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): July 20, 2004 (July 15, 2004)
American Retirement Corporation
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(Exact Name of Registrant as Specified in its Charter)
Tennessee 01-13031 62-1674303
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(State or Other Jurisdiction of (Commission (I.R.S. Employer
Incorporation or Organization) File No.) Identification No.)
111 Westwood Place, Suite 200, Brentwood, TN 37027
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (615) 221-2250
TABLE OF CONTENTS:
Page
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Item 2. Acquisition or Disposition of Assets 3
Signatures 6
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Item 2. Acquisition or Disposition of Assets
On July 15, 2004, we completed a multi-property, sale-leaseback transaction with
Health Care Property Investors, Inc. ("HCPI"). In the transaction we sold a
substantial majority of our interest in the real property and improvements
underlying two Retirement Centers and one free-standing assisted living
community ("Free-standing AL"), while retaining a 10% interest in those three
communities. We also sold to HCPI all of our interest in the real property and
improvements underlying one of our other Retirement Centers. (1) We will
continue to operate all four of the communities involved in the transaction
under a master lease. The proceeds from the transaction were used primarily to
repay $18.9 million of mortgage debt and the remaining $82.6 million balance of
our 19.5% mezzanine loan with HCPI (the "Mezzanine Loan"). (2)
In August 2002, as the final element of our 2002 recapitalization plan, we
entered into the Mezzanine Loan with HCPI for $112.8 million with a five-year
term. At the same time, HCPI also made a $12.2 million equity investment in
certain of our other subsidiaries that functioned solely as passive real estate
holding companies owning the real property and improvements of nine of our
Retirement Centers. HCPI received a 9.8% ownership interest in those
subsidiaries as a result of that investment.
In September 2003, we partially repaid the Mezzanine Loan through a
multi-property transaction with HCPI that resulted in the repayment of $51.8
million of the principal and accrued interest on the Mezzanine Loan.
The four communities involved in the July 15, 2004 transaction were valued at
$153.5 million, which amount was supported by fair market value appraisals. The
communities have a combined capacity of 1,353 units, including independent
living, assisted living, memory enhancement and skilled nursing units. Two of
the communities are located in Florida, one in Kentucky and one in Michigan. As
a result of the transaction, we will continue to own 10% of the real estate
holding companies owning three of the communities. HCPI will own 90% of these
holding companies and 100% of the fourth real estate holding company. These four
real estate holding companies leased the four communities to us pursuant to a
master lease.
The master lease agreement has an initial term of ten years, plus three ten year
renewal periods at our option. The initial lease rate will be 8.8% on the $153.5
million value, consisting of a 9% base lease rate on invested equity in the real
estate holding companies and a pass-through of the cost of $24.8 million of
mortgage debt for two of the real estate holding companies.(3) The lease also
contains certain formula-based lease rate escalators. For the three communities
in which we retained a 10% interest, we retained a formula-based option
(transaction value escalated at 3% per annum, compunded annually) to repurchase
the real estate, which option is exercisable at the end of the base lease term
or any renewal term. We also have an earnout provision of up to $900,000 of
additional proceeds on the Free-standing AL contingent on achievement of certain
operating results at that community.
The recent transaction resulted in the repayment of $18.9 million of mortgage
debt and the remaining $82.6 million balance of our Mezzanine Loan, including
accrued interest. We intend to use the remaining proceeds for
transaction-related costs, for taxes on the gain on sale and for general
corporate purposes. (4)
The master lease will be accounted for as an operating lease for one of the
Retirement Centers and as a lease financing with respect to the other three
communities as a result of our continuing 10% ownership interest and other
factors. Because of the lease financing treatment for these three communities,
the amount of debt on our balance sheet will remain approximately the same. The
debt associated with these three new lease financings (capital leases) will be
fully amortized over the initial ten-year lease term. For the community with the
operating lease treatment, we will realize a gain of approximately $16.3
million, which will be deferred and amortized over the initial ten-year lease
term. No gain or loss is recognized for the three communities with lease
financing treatment.
During the third quarter of 2004, we will write-off $3.4 million of unamortized
financing costs relating to the early prepayment of the Mezzanine Loan and the
other debt repaid in the transaction and we will expense approximately $1.2
million of other transaction related costs. Additionally, we will record a $6.8
million current tax expense relating to the taxable gain on the sale of our
interest in the four communities after full utilization of net operating losses.
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We expect the transaction to positively impact our pre-tax income by
approximately $3.0 million per quarter (approximately $12 million per year),
comprised of the following elements.
o We expect to generate interest savings of approximately $4.5 million per
quarter (approximately $18 million per year) reflecting significantly
reduced cost of debt resulting from the transaction.
o Our 10% interest in the real estate holding companies of the three
communities will be accounted for using the cost method. Our minority
interest expense, which prior to the transaction included HCPI's 9.8% in
the subject communities, will be reduced. The net impact of these two items
is expected to be a positive increase in pre-tax earnings of approximately
$500,000 per quarter (approximately $2 million per year).
o We expect an increase in our lease-related expenses of approximately $2.0
million per quarter (approximately $8 million per year).
We also obtained on July 15, 2004 a separate mortgage loan with HCPI in the
amount of $5.65 million. Interest is payable monthly at 9%, with the principal
balance due in July 2006. The note is secured by mortgages on one of our
Free-standing AL communities, an undeveloped land parcel and a Free-standing AL
leased to a third party. The proceeds were used to repay approximately $500,000
of debt owed HCPI and the remainder is available for general corporate purposes.
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Notes:
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(1) Prior to the transaction, we held 90.2% and HCPI held 9.8% interests in the
real property underlying the three Retirement Centers and we owned a 61%
interest in the Free-standing AL through a joint venture with unaffiliated
parties. After the transaction, we retained a 10% interest in the real property
and improvements underlying two of the Retirement Centers and the Free-standing
AL through our 10% interest in the real estate holding companies that will serve
as the lessors for these communities. We will continue to operate all four
communities as lessee under a master lease.
(2) The Mezzanine Loan balance and accrued interest, as of July 15, 2004, was
approximately $82.6 million, a $2.7 million increase from $79.9 million at March
31, 2004.
(3) The $24.8 of mortgage debt subject to the pass-through of debt cost in the
master lease was retained by two of the real estate holding companies and will
no longer be consolidated on our balance sheet. Our guarantee with respect to
$16.8 million of that debt will continue until the debt is repaid.
(4) Gross transaction value of the four communities 153.5
Value of ARC's retained 10% interests (10.4)
Net value of HCPI minority interest (from Sept. 2002) (6.0)
Mortgage debt retained by real estate holding companies (Note 3) (24.8)
Mezzanine debt repaid, including accrued interest (82.6)
Mortgage debt repaid (18.9)
Taxes payable (6.8)
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Cash available for transactions costs and other uses 4.0
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Risks Associated with Forward Looking Statements
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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, including our
expectations regarding the consequences of the transaction on our financial
results and income. 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.
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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: July 20, 2004 By: /s/ Bryan D. Richardson
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Bryan D. Richardson
Executive Vice President-Finance and
Chief Financial Officer (Principal
Financial and Accounting Officer)
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