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(1) |
The tables show financial and statistical data of the properties
for the periods presented which includes periods prior to the
date the Company acquired the properties. All data has been
provided by Amerihost. |
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(2) |
“ADR” is defined as the average daily room rate. |
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(3) |
“RevPAR” is defined as room revenue per available room
and is determined by dividing room revenue by available rooms for
the applicable period. |
Loan Prepayment Considerations
The terms of the loans originated by the Company generally
provide that voluntary prepayments of principal of the loans are
permitted, subject to a yield maintenance charge (a “Yield
Maintenance Charge”). The Yield Maintenance Charge will
generally be equal to the greater of either 95 days of
interest at the stated interest rate applied to the amount of
principal being prepaid, or a yield maintenance premium (the
“Yield Maintenance Premium”). For the majority of the
Company’s loans, the Yield Maintenance Premium is calculated
by multiplying the amount of principal being prepaid by the
product of the number of years remaining to maturity of the loan
and the Reinvestment Rate (as defined hereafter). For the
majority of the loans, the “Reinvestment Rate” is the
difference between the U.S. Treasury Rate nearest to the
loan’s original maturity at the time of origination of the
loan and the 5-year U.S. Treasury Rate at the time of
prepayment. Generally, as prevailing interest rates decline, the
amount of the Yield Maintenance Premium increases. Some of the
loans permit the prepayment of up to 10% of the original loan
principal balance per year without penalty.
Competition
The Company’s primary competition comes from banks,
financial institutions and other lenders. Additionally, there are
lending programs which have been established by national
franchisors in the lodging industry. Some of these competitors
have greater financial and larger managerial resources than the
Company. Competition has increased as the financial strength of
the banking and thrift industries improved. In management’s
opinion, there continues to be increased competitive lending
activity at advance rates and interest rates which are
considerably more aggressive than those offered by the Company.
In order to maintain a quality portfolio, the Company has and
will continue to adhere to its historical underwriting criteria,
and as a result, certain loan origination opportunities will not
be funded by the Company. The Company believes that it competes
effectively with such entities on the basis of the lending
programs offered, the interest rates, maturities and payment
schedules, the quality of its service, its reputation as a
lender, the timely credit analysis and decision-making processes,
and the renewal options available to borrowers.
Interest Rate and Prepayment Risk
The ability of the Company to achieve certain of its investment
objectives will depend in part on its ability to borrow funds on
favorable terms, and there can be no assurance that such
borrowings or issuances can be achieved. The Company’s net
income of the lending division is materially dependent upon the
“spread” between the rate at which it borrows funds
(typically either short-term at variable rates or long-term at
fixed rates) and the rate at which it loans these funds
(typically long-term at fixed rates) and the lease revenues on
owned properties. During periods of changing interest rates,
interest rate mismatches could negatively impact the
Company’s net income, dividend yield, and the market price
of the Company’s Common Shares. As interest rates have
declined, the Company has experienced loan prepayments, and such
prepayments, as well as scheduled repayments, have generally been
reloaned at lower rates. A high volume of loan prepayments could
have an adverse effect on the Company’s business, financial
condition and results of operations and on its ability to
maintain distributions at current levels. The loans originated by
the Company have prepayment fees charged as described above
which the Company believes helps mitigate the likelihood and
effect of principal prepayments. While prepayments continued at
accelerated levels through the second quarter of 1999, as a
result of recent changes in the credit markets, the pace of
prepayment activity decreased during the third quarter of 1999
and the Company believes that as a result of the current interest
rate environment the prepayment activity may continue at these
lower levels during the remainder of the current fiscal year.
13
Certain Accounting Considerations
The preparation of financial statements in conformity with
generally accepted accounting principles (“GAAP”)
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.
The Company follows the accounting practices prescribed by the
American Institute of Certified Public Accountants -
Accounting Standards Division in Statement of Position 75-2
“Accounting Practices of Real Estate Investment Trusts”
(“SOP 75-2”), as modified by SFAS No. 114,
“Accounting by Creditors for Impairment of a Loan”. In
accordance with SFAS No. 114, a loan loss reserve is
established based on a determination, through an evaluation of
the recoverability of individual loans, by the Company’s
Board of Trust Managers when significant doubt exists as to the
ultimate realization of the loan. As of September 30, 1999,
a $100,000 loan loss reserve had been established. The
determination of whether significant doubt exists and whether a
loan loss provision is necessary for each loan requires judgment
and considers the facts and circumstances existing at the
evaluation date. Changes to the facts and circumstances of the
borrower, the lodging industry and the economy may require the
establishment of significant additional loan loss reserves. If a
determination is made that there exists significant doubt as to
the ultimate collection of a loan, the effect to operating
results may be material.
Results of Operations
Nine Months Ended September 30, 1999 Compared to the Nine
Months Ended September 30, 1998
The net income of the Company during the nine months ended
September 30, 1999 and 1998 was $7,674,000 and $8,578,000,
or $1.18 and $1.32 per share, respectively. The basic
weighted average shares outstanding increased by approximately 1%
from 6,492,000 for the nine months ended September 30, 1998
to 6,528,000 for the nine months ended September 30, 1999
as a result of shares issued pursuant to the dividend
reinvestment and cash purchase plan and the exercise of stock
options. Revenues of the Company increased by $3,321,000, or 25%,
from $13,129,000 during the nine months ended September 30,
1998 to $16,450,000 during the nine months ended
September 30, 1999 due primarily to the lease revenue on
owned properties commencing June 1998. Equity ownership in
properties, while causing increased revenues also causes
increased expenses (primarily depreciation, interest costs and
advisory fees). While there was a decrease in net income, the
Company’s funds from operations increased due to the effect
of depreciation (see “Funds From Operations”).
Depreciation expense increased by $1,146,000, or 235%, from
$488,000 for the nine months ended September 30, 1998 to
$1,634,000 during the nine months ended September 30, 1999.
The increase in depreciation expense results from the acquisition
of properties during June, 1998 and March, 1999.
Interest income - loans decreased by $55,000
(1%) from $10,021,000 during the nine months ended
September 30, 1998 to $9,966,000 during the nine months
ended September 30, 1999. Interest income-loans represents
income generated primarily by interest earned on the
Company’s outstanding loans and the accretion of deferred
commitment fees. This $55,000 decrease in interest income-loans
was primarily attributable to the impact of a continued decline
in the weighted average contractual interest rate on loans
outstanding. The weighted average contractual interest rate was
10.5% at September 30, 1998 compared to 10.2% at
September 30, 1999. Partially offsetting the decrease in
weighted average interest rates was an increase in the
Company’s average outstanding loan portfolio. The average
outstanding loan portfolio increased by $3.4 million (3%),
from $117.6 million during the nine months ended
September 30, 1998, to $121.0 million during the nine
months ended September 30, 1999.
Lease income increased by $3,911,000 (233%) from
$1,678,000 during the nine months ended September 30, 1998
to $5,589,000 during the nine months ended September 30,
1999. The Company acquired 26 Amerihost Properties during June
1998. As a result, for the nine months ended September 30,
1998, the Company earned lease revenue for a three-month period
while the lease income for the nine months ended
September 30, 1999 includes lease revenue for the entire
nine-month period. In addition, lease income increased as a
result of lease revenue derived from the Four Amerihost
Properties which were acquired in March 1999.
Interest and dividends - other investments
decreased by $16,000 (7%) from $224,000 during the nine months
ended September 30, 1998 to $208,000 during the nine months
ended September 30, 1999. The average
14
short-term investments of the Company increased by $200,000, from
$6.0 million during the nine months ended
September 30, 1998, to $6.2 million during the nine
months ended September 30, 1999. The average yields on
short-term investments during the nine months ended
September 30, 1999 and 1998 were approximately 4.3% and
5.0%, respectively.
Other income decreased by $519,000 (43%) from
$1,206,000 during the nine months ended September 30, 1998
to $687,000 during the nine months ended September 30, 1999.
Other income consists of: (i) prepayment fees,
(ii) amortization of construction monitoring fees,
(iii) late and other loan fees and (iv) miscellaneous
collections. Since the components of other income are primarily
attributable to lending activities, other income will generally
fluctuate with the Company’s lending activities.
The decrease was principally attributable to the reduced amount
of prepayment fees collected during the nine months ended
September 30, 1999 of $494,000 compared to $953,000 during
the nine months ended September 30, 1998. During the nine
months ended September 30, 1999 and 1998, nine and 10 loans
in the amount of approximately $7.9 million and
$9.8 million, respectively, paid in full prior to their
stated maturity. Additionally, one of the loans which paid in
full during the three months ended September 30, 1998 had a
significant penalty. Prepayment fee income as a percentage of
loans which paid in full was less during the nine months ended
September 30, 1999 than during the nine months ended
September 30, 1998 because the Yield Maintenance Premiums
were not as large due to (i) the lower interest rates on the
loans which prepaid and (ii) the higher interest rates on
U.S. Treasuries. Prepayment fees result in one-time
increases in the Company’s other income, but will result in
a long-term reduction in income if the Company is unable to
generate new loans with the proceeds of such prepayments with
interest rates equal to or greater than the rates of loans which
were prepaid. Prepayments generally increase during times of
declining interest rates. The Company believes that while
prepayments continued at accelerated levels through the second
quarter of 1999, as a result of changes in credit markets, the
pace of prepayment activity decreased during the third quarter
and the Company believes that as a result of the current interest
rate environment the prepayment activity may continue at these
lower levels during the remainder of the current fiscal year. The
borrower’s decision to prepay will depend on factors such
as prepayment penalties and the availability of alternative
lending sources. As interest rates remained at low levels,
borrowers appeared more willing to pay the prepayment penalties
in order to obtain the lower interest rate. This apparent
willingness, coupled with the increased lending competition,
could result in higher than anticipated prepayments. See
“- Loan Prepayment Considerations” and
“- Interest Rate and Prepayment Risk.”
In addition, the decrease in other income was partially due to
decreases in other loan-related fees, such as assumption,
modification, construction, extension and other fees, decreasing
by $88,000 from $205,000 during the nine months ended
September 30, 1998 to $117,000 during the nine months ended
September 30, 1999.
Interest expense increased by $2,688,000 (105%)
from $2,555,000 during the nine months ended September 30,
1998 to $5,243,000 during the nine months ended
September 30, 1999. The increase was primarily a result of
the issuance of the 1998 Notes used to purchase the Amerihost
Properties, the assumption of notes on the Four Amerihost
Properties, the new mortgages on five of the Amerihost properties
and increases in the borrowings under the Company’s
revolving credit facility used to originate loans. The increase
in interest expense was partially offset by decreases in interest
expense due to the redemption of the remaining 1996 Notes.
Interest expense during the nine months ended September 30,
1999 consisted primarily of interest incurred on the 1996 Notes
(approximately $108,000), the 1998 Notes (approximately
$2,607,000), the revolving credit facility (approximately
$1,948,000), and debt related to the Amerihost Properties
($427,000). During the nine months ended September 30, 1998,
interest expense consisted of interest incurred on the 1996
Notes (approximately $666,000), interest incurred on the 1998
Notes (approximately $1,115,000), and interest on the revolving
credit facility (approximately $582,000).
Advisory and servicing fees to affiliate, net
increased by $352,000 (28%) from $1,276,000 during the nine
months ended September 30, 1998 to $1,628,000 during the
nine months ended September 30, 1999. Pursuant to the
investment management agreement (“IMA”), fees between
0.40% and 1.67% annually are charged to the Company based upon
the average principal outstanding of the Company’s loans.
While PMC Advisers bears substantially all of the costs
associated with the Company’s operations, the Company does
pay certain expenses, including, direct transaction costs
incident to the acquisition and disposition of investments, legal
and auditing fees and expenses, the fees and expenses of trust
managers who are not officers of the Company (“Independent
Trust Managers”), the costs
15
of printing and mailing proxies and reports to shareholders and
the fees and expenses of the Company’s custodian and
transfer agent. The Company, rather than PMC Advisers, is also
required to pay expenses associated with any litigation and other
extraordinary or nonrecurring expenses.
In addition, the Company and PMC Advisers entered into a separate
agreement relating to the supervision of the sale-leaseback
agreements between the Company and Amerihost (the “Lease
Supervision Agreement” and together with the IMA, the
“IMAs”). The Company is required to pay an annual fee
(the “Lease Supervision Fee”) of 0.70% of the original
cost of the Amerihost Properties ($73.0 million). As of
April 1, 1999, the Lease Supervision Fee is
$511,000 per annum. In the event the Lease Supervision
Agreement with PMC Advisers is terminated or not renewed by PMC
Commercial (other than as a result of a material breach by PMC
Advisers) or terminated by PMC Advisers (as a result of a
material breach by PMC Commercial), PMC Advisers would be
entitled to receive the Lease Supervision Fee for a period of
five years from the termination date.
Pursuant to the IMAs, the Company incurred an aggregate of
approximately $1,756,000 in management fees for the nine months
ended September 30, 1999 including approximately $364,000
for the Lease Supervision Fee. Of the total management fees paid
or payable to PMC Advisers during the nine months ended
September 30, 1999, $47,000 has been offset against
commitment fees as a direct cost of originating loans and $81,000
of fees charged related to the acquisition of the Four Amerihost
Properties were capitalized as a cost of the properties.
Investment management fees were approximately $2,078,000 for the
nine months ended September 30, 1998. Of the total
management fees paid or payable to PMC Advisers during the nine
months ended September 30, 1998, $171,000 was offset against
commitment fees as a direct cost of originating loans, $165,000
was capitalized as part of the structured financing completed in
June 1998, and a $466,000 fee charged for the acquisition of the
Amerihost Properties was capitalized as a cost of the properties.
The increase in investment management fees (based on the loans
receivable outstanding) from $1,335,000 during the nine months
ended September 30, 1998 to $1,353,000 during the nine
months ended September 30, 1999, an increase of $18,000, or
1% (prior to offsetting direct costs related to the origination
of loans), is primarily due to increases in the outstanding
portfolio. The average outstanding loans as defined by the IMA
increased by $2.3 million (2%), from $118.0 million
during the nine months ended September 30, 1998 to
$120.3 million during the nine months ended
September 30, 1999. The average common equity capital as
defined in the IMA increased by $0.9 million (1%), from
$93.4 million during the nine months ended
September 30, 1998 to $94.3 million during the nine
months ended September 30, 1999.
Depreciation expense increased by $1,146,000 (235%)
from $488,000 during the nine months ended September 30,
1998 to $1,634,000 during the nine months ended
September 30, 1999. This increase is attributable to
depreciation of the 26 Amerihost Properties acquired by the
Company on June 30, 1998 and the Four Amerihost Properties
acquired during March 1999.
General and administrative expenses increased by
$7,000 (5%) from $150,000 during the nine months ended
September 30, 1998 to $157,000 during the nine months ended
September 30, 1999. The general and administrative expenses
remained at low levels and stable since the majority of the
expenses are payable by PMC Advisers pursuant to the IMA.
Legal and accounting fees increased by $62,000
(119%) from $52,000 during the nine months ended
September 30, 1998 to $114,000 during the nine months ended
September 30, 1999. This increase is attributable to an
increase in corporate activity when comparing the nine months
ended September 30, 1999 to the nine months ended
September 30, 1998.
Federal income taxes. As the Company is currently
qualified as a real estate investment trust under the applicable
provisions of the Internal Revenue Code of 1986, as amended,
there are no provisions in the financial statements for Federal
income taxes.
Three Months Ended September 30, 1999 Compared to the
Three Months Ended September 30, 1998
The net income of the Company during the three months ended
September 30, 1999 and 1998 was $2,523,000 and $3,215,000,
or $0.39 and $0.49 per share, respectively. The basic
weighted average shares outstanding increased from 6,512,000 for
the three months ended September 30, 1998 to 6,532,000 for
the three months ended September 30, 1999 as a result of
shares issued pursuant to the dividend reinvestment and cash
16
purchase plan and the exercise of stock options. Revenues of the
Company decreased by $435,000, or 7%, from $5,952,000 during the
three months ended September 30, 1998 to $5,517,000 during
the three months ended September 30, 1999 due primarily to
lower prepayment fees as a result of fewer prepayments and lower
interest income due to lower interest rates. These decreases were
partially offset by the lease revenue on owned properties
purchased in March 1999.
Interest income - loans decreased by $297,000
(8%) from $3,578,000 during the three months ended
September 30, 1998 to $3,281,000 during the three months
ended September 30, 1999. Interest income-loans represents
income generated primarily by interest earned on the
Company’s outstanding loans and the accretion of deferred
commitment fees. This $297,000 decrease in interest income-loans
was primarily attributable to decreases in average invested
assets in loans to small businesses which decreased by
$1.9 million (2%), from $124.7 million during the three
months ended September 30, 1998, to $122.8 million
during the three months ended September 30, 1999. In
addition, interest income was reduced as a result of the decrease
in the weighted average interest rate of the Company’s
outstanding loan portfolio. The weighted average interest rate at
September 30, 1999 was 10.2% compared to 10.5% at
September 30, 1998.
Lease income increased by $300,000 (18%) from
$1,661,000 during the three months ended September 30, 1998
to $1,961,000 during the three months ended September 30,
1999. The increase is primarily due to the additional lease
income on the Four Amerihost Properties purchased in March 1999.
Interest and dividends - other investments
decreased by $29,000 (34%) from $85,000 during the three months
ended September 30, 1998 to $56,000 during the three months
ended September 30, 1999. The average short-term investments
of the Company decreased by $1.9 million, from
$6.7 million during the three months ended
September 30, 1998, to $4.8 million during the three
months ended September 30, 1999. The average yields on
short-term investments during the three months ended
September 30, 1999 and 1998 were approximately 4.7% and
5.1%, respectively.
Other income decreased by $409,000 (65%), from
$628,000 during the three months ended September 30, 1998 to
$219,000 during the three months ended September 30, 1999.
Other income consists of: (i) prepayment fees,
(ii) amortization of construction monitoring fees,
(iii) late and other loan fees and (iv) miscellaneous
collections. Since the components of other income are primarily
attributable to lending activities, other income will generally
fluctuate with the Company’s lending activities.
The decrease in other income was primarily attributable to the
decrease in prepayment fees which decreased from $545,000 during
the three months ended September 30, 1998, to $132,000
during the three months ended September 30, 1999. During the
three months ended September 30, 1999 and 1998, three and
eight loans in the amount of approximately $2.5 million and
$6.7 million, respectively, paid in full prior to their
stated maturity. Additionally, one of the loans which paid in
full during the three months ended September 30, 1998 had a
significant penalty. Prepayment fee income as a percentage of
loans which paid in full was less during the three months ended
September 30, 1999 than during the three months ended
September 30, 1998 because the Yield Maintenance Premiums
were not as large due to (i) the lower interest rates on the
loans which prepaid and (ii) the higher interest rates on
U.S. Treasuries. Prepayment fees result in one-time
increases in the Company’s other income, but will result in
a long-term reduction in income if the Company is unable to
generate new loans with the proceeds of such prepayments with
interest rates equal to or greater than the rates of loans which
were prepaid. Prepayments generally increase during times of
declining interest rates. While prepayments continued at
accelerated levels during the three months ended
September 30, 1998, as a result of recent changes in the
credit markets, the pace of prepayment activity decreased during
the three months ended September 30, 1999 and the Company
believes that as a result of the current interest rate
environment the prepayment activity may continue at these lower
levels during the remainder of the current fiscal year. The
borrower’s decision to prepay will depend on factors such as
prepayment penalties and the availability of alternative lending
sources. As interest rates remained at low levels, borrowers
appeared more willing to pay the prepayment penalties in order to
obtain the lower interest rate. This apparent willingness,
coupled with the increased lending competition, could result in
higher than anticipated prepayments. See “- Loan
Prepayment Considerations” and “- Interest Rate
and Prepayment Risk.”
Interest expense increased by $144,000 (9%) from
$1,656,000 during the three months ended September 30, 1998
to $1,800,000 during the three months ended September 30,
1999. The increase was primarily a result of
17
the issuance of debt for the purchase of the Four Amerihost
Properties during March 1999. Interest expense during the three
months ended September 30, 1999 consisted primarily of
interest incurred on the 1998 Notes (approximately $828,000),
notes related to the Amerihost Properties (approximately
$248,000) and the revolving credit facility (approximately
$697,000). During the three months ended September 30, 1998,
interest expense consisted of interest incurred on the 1996
Notes (approximately $192,000), the 1998 Notes (approximately
$1,021,000), and interest on the revolving credit facility
(approximately $367,000).
Advisory and servicing fees to affiliate, net
increased by $23,000 (4%) from $526,000 during the three months
ended September 30, 1998 to $549,000 during the three months
ended September 30, 1999. Pursuant to the IMA, fees between
0.40% and 1.67% annually are charged to the Company based upon
the average principal outstanding of the Company’s loans.
Pursuant to the IMAs, the Company incurred an aggregate of
approximately $568,000 in management fees for the three months
ended September 30, 1999 including approximately $128,000
for the Lease Supervision Fee. Of the total management fees paid
or payable to PMC Advisers during the three months ended
September 30, 1999, $19,000 was offset against commitment
fees as a direct cost of originating loans. Investment management
fees were approximately $571,000 for the three months ended
September 30, 1998. Of the total management fees paid or
payable to PMC Advisers during the three months ended
September 30, 1998, $45,000 was offset against commitment
fees as a direct cost of originating loans. The decrease in
investment management fees (based on the loans receivable
outstanding) from $463,000 during the three months ended
September 30, 1998 to $441,000 during the three months ended
September 30, 1999, a decrease of $22,000, or 5% (prior to
offsetting direct costs related to the origination of loans), is
primarily due to decreases in the average outstanding loans and
lower fees charged on a portion of the outstanding portfolio. The
average outstanding loans as defined by the IMA decreased by
$4.8 million (4%), from $124.9 million during the three
months ended September 30, 1998 to $120.1 million
during the three months ended September 30, 1999. This
decrease was partially offset by increases in common equity
capital, including additional paid-in capital. The average common
equity capital as defined in the IMA increased by $300,000 (-%),
from $94.0 million during the three months ended
September 30, 1998, to $94.3 million during the three
months ended September 30, 1999.
Depreciation expense increased by $85,000 (17%)
from $488,000 during the three months ended September 30,
1998 to $573,000 during the three months ended September 30,
1999. This increase is attributable to depreciation associated
with the Four Amerihost Properties acquired by the Company during
March 1999.
General and administrative expenses decreased by
$7,000 (14%) from $49,000 during the three months ended
September 30, 1998 to $42,000 during the three months ended
September 30, 1999. The general and administrative expenses
remained at low levels and stable since the majority of the
expenses are payable by PMC Advisers pursuant to the IMA.
Legal and accounting fees increased by $22,000
(275%), from $8,000 during the three months ended
September 30, 1998 to $30,000 during the three months ended
September 30, 1999. This increase is attributable to an
increase in corporate activity when comparing the three months
ended September 30, 1999 to the three months ended
September 30, 1998.
Federal income taxes. As the Company is currently
qualified as a real estate investment trust under the applicable
provisions of the Internal Revenue Code of 1986, as amended,
there are no provisions in the financial statements for Federal
income taxes.
Cash Flow Analysis
The Company generated $8,781,000 and $11,059,000 from operating
activities during the nine months ended September 30, 1999
and 1998, respectively. The primary source of funds is the net
income of the Company. The decrease of $2,278,000 (21%) was
primarily due to several factors including (i) the change
related to “Due to affiliates” which decreased by
$989,000 from a source of funds of $263,000 during the nine
months ended September 30,1998 to a use of funds of $726,000
during the nine months ended September 30, 1999,
(ii) fluctuations in borrower advances which decreased by
$626,000 from a source of funds of $784,000 during the nine
months ended September 30, 1998 to $158,000 during the nine
months ended September 30, 1999, (iii) the change
18
related to “other liabilities” which decreased by
$1,158,000 from a source of funds of $1,533,000 during the nine
months ended September 30,1998 to a source of funds of
$375,000 during the nine months ended September 30, 1999 and
(iv) the decrease in net income of $904,000 from $8,578,000
during the nine months ended September 30, 1998 to
$7,674,000 during the nine months ended September 30, 1999.
The Company had a net source of funds of $1,121,000 and a net use
of funds of $80,701,000 from investing activities during the
nine months ended September 30, 1999 and 1998, respectively.
The increased source of funds of $81,822,000 was due to;
(i) the purchase of the Amerihost Properties in June 1998
for $62,730,000, and (ii) a decrease in the use of funds
$19,680,000 in the loans funded during the nine months ended
September 30, 1999 compared to the nine months ended
September 30, 1998.
The Company had a net use of funds of $9,872,000 and a net source
of funds of $69,731,000 from financing activities during the
nine months ended September 30, 1999 and 1998, respectively.
During the nine months ended September 30, 1998 the Company
issued $66,100,000 of the 1998 Notes and increased its revolving
credit facility in order to purchase the 26 Amerihost
Properties. The Company had no such large issuance during the
nine months ended September 30, 1999. The Company borrowed
under its credit facility in order to acquire the remaining Four
Amerihost Properties in March 1999 and to fund increases in the
loan portfolio. The Company’s main use of funds from
financing activities is the payment of dividends as part of its
requirements to maintain REIT status and the payment of principal
on notes payable. Dividends paid increased $759,000 from
$8,212,000 during the nine months ended September 30, 1998,
to $8,971,000 during the nine months ended September 30,
1999. These dividend increases correspond to the increase in the
Company’s funds from operations.
Liquidity and Capital Resources
The primary use of the Company’s funds is to originate loans
and to acquire commercial real estate. The Company also uses
funds for payment of dividends to shareholders, management and
advisory fees (in lieu of salaries and other administrative
overhead), general corporate overhead and interest and principal
payments on borrowed funds.
As a REIT, the Company must distribute to its shareholders at
least 95% of its taxable income to maintain its tax status under
the Code. As a result, the Company’s earnings will not be
available to fund investments. In order to maintain and increase
the investment portfolio, the Company has a continuing need for
capital. The Company has historically met its capital needs
through borrowings under its credit facility, structured
sales/financings of its loan portfolio and the issuance of common
stock. A reduction in the availability of these sources of funds
could have a material adverse effect on the financial condition
and results of the Company. The Company expects to obtain capital
to fund loans through borrowings as further discussed below.
At September 30, 1999, the Company had $255,000 of cash and
cash equivalents and approximately $10 million of total loan
commitments and approvals outstanding to five small business
concerns predominantly in the lodging industry. Of the total loan
commitments and approvals outstanding, the Company had
approximately $1.2 million of loan commitments outstanding
pertaining to three partially funded construction loans and
$800,000 of commitments under the SBA 504 takeout program at
September 30, 1999. The weighted average interest rate on
loan commitments at September 30, 1999 was 9.4%. These
commitments are made in the ordinary course of business and, in
management’s opinion, are generally on the same terms as
those to existing borrowers. These commitments to extend credit
are conditioned upon compliance with the terms of the applicable
commitment letter. Commitments have fixed expiration dates and
require payment of a fee. Since some commitments expire without
the proposed loan closing, the total committed amounts do not
necessarily represent future cash requirements. Pursuant to the
Loan Origination Agreement included in the IMA, if the Company
does not have available capital to fund outstanding commitments,
PMC Advisers will refer such commitments to its affiliates and
the Company for which the Company will receive no income.
In general, to meet its liquidity requirements, including
expansion of its outstanding loan portfolio and/or acquisition of
properties, the Company intends to use: (i) its revolving
credit facility as described below, (ii) borrowings
collateralized by the properties, (iii) issuance of debt
securities including securitizations of loans or properties,
(iv) placement of corporate long-term borrowings, and/or
(v) offering of additional equity securities. The Company
believes that these financing sources will enable the Company to
generate funds sufficient to meet both its
19
short-term and long-term capital needs. The ability of the
Company to continue its historical growth, however, will depend
on its ability to borrow funds and/or issue equity on acceptable
terms.
The Company has a revolving credit facility (the
“Revolver”) which provides the Company funds to
originate loans and, on a limited basis, to purchase commercial
real estate. The Revolver, as amended in March 1999, provides the
Company with credit availability up to the lesser of
$45 million or an amount equal to the sum of 50% of the
value of the projects underlying the loans collateralizing the
borrowings up to 100% of the amount of the loans outstanding. At
September 30, 1999, the Company had $36.1 million of
outstanding borrowings under the Revolver and $8.9 million
available thereunder, as amended. The Company is charged interest
on the balance outstanding under the credit facility at the
Company’s election of either the prime rate of the lender
less 50 basis points or 175 basis points over the 30, 60 or
90 day LIBOR. The facility matures on March 31, 2000
except for $15 million which matures January 31, 2000.
The Company is currently negotiating a syndicated credit facility
with a group of banks and anticipates it will be in place by the
end of November 1999. This new credit facility is expected to
aggregate $45.0 million and mature in three years. Under the
terms of the agreement, an additional $15 million credit
facility will be available through April 30, 2000.
With regard to its Amerihost Properties, the Company is currently
pursuing financing sources including both mortgages on
individual properties owned by the Company and a combination of
smaller pools of properties identified for inclusion in
commercial mortgage backed securities (“CMBS”). The
Amerihost Properties are relatively new and have not achieved
their optimal cash flow. Thus, the amount of leverage currently
available through CMBS transactions is lower than that which
management believes is appropriate and/or the cost of the related
leverage is higher than management believes is warranted. When
the CMBS markets value the properties as management anticipates,
the Company may utilize them in order to issue debt in a
securitization. As of September 30, 1999, the Company
mortgaged five of the Amerihost Properties for $6.9 million
at a weighted average interest rate of 7.5% for all five
mortgages. Subsequent to September 30, 1999, the Company
completed a mortgage on another Amerihost Property for proceeds
of $1.7 million at an interest rate of 8.00%. The related
notes each have terms of five years (except for one note),
amortization periods of 20 years, and rates ranging from
7.44% to 7.75%. The remaining note’s term is 9 years,
has no prepayment penalty and has an interest rate reset at the
end of its fifth year.
With regard to its loans, the Company is also developing a loan
pool of approximately $40-$50 million for a securitization
transaction which is anticipated to be completed during the first
quarter of 2000.
Management anticipates the sources of funds described above will
be adequate to meet its existing obligations. There can be no
assurance the Company will be able to raise funds through these
financing sources. If these sources are not available, the
Company may have to continue originating loans at the present
slow rate. If the bank is unwilling to extend the maturity date
of the Revolver and the other sources of capital described above
are not available at acceptable advance rates and/or interest
rates, the Company may have to refer commitments to PMC Advisers,
issue debt at decreased loan-to-value ratios or increased
interest rates and/or sell assets in order to cause the revolving
credit facility to be reduced to $30 million on
January 31, 2000.
Leverage
In general, if the returns on loans originated by the Company
combined with lease payments on properties purchased with funds
obtained from any borrowing fail to cover the cost of such funds,
the net cash flow on such loans will be negative. Additionally,
any increase in the interest rate earned by the Company on
investments in excess of the interest rate incurred on the funds
obtained from borrowings would cause its net income to increase
more than it would without the leverage. Conversely, any decrease
in the interest rate earned by the Company on investments would
cause net income to decline by a greater amount than it would if
the funds had not been obtained from borrowings. Leverage is thus
generally considered a speculative investment technique. See
“Loan Prepayment Considerations” and “Interest
Rate and Prepayment Risks”.
20
Fluctuations In Quarterly Results
The Company’s quarterly operating results will fluctuate
based on a number of factors. These include, among others, the
completion of a securitization transaction in a particular
calendar quarter, the interest rates on the securities issued in
connection with its securitization transactions, the volume of
loans originated by the Company, the timing of prepayment of
loans, changes in and the timing of the recognition of gains or
losses on investments, the degree to which the Company encounters
competition in its markets and general economic conditions. As a
result of these factors, results for any one quarter should not
be relied upon as being indicative of performance in future
quarters.
Impact of Inflation
The Company does not believe that inflation materially affects
its business other than the impact that it may have on the
securities markets, the valuation of collateral underlying the
loans and the relationship of the valuations to underlying
earnings. Those could all influence the value of the
Company’s investments.
Year 2000 Compliance Update
The Year 2000 issue concerns the potential impact of
historic computer software code that only utilized two digits to
represent the calendar year (e.g., “98” for
“1998”). Software so developed, and not corrected,
could produce inaccurate or unpredictable results commencing
January 1, 2000, when current and future dates present a
lower two digit year number than dates in the prior century. The
Company, similar to most financial services providers, is subject
to the potential impact of the Year 2000 issue due to the
nature of financial information. Potential impacts to the Company
may arise from software, computer hardware, and other equipment
both within the Company’s direct control and outside of the
Company’s ownership, yet with which the Company
electronically or operationally interfaces. Regulators have
intensively focused upon Year 2000 exposures, issuing
guidance concerning the responsibilities of senior management and
directors. Year 2000 testing and certification is being
addressed as a key safety and soundness issue in conjunction with
these regulatory concerns.
During 1998, the Company, through PMC Advisers, formed an
internal review team to address, identify and resolve any
Year 2000 issues that encompass operating and administrative
areas of the Company. In addition, executive management monitors
the status of the Company’s Year 2000 remediation
plans, where necessary, as they relate to internally used
software, computer hardware and use of computer applications in
the Company’s servicing processes. In addition, PMC Advisers
is engaged in assessing the Year 2000 issue with
significant suppliers.
The assessment process relating to PMC Adviser’s loan
receivable servicing operations has been substantially completed.
In addition, PMC Advisers has initiated and substantially
completed formal communications with its significant suppliers to
determine the extent to which PMC Advisers is vulnerable to
those third parties’ failure to remedy their own
Year 2000 issues.
The Company, through PMC Advisers, used internal resources to
test the software for Year 2000 compliance. The Company has
substantially completed its Year 2000 assessment and
remediation. The Company will not incur any direct costs as a
result of the advisory relationship with PMC Advisers. The costs
of the project and the date on which the Company plans to
complete its Year 2000 assessment and remediation are based
on management’s estimates, which were derived utilizing
assumptions of future events including the continued availability
of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates
will be achieved and actual results could differ significantly
from those plans. Specific factors that might cause differences
from management’s estimates include, but are not limited to,
completion by third parties of their Year 2000 evaluations
and their required modifications. Management believes that PMC
Advisers is devoting the necessary resources to identify and
resolve significant Year 2000 issues related to the Company
in a timely manner.
Funds From Operations and Dividends
Funds From Operations The Company considers Funds
From Operations (“FFO”) to be an appropriate measure of
performance for an equity or hybrid REIT that provides a
relevant basis for comparison among REITs. FFO, as defined by the
National Association of Real Estate Investment Trusts (NAREIT),
means income (loss) before minority interest (determined in
accordance with GAAP), excluding gains (losses) from debt
restructuring
21
and sales of property, plus real estate depreciation and after
adjustments for unconsolidated partnerships and joint ventures.
FFO is presented to assist investors in analyzing the performance
of the Company. The Company’s method of calculating FFO may
be different from the methods used by other REITs and,
accordingly, may be not be directly comparable to such other
REITs. The formulation of FFO below is consistent with the NAREIT
White Paper definition of FFO. FFO (i) does not represent
cash flows from operations as defined by GAAP, (ii) is not
indicative of cash available to fund all cash flow needs and
liquidity, including its ability to make distributions, and
(iii) should not be considered as an alternative to net
income (as determined in accordance with GAAP) for purposes of
evaluating the Company’s operating performance. For a
completed discussion of the Company’s cash flows from
operations, see “Cash Flow Analysis”.
The Company’s FFO for the three and nine months ended
September 30, 1999 and 1998 was computed as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
Three Months Ended |
|
|
September 30, |
|
September 30, |
|
|
|
|
|
|
|
1999 |
|
1998 |
|
1999 |
|
1998 |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
Net income |
|
$ |
7,674 |
|
|
$ |
8,578 |
|
|
$ |
2,523 |
|
|
$ |
3,215 |
|
|
|
|
|
|
|
Add depreciation |
|
|
1,634 |
|
|
|
488 |
|
|
|
573 |
|
|
|
488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO |
|
$ |
9,308 |
|
|
$ |
9,066 |
|
|
$ |
3,096 |
|
|
$ |
3,703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
6,528 |
|
|
|
6,492 |
|
|
|
6,532 |
|
|
|
6,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends. During January 1999, the Company paid
$0.455 per share in dividends to common shareholders of
record on December 31, 1998. During April and July 1999, the
Company paid $0.46 per share in dividends to common
shareholders of record on March 31, 1999 and
September 30, 1999, respectively. The Company declared a
$0.46 per share dividend to common shareholders of record on
September 30, 1999, which was paid on October 12,
1999. The Board of Trust Managers has determined that the
quarterly dividend will be $0.46 per share through the year
ended December 31, 2000. While FFO has continued to meet
management’s expectations, many factors are considered in
dividend policy, consequently dividends cannot be guaranteed.
Risks Associated with Forward-Looking Statements Included in
this Form 10-Q
This Form 10-Q contains certain 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,
which are intended to be covered by the safe harbors created
thereby. These statements include the plans and objectives of
management for future operations, including plans and objectives
relating to future property acquisitions and the growth of the
loan portfolio and availability of funds. The forward-looking
statements included herein are based on current expectations that
involve numerous risks and uncertainties and, in most instances,
are identified through the use of words such as
“anticipates,” “expects” and
“should.” Assumptions relating to the foregoing involve
judgments with respect to, among other things, future economic,
competitive and market conditions and future business decisions,
all of which are difficult or impossible to predict accurately
and many of which are beyond the control of the Company. Although
the Company believes that the assumptions underlying the
forward-looking statements are reasonable, any of the assumptions
could be inaccurate and, therefore, there can be no assurance
that the forward-looking statements included in this
Form 10-Q will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking
statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any
other person that the objectives and plans of the Company will be
achieved.
22
PART I
Financial Information
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
The Company is subject to market risk associated with changes in
interest rates.
The Company’s balance sheet consists of two items subject to
interest rate risk. The majority of the Company’s
investment portfolio consists of fixed interest rate loans. Given
that the loans are priced at a fixed rate of interest, changes
in interest rates should not have a direct impact on interest
income. Significant reductions in interest rates, however, can
prompt increased prepayments of the Company’s loans,
resulting in possible decreases in long-term revenues due to the
relending of the prepayment proceeds at lower interest rates. See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations - Interest Rate and
Prepayment Risk.” The Company’s liabilities consist
primarily of the 1998 Notes of approximately $51.4 million
at September 30, 1999 and amounts outstanding under the
Company’s Revolver of approximately $36.1 million. The
1998 Notes are payable at fixed rates of interest, so changes in
interest rates do not affect the related interest expense.
However, the Company’s Revolver is subject to adverse
changes in market interest rates. Assuming interest rates
increased by 200 basis points (2%) above the present
Revolver interest rate of approximately 7.75%, on an annualized
basis, interest expense would increase by approximately $722,000
on the amount outstanding of $36.1 million at
September 30, 1999.
23
PART II
Other Information
|
|
| ITEM 4. |
Submission of Matters to a Vote of Security Holders |
None
|
|
| ITEM 6. |
Exhibits and Reports on Form 8-K |
A. Exhibits
None
B. Form 8-K
None
24
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.
|
|
| |
PMC Commercial Trust |
Date: 11/15/99
|
|
| |
/s/ LANCE B. ROSEMORE |
| |
|
| |
Lance B. Rosemore |
| |
President |
Date: 11/15/99
|
|
| |
/s/ BARRY N. BERLIN |
| |
|
| |
Barry N. Berlin |
| |
Chief Financial Officer |
| |
(Principal Accounting Officer) |
25
EXHIBIT
INDEX
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Description |
|
|
|
|
27 |
|
|
- Financial Data Schedule |
5
1,000
9-MOS
DEC-31-1999
JAN-01-1999
SEP-30-1999
94
161
120,120
(100)
0
0
73,770
(2,610)
200,875
7,360
101,218
0
0
94,360
(2,063)
200,875
16,450
16,450
0
0
3,533
0
5,243
7,674
0
7,674
0
0
0
7,674
1.18
1.18
INCLUDES CURRENT AND LONG-TERM PORTION OF ALL LOANS RECEIVEABLE - BEFORE
RESERVE AND RELATED INTEREST RECEIVABLES.
INCLUDES THE FOLLOWING ITEMS NOT INCLUDED ABOVE:
(i) OTHER ASSETS, NET $ 386
(ii) DEFERRED BORROWING COSTS 484
(iii) RESTRICTED INVESTMENTS 8,570
-------
$ 9,440
=======
INCULDES THE FOLLOWING ITEMS:
(i) DIVIDENDS PAYABLE $ 3,005
(ii) OTHER LIABILITIES 2,202
(iii) INTEREST PAYABLE 360
(iv) BORROWER ADVANCES 946
(v) UNEARNED COMMITMENT FEES 341
(vi) DUE TO AFFILIATES 506
--------
$ 7,360
========
