UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
-------------------------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------------ ------------------
Commission file number
000-32607
------------------------------
CNL Retirement Properties, Inc.
-----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 59-3491443
-------------------------------------- --------------------------------------
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
450 South Orange Avenue
Orlando, Florida 32801
-------------------------------------- --------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number
(including area code) (407) 650-1000
--------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
24,144,571 shares of common stock, $.01 par value, outstanding as of August 7,
2002.
CONTENTS
Part I Page
----
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Earnings 2
Condensed Consolidated Statements of Stockholders' Equity 3
Condensed Consolidated Statements of Cash Flows 4
Notes to Condensed Consolidated Financial Statements 5-13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14-21
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
Part II
Other Information 23-27
CNL RETIREMENT PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
2002 2001
------------------ ------------------
ASSETS
Land, buildings and equipment on operating leases, less
accumulated depreciation of $1,992,989 and $827,127,
respectively $ 145,722,178 $ 35,232,568
Cash and cash equivalents 69,268,957 26,721,107
Restricted cash 330,089 35,109
Receivables 514,165 180,163
Investment in real estate partnership 300,000 --
Loan costs, less accumulated amortization of $65,367 and
$18,981, respectively 576,607 36,936
Accrued rental income 451,790 97,793
Other assets 4,204,900 2,143,213
------------------ ------------------
$ 221,368,686 $ 64,446,889
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgages payable $ 36,417,422 $ --
Due to related parties 1,360,818 1,772,807
Accounts payable and accrued expenses 198,522 294,839
Security deposits 3,204,875 1,363,986
Rents paid in advance 54,539 105,215
------------------ ------------------
Total liabilities 41,236,176 3,536,847
------------------ ------------------
Minority interest 8,598,410 --
------------------ ------------------
Stockholders' equity:
Preferred stock, without par value.
Authorized and unissued 3,000,000 shares -- --
Excess shares, $.01 par value per share.
Authorized and unissued 103,000,000 shares -- --
Common stock, $.01 parvalue per share.
Authorized 100,000,000 shares, issued 19,828,933 and
7,141,131 shares, respectively, outstanding 19,820,921
and 7,134,400 shares, respectively 198,209 71,344
Capital in excess of par value 173,891,489 61,786,149
Accumulated distributions in excess of net earnings (2,555,598) (947,451)
------------------ ------------------
Total stockholders' equity 171,534,100 60,910,042
------------------ ------------------
$ 221,368,686 $ 64,446,889
================== ==================
See accompanying notes to condensed consolidated financial statements.
CNL RETIREMENT PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Quarter Six Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
--------------- ------------- -------------- -------------
Revenues:
Rental income from operating leases $ 2,976,424 $ 344,940 $ 4,377,797 $ 689,880
FF&E reserve income 24,403 9,668 33,738 17,526
Interest and other income 304,842 1,728 561,895 5,292
-------------- ------------- ------------- -------------
3,305,669 356,336 4,973,430 712,698
-------------- ------------- ------------- -------------
Expenses:
Interest 263,468 37,055 372,160 103,793
General operating and administrative 302,619 119,885 549,458 209,881
Asset management fees to related party 142,747 20,774 207,975 41,547
Reimbursement of operating expenses
from related party -- (145,015) -- (145,015)
Depreciation and amortization 793,851 111,692 1,212,249 223,199
-------------- ------------- ------------- -------------
1,502,685 144,391 2,341,842 433,405
-------------- ------------- ------------- -------------
Earnings Before Share in Loss of
Investment in Real Estate Partnership
and Minority Interest 1,802,984 211,945 2,631,588 279,293
Share in Loss of Investment in Real Estate
Partnership (2,236) -- (2,236) --
Minority interest (98,410) -- (98,410) --
-------------- ------------- ------------- -------------
Net Earnings $ 1,702,338 $ 211,945 $ 2,530,942 $ 279,293
============== ============= ============= =============
Net Earnings Per Share of Common Stock
(Basic and Diluted) $ 0.11 $ 0.15 $ 0.20 $ 0.20
============== ============= ============= =============
Weighted Average Number of Shares of
Common Stock Outstanding (Basic and
Diluted) 15,945,853 1,443,030 12,831,671 1,363,640
============== ============= ============= =============
See accompanying notes to condensed consolidated financial statements.
CNL RETIREMENT PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Six Months Ended June 30, 2002 and Year Ended December 31, 2001
Common stock Accumulated
------------------------------- Capital in distributions
Number Par excess of in excess of
of shares value par value net earnings Total
-------------- ------------ ---------------- ---------------- ---------------
Balance at December 31, 2000 1,185,840 $ 11,858 $ 9,547,784 $ (356,094) $ 9,203,548
Subscriptions received for common
stock through public offering and
distribution reinvestment plan 5,951,975 59,520 59,460,231 -- 59,519,751
Retirement of common stock (3,415) (34) (31,386) -- (31,420)
Stock issuance costs -- -- (7,190,480) -- (7,190,480)
Net earnings -- -- -- 915,965 915,965
Distributions declared and paid
($0.6996 per share) -- -- -- (1,507,322) (1,507,322)
--------------- --------------- --------------- ---------------- -----------------
Balance at December 31, 2001 7,134,400 71,344 61,786,149 (947,451) 60,910,042
Subscriptions received for common
stock through public offering and
distribution reinvestment plan 12,687,802 126,878 126,751,140 -- 126,878,018
Retirement of common stock (1,281) (13) (11,774) -- (11,787)
Stock issuance costs -- -- (14,634,026) -- (14,634,026)
Net earnings -- -- -- 2,530,942 2,530,942
Distributions declared and paid
($0.3498 per share) -- -- -- (4,139,089) (4,139,089)
--------------- ------------- --------------- ---------------- ---------------
Balance at June 30, 2002 19,820,921 $ 198,209 $ 173,891,489 $ (2,555,598) $ 171,534,100
=============== ============= =============== ================ ===============
See accompanying notes to condensed consolidated financial statements.
CNL RETIREMENT PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
2002 2001
------------------ -------------------
Increases (Decreases) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities $ 4,896,311 $ 385,659
------------------- -------------------
Net Cash Used in Investing Activities:
Additions to land, buildings and equipment on
operating leases (92,398,063) (3,887)
Investment in real estate partnership (302,236) --
Payment of acquisition costs (8,272,827) (168,774)
Increase in restricted cash (294,980) (14,168)
------------------- -------------------
Net cash used in investing activities (101,268,106) (186,829)
------------------- -------------------
Net Cash Provided by (Used in) Financing Activities:
Repayment of borrowings on line of credit -- (3,434,000)
Proceeds from borrowings on mortgage loans 23,520,000 --
Principal payments on mortgage loans (76,975) --
Payment of loan costs (586,057) --
Subscriptions received from stockholders 126,878,018 4,073,720
Distributions to stockholders (4,139,089) (467,809)
Retirement of common stock (26,507) (5,226)
Payment of stock issuance costs (15,149,745) (409,742)
Contributions by minority interest 8,500,000 --
------------------- -------------------
Net cash provided by (used in) financing
activities 138,919,645 (243,057)
------------------- -------------------
Net Increase (Decrease) in Cash and Cash Equivalents 42,547,850 (44,227)
Cash and Cash Equivalents at Beginning of Period 26,721,107 177,884
------------------- -------------------
Cash and Cash Equivalents at End of Period $ 69,268,957 $ 133,657
=================== ===================
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Mortgage assumed on property purchase $ 12,974,397 $ --
=================== ===================
See accompanying notes to condensed consolidated financial statements.
CNL RETIREMENT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Quarters and Six Months Ended June 30, 2002 and 2001
1. Organization and Nature of Business:
------------------------------------
CNL Retirement Properties, Inc. was organized pursuant to the laws of
the state of Maryland on December 22, 1997 to invest in real estate
properties (the "Property or Properties") related to health care and
seniors' housing facilities ("Retirement Facilities") located across
the United States. The term "Company" includes, unless the context
otherwise requires, CNL Retirement Properties, Inc. and its
subsidiaries.
The Retirement Facilities may include congregate living, assisted
living and skilled nursing facilities, continuing care retirement
communities and life care communities, and medical office buildings and
walk-in clinics. The Company may provide mortgage financing ("Mortgage
Loans") to operators of Retirement Facilities in the aggregate
principal amount of approximately 5 to 10 percent of the Company's
total assets. The Company also may offer furniture, fixture and
equipment financing ("Secured Equipment Leases") to operators of
Retirement Facilities. Any Secured Equipment Leases will be funded from
the proceeds of a loan in an amount up to 10 percent of the Company's
total assets.
2. Summary of Significant Accounting Policies:
-------------------------------------------
Basis of Presentation - The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to
Form 10-Q. Accordingly, they do not include all of the information and
note disclosures required by accounting principles generally accepted
in the United States for complete financial statements. The condensed
consolidated financial statements reflect all adjustments, consisting
of normal recurring adjustments, which are, in the opinion of
management, necessary for a fair statement of the results for the
interim periods presented. Operating results for the quarter and six
months ended June 30, 2002, may not be indicative of the results that
may be expected for the year ending December 31, 2002. Amounts included
in the financial statements as of December 31, 2001, have been derived
from audited financial statements as of that date.
These unaudited financial statements should be read in conjunction with
the financial statements and notes thereto included in the Report on
Form 10-K of CNL Retirement Properties, Inc. and its subsidiaries for
the year ended December 31, 2001.
Principles of Consolidation - The accompanying unaudited condensed
consolidated financial statements include the accounts of CNL
Retirement Properties, Inc. and its majority owned subsidiaries. All
significant intercompany balances and transactions have been eliminated
in consolidation. Interests of unaffiliated third parties are reflected
as minority interest for less than 100 percent owned and majority
controlled entities.
CNL RETIREMENT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
Quarters and Six Months Ended June 30, 2002 and 2001
2. Summary of Significant Accounting Policies - Continued:
-------------------------------------------------------
Recent Accounting Pronouncements - In April 2002, the FASB issued FAS
Statement No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Ammendment of FASB Statement No. 13, and Technical Corrections." This
statement recinds FASB Statement No. 4, "Reporting Gains and Losses
from Extinguishment of Debt," and an amendment of that Statement, FASB
Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements." This statement also rescinds FASB Statement No. 44,
"Accounting for Intangible Assets of Motor Carriers." This statement
amends FASB Statement No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease
modifications that have economic effects that are similar to
sale-leaseback transactions. This statement also amends other existing
authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed
conditions. The provisions of this statement related to the rescission
of Statement 4 are applicable in fiscal years beginning after May 15,
2002. The provisions of this statement related to Statement 13 are
effective for transactions occurring after May 15, 2002. All other
provisions of this statement are effective for financial statements
issued on or after May 15, 2002. The provisions of this statement are
not expected to have a significant impact on the financial position or
results of operations of the Company.
In July 2002, the FASB issued FAS Statement No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." The statement
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. Examples of costs covered by
the statement include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. The
statement is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The adoption of this statement is
not expected to have a significant impact on the financial position or
results of operations of the Company.
3. Public Offerings:
-----------------
On May 24, 2002, the Company completed its offering of up to 15,500,000
shares of common stock ($155,000,000) (the "2000 Offering"), which
included up to 500,000 shares ($5,000,000) available to stockholders
who elected to participate in the Company's distribution reinvestment
plan. In connection with the 2000 Offering, the Company received
subscription proceeds of $155,000,000 (15,500,000 shares), including
$418,670 (41,867 shares) through the distribution reinvestment plan.
Immediately following the completion of the 2000 Offering, the Company
commenced an offering of up to 45,000,000 shares of common stock
($450,000,000) (the "2002 Offering"). Of the 45,000,000 shares of
common stock offered, up to 5,000,000 are available to stockholders
purchasing shares through the Company's distribution reinvestment plan.
The price per share and other terms of the 2002 Offering, including the
percentage of gross proceeds payable (i) to the managing dealer for
selling commissions and expenses in connection with the offering and
(ii) to CNL Retirement Corp. (the "Advisor") for acquisition fees, are
substantially the same as for the Company's 2000 Offering. As of June
30, 2002, the Company had received total subscription proceeds from its
initial public offering, the 2000 Offering and the 2002 Offering of
$198,089,362 (19,808,933 shares), including $595,911 (59,591 shares)
through the distribution reinvestment plan.
CNL RETIREMENT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
Quarters and Six Months Ended June 30, 2002 and 2001
4. Land, Buildings and Equipment on Operating Leases:
--------------------------------------------------
During the six months ended June 30, 2002, the Company acquired eight
Properties throughout the United States resulting in the Company owning
a total of eleven Properties (six directly and five through a joint
venture). Land, buildings and equipment on operating leases consisted
of the following at:
June 30, December 31,
2002 2001
------------------- --------------------
Land $ 16,317,346 $ 4,649,497
Buildings 125,715,236 29,209,418
Equipment 5,682,585 2,200,780
------------------ -------------------
147,715,167 36,059,695
Less accumulated depreciation (1,992,989) (827,127)
------------------- --------------------
$ 145,722,178 $ 35,232,568
=================== ====================
The Properties are leased on a long-term, triple-net basis to third
party lessees. The leases are for 15 years, provide for minimum and
contingent rent and require the tenants to pay executory costs. In
addition, the tenants pay all property taxes and assessments and carry
insurance coverage for public liability, property damage, fire and
extended coverage. The lease options allow the tenants to renew the
leases from ten to 20 successive years subject to the same terms and
conditions of the initial leases.
The leases provide for increases in the minimum annual rents commencing
at predetermined intervals during the leases. Such amounts are
recognized on a straight-line basis over the terms of the leases
commencing on the date the Properties were placed in service. For the
quarter and six months ended June 30, 2002, the Company recognized
$223,845 and $353,997, respectively, of such rental income. These
amounts are included in rental income from operating leases in the
accompanying consolidated statements of earnings.
The following is a schedule of future minimum lease payments to be
received on the noncancellable operating leases at June 30, 2002:
2002 $ 6,750,695
2003 13,575,075
2004 3,692,078
2005 13,811,235
2006 13,932,586
Thereafter 154,876,921
----------------
$ 216,638,590
================
Since the leases are renewable at the option of the tenants, the above
table only presents future minimum lease payments due during the
initial lease terms. In addition, this table does not include any
amounts for future contingent rents, which may be received on the
leases based on a percentage of the tenants' gross sales.
CNL RETIREMENT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
Quarters and Six Months Ended June 30, 2002 and 2001
5. Investment in Real Estate Partnership:
--------------------------------------
On May 30, 2002, the Company acquired a 10 percent interest in a
limited partnership, CNL Plaza, Ltd., that owns an office building
located in Orlando, Florida, in which the Advisor and its affiliates
lease office space. The Company's investment in the partnership is
accounted for using the equity method. The remaining interest in the
limited partnership is owned by several affiliates of the Advisor. The
following presents unaudited condensed financial information for CNL
Plaza, Ltd. as of June 30, 2002 and for the period May 30, 2002 through
June 30, 2002:
Balance Sheet:
Land, buildings and equipment, net $ 54,899,322
Other assets 10,977,994
Notes and mortgages payable 63,925,586
Other liabilities 823,858
Partners' capital 1,127,872
Income Statement:
Revenues 897,255
Expenses 919,615
Net income (22,360)
6. Indebtedness:
-------------
In February 2002, the Company assumed a mortgage of $12,974,397 that
matures on October 2, 2003, in conjunction with the purchase of a
Property located in Oak Park, Illinois. The mortgage bears interest at
a floating rate of (i) 350 basis points over the 30-day LIBOR if LIBOR
is over 2.6 percent or (ii) 440 basis points over the 30-day LIBOR if
LIBOR is under 2.6 percent not to exceed 8 percent. In accordance with
the provisions of the mortgage, the Company has placed $277,821 in an
escrow reserve account that represents three months of debt service
related to the mortgage. This escrow reserve is included in restricted
cash at June 30, 2002.
On June 7, 2002, a joint venture in which the Company owns a 76.75
percent interest borrowed $23,520,000 in the form of a commercial paper
backed loan secured by certain Properties. The loan is funded from
proceeds received from the sale of 30-day commercial paper. The
commercial paper is re-marketed to investors every 30 days upon
maturity. The joint venture has a liquidity facility in place in the
event that the marketing effort is unsuccessful. The liquidity agent
has provided a liquidity facility for up to 102 percent of the
outstanding loan balance. In the event the liquidity provider defaults,
a participating liquidity agent will provide up to $20,000,000 and the
Company has agreed to provide liquidity for any amount in excess of
$20,000,000 not to exceed $3,520,000. Interest is payable monthly with
principal due when the commercial paper loan matures on June 6, 2007.
The commercial paper loan bears interest at the commercial paper rate
as determined by market demand (1.95 percent as of June 30, 2002) plus
a margin of 1.86 percent, which is inclusive of liquidity fees and
administrative costs. As of June 30, 2002, the commercial paper loan
interest rate was 3.81 percent. The weighted average interest rate for
the period June 7, 2002 through June 30, 2002 was 3.79 percent.
CNL RETIREMENT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
Quarters and Six Months Ended June 30, 2002 and 2001
7. Redemption of Shares:
---------------------
The Company has a redemption plan under which the Company may elect to
redeem shares, subject to certain conditions and limitations. Under the
redemption plan, prior to such time, if any, as listing occurs any
stockholder who has held shares for at least one year may present all
or any portion equal to at least 25 percent of their shares to the
Company for redemption in accordance with the procedures outlined in
the redemption plan. Upon presentation, the Company may, at its option,
redeem the shares, subject to certain conditions and limitations.
However, at no time during a 12-month period may the number of shares
redeemed by the Company exceed 5 percent of the number of shares of the
Company's outstanding common stock at the beginning of such 12-month
period. During the six months ended June 30, 2002, 1,281 shares of
common stock were redeemed for $11,787 ($9.20 per share) and retired
from shares outstanding of common stock.
8. Stock Issuance Costs:
---------------------
The Company has incurred certain expenses in connection with its
offerings, including commissions, marketing support fees, due diligence
expense reimbursements, filing fees, and legal, accounting, printing
and escrow fees, which have been deducted from the gross proceeds of
the offerings. During the six months ended June 30, 2002, the Company
incurred $14,634,026 in stock issuance costs, including $10,191,304 in
commissions, marketing support fees and due diligence expense
reimbursements (see Note 10). These amounts have been charged to
stockholders' equity. In connection with each of the 2000 Offering and
the 2002 Offering, offering expenses paid by the Company together with
selling commissions, marketing support fees, due diligence expense
reimbursements and the soliciting dealer servicing fee incurred by the
Company will not exceed 13 percent of the proceeds raised in each such
offering.
9. Distributions:
--------------
For the six months ended June 30, 2002, approximately __ percent of the
distributions paid to stockholders were considered ordinary income and
approximately __ percent were considered a return of capital for
federal income tax purposes. No amounts distributed to stockholders for
the six months ended June 30, 2002, are required to be or have been
treated by the Company as a return of capital for purposes of
calculating the stockholders' return on their invested capital. The
characterization for tax purposes of distributions declared for the six
months ended June 30, 2002, may not be indicative of the
characterization of distributions that may be expected for the year
ending December 31, 2002.
10. Related Party Arrangements:
---------------------------
Certain directors and officers of the Company hold similar positions
with CNL Retirement Corp. (the "Advisor") and the managing dealer of
the Company's public offerings, CNL Securities Corp. These affiliates
are entitled to receive fees and compensation in connection with the
offerings and the acquisition, management and sale of the assets of the
Company.
CNL RETIREMENT PROPERTIES, INC.
AND SUBSIDIARIES NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
Quarters and Six Months Ended June 30, 2002 and 2001
10. Related Party Arrangements - Continued:
---------------------------------------
CNL Securities Corp. is entitled to receive commissions amounting to
7.5 percent of the total amount raised from the sale of shares for
services in connection with the offerings, a substantial portion of
which has been or will be paid as commissions to other broker-dealers.
During the six months ended June 30, 2002, the Company incurred
$9,515,851 of such fees, of which $8,885,503 has been or will be paid
by CNL Securities Corp. as commissions to other broker-dealers.
In addition, CNL Securities Corp. is entitled to receive a marketing
support and due diligence expense reimbursement fee equal to 0.5
percent of the total amount raised from the sale of shares in the 2000
Offering, all or a portion of which may be reallowed to other
broker-dealers. Commencing with the 2002 Offering, CNL Securities Corp.
is entitled to receive marketing support fees of 0.5 percent, and due
diligence expense reimbursements of up to 0.125 percent, of the total
amount raised from the sale of shares in the 2002 Offering, a portion
of which may be reallowed to other broker-dealers. During the six
months ended June 30, 2002, the Company incurred $675,452 of such fees,
the majority of which were reallowed to other broker-dealers and from
which all bona fide due diligence expenses have been or will be paid.
CNL Securities Corp. will also receive, in connection with the 2000
Offering, a soliciting dealer servicing fee payable by the Company
beginning on December 31, 2003 and every December 31 thereafter until
the Company's shares are listed on a national securities exchange or
over-the-counter market ("Listing"). The soliciting dealer servicing
fee will be equal to 0.20 percent of the aggregate investment of
stockholders who purchased shares in the 2000 Offering. CNL Securities
Corp. in turn may pay all or a portion of such fees to soliciting
dealers whose clients hold shares on such date. As of June 30, 2002, no
such fees had been incurred.
The Advisor is entitled to receive acquisition fees for services in
identifying Properties and structuring the terms of the leases of the
Properties and Mortgage Loans equal to 4.5 percent of gross proceeds of
the offerings and loan proceeds from permanent financing, excluding
that portion of the permanent financing used to finance Secured
Equipment Leases. The Advisor is also entitled to receive acquisition
fees equal to 4.5 percent of amounts outstanding on the line of credit,
if any, at the time Listing occurs. During the six months ended June
30, 2002, the Company incurred $7,350,565 of such fees, including
$1,642,248 of acquisition fees on permanent debt. Such fees are
included in other assets prior to being allocated to individual
Properties. In addition to acquisition fees, the Advisor may pay
miscellaneous acquisition costs on behalf of the Company. Such costs
are reimbursed to the Advisor on a monthly basis.
The Company incurs operating expenses which, in general, are expenses
relating to administration of the Company on an ongoing basis. Pursuant
to an advisory agreement, the Advisor is required to reimburse the
Company the amount by which the total operating expenses paid or
incurred by the Company exceed in any four consecutive fiscal quarters
(the "Expense Year") the greater of 2 percent of average invested
assets or 25 percent of net income (the "Expense Cap"). Operating
expenses for the Expense Year ended June 30, 2001 exceeded the Expense
Cap by $145,015; therefore, the Advisor reimbursed the Company such
amount in accordance with the advisory agreement. Operating expenses
for the Expense Year ended June 30, 2002 did not exceed the Expense
Cap.
CNL RETIREMENT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
Quarters and Six Months Ended June 30, 2002 and 2001
10. Related Party Arrangements - Continued:
---------------------------------------
The Company and the Advisor have entered into an advisory agreement
pursuant to which the Advisor receives a monthly asset management fee
of one-twelfth of 0.60 percent of the Company's real estate asset value
and the outstanding principal balance of any Mortgage Loan as of the
end of the preceding month. During the six months ended June 30, 2002,
the Company incurred $207,975 of such fees.
An affiliate of the Advisor made the arrangements for the $23,520,000
commercial paper loan described in Note 6. The affiliate was paid a 2
percent structuring fee ($470,400), which is included in the Company's
deferred loan costs as of June 30, 2002, and is being amortized over
the term of the loan. In addition, the monthly interest payment due
under the commercial paper loan includes a margin of 30 basis points
payable to the affiliate for the monthly services provided by the
affiliate related to the administration of the commercial paper loan.
The Company maintains bank accounts in a bank in which certain officers
and directors of the Company serve as directors, and in which an
affiliate of the Advisor and an executive officer of the Company are
stockholders. The amount deposited with this affiliate was $3,316,928
and $3,000,000 at June 30, 2002 and December 31, 2001, respectively.
On May 30, 2002, the Company acquired a 10 percent interest in a
limited partnership, CNL Plaza, Ltd., that owns an office building
located in Orlando, Florida, in which the Advisor and its affiliates
lease office space. The remaining interest in the limited partnership
is owned by several affiliates of the Advisor.
The Advisor and its affiliates provide various administrative services
to the Company, including services related to accounting; financial,
tax and regulatory compliance reporting; stockholder distributions and
reporting; due diligence and marketing; and investor relations
(including administrative services in connection with the offerings) on
a day-to-day basis.
The expenses incurred for these services were classified as follows for
the six months ended June 30:
2002 2001
----------------- ----------------
Stock issuance costs $ 1,868,217 $ 91,196
Land, buildings and equipment on operating leases
and other assets 10,755 11,208
General operating and administrative expenses 213,745 104,146
----------------- ----------------
$ 2,092,717 $ 206,550
================= ================
CNL RETIREMENT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
Quarters and Six Months Ended June 30, 2002 and 2001
10. Related Party Arrangements - Continued:
---------------------------------------
Amounts due to related parties consisted of the following at:
June 30, December 31,
2002 2001
----------------- ----------------
Due to the Advisor and its affiliates:
Expenditures incurred for offering expenses on behalf
of the Company $ 355,970 $ 1,328,123
Accounting and administrative services 47,507 62,313
Acquisition fees and miscellaneous acquisition
expenses 345,523 226,986
----------------- ----------------
749,000 1,617,422
----------------- ----------------
Due to CNL Securities Corp.:
Commissions 534,622 145,670
Marketing support fees and due diligence expense
reimbursements 77,196 9,715
----------------- ----------------
611,818 155,385
----------------- ----------------
$ 1,360,818 $ 1,772,807
================= ================
11. Commitments and Contingencies:
-----------------------------
In connection with the acquisition of four of its Properties, the
Company may be required to make additional payments (the "Earnout
Amount") if certain earnout provisions are achieved by the earnout date
(the "Earnout Date") for each Property. The calculation of the Earnout
Amount generally considers the net operating income for the Property,
the Company's initial investment in the Property and the fair value of
the Property. In the event an Earnout Amount becomes payable, the lease
will be amended to increase the annual minimum rent for any such
amount.
The Earnout Dates for each Property are as follows:
Property Earnout Dates
-------------------------------------------- ----------------------------------
Broadway Plaza, Arlington, Texas October 31, 2004
Homewood Residence, Boca Raton, Florida August 31, 2004
Homewood Residence, Coconut Creek, March 31, 2005
Heritage Club, Greenwood Village, Colorado August 1, 2002 and April 15, 2005
In connection with the acquisition of a 10 percent limited partnership
interest in CNL Plaza, Ltd. (see Note 5), the Company has severally
guaranteed 16.67 percent or $2,583,333, of a $15,500,000 unsecured
promissory note of the limited partnership.
CNL RETIREMENT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
Quarters and Six Months Ended June 30, 2002 and 2001
12. Concentration of Credit Risk:
-----------------------------
As of June 30, 2002, the Company owned eleven Properties. The lessees
of five of these Properties are wholly owned subsidiaries of American
Retirement Corporation ("ARC"). In addition, the five Properties are
operated under the ARC brand chains. These five Properties are located
in various states and the leases contain cross-default terms, meaning
that if any tenant of any of the Properties leased to ARC defaults on
its obligations under its lease, the Company will have the ability to
pursue its remedies under the lease with respect to any of the
Properties leased to ARC regardless of whether the tenant of any such
Property is in default under its lease. The ARC leases contributed 67
percent of the Company's total rental income during the six months
ended June 30, 2002.
In May 2002, five Properties were acquired by a joint venture in which
the Company owns a 76.75 percent interest and Marriott Senior Living
Services, Inc. owns a 23.25 percent interest. The Company is accounting
for its interest in the joint venture using the consolidation method.
The five Properties, purchased for an aggregate price of $58,800,000,
are leased to HRA Management Corporation and are operated by Marriott
Senior Living Services, Inc., a Marriott International, Inc. brand
chain. These five Properties are located in various states and the
leases contain cross-default terms. In addition, Marriott
International, Inc. has, with certain limitations, guaranteed the
tenant's obligation to pay minimum rent due under the leases up to a
maximum of $6.5 million. The guarantee terminates upon the earlier of
(i) the five Retirement Facilities achieving certain pooled minimum net
operating income performance thresholds or (ii) the end of the fifth
lease year. A former director and a former officer of the Company are
the principal shareholders of the tenant, HRA Management Corporation.
The remaining property is leased to a wholly owned subsidiary of
Marriott International, Inc. and is also operated by Marriott Senior
Living Services, Inc.
Although the Company acquires Properties located in various states and
regions and carefully screens its tenants in order to reduce risks of
default, failure of these lessees, the American Retirement Corporation
brand chains or the Marriott International, Inc. brand chains would
significantly impact the results of operations of the Company.
Management believes that the risk of such a default is reduced due to
the Company requiring security deposits on certain Properties,
obtaining a guaranty from the tenant's or operator's parent company
and, in some cases, requiring an additional cash reserve account to be
held at the tenant level. It is expected that the percentage of total
rental income contributed by these lessees will decrease as additional
Properties are acquired and leased to diversified tenants during
subsequent periods.
13. Subsequent Events:
------------------
During the period July 1, 2002 through August 7, 2002, the Company
received subscription proceeds for an additional 4,323,650 shares
($43,236,496 ) of common stock. As of August 7, 2002, the Company had
received total subscription proceeds of $241,452,144.
On July 1, 2002 and August 1, 2002, the Company declared distributions
totaling $1,161,671 and $1,367,286, respectively, or $0.0583 per share
of common stock, payable in September 2002, to stockholders of record
on July 1, 2002 and August 1, 2002, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company
CNL Retirement Properties, Inc. was organized pursuant to the laws
of the State of Maryland on December 22, 1997. Various other majority
owned subsidiaries have been or will be formed for the purpose of
acquiring health care properties and seniors' housing facilities (the
"Properties"). The terms "Company" or "Registrant" include CNL
Retirement Properties, Inc. and its subsidiaries. The Company operates
for federal income tax purposes as a real estate investment trust (a
"REIT").
Liquidity and Capital Resources
Common Stock Offerings
On May 24, 2002, the Company completed its offering of up to
15,500,000 shares of common stock ($155,000,000) (the "2000 Offering"),
which included up to 500,000 shares ($5,000,000) available to
stockholders who elected to participate in the Company's distribution
reinvestment plan. In connection with the 2000 Offering, the Company
received subscription proceeds of $155,000,000 (15,500,000 shares),
including $418,670 (41,867 shares) through the distribution
reinvestment plan.
Immediately following the completion of the 2000 Offering, the
Company commenced an offering of up to an additional 45,000,000 shares
of common stock ($450,000,000) (the "2002 Offering"). Of the 45,000,000
shares of common stock offered in the 2002 Offering, up to 5,000,000
are available to stockholders purchasing shares through the Company's
distribution reinvestment plan. Since its formation, the Company has
received an initial $200,000 contribution from its Advisor and
subscription proceeds of $198,089,362 (19,808,933 shares), including
$595,911 (59,591 shares) through its distribution reinvestment plan. As
of June 30, 2002, the Company had received net offering proceeds of
approximately $175,200,000 following the deduction of selling
commissions, marketing support and due diligence expense reimbursement
fees and organizational and offering expenses. As of June 30, 2002, the
Company had used approximately $95,200,000 of net offering proceeds and
approximately $36,500,000 of loan proceeds to invest in eleven
Properties located in Illinois, Florida, Colorado, Texas, California,
Maryland, Massachusetts and Ohio (see "Property Acquisitions and
Investments" below) and approximately $12,900,000 to pay acquisition
fees and expenses, leaving approximately $67,100,000 available for
investment in Properties and mortgage loans.
During the period July 1 through August 7, 2002, the Company
received additional offering proceeds of approximately $43,236,496. The
Company expects to use any uninvested net offering proceeds, plus any
additional net offering proceeds from the 2002 Offering to purchase
additional Properties and to invest in mortgage loans. In addition, the
Company intends to borrow money to acquire assets and to pay certain
related fees. The Company intends to encumber assets in connection with
such borrowing. The Company has obtained a revolving $25,000,000 line
of credit. The Company has also obtained permanent financing. The
aggregate amount of any permanent financing is not expected to exceed
30 percent of the Company's total assets and the maximum amount the
Company may borrow is 300 percent of the Company's net assets.
Liquidity and Capital Resources - Continued:
--------------------------------------------
Property Acquisitions and Investments
On February 11, 2002, the Company acquired the Holley Court
Terrace independent living Property located in Oak Park, Illinois (the
"Oak Park Property") for $18,469,275 from American Retirement
Corporation. The Company, as lessor, has entered into a long-term lease
agreement relating to this Property. The initial term of the lease
expires on February 11, 2017. At the end of the initial lease term, the
tenant will have two consecutive renewal options of five years each.
The lease requires minimum annual rent of $1,846,928 for the first
lease year with increases of 1 percent each lease year thereafter. In
addition to minimum rent, the lease requires percentage rent. The
Company assumed approximately $13,000,000 of permanent financing
relating to the Oak Park Property that is secured by a mortgage on the
Property (see "Borrowings" below).
In addition, on February 11, 2002, the Company acquired the
Homewood Residence of Coconut Creek assisted living Property located in
Coconut Creek, Florida (the "Coconut Creek Property") for $9,687,563
from American Retirement Corporation. The Company, as lessor, has
entered into a long-term lease agreement relating to this Property. The
initial term of the lease expires on February 11, 2017. At the end of
the initial lease term, the tenant will have two consecutive renewal
options of five years each. The lease requires minimum annual rent of
$968,756 for the first lease year with increases of 2 percent each
lease year thereafter. In addition to minimum rent, the lease requires
percentage rent.
On March 22, 2002, the Company acquired the Heritage Club at
Greenwood Village assisted living/skilled nursing Property located in
Greenwood Village, Colorado (the "Greenwood Village Property") for
$17,865,375 from American Retirement Corporation. The Company, as
lessor, has entered into a long-term lease agreement relating to this
Property. The initial term of the lease expires on March 31, 2017. At
the end of the initial lease term, the tenant will have two consecutive
renewal options of five years each. The lease requires minimum annual
rent of $1,786,538 for the first lease year with increases of 2 percent
each lease year thereafter. In addition to minimum rent, the lease
requires percentage rent.
In May 2002, a joint venture in which the Company owns a 76.75
percent interest and Marriott Senior Living Services, Inc., an
affiliate of Marriott International, Inc., owns a 23.25 percent
interest was formed to acquire five Properties located in Camarillo,
California; Towson, Maryland; Dartmouth, Massachusetts; Elk Grove,
California and Clayton, Ohio (the "Marriott Portfolio") for an
aggregate purchase price of $58,800,000. The joint venture, as lessor,
entered into five separate, long-term lease agreements relating to the
Marriott Portfolio with a third party tenant, HRA Management
Corporation. The five retirement facilities are operated by Marriott
Senior Living Services, Inc., a Marriott International, Inc. brand
chain. The initial term of each lease expires in May 2017. At the end
of each initial lease term, the tenant will have two consecutive
renewal options of ten years each. Minimum annual rent for the first
through fifth lease years is adjustable based upon the cost of debt and
minimum returns to the joint venture. The rental rate will range from
9.0 percent to 10.5 percent of the joint venture's total cost to
purchase the Marriott Portfolio over the term of the lease. Marriott
International, Inc. has, with certain limitations, guaranteed the
tenant's obligation to pay minimum rent due under the leases up to a
maximum of $6,500,000. The guarantee terminates upon the earlier of (i)
the five retirement facilities achieving certain pooled minimum net
operating income performance thresholds or (ii) the end of the fifth
lease year.
Liquidity and Capital Resources - Continued:
--------------------------------------------
On May 30, 2002, the Company acquired a 10 percent interest in a
limited partnership, CNL Plaza, Ltd., that owns an office building
located in Orlando, Florida, in which the Advisor and its affiliates
lease office space. The Company's equity investment in the partnership
at June 30, 2002 was $300,000. The Company's share in the limited
partnership's distribution will be equivalent to its equity interest in
the limited partnership. The remaining interest in the limited
partnership is owned by several affiliates of the Advisor.
In connection with the acquisition of a 10 percent limited
partnership interest in CNL Plaza, Ltd., the Company has severally
guaranteed 16.67 percent or $2,583,333, of a $15,500,000 unsecured
promissory note of the limited partnership.
Borrowings
In conjunction with the purchase of the Oak Park Property, the
Company assumed a mortgage in the amount of $12,974,397, maturing
October 2, 2003 (the "Oak Park Mortgage"). The Oak Park Mortgage bears
interest at a floating rate of (i) 350 basis points over the 30-day
London Interbank Offered Rate (LIBOR) if LIBOR is over 2.6 percent or
(ii) 440 basis points over the 30-day LIBOR if LIBOR is under 2.6
percent not to exceed 8 percent. In accordance with the provisions of
the mortgage, the Company has placed $277,821 in an escrow reserve
account that represents three months of debt service related to the Oak
Park Mortgage. In connection with the loan, the Company incurred
assumption fees of approximately $16,200. The Company anticipates
refinancing the loan prior to its maturity date.
On June 7, 2002, a joint venture in which the Company owns a 76.75
percent interest borrowed $23,520,000 in the form of a five-year
commercial paper backed loan secured by the Marriott Portfolio
Properties. The loan is funded from proceeds received from the sale of
30-day commercial paper. The commercial paper is re-marketed to
investors every 30 days upon maturity. The joint venture has a
liquidity facility in place in the event that the marketing effort is
unsuccessful. The liquidity agent has provided a liquidity facility for
up to 102 percent of the outstanding loan balance. In the event the
liquidity provider defaults, a participating liquidity agent will
provide up to $20,000,000 and the Company has agreed to provide
liquidity for any amount in excess of $20,000,000 not to exceed
$3,520,000. Interest is payable monthly with principal due when the
commercial paper loan matures. The commercial paper loan bears interest
at the commercial paper rate as determined by market demand (1.95
percent as of June 30, 2002) plus a margin of 1.86 percent, which is
inclusive of liquidity fees and administrative costs. In connection
with the loan, the Company incurred loan closing fees and costs of
$538,324.
Cash and Cash Equivalents
Until Properties are acquired, or mortgage loans are entered into,
net offering proceeds are held in short-term (defined as investments
with a maturity of three months or less), highly liquid investments
which management believes to have appropriate safety of principal such
as overnight repurchase agreements, certificates of deposit and money
market funds. This investment strategy provides high liquidity in order
to facilitate the Company's use of these funds to acquire Properties at
such time as Properties suitable for acquisition are located or to fund
mortgage loans. At June 30, 2002, the Company had $69,268,957 invested
in such short-term investments as compared to $26,721,107 at December
31, 2001. The increase in the amount invested in short-term investments
primarily reflects proceeds received from the sale of shares, offset by
the purchase of eight Properties described in "Property Acquisitions
and Investments" above during the six months ended June 30, 2002. The
funds remaining at June 30, 2002, along with additional funds expected
to be received from the sale of shares and amounts received from
tenants, will be used primarily to purchase additional Properties, to
make mortgage loans, to pay offering and acquisition expenses, to pay
distributions to stockholders, to meet other Company expenses and, in
management's discretion, to create cash reserves.
Liquidity and Capital Resources - Continued:
--------------------------------------------
Accounts Receivable
The Company's accounts receivable balance increased from $180,163
at December 31, 2001 to $514,165 as of June 30, 2002. The increase is
primarily due to approximately $356,000 that is due from the seller of
the Marriott Portfolio for excess closing costs related to the purchase
of the Marriott Portfolio. Other amounts included in the Company's
accounts receivable balance as of June 30, 2002 and December 31, 2001,
include normal operating receivables such as rent payments due under
the Company's long-term lease agreements. As of August 7, 2002,
management believes accounts receivable as of June 30, 2002 is fully
collectible.
Liquidity Requirements
During the six months ended June 30, 2002 and 2001, the Company
generated cash from operating activities (which includes cash received
from tenants and interest, less cash paid for operating expenses) of
$4,896,311 and $385,659, respectively. For the six months ended June
30, 2002, cash from operations included security deposits of $1,840,889
that were received from tenants. Management expects the Company to meet
its short-term liquidity requirements, other than for offering
expenses, the acquisition and development of Properties, and the
investment in mortgage loans and secured equipment leases, through cash
flow provided by operating activities. Management believes that cash
flow provided by operating activities will be sufficient to fund normal
recurring operating expenses, regular debt service requirements and
distributions to stockholders. To the extent that the Company's cash
flow provided by operating activities is not sufficient to meet such
short-term liquidity requirements as a result, for example, of
unforeseen expenses due to a tenant defaulting under the terms of its
lease agreement, the Company will use borrowings under its line of
credit. Management expects the Company to meet its other short-term
liquidity requirements, including payment of offering expenses, the
acquisitions and development of Properties, and the investment in
mortgage loans and secured equipment leases, with proceeds from its
offerings, additional advances under its line of credit and permanent
financing. Management expects the Company to meet its long-term
liquidity requirements through short- or long-term, unsecured or
secured debt financing or equity financing.
Due to the fact that the Company's Properties are leased on a
long-term, triple-net basis, meaning the tenants are required to pay
repairs and maintenance, property taxes, insurance and utilities,
management does not believe that other working capital reserves are
necessary at this time. However, management may maintain additional
cash required to meet the Company's working capital needs.
Management believes that the Company's Properties are adequately
covered by insurance. In addition, the Advisor has obtained contingent
liability and property coverage for the Company. This insurance policy
is intended to reduce the Company's exposure in the unlikely event a
tenant's insurance policy lapses or is insufficient to cover a claim
relating to the Property.
Distributions
The Company declared and paid distributions to its stockholders
totaling $4,139,089 and $467,809 during the six months ended June 30,
2002 and 2001, respectively. On July 1 and August 1, 2002, the Company
declared distributions to stockholders of record on July 1 and August
1, 2002, of $0.0583 per share of common stock. These distributions are
payable in September 2002.
Liquidity and Capital Resources - Continued:
--------------------------------------------
For the six months ended June 30, 2002 and 2001, approximately 53
percent and 68 percent, respectively, of the distributions received by
stockholders were considered to be ordinary income and approximately 47
percent and 32 percent, respectively, were considered a return of
capital for federal income tax purposes. No amounts distributed to
stockholders for the six months ended June 30, 2002 and 2001, were
required to be or have been treated by the Company as a return of
capital for purposes of calculating the stockholders' return on their
invested capital. The Company intends to continue to declare
distributions of cash available for such purpose to the stockholders on
a monthly basis, payable quarterly.
Due to Related Parties
During the six months ended June 30, 2002 and 2001, affiliates
incurred on behalf of the Company $2,222,552 and $270,422,
respectively, for certain offering expenses. Affiliates also incur
certain acquisition and operating expenses on behalf of the Company. As
of June 30, 2002 and December 31, 2001, the Company owed affiliates
$1,360,818 and $1,772,807, respectively, for such amounts and unpaid
fees and administrative expenses. In connection with each of the 2000
Offering and the 2002 Offering, offering expenses paid by the Company
together with selling commissions, the marketing support fees, due
diligence expense reimbursements and the soliciting dealer servicing
fee incurred by the Company will not exceed 13 percent of the proceeds
raised in each such offering.
Pursuant to the advisory agreement, the Advisor is also required
to reimburse the Company the amount by which the total operating
expenses paid or incurred by the Company exceed in any four consecutive
fiscal quarters (the "Expense Year") the greater of 2 percent of
average invested assets or 25 percent of net income (the "Expense
Cap"). Operating expenses for the Expense Year ended June 30, 2001,
exceeded the Expense Cap by $145,015; therefore, the Advisor reimbursed
the Company such amounts in accordance with the advisory agreement.
During the Expense Year ended June 30, 2002, the Company's operating
expenses did not exceed the Expense Cap.
Results of Operations
Revenues
As of June 30, 2002, the Company owned eleven Properties
consisting of land, buildings and equipment, and had entered into
long-term, triple-net lease agreements relating to these Properties.
The Property leases provide for minimum annual base rent generally
payable in monthly installments. The leases provide that the annual
base rent required under the leases will increase at predetermined
intervals. In addition to annual base rent, the leases require the
payment of contingent rent computed as a percentage of gross sales of
the Property. For the six months ended June 30, 2002 and 2001, the
Company earned $4,377,797 and $689,880, respectively, in rental income
from its Properties ($2,976,424 and $344,940 of which was earned during
the quarters ended June 30, 2002 and 2001, respectively). The Company
also earned $33,738 and $17,526 in FF&E Reserve income during the six
months ended June 30, 2002 and 2001, respectively ($24,403 and $9,668
of which was earned during the quarters ended June 30, 2002 and 2001,
respectively). The increase in rental income was due to the Company
owning eleven Properties during the six months ended June 30, 2002, as
compared to one Property during the six months ended June 30, 2001.
Because the Company has not yet invested all of the proceeds previously
raised and is continuing to raise additional proceeds with which it
will acquire additional Properties, revenues for the six months ended
June 30, 2002, represent only a portion of revenues that the Company is
expected to earn in future periods.
Results of Operations - Continued:
----------------------------------
During the six months ended June 30, 2002 and 2001, the Company
also earned $560,932 and $4,744, respectively ($303,932 and $1,728 of
which were earned during the quarters ended June 30, 2002 and 2001,
respectively), in interest income from investments in money market
accounts and other short-term, highly liquid investments. Interest
income increased during the six months ended June 30, 2002, as compared
to the six months ended June 30, 2001, due to the Company having a
larger amount of offering proceeds temporarily invested pending the
acquisition of Properties. However, as net offering proceeds are used
to invest in Properties and make mortgage loans, the percentage of the
Company's total revenues earned from interest income from investments
in money market accounts or other short term, highly liquid investments
is expected to decrease.
Significant Tenants
During the six months ended June 30, 2002, the Company owned
eleven Properties. The lessees of five of these Properties are wholly
owned subsidiaries of American Retirement Corporation ("ARC") and are
operated under the ARC brand chains. Another five Properties are leased
to HRA Management Corp. and are operated by Marriott Senior Living
Services, Inc., a Marriott International, Inc. brand chain. The
remaining Property is leased to a wholly owned subsidiary of Marriott
International, Inc. and is also operated by Marriott Senior Living
Services, Inc. Although the Company intends to acquire additional
Properties located in various states and regions and to carefully
screen its tenants in order to reduce risks of default, failure of the
lessees, the ARC brand chains or the Marriott International, Inc. brand
chains would significantly impact the results of operations of the
Company. However, management believes that the risk of such default is
reduced due to the Company's initial and continuing due diligence
procedures. The Company's leases generally have credit enhancement
provisions, such as guarantees or shortfall reserves provided by the
tenant or operator's parent company. It is anticipated that the
percentage of total rental income contributed by these lessees will
decrease as additional Properties are acquired and leased during
subsequent periods.
Maturity of Debt Obligations of American Retirement Corporation
As of June 30, 2002, ARC was the parent company of the lessees to
five of the Company's eleven Properties. ARC also operates the
Properties and is obligated to fund certain shortfall reserves relating
to the Properties. According to its December 31, 2001 audited financial
statements, ARC has significant debt obligations that mature in 2002,
as well as a net working capital deficit as a result of such
maturities, significant lease obligations and its current cash balances
and internally developed cash are not sufficient to satisfy its
scheduled debt maturities in 2002. As of August 7, 2002, ARC had
completed several refinancing and sale lease-back transactions that
reduced the amount of scheduled debt maturities in 2002. ARC is
currently in discussions with its lenders to complete its plan to
extend and refinance the remaining debt obligations that mature in
2002. If ARC is unable to successfully complete such a plan, it may
have difficulty meeting its obligations and its ability to continue to
operate the Properties may be impaired. In such an event, the Company
would have to obtain a new operator for the Properties and the
Company's results of operations could be affected if it were unable to
do so within a brief time period. In addition, if these Properties are
unable to generate sufficient cash flow to make lease payments and ARC
or a replacement tenant is unable or not required to fund lease
payments, the Company's results of operations would also be affected.
As the Company acquires additional Properties that will be leased to
different operators, the effect on the Company's results of operations
caused by any failure by ARC to continue to meet its obligations should
diminish. As of August 7, 2002, ARC had met all of its obligations
relating to the five Properties.
Results of Operations - Continued:
----------------------------------
Expenses
Operating expenses were $2,341,842 and $433,405 for the six months
ended June 30, 2002 and 2001, respectively ($1,502,685 and $144,391 of
which were incurred during the quarters ended June 30, 2002 and 2001,
respectively). Operating expenses for the six months ended June 30,
2002 increased as a result of the Company incurring asset management
fees, greater general operating and administrative expenses and
depreciation and amortization expense related to the Company owning ten
additional Properties. The dollar amount of operating expenses is
expected to increase as the Company acquires additional Properties and
invests in mortgage loans. However, general and administrative expenses
as a percentage of total revenues are expected to decrease as the
Company acquires additional Properties and invests in mortgage loans.
Funds from Operations
Management considers funds from operations ("FFO"), as defined by
the National Association of Real Estate Investment Trusts, to be an
indicative measure of operating performance due to the significant
effect of depreciation of real estate assets on net earnings. (Net
earnings determined in accordance with generally accepted accounting
principles ("GAAP") includes the noncash effect of straight-lining rent
increases throughout the lease term. This straight-lining is a GAAP
convention requiring real estate companies to report rental revenue
based on the average rent per year over the life of the lease. During
the six months ended June 30, 2002 and 2001, net earnings included
$353,997 and $14,746, respectively, of these amounts.) This information
is presented to help stockholders better understand the Company's
financial performance and to compare the Company to other REITs.
However, FFO as presented may not be comparable to amounts calculated
by other companies. This information should not be considered as an
alternative to net earnings, cash from operations, or any other
operating or liquidity performance measure prescribed by accounting
principles generally accepted in the United States. The following is a
reconciliation of net earnings to FFO:
Quarter Six Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
--------------- --------------- -------------- --------------
Net earnings $ 1,702,338 $ 211,945 $ 2,530,942 $ 279,293
Adjustments:
Effect of share in loss of
investment in real estate
partnership 21,930 -- 21,930 --
Effect of minority interest (46,747) -- (46,747) --
Depreciation of real estate assets 785,204 108,897 1,165,862 217,608
--------------- --------------- --------------- --------------
FFO $ 2,462,725 $ 320,842 $ 3,671,987 $ 496,901
=============== =============== ============== ==============
Results of Operations - Continued:
----------------------------------
Other
In April 2002, the FASB issued FAS Statement No. 145, "Rescission
of FASB Statements No. 4, 44, and 64, Ammendment of FASB Statement No.
13, and Technical Corrections." This statement rescinds FASB Statement
No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and an
amendment of that Statement, FASB Statement No. 64, "Extinguishments of
Debt Made to Satisfy Sinking-Fund Requirements." This statement also
rescinds FASB Statement No. 44, "Accounting for Intangible Assets of
Motor Carriers." This statement amends FASB Statement No. 13,
"Accounting for Leases," to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects
that are similar to sale-leaseback transactions. This statement also
amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings, or describe their
applicability under changed conditions. The provisions of this
statement related to the rescission of Statement 4 are applicable in
fiscal years beginning after May 15, 2002. The provisions of this
statement related to Statement 13 are effective for transactions
occurring after May 15, 2002. All other provisions of this statement
are effective for financial statements issued on or after May 15, 2002.
The provisions of this statement are not expected to have a significant
impact on the financial position or results of operations of the
Company.
In July 2002, the FASB issued FAS Statement No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities." The statement
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. Examples of costs covered by
the statement include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. The
statement is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The adoption of this statement is
not expected to have a significant impact on the financial position or
results of operations of the Company.
Statement Regarding Forward Looking Information
The preceeding information contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements
are generally characterized by the use of terms such as "believe,"
"expect" and "may." Although the Company believes that the expectations
reflected in such forward-looking statements are based upon reasonable
assumptions, the Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that
might cause such a difference include the following: changes in general
economic conditions, changes in local and national real estate
conditions, availability of capital from borrowings under the Company's
line of credit, continued availability of proceeds from the Company's
current offering, the ability of the Company to obtain permanent
financing on satisfactory terms, the ability of the Company to continue
to locate suitable tenants for its Properties and borrowers for its
mortgage loans and secured equipment leases, and the ability of tenants
and borrowers to make payments under their respective leases, mortgage
loans or secured equipment leases. Given these uncertainties, readers
are cautioned not to place undue reliance on such statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company is exposed to market changes in interest rates through
its variable rate mortgage payable. To mitigate interest rate risk, the
Company can pay down the mortgage with offering proceeds should
interest rates rise substantially.
The Company has mitigated its exposure to variable interest rates
on its commercial paper loan by providing fluctuating lease payments
under the leases for the properties securing the loan as a result of
changes in periodic interest rates due under the commercial paper loan.
The Company may also be subject to interest rate risk through
outstanding balances on its variable rate line of credit. The Company
may mitigate this risk by paying down its line of credit from offering
proceeds should interest rates rise substantially. There were no
amounts outstanding on the variable rate line of credit at June 30,
2002.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. Inapplicable.
------------------
Item 2. Changes in Securities and Use of Proceeds. Inapplicable.
------------------------------------------
Item 3. Defaults upon Senior Securities. Inapplicable.
--------------------------------
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
(a) The regular annual meeting of stockholders of the
Company was held in Orlando, Florida on May 9, 2002 for
the purposes of electing the board of directors.
(b) Proxies for the meeting were solicited and there was no
solicitation in opposition to management's
solicitations. All of management's nominees for director
were elected.
(c) The stockholders approved the election of the following
persons as directors of the Company:
Name For Withheld Against
----------------------------- ------------- ------------- -------------
James M. Seneff, Jr. 5,620,082 60,060 0
Robert A. Bourne 5,619,082 61,060 0
David W. Dunbar 5,626,582 53,560 0
Edward A. Moses 5,620,082 60,060 0
James W. Duncan, Jr. 5,626,582 53,560 0
Item 5. Other Information. Inapplicable.
------------------
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits:
3.1 CNL Health Care Properties, Inc. Amended and
Restated Articles of Incorporation.
(Included as Exhibit 3.1 to the Registrant's
1998 Report on Form 10-K filed with the
Securities and Exchange Commission on March
5, 1999, and incorporated herein by
reference.)
3.2 CNL Health Care Properties, Inc. Bylaws.
(Included as Exhibit 3.2 to the Registrant's
1998 Report on Form 10-K filed with the
Securities and Exchange Commission on March
5, 1999, and incorporated herein by
reference.)
3.3 CNL Health Care Properties, Inc. Articles of
Amendment to Amended and Restated Articles
of Incorporation dated June 27, 2000.
(Included as Exhibit 3.3 to the Registrant's
June 30, 2000, Report on Form 10-Q filed
with the Securities and Exchange Commission
on August 1, 2000, and incorporated herein
by reference.)
3.4 Articles of Amendment to the Amended and
Restated Articles of Incorporation of CNL
Health Care Properties, Inc. dated August
24, 2000. (Included as Exhibit 3.5 to
Registration Statement No. 333-37480 on Form
S-11 and incorporated herein by reference.)
3.5 Amendment No. 1 to the Bylaws of CNL Health
Care Properties, Inc. (Included as Exhibit
3.6 to Registration Statement No. 333-37480
on Form S-11 and incorporated herein by
reference.)
4.1 Reinvestment Plan (Included as Exhibit 4.4
to Registration Statement No. 333-37480 on
Form S-11 and incorporated herein by
reference.)
10.1 Advisory Agreement, dated as of September
17, 2001, between CNL Retirement Properties,
Inc. and CNL Retirement Corp. (Included as
Exhibit 10.1 to the September 30, 2001,
Report on Form 10-Q filed with the
Securities and Exchange Commission on
November 9, 2001, and incorporated herein by
reference).
10.2 Indemnification Agreement between CNL Health
Care Properties, Inc. and Thomas J.
Hutchison III dated February 29, 2000. Each
of the following directors and/or officers
has signed a substantially similar agreement
as follows: James M. Seneff, Jr., Robert A.
Bourne, David W. Dunbar, Timothy S. Smick,
Edward A. Moses, Jeanne A. Wall, and Lynn E.
Rose dated September 15, 1998, Phillip M.
Anderson, Jr. dated February 19, 1999, James
W. Duncan dated February 22, 2002, and
Stuart J. Beebe dated July 15, 2002.
(Included as Exhibit 10.2 to the March 31,
2000, Report on Form 10-Q filed with the
Securities and Exchange Commission on May 3,
2000, and incorporated herein by reference.)
10.3 Agreement of Limited Partnership of CNL
Health Care Partners, LP. (Included as
Exhibit 10.10 to Registration Statement No.
333-47411 on Form S-11 and incorporated
herein by reference.)
10.4 Purchase and Sale Agreement between CNL
Health Care Partners, LP and Marriott Senior
Living Services, Inc., relating to the
Brighton Gardens by Marriott - Orland Park,
Illinois. (Included as Exhibit 10.4 to the
March 31, 2000, Report on Form 10-Q filed
with the Securities and Exchange Commission
on May 3, 2000, and incorporated herein by
reference.)
10.5 Lease Agreement between CNL Health Care
Partners, LP and BG Orland Park, LLC dated
April 20, 2000, relating to the Brighton
Gardens by Marriott - Orland Park, Illinois.
(Included as Exhibit 10.5 to the March 31,
2000, Report on Form 10-Q filed with the
Securities and Exchange Commission on May 3,
2000, and incorporated herein by reference.)
10.6 Revolving Line of Credit Agreement with CNL
Health Care Properties, Inc., CNL Health
Care Partners, LP and Colonial Bank, dated
April 20, 2000. (Included as Exhibit 10.6 to
the March 31, 2000, Report on Form 10-Q
filed with the Securities and Exchange
Commission on May 3, 2000, and incorporated
herein by reference.)
10.7 Real Estate Purchase and Sale Contract
between CNL Retirement Corp. and American
Retirement Corporation, relating to the
Broadway Plaza at Pecan Park - Arlington,
Texas. (Included as Exhibit 10.14 to
Registration Statement No. 333-37480 on Form
S-11 and incorporated herein by reference.)
10.8 Lease Agreement between CNL Retirement -
AM/Texas, LP and ARC Pecan Park, L.P. dated
November 9, 2001, relating to the Broadway
Plaza at Pecan Park - Arlington, Texas.
(Included as Exhibit 10.15 to Registration
Statement No. 333-37480 on Form S-11 and
incorporated herein by reference.)
10.9 Real Estate Purchase and Sale Contract
between CNL Retirement Corp. and American
Retirement Corporation, relating to the
Homewood Residence of Boca Raton - Boca
Raton, Florida. (Included as Exhibit 10.16
to Registration Statement No. 333-37480 on
Form S-11 and incorporated herein by
reference.)
10.10 Lease Agreement between CNL Retirement -
AM/Florida, LP and ARC Boca Raton, Inc.
dated November 9, 2001, relating to the
Homewood Residence of Boca Raton - Boca
Raton, Florida. (Included as Exhibit 10.17
to Registration Statement No. 333-37480 on
Form S-11 and incorporated herein by
reference.)
10.11 Lease Agreement between CNL Retirement Corp.
and ARC Holley Court, LLC dated February 11,
2002, relating to the Holley Court Terrace -
Oak Park, Illinois. (Included as Exhibit
10.18 to the Registration Statement No.
333-37480 on Form S-11 and incorporated
herein by reference.)
10.12 Real Estate Purchase and Sale Contract
between CNL Retirement Corp., as Buyer, and
ARC Holley Court, LLC, as Seller, relating
to the Holley Court Terrace - Oak Park,
Illinois. (Included as Exhibit 10.19 to the
Registration Statement No. 333-37480 on Form
S-11 and incorporated herein by reference.)
10.13 Lease Agreement between CNL Retirement -
AM/Florida, LP and ARC Coconut Creek, LLC
dated February 11, 2002, relating to the
Homewood Residence of Coconut Creek -
Coconut Creek, Florida. (Included as Exhibit
10.20 to the Registration Statement No.
333-37480 on Form S-11 and incorporated
herein by reference.)
10.14 Real Estate Purchase and Sale Contract
between CNL Retirement Corp., as Buyer, and
American Retirement Corporation, as Seller,
relating to the Homewood Residence of
Coconut Creek - Coconut Creek, Florida.
(Included as Exhibit 10.21 to the
Registration Statement No. 333-37480 on Form
S-11 and incorporated herein by reference.)
10.15 Lease Agreement between CNL Retirement -
AM/Colorado LP and ARC Greenwood Village,
Inc. dated March 21, 2002, relating to the
Heritage Club at Greenwood Village -
Greenwood Village, Colorado. (Included as
Exhibit 10.22 to the Registration Statement
No. 333-76538 on Form S-11 and incorporated
herein by reference.)
10.16 Real Estate Purchase and Sale Contract
between CNL Retirement Corp., as Buyer, and
American Retirement Corporation, as Seller,
relating to the Heritage Club at Greenwood
Village - Greenwood Village, Colorado.
(Included as Exhibit 10.23 to the
Registration Statement No. 333-76538 on Form
S-11 and incorporated herein by reference.)
10.17 Loan Agreement between ARC Holley Court,
LLC, as Borrower, and GMAC Commercial
Mortgage Corporation, as Lender, relating to
the Holley Court Terrace - Oak Park,
Illinois. (Included as Exhibit 10.24 to the
Registration Statement No. 333-76538 on Form
S-11 and incorporated herein by reference.)
10.18 Lease Agreement between CNL Retirement
Camarillo CA, LP and HRA Management
Corporation dated May 16, 2002, relating to
the Brighton Gardens Senior Living Community
at Camarillo, California. (Included as
Exhibit 10.25 to Post-Effective Amendment
No. One to the Registration Statement No.
333-76538 on Form S-11 and incorporated
herein by reference.)
10.19 Lease Agreement between CNL Retirement
Towson MD, LP and HRA Management Corporation
dated May 16, 2002, relating to the Brighton
Gardens Senior Living Community at Towson,
Maryland. (Included as Exhibit 10.26 to
Post-Effective Amendment No. One to the
Registration Statement No. 333-76538 on Form
S-11 and incorporated herein by reference.)
10.20 Lease Agreement between CNL Retirement
Clayton OH, LP and HRA Management
Corporation dated May 17, 2002, relating to
the MapleRidge Senior Living Community at
Clayton, Ohio. (Included as Exhibit 10.27 to
Post-Effective Amendment No. One to the
Registration Statement No. 333-76538 on Form
S-11 and incorporated herein by reference.)
10.21 Lease Agreement between CNL Retirement
Dartmouth MA, LP and HRA Management
Corporation dated May 16, 2002, relating to
the MapleRidge Senior Living Community at
Dartmouth, Massachusetts. (Included as
Exhibit 10.28 to Post-Effective Amendment
No. One to the Registration Statement No.
333-76538 on Form S-11 and incorporated
herein by reference.)
10.22 Lease Agreement between CNL Retirement
Laguna Creek CA, LP and HRA Management
Corporation dated May 16, 2002, relating to
the MapleRidge Senior Living Community at
Laguna Creek, Elk Grove, California.
(Included as Exhibit 10.29 to Post-Effective
Amendment No. One to the Registration
Statement No. 333-76538 on Form S-11 and
incorporated herein by reference.)
10.23 Purchase and Sale Agreement between Marriott
Senior Living Services, Inc., VCS, Inc. and
MSLS - MapleRidge, Inc., as Sellers,
Marriott International, Inc. and CNL
Retirement MA1, LP, as Purchaser, and HRA
Management Corporation, as Tenant, relating
to the Brighton Gardens of Camarillo -
Camarillo, California; Brighton Gardens of
Towson - Towson, Maryland; Marriott
MapleRidge of Clayton - Clayton, Ohio;
Marriott MapleRidge of Dartmouth -
Dartmouth, Massachusetts; and Marriott
MapleRidge of Laguna Creek - Elk Grove,
California. (Included as Exhibit 10.30 to
Post-Effective Amendment No. One to the
Registration Statement No. 333-76538 on Form
S-11 and incorporated herein by reference.)
10.24 Loan Agreement between Five Pack Retirement
2002, LLC, Lender, and CNL Retirement
Clayton OH, LP, CNL Retirement Laguna Creek
CA, LP, CNL Retirement Camarillo CA, LP, CNL
Retirement Dartmouth MA, LP, CNL Retirement
Towson MD, LP, Borrowers, and U.S. Bank,
National Association, Collateral Agent,
relating to the Brighton Gardens of
Camarillo - Camarillo, California; Brighton
Gardens of Towson - Towson, Maryland;
Marriott MapleRidge of Clayton - Clayton,
Ohio; Marriott MapleRidge of Dartmouth -
Dartmouth, Massachusetts; and Marriott
MapleRidge of Laguna Creek - Elk Grove,
California. (Included as Exhibit 10.31 to
Post-Effective Amendment No. One to the
Registration Statement No. 333-76538 on Form
S-11 and incorporated herein by reference.)
(b) The Company filed a report on Form 8-K on May 31, 2002,
in connection with the acquisition of five Properties.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DATED this 7th day of August, 2002
CNL RETIREMENT PROPERTIES, INC.
By: /s/ James M. Seneff, Jr.
------------------------
JAMES M. SENEFF, JR.
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Stuart J. Beebe
------------------------
STUART J. BEEBE
Chief Financial Officer
(Principal Financial and
Accounting Officer)