolving
credit agreements associated with the asset or assets sold) with any excess
used to pay down the balance outstanding under the fixed rate inter-Group loan.
The Psychiatric Group reduced the combined balance of the revolving inter-Group
and fixed rate inter-Group loans by $15,150,000 in the first quarter of 1995
with proceeds from such asset sales and operator borrowing paydowns. The
Company's Board of Directors has established certain management policies
relating to the Psychiatric Group's inter-Group loans from the Core Group.
Under the policies currently in effect, which may be modified or rescinded in
the sole discretion of the Company's Board of Directors, the aggregate
revolving inter-Group loans owed to the Core Group by the Psychiatric Group are
limited to a maximum of $8,750,000 at any one time outstanding, which limit is
to be reduced dollar-for-dollar with any permanent repayment in the future of
borrowings under revolving credit agreements provided to Psychiatric Group
hospital operators. In addition, the limit on the aggregate revolving
inter-Group loans will not be reduced below $5,000,000, and except for such
revolving inter-Group loans, no additional fixed rate or other inter-Group
loans will be advanced to the Psychiatric Group by the Core Group. The
Psychiatric Group has no third-party sources of additional financing and, as a
result, will be dependent on the Core Group for all such financing. Although
the 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.
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<PAGE> 44
AMERICAN HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PSYCHIATRIC GROUP
COMBINED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
43
<PAGE> 45
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 12, 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)
44
<PAGE> 46
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 - Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,331
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> (86,359)
<TOTAL-ASSETS> 579,127
<CURRENT-LIABILITIES> 0
<BONDS> 158,544
0
2
<COMMON> 235
<OTHER-SE> 346,888
<TOTAL-LIABILITY-AND-EQUITY> 579,127
<SALES> 0
<TOTAL-REVENUES> 66,186
<CGS> 0
<TOTAL-COSTS> 11,204
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,564
<INCOME-PRETAX> 32,571
<INCOME-TAX> 0
<INCOME-CONTINUING> 32,571
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,571
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>Primary and fully diluted earnings per share attributable to Core Group
Common Stock $1.22; Psychiatric Group Depository Shares $1.89
</FN>
</TABLE>
