UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 8, 2003
(September 23, 2003)
AMERICAN RETIREMENT CORPORATION
-------------------------------
(Exact Name of Registrant as Specified in its Charter)
Tennessee 01-13031 62-1674303
--------- -------- ----------
(State or Other Jurisdiction of (Commission File (I.R.S. Employer
Incorporation or Organization) Number) Identification No.)
111 Westwood Place, Suite 200, Brentwood, TN 37027
-------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (615) 221-2250
INDEX
Page
Item 2. Acquisition or Disposition of Assets .......................3
Signatures .......................................................5
2
Item 2. Acquisition or Disposition of Assets
On September 23, 2003, American Retirement Corporation (the "Company")
completed a multi-property transaction with Health Care Property Investors, Inc.
("HCPI") that involved the sale/lease-back of three Retirement Centers and the
sale of a fourth Retirement Center.(1) The Company also entered into a long-term
agreement to manage the fourth community for an unaffiliated third party.
Finally, the Company obtained mortgage financings from HCPI that are secured by
certain land parcels adjoining two of the communities.
The proceeds of the transaction were used to repay approximately $113
million of first mortgage debt on the four Retirement Centers. In addition,
after first mortgage prepayment costs of $1 million, credit for HCPI's existing
minority interest in the properties, and transaction costs, the remaining
proceeds of $52 million were used to repay a portion of the HCPI 19.5% mezzanine
debt ("HCPI Loan"). The terms of the HCPI Loan originally did not permit
prepayment until after October 2005, however, the parties amended the agreement
to allow for this transaction and the resulting prepayment.(2)
The four Retirement Centers were valued in the transaction at $163.5
million, versus their net book value of approximately $73 million. As a result
of the transaction, the Company expects to realize gains of approximately $93
million. Approximately $23 million of these gains will be recognized during the
third quarter of 2003. The remaining approximately $70 million of gains will be
recognized over the lease terms ("Deferred Gain"). Approximately $66 million of
the Deferred Gain will be recognized over the initial ten year lease terms for
the three Retirement Centers included in the sale/lease-back.
An additional $4 million of Deferred Gain will be recognized over the
remaining thirteen years of a Retirement Center lease previously entered into
with HCPI during the first quarter of 2002. As part of the current transaction,
this prior lease was amended to remove a purchase option related to the fixed
assets of this community. The lease was previously accounted for as a financing,
but as a result of the amendment, will now be accounted for as an operating
lease with the associated gain recognized over the remaining thirteen years of
the initial lease term.(3)
The Company will continue to operate all four Retirement Centers (one
under a management agreement), two of which are located in Texas, one in
Arizona, and one in Colorado. The communities have a combined capacity of 1,170
units, including independent living, assisted living, memory enhancement and
skilled nursing units. Three of the Retirement Centers were leased-back from
HCPI under a master lease agreement with an initial term of ten years, plus two
ten year renewal options. The lease for these three Retirement Centers will be
accounted for as operating lease. The initial lease rate for these three
communities will be 9.5%, with annual rent increases of 2.75%.
The Company additionally agreed to manage the fourth Retirement
Center, located in Colorado, for an unaffiliated third party under a long term
management agreement. The initial term of the management agreement is ten years,
plus two ten year renewal terms. Under the terms of the management agreement,
the Company will continue to operate the Retirement Center under its existing
tradename, and does not anticipate any change in operations, employees or
services.
As a result of this transaction, the Company will now report
management fee revenue earned under the management agreement for the Colorado
Retirement Center, instead of including the revenues and expenses of this
community as part of its consolidated results. In addition, as a result of the
transaction, the Company anticipates an increase in reported lease expense of
approximately $10 million per year, but a decrease in reported interest expense
of approximately $21 million per year.(4)(5)
The Company also entered into a mortgage loan with HCPI in the amount
of $7 million. Interest is payable monthly at LIBOR plus 3%, with the principal
balance due in September 2005. The Company used the proceeds from the loan in
conjunction with the repayment of the HCPI Loan as described above. The note is
secured by vacant land parcels adjacent to two of the Retirement Centers
included in the sale/lease-back transaction. Since these land parcels are
currently in the process of being sold, the $7 million loan will be shown as a
current liability, as debt associated with assets held-for-sale.
3
(1) Prior to the transaction, the Company held 90.8% and HCPI held 9.2%
interest in the properties associated with these four Retirement Centers.
(2) The HCPI Loan balance as of September 30, 2003 will be approximately $76
million, down from $122 million as of June 30, 2003.
(3) This will result in reduction of land, buildings and equipment of
approximately $20 million, and debt (capital lease obligations) of
approximately $24 million.
(4) As a result of the transaction, reported lease expense is expected to
increase by approximately $10 million per year, resulting from increases of
approximately $17 million from the master lease entered into for the three
Retirement Centers (including accounting for lease escalators), and the
conversion of the March 2002 Retirement Center lease from a financing to an
operating lease, offset by approximately $7 million per year of recognition
of the Deferred Gain on the sale/lease-back transactions.
(5) As a result of the transaction, reported interest expense is expected to
decrease by approximately $21 million per year, primarily resulting from a
decrease in first mortgage interest of approximately $8 million per year, a
decrease of $10 million per year of interest on the HCPI Loan, and
conversion of the March 2002 Retirement Center lease from a financing to an
operating lease. Approximately $5 million of the HCPI Loan interest savings
were from amounts accrued but not paid each quarter. (Under the HCPI Loan,
9.5% of the 19.5% total interest is paid currently each quarter, with the
balance deferred.)
Risks Associated with Forward Looking Statements
This Form 8-K contains certain forward-looking statements within the meaning of
the federal securities laws, which are intended to be covered by the safe
harbors created thereby. Those forward-looking statements include all statements
that are not historical statements of fact and those regarding the intent,
belief or expectations of the Company or its management. Although the Company
believes that the assumptions underlying the forward-looking statements
contained herein are reasonable, any of these assumptions could prove to be
inaccurate, and therefore, there can be no assurance that the forward-looking
statements included in this Form 8-K will prove to be accurate. These
forward-looking statements involve risks and uncertainties, including those
identified within other filings with the SEC by the Company. The actual results
that the Company achieves may differ materially from any forward-looking
statements due to such risks and uncertainties. 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 forecasts, expectations, objectives or
plans of the Company will be achieved. The Company undertakes no obligation to
publicly release any revisions to any forward-looking statements contained
herein to reflect events and circumstances occurring after the date hereof or to
reflect the occurrence of unanticipated events.
4
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.
AMERICAN RETIREMENT CORPORATION
Date: October 8, 2003 By: /s/ Bryan D. Richardson
--------------------------------------
Bryan D. Richardson
Executive Vice President-Finance and
Chief Financial Officer (Principal
Financial and Accounting Officer)