American Retirement Corp. 10-Q
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 March 31, 2006
or
o |
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 01-13031
American
Retirement Corporation
(Exact
Name of Registrant as Specified in its Charter)
Tennessee
|
62-1674303
|
(State
or Other Jurisdiction of
|
(I.R.S.
Employer
|
Incorporation
or Organization)
|
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
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes
þ
No
o
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer as defined in Rule 12b-2 of
the Securities Exchange Act of 1934.
Large
accelerated filer o
Accelerated
filer þ
Non-Accelerated
filer o
Indicate
by check mark whether the Registrant is a shell company as defined in
Rule 12b-2 of the Securities Exchange Act of 1934.
Yes
o
No
þ
As
of May
3, 2006, 35,302,922 shares of the registrant’s common stock, par value
$0.01 per share, were outstanding.
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Page
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3
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4
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5
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7
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20
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34
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34
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35
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35
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36
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AMERICAN
RETIREMENT CORPORATION AND SUBSIDIARIES
|
|
(in
thousands, except share data)
|
|
|
March
31,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
ASSETS
|
|
(Unaudited)
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
84,245
|
|
$
|
40,771
|
|
Restricted
cash
|
|
|
21,824
|
|
|
18,554
|
|
Accounts
receivable, net of allowance for doubtful accounts
|
|
|
27,227
|
|
|
24,480
|
|
Inventory
|
|
|
1,442
|
|
|
1,389
|
|
Prepaid
expenses
|
|
|
4,594
|
|
|
3,346
|
|
Deferred
income taxes
|
|
|
9,378
|
|
|
9,795
|
|
Other
current assets
|
|
|
12,524
|
|
|
15,790
|
|
Total
current assets
|
|
|
161,234
|
|
|
114,125
|
|
|
|
|
|
|
|
|
|
Restricted
cash, excluding amounts classified as current
|
|
|
10,746
|
|
|
9,881
|
|
Land,
buildings and equipment, net
|
|
|
558,257
|
|
|
551,298
|
|
Notes
receivable
|
|
|
33,234
|
|
|
32,865
|
|
Deferred
income taxes
|
|
|
45,231
|
|
|
45,234
|
|
Goodwill
|
|
|
36,463
|
|
|
36,463
|
|
Leasehold
acquisition costs, net of accumulated amortization
|
|
|
21,346
|
|
|
21,938
|
|
Other
assets
|
|
|
78,570
|
|
|
67,670
|
|
Total
assets
|
|
$
|
945,081
|
|
$
|
879,474
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$
|
7,437
|
|
$
|
11,978
|
|
Current
portion of capital lease and lease financing obligations
|
|
|
16,946
|
|
|
16,868
|
|
Accounts
payable
|
|
|
5,825
|
|
|
4,902
|
|
Accrued
payroll and benefits
|
|
|
10,169
|
|
|
12,599
|
|
Accrued
property taxes
|
|
|
6,629
|
|
|
8,653
|
|
Other
accrued expenses
|
|
|
9,899
|
|
|
12,428
|
|
Other
current liabilities
|
|
|
8,568
|
|
|
9,072
|
|
Tenant
deposits
|
|
|
4,566
|
|
|
4,563
|
|
Refundable
portion of entrance fees
|
|
|
85,434
|
|
|
85,164
|
|
Deferred
entrance fee income
|
|
|
37,591
|
|
|
38,407
|
|
Total
current liabilities
|
|
|
193,064
|
|
|
204,634
|
|
|
|
|
|
|
|
|
|
Long-term
debt, less current portion
|
|
|
117,591
|
|
|
134,605
|
|
Capital
lease and lease financing obligations, less current
portion
|
|
|
156,281
|
|
|
160,549
|
|
Deferred
entrance fee income
|
|
|
125,112
|
|
|
122,417
|
|
Deferred
gains on sale-leaseback transactions
|
|
|
86,392
|
|
|
89,012
|
|
Other
long-term liabilities
|
|
|
24,692
|
|
|
24,186
|
|
Total
liabilities
|
|
|
703,132
|
|
|
735,403
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
12,330
|
|
|
11,316
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (See notes)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
Preferred
stock, no par value; 5,000,000 shares authorized, no
|
|
|
|
|
|
|
|
shares
issued or outstanding
|
|
|
—
|
|
|
—
|
|
Common
stock, $.01 par value; 200,000,000 shares authorized,
|
|
|
|
|
|
|
|
35,286,257
and 31,751,575 shares issued and outstanding,
respectively
|
|
|
350
|
|
|
315
|
|
Additional
paid-in capital
|
|
|
315,194
|
|
|
225,476
|
|
Accumulated
deficit
|
|
|
(85,925
|
)
|
|
(90,727
|
)
|
Deferred
compensation, restricted stock
|
|
|
—
|
|
|
(2,309
|
)
|
Total
shareholders' equity
|
|
|
229,619
|
|
|
132,755
|
|
Total
liabilities and shareholders' equity
|
|
$
|
945,081
|
|
$
|
879,474
|
|
See
accompanying notes to condensed consolidated financial
statements.
AMERICAN
RETIREMENT CORPORATION AND SUBSIDIARIES
|
|
(UNAUDITED)
|
(in
thousands, except per share data)
|
|
|
|
|
|
|
|
|
Three
months ended
March
31,
|
|
|
|
2006
|
|
2005
|
|
Revenues:
|
|
|
|
|
|
Resident
and health care
|
|
$
|
127,786
|
|
$
|
116,653
|
|
Management
and development services
|
|
|
1,224
|
|
|
500
|
|
Reimbursed
expenses
|
|
|
2,083
|
|
|
802
|
|
Total
revenues
|
|
|
131,093
|
|
|
117,955
|
|
|
|
|
|
|
|
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Costs
and operating expenses:
|
|
|
|
|
|
|
|
Cost
of community service revenue, exclusive of depreciation expense
|
|
|
|
|
|
|
|
presented
separately below
|
|
|
83,454
|
|
|
78,301
|
|
Lease
expense
|
|
|
15,333
|
|
|
15,510
|
|
Depreciation
and amortization, inclusive of general and administrative
|
|
|
|
|
|
|
|
depreciation
and amortization of $364 and $943, respectively
|
|
|
9,407
|
|
|
9,271
|
|
Amortization
of leasehold acquisition costs
|
|
|
592
|
|
|
699
|
|
Loss
on disposal or sale of assets
|
|
|
84
|
|
|
12
|
|
Reimbursed
expenses
|
|
|
2,083
|
|
|
802
|
|
General
and administrative
|
|
|
9,942
|
|
|
6,591
|
|
Total
costs and operating expenses
|
|
|
120,895
|
|
|
111,186
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
10,198
|
|
|
6,769
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(4,270
|
)
|
|
(3,557
|
)
|
Interest
income
|
|
|
1,626
|
|
|
720
|
|
Other
|
|
|
(214
|
)
|
|
139
|
|
Other
expense, net
|
|
|
(2,858
|
)
|
|
(2,698
|
)
|
|
|
|
|
|
|
|
|
Income
before income taxes and minority interest
|
|
|
7,340
|
|
|
4,071
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
2,714
|
|
|
1,375
|
|
|
|
|
|
|
|
|
|
Income
before minority interest
|
|
|
4,626
|
|
|
2,696
|
|
|
|
|
|
|
|
|
|
Minority
interest in losses (earnings) of consolidated subsidiaries, net
of
tax
|
|
|
176
|
|
|
(71
|
)
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
4,802
|
|
$
|
2,625
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.14
|
|
$
|
0.09
|
|
Dilutive
earnings per share
|
|
$
|
0.14
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used for basic earnings per share data
|
|
|
33,798
|
|
|
28,899
|
|
Effect
of dilutive common stock options and non-vested shares
|
|
|
1,098
|
|
|
1,801
|
|
Weighted
average shares used for dilutive earnings per share data
|
|
|
34,896
|
|
|
30,700
|
|
See
accompanying notes to condensed consolidated financial
statements.
AMERICAN
RETIREMENT CORPORATION AND SUBSIDIARIES
|
|
(UNAUDITED)
|
(in
thousands)
|
|
|
Three
months ended March 31,
|
|
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$
|
4,802
|
|
$
|
2,625
|
|
Adjustments
to reconcile net income to cash and cash
|
|
|
|
|
|
|
|
equivalents
provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
9,999
|
|
|
9,970
|
|
Non-cash
stock-based compensation expense
|
|
|
1,495
|
|
|
218
|
|
Tax
benefit from exercise of stock options
|
|
|
—
|
|
|
395
|
|
Amortization
of deferred financing costs
|
|
|
197
|
|
|
96
|
|
Amortization
of prepaid insurance
|
|
|
1,131
|
|
|
1,050
|
|
Non-cash
interest income
|
|
|
(36
|
)
|
|
|
|
Amortization
of deferred gain on sale-leaseback transactions
|
|
|
(2,961
|
)
|
|
(2,956
|
)
|
Loss
on sale or disposal of assets
|
|
|
84
|
|
|
12
|
|
Losses
(gains) from unconsolidated joint ventures
|
|
|
346
|
|
|
(66
|
)
|
Deferred
income taxes
|
|
|
2,218
|
|
|
(765
|
)
|
Minority
interest in earnings (losses) of consolidated subsidiaries
|
|
|
(176
|
)
|
|
71
|
|
Entrance
fee items:
|
|
|
|
|
|
|
|
Amortization
of deferred entrance fee income
|
|
|
(4,639
|
)
|
|
(4,064
|
)
|
Proceeds
from entrance fee sales - deferred income
|
|
|
8,789
|
|
|
7,805
|
|
Changes
in assets and liabilities, exclusive of acquisitions
|
|
|
|
|
|
|
|
and
sale-leaseback transactions:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(2,747
|
)
|
|
334
|
|
Inventory
|
|
|
(53
|
)
|
|
49
|
|
Prepaid
expenses
|
|
|
(2,479
|
)
|
|
(1,834
|
)
|
Other
assets
|
|
|
(216
|
)
|
|
(609
|
)
|
Accounts
payable
|
|
|
923
|
|
|
(517
|
)
|
Accrued
interest
|
|
|
(29
|
)
|
|
(499
|
)
|
Other
accrued expenses and other current liabilities
|
|
|
(7,737
|
)
|
|
(757
|
)
|
Tenant
deposits
|
|
|
3
|
|
|
(9
|
)
|
Deferred
lease liability
|
|
|
1,094
|
|
|
1,249
|
|
Other
liabilities
|
|
|
(366
|
)
|
|
57
|
|
Net
cash and cash equivalents provided by operating activities
|
|
|
9,642
|
|
|
11,855
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Additions
to land, buildings and equipment
|
|
|
(13,985
|
)
|
|
(5,679
|
)
|
Acquisition
of communities and property, net of cash acquired
|
|
|
|
|
|
(13,950
|
)
|
Investment
in joint ventures
|
|
|
(12,568
|
)
|
|
|
|
Distributions
received from joint ventures
|
|
|
324
|
|
|
|
|
Proceeds
from the sale of assets
|
|
|
|
|
|
208
|
|
Acquisition
of other assets
|
|
|
(118
|
)
|
|
|
|
Investment
in restricted cash
|
|
|
(4,150
|
)
|
|
(3,389
|
)
|
Proceeds
from release of restricted cash
|
|
|
734
|
|
|
3,749
|
|
Net
change in other restricted cash accounts
|
|
|
(719
|
)
|
|
(1,181
|
)
|
Issuance
of notes receivable
|
|
|
(376
|
)
|
|
|
|
Receipts
from notes receivable
|
|
|
145
|
|
|
42
|
|
Other
investing activities
|
|
|
|
|
|
233
|
|
Net
cash and cash equivalents used by investing activities
|
|
|
(30,713
|
)
|
|
(19,967
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from the issuance of long-term debt
|
|
|
7,650
|
|
|
|
|
Proceeds
from the issuance of common stock, net of transaction
|
|
|
|
|
|
|
|
expenses
of $1,916 and $3,166, respectively
|
|
|
89,854
|
|
|
49,934
|
|
Proceeds
from the issuance of stock pursuant to the associate stock
|
|
|
|
|
|
|
|
purchase
plan
|
|
|
561
|
|
|
|
|
Proceeds
from the exercise of stock options
|
|
|
369
|
|
|
540
|
|
Tax
benefit from exercise of stock options in excess of recognized
compensation cost
|
|
|
448
|
|
|
|
|
Refundable
entrance fee items:
|
|
|
|
|
|
|
|
Proceeds
from entrance fee sales - refundable portion
|
|
|
2,896
|
|
|
4,996
|
|
Refunds
of entrance fee terminations
|
|
|
(4,370
|
)
|
|
(6,517
|
)
|
Principal
payments on long-term debt
|
|
|
(33,394
|
)
|
|
(32,283
|
)
|
Distributions
to minority interest holders
|
|
|
(762
|
)
|
|
(984
|
)
|
Principal
reductions in master trust liability
|
|
|
(244
|
)
|
|
(285
|
)
|
Expenditures
for financing costs
|
|
|
(163
|
)
|
|
(63
|
)
|
Proceeds
from contingent earnouts
|
|
|
1,700
|
|
|
|
|
Net
cash and cash equivalents provided by financing activities
|
|
|
64,545
|
|
|
15,338
|
|
See
accompanying notes to condensed consolidated financial
statements.
AMERICAN
RETIREMENT CORPORATION AND SUBSIDIARIES
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
|
(UNAUDITED)
|
(in
thousands)
|
|
|
Three
months ended
March
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
$
|
43,474
|
|
$
|
7,226
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
40,771
|
|
|
28,454
|
|
Cash
and cash equivalents at end of year
|
|
$
|
84,245
|
|
$
|
35,680
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid during the period for interest
|
|
$
|
3,947
|
|
$
|
3,771
|
|
Income
taxes paid
|
|
$
|
120
|
|
$
|
611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the three months ended March 31, 2005, the Company acquired an
entrance-fee continuing care retirement community and a free-standing
assisted living community for approximately $14.0 million of cash
(including estimated closing costs of $0.6 million) plus the assumption
of
various liabilities, including existing entrance fee refund obligations.
As a result of the transaction, assets and liabilities changed
as
follows:
|
|
|
|
Three
months ended
March
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Land,
buildings and equipment acquired, net
|
|
$
|
—
|
|
$
|
26,139
|
|
Deferred
entrance fee income
|
|
|
|
|
|
(9,779
|
)
|
Refundable
portion of entrance fees
|
|
|
|
|
|
(631
|
)
|
Other
|
|
|
|
|
|
(1,779
|
)
|
Cash
paid for acquisition of community and property
|
|
$
|
|
|
$
|
13,950
|
|
See
accompanying notes to condensed consolidated financial statements.
AMERICAN
RETIREMENT CORPORATION AND SUBSIDIARIES
1.
Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements of American
Retirement Corporation (the “Company”) as of March 31, 2006 and for the
three-month periods ended March 31, 2006 and 2005, have been prepared in
accordance with U.S. generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of
Regulation S-X. These condensed consolidated financial statements should be
read
in conjunction with the consolidated financial statements and the notes thereto
included in the Company’s Annual Report on Form 10-K for the year ended December
31, 2005. Accordingly, they do not include all of the information and footnotes
required by U.S. generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals and other adjustments) considered necessary for a fair
presentation have been included. In addition, certain prior period amounts
have
been reclassified to conform to current period presentation. Operating results
for the three months ended March 31, 2006 are not necessarily indicative of
the
results that may be expected for the entire year ending December 31, 2006.
The
preparation of the condensed consolidated financial statements requires
management to make estimates and assumptions relating to the reported amounts
of
assets and liabilities and disclosure of contingent assets and liabilities
at
the date of the condensed consolidated financial statements and the reported
amounts of revenues and expenses during the period. Actual results could differ
from those estimates.
As
discussed in Note 3, the Company adopted Statement of Financial Accounting
Standards (“SFAS”) No. 123(R), Share-Based
Payment,
effective January 1, 2006. The Company adopted the modified prospective
transition method provided under SFAS No. 123(R) and consequently has not
adjusted results for prior periods.
2.
Principles of Consolidation
The
accompanying condensed consolidated financial statements include the financial
statements of American Retirement Corporation and its wholly owned and majority
owned subsidiaries (each of which is a separate and distinct legal entity),
that
manage own and operate senior living communities. The accounts of limited
liability companies, joint ventures and partnerships are consolidated when
the
Company maintains effective control over such entities' assets and operations,
notwithstanding, in some cases, a lack of majority ownership. Under current
authoritative literature, the Company consolidates the communities it manages
for others if the Company has the unilateral ability to conduct the ordinary
course of business of the managed communities and is the primary beneficiary
of
the managed entities’ operations. As a result, the Company consolidates the
operating results of one managed community and a community currently under
development pursuant to the requirements of FIN No. 46(R) Consolidation
of Variable Interest Entities. All
significant intercompany balances and transactions have been eliminated in
consolidation.
3.
Share-Based Payment
On
January 1, 2006, the Company adopted the provisions of SFAS No. 123(R)
requiring the measurement and recognition of all share-based compensation
under
the fair value method. The Company implemented SFAS No. 123(R) using the
modified prospective transition method.
Accordingly,
for the three months ended March 31, 2006, the Company recognized
share-based compensation for all current award grants and for the unvested
portion of previous award grants based on grant date fair values. Prior
to 2006,
the Company accounted for share-based awards under Accounting Principles
Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations, including FASB Interpretation No. 44,
Accounting for Certain Transactions involving Stock Compensation,
an
interpretation of APB Opinion No. 25, to account for its stock option
plans. Under this method, compensation expense was generally recorded on
the
date of grant only if the current market price of the underlying stock
exceeded
the exercise price. Prior period financial statements have not been adjusted
to
reflect fair value of share-based compensation expense under SFAS No. 123(R).
As
permissible under SFAS No. 123(R), the Company changed its method of expense
attribution for fair value share-based compensation from the accelerated
approach to the straight-line approach for all new awards granted. The
Company
anticipates that the straight-line method will provide a more meaningful
measure
of costs incurred as options are generally granted with vesting provisions
that
are subject to time-based vesting requirements. At January 1, 2006, there
was no
unrecognized compensation for share-based awards granted prior to the adoption
of SFAS No. 123(R) that will be required to be recognized under the accelerated
method.
The
Company uses historical data and projections to estimate expected employee
behaviors related to option exercises and forfeitures. SFAS No. 123(R)
requires
that forfeitures be included as part of the grant date estimate. The cumulative
effect of forfeitures related to previous SFAS No. 123 pro forma expense
was not
material. Prior to adopting SFAS No. 123(R), the Company reduced share-based
compensation expense when forfeitures occurred.
The
Company estimates the fair value of each stock option award on the grant
date
using the Black-Scholes-Merton valuation model incorporating the assumptions
noted in the following table. Option valuation models require the input
of
highly subjective assumptions, and changes in assumptions used can materially
affect the fair value estimate. Expected volatility and dividends are based
on
implied and historical factors related to the Company’s common stock. Expected
term represents the estimated weighted-average time between grant and employee
exercise. Risk-free rate is based on U.S. Treasury rates appropriate for
the
expected term. The following table reflects proforma information for the
period
ended March 31, 2005 had the Company applied the fair-value provisions
of SFAS
123.
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2006
|
|
2005
(proforma)
|
|
Option
valuation assumptions:
|
|
|
|
|
|
Dividend
yield
|
|
|
—
|
|
|
|
|
Expected
volatility
|
|
|
55.2
|
%
|
|
66.7
|
%
|
Risk-free
interest rate
|
|
|
4.5
|
%
|
|
2.3
|
%
|
Weighted-average
expected term of options granted
|
|
|
4.8
years
|
|
|
3.0
years
|
|
Weighted
average grant date fair
value per share - options granted
|
|
$
|
15.54
|
|
$
|
5.61
|
|
Total
intrinsic value of options exercised during the period (in
millions)
|
|
$
|
1.1
|
|
$
|
1.1
|
|
Total
fair value of restricted shares vested during the period (in
millions)
|
|
$
|
1.1
|
|
$
|
0.2
|
|
Stock-based
compensation awards are granted under the American Retirement Corporation
1997
Stock Incentive Plan (“the 1997 Plan”). In
1997,
the Company adopted a stock incentive plan (the “1997 Plan”). The 1997 Plan
allows for the grant of incentive stock options intended to qualify under
Section 422 of the Internal Revenue Code as well as stock options which do
not so qualify, stock appreciation rights, restricted stock, performance
units
and performance shares, phantom stock awards and share awards. Persons eligible
to receive grants under the 1997 Plan include the Company’s non-employee
directors, employees, officers, and consultants. The options generally expire
ten years from the date of grant and vest ratably over a three-year period.
The
exercise price of options granted to employees under the 1997 Plan was equal
to
the fair value of the Company’s common stock on the option grant date. As of
March 31, 2006, 1.0 million shares of unissued common stock remain reserved
for future grants under the 1997 Plan.
Stock
Options
A
summary
of the Company’s stock option information at December 31, 2005 and activity for
the three months ended March 31, 2006 is presented below (shares in thousands)
(weighted average remaining contractual term in years):
Options
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
(in
millions)
|
|
Weighted
Average
Grant-Date
Fair
Value
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Outstanding
at December 31, 2005
|
|
|
1,937
|
|
$
|
4.43
|
|
$
|
36.2
|
|
|
|
|
|
6.84
|
|
Granted
|
|
|
72
|
|
|
26.56
|
|
|
-
|
|
$
|
15.54
|
|
|
|
|
Exercised
|
|
|
(58
|
)
|
|
6.67
|
|
|
1.1
|
|
|
2.62
|
|
|
|
|
Forfeited
|
|
|
(24
|
)
|
|
11.23
|
|
|
0.3
|
|
|
5.15
|
|
|
|
|
Outstanding
at March 31, 2006
|
|
|
1,927
|
|
|
7.12
|
|
|
35.6
|
|
|
|
|
|
6.68
|
|
Exercisable
at March 31, 2006
|
|
|
1,219
|
|
|
4.80
|
|
|
25.4
|
|
|
|
|
|
|
|
At
March
31, 2006 and December 31, 2005, the Company had 0.6 million and 0.8 million
unvested options outstanding at a weighted average grant-date fair value
of
$4.31 and $4.06, respectively. During the three months ended March 31, 2006,
0.1
million options vested at a weighted average grant-date fair value of
$2.48.
Restricted
Stock
On
September 22, 2005, the Company granted certain members of management a total
of
277,000 shares of performance-based non-vested stock. One-third
of shares underlying the grant vested on March 31, 2006, and the remainder
will
vest in two equal tranches on March 31, 2007 and March 31, 2008, subject
to
continued employment and the Company’s achievement of certain performance
targets. The first tranche was subject to “variable” accounting rules under APB
No. 25. As a result, compensation expense related to these grants was recognized
as the shares vested and varied with changes in the Company’s stock price prior
to the January 1, 2006 adoption of SFAS No. 123(R). In accordance with the
provisions of SFAS No. 123(R), the Company expensed the remainder of the
unvested shares over the vesting term based on the $18.23 grant-date fair
value
beginning January 1, 2006. Compensation expense for the three months ended
March
31, 2006 is representative only of the first tranche that vested on March
31,
2006. Compensation expense on the second and third tranches will be recognized
on a straight-line basis over the respective requisite service periods.
On
July
19, 2004, the Company granted certain members of management a total of 440,000
shares of restricted stock. This
stock had a $5.95 market value at the date of grant and vests ratably over
a
period of three years from the grant date, subject only to continued employment.
Compensation expense related to the 2004 grant was considered “fixed” under the
provisions of APB No. 25 and is treated in a similar manner under SFAS No.
123(R). Compensation
expense related to this grant will be recognized on a straight-line basis
over
the remaining requisite service period. Approximately 280,000 shares related
to
this grant remain unvested at March 31, 2006.
The
following table compares total share-based compensation expense for the three
months ended March 31, 2006 and 2005 (in thousands):
|
|
|
Three
Months Ended
March
31,
|
|
|
|
|
2006
|
|
|
2005
|
|
Total
share-based compensation expense
|
|
$
|
1,495
|
|
$
|
218
|
|
Tax
benefit
|
|
|
(428
|
)
|
|
—
|
|
Total
share-based compensation, net of tax
|
|
$
|
1,067
|
|
$
|
218
|
|
The
following table compares the net income for the three months ended March
31,
2006 reflecting SFAS No. 123(R) share-based compensation of $1,067, net of
tax,
reported in the current quarter compared to the March 31, 2005 pro forma
SFAS
No. 123 fair value compensation of $28 thousand, net of tax, and reported
APB
No. 25 intrinsic value compensation of $0.2 million, net of tax, consisting
of
restricted stock amortization (in thousands, except per share
amounts)
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2006
|
|
2005
|
|
Reported
net income
|
|
$
|
4,802
|
|
$
|
2,625
|
|
Additional
pro forma stock-based compensation, net of tax
|
|
|
—
|
|
|
(28
|
)
|
Comparative
net income
|
|
$
|
4,802
|
|
$
|
2,597
|
|
Basic earnings
per share as reported
|
|
|
0.14
|
|
|
0.09
|
|
Basic earnings
per share (prior year pro forma)
|
|
|
0.14
|
|
|
0.09
|
|
Diluted earnings
per share as reported
|
|
|
0.14
|
|
|
0.09
|
|
Diluted earnings
per share (prior year pro forma)
|
|
|
0.14
|
|
|
0.09
|
|
At
March
31, 2006, $7.4 million of unrecognized stock-based compensation expense for
all
outstanding unvested stock options and restricted stock is expected to be
recognized over a weighted average period of 2.1 years.
Prior
to
the adoption of SFAS No. 123R, the Company presented all tax benefits resulting
from the exercise of stock options as operating cash inflows in the condensed
consolidated statements of cash flows, in accordance with the provisions
of the
Emerging Issues Task Force (“EITF”) Issue No. 00-15, Classification
in the Statement of Cash Flows of the Income Tax Benefit Received by a Company
upon Exercise of a Nonqualified Employee Stock Option.
SFAS No. 123(R) requires the benefit of tax deductions in excess of the
compensation cost recognized for those options to be classified as financing
cash inflows rather than operating cash inflows, on a prospective basis.
This
amount is shown as “tax benefit from exercise of stock options in excess of
recognized compensation cost” on the unaudited condensed consolidated statement
of cash flows. This requirement reduced net operating cash flows and increased
financing cash flows by $0.4 million for the three months ended March 31,
2006.
Had SFAS No. 123(R) been adopted on January 1, 2005, net operating cash flows
would have been reduced by $0.4 million and net financing cash flows would
have
increased by $0.4 million for the three months ended March 31, 2005. Prior
period results have not been restated to conform to current period
presentation.
In
accordance with APB No. 25, the Company presented the unamortized expense
associated with the restricted stock grants as an offsetting amount to
additional paid in capital. This “gross up” presentation is prohibited under
SFAS No. 123(R) since the full fair value of share-based payments is not
recognized until the associated instrument vests. As a result, the Company
discontinued this method of
accounting and reclassified the unamortized expense into additional paid-in
capital on January 1, 2006. This reclassification had no impact to the Company’s
financial
position, results of operations or cash flows.
4.
Completion of Public Equity Offering
On
January 24, 2006, the Company completed a public offering of 3,450,000 shares
of
its common stock, including the underwriter’s over-allotment of 450,000 shares.
The shares were priced at $26.60. The net proceeds of the offering, after
deducting underwriting discounts and commissions and estimated expenses, were
approximately $89.8 million. A portion of the proceeds of this offering were
primarily used to repay higher cost debt and fund certain acquisitions during
the quarter ended March 31, 2006. The Company expects to use the remainder
of
the proceeds to fund acquisitions and expansion and development activity, and
for general corporate purposes. See Note 8.
5.
Segment Information
The
Company operates principally in three business segments: (1) retirement centers,
(2) free-standing assisted living communities, and (3) management services.
The
Company currently operates 33 retirement centers, which provide a continuum
of
care services such as independent living, assisted living and skilled nursing
care. Of
the 33
retirement centers, the Company owns ten (including four partially-owned through
nonconsolidated joint ventures), operates four pursuant to leases classified
as
lease financing obligations (which include purchase options), operates 18
pursuant to
operating
leases and consolidates one variable interest entity, a retirement center that
the Company manages (Freedom Square). The Company operates seven retirement
centers for which the Company receives an upfront fee
and
provides housing and health care services under various types of entrance fee
agreements with residents.
The
Company currently operates 41 free-standing assisted living communities.
Free-standing assisted living communities are generally comprised of stand-alone
assisted living communities that are not located on a retirement center campus,
most of which also provide some specialized care such as Alzheimer’s and memory
enhancement programs. Free-standing assisted living communities are generally
much smaller than retirement centers. Of the 41
free-standing assisted living communities operated by the Company, 20 are owned
(including nine partially-owned through nonconsolidated joint ventures), five
are operated pursuant to leases classified as lease financing obligations,
and
16 are operated pursuant to operating leases.
The
management services segment includes fees from management agreements for
communities owned by others and fees for management agreements for communities
the Company partially owns through nonconsolidated joint ventures. This segment
also includes fees for other services including development services and
reimbursed expense revenues together with associated expenses. The management
services segment does not include any managed communities that the Company
consolidates, either through majority interest or a controlling financial
interest. The
Company currently provides services under six management agreements for
retirement centers with third parties. Of these managed communities, two are
cooperatives that are owned by their residents, and three are owned by
not-for-profit sponsors. The remaining managed retirement center is owned by
an
unaffiliated
third party.
As
noted
above, the Company manages nine free-standing assisted living communities and
four retirement centers in which it has a non-controlling minority ownership
interest. Eight of the free-standing assisted living communities were acquired
during November 2005 from the Epoch Senior Living group. The four retirement
centers were acquired on February 28, 2006 from Cypress Senior Living, Inc.
See
Note 7.
The
Company manages and evaluates the performance of its business segments
principally based upon segment operating contributions, which the Company
defines as revenue from the segment less operating expenses associated with
the
segment. The following is a summary of total revenues and operating
contributions by segment for the three months ended March 31, 2006 and 2005,
and
total assets by segment at March 31, 2006 and December 31, 2005 (in
thousands).(1)(2)(3)
|
|
Three
Months Ended
March
31,
|
|
|
|
2006
|
|
2005
|
|
Revenues
|
|
|
|
|
|
Retirement
centers
|
|
$
|
98,606
|
|
$
|
91,046
|
|
Free-standing
assisted living communities
|
|
|
29,180
|
|
|
25,607
|
|
Management
services (2)
|
|
|
3,307
|
|
|
1,302
|
|
Total
revenues
|
|
$
|
131,093
|
|
$
|
117,955
|
|
|
|
|
|
|
|
|
|
Retirement
centers
|
|
|
|
|
|
|
|
Resident
and health care revenues
|
|
$
|
98,606
|
|
$
|
91,046
|
|
Cost
of community service revenue
|
|
|
64,351
|
|
|
60,454
|
|
Segment
operating contribution
(3)
|
|
|
34,255
|
|
|
30,592
|
|
|
|
|
|
|
|
|
|
Free-standing
assisted living communities
|
|
|
|
|
|
|
|
Resident
and health care revenues
|
|
|
29,180
|
|
|
25,607
|
|
Cost
of community service revenue
|
|
|
19,103
|
|
|
17,847
|
|
Segment
operating contribution (3)
|
|
|
10,077
|
|
|
7,760
|
|
|
|
|
|
|
|
|
|
Management
services operating contribution
|
|
|
1,224
|
|
|
500
|
|
|
|
|
|
|
|
|
|
Lease
expense
|
|
|
15,333
|
|
|
15,510
|
|
Depreciation
and amortization (including general and administrative depreciation
|
|
|
|
|
|
|
|
and
amortization of $364 and $943, respectively)
|
|
|
9,999
|
|
|
9,970
|
|
Loss
on disposal or sale of assets
|
|
|
84
|
|
|
12
|
|
General
and administrative expense
|
|
|
9,942
|
|
|
6,591
|
|
Income
from operations
|
|
$
|
10,198
|
|
$
|
6,769
|
|
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
Total
Assets
|
|
|
|
|
|
Retirement
centers
|
|
$
|
505,853
|
|
$
|
521,581
|
|
Free-standing
assisted living communities
|
|
|
192,488
|
|
|
188,548
|
|
Management
services
|
|
|
246,740
|
|
|
169,345
|
|
Total
|
|
$
|
945,081
|
|
$
|
879,474
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Segment
financial and operating data does not include any inter-segment
transactions or allocated costs.
|
|
(2)
|
Management
Services represent the Company’s management fee revenue and reimbursed
expense revenue.
|
|
(3)
|
Segment
operating contribution is defined as segment revenues less segment
operating expenses.
|
6.
Earnings per Share
Basic
and
diluted earnings per share for the three months ended March 31, 2006 have been
computed on the basis of the weighted average number of shares outstanding.
Diluted earnings per share reflects the potential dilution that could occur
if
securities or other contracts to issue common stock were exercised or converted
into common stock. During the three months ended March 31, 2006 and 2005, there
were approximately 1.9 and 2.1 million options to purchase shares of common
stock outstanding which had an exercise price below the average market price
of
the common shares for the corresponding periods, respectively.
A
computation of diluted earnings per share is as follows (in
thousands):
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2006
|
|
2005
|
|
Net
income
|
|
$
|
4,802
|
|
$
|
2,625
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used for basic earnings per share data
|
|
|
33,798
|
|
|
28,899
|
|
Effect
of dilutive common securities:
|
|
|
|
|
|
|
|
Employee
stock options and non-vested stock
|
|
|
1,098
|
|
|
1,801
|
|
Weighted
average shares used for diluted earnings per share data
|
|
|
34,896
|
|
|
30,700
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.14
|
|
$
|
0.09
|
|
Effect
of dilutive securities
|
|
|
—
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
0.14
|
|
$
|
0.09
|
|
The
following options outstanding during the three months ended March 31, 2006
and
2005 were excluded from the computation of diluted earnings per share for the
respective period because the options’ exercise price was greater than the
average market price of the common shares and, therefore, the effect would
be
anti-dilutive.
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2006
|
|
2005
|
|
Number
of options (in thousands)
|
|
|
28
|
|
|
111
|
|
Weighted-average
exercise price
|
|
$
|
26.96
|
|
$
|
14.61
|
|
7.
Investments in Joint Ventures
On
February 28, 2006, two newly-formed joint ventures in which the Company has
a
20% interest completed the acquisition of four senior living communities from
affiliates of Cypress Senior Living, Inc. for an aggregate purchase price of
$146.3 million. The communities are located in Arlington, Dallas and Ft. Worth,
Texas and Leawood, Kansas.
The
two
joint venture entities are owned 20% by the Company and 80% by affiliates of
CNL
Capital Investments Corp. Merrill Lynch Capital, a division of Merrill Lynch
Business Financial Services Inc., provided the joint ventures with approximately
$95.5 million of first mortgage financing for the acquisition, which is
evidenced by two credit and security agreements. The Company has also guaranteed
debt service payments under first mortgage financing in the event of certain
defaults or nonperformance by the counterparty. The debt has a three-year term
with two twelve-month extension options and requires the payment of interest
only at a floating rate based upon one month LIBOR plus 2.10%. The remainder
of
the purchase price was funded by proportional capital contributions by the
joint
venturers. At closing, the Company also entered into long-term management
agreements for the communities. The management fees will be included in the
Company's management services segment.
Although
the Company holds a significant variable interest in the joint ventures, it
is
not considered the primary beneficiary of these entities as defined by FIN
No.
46(R). As a result, the Company accounts for its investment under the equity
method of accounting. The Company believes its maximum exposure to loss as
a result of its involvement with this variable interest entity is approximately
$10.8 million at March 31, 2006, which represents its initial capital
contribution into the joint ventures.
8.
Long-term Debt and Other Transactions
A
summary
of long-term debt is as follows (in thousands):
|
|
|
|
|
|
|
|
March
31,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
Various
mortgage notes, interest at variable and fixed rates, generally payable
monthly with any unpaid principal and interest due between 2006 and
2037.
Interest rates at March 31, 2006 range from 6.5% to 9.5%. The loans
are
secured by certain land, buildings and equipment.
|
|
$
|
79,949
|
|
$
|
109,090
|
|
Various
construction loans, interest generally payable monthly with unpaid
principal due between 2006 and 2009. Variable interest rates at March
31,
2006 range from 7.0% to 9.0%. The loans are secured by certain real
property.
|
|
|
25,046
|
|
|
17,392
|
|
Various
other long-term debt, generally payable monthly with any unpaid principal
and interest due between 2006 and 2018. Variable and fixed interest
rates
at March 31, 2006 range from 4.7% to 9.0%. The loans are secured
by
certain land, buildings and equipment.
|
|
|
20,033
|
|
|
20,101
|
|
Subtotal
debt
|
|
|
125,028
|
|
|
146,583
|
|
Capital
lease and lease financing obligations with principal and interest
payable
monthly bearing interest at fixed rates ranging from 0.4% to 10.9%,
with
final payments due between 2006 and 2017. The obligations are secured
by
certain land, buildings and equipment.
|
|
|
173,227
|
|
|
177,417
|
|
Total
debt, including capital lease and lease financing
obligations
|
|
|
298,255
|
|
|
324,000
|
|
|
|
|
|
|
|
|
|
Less
current portion of debt
|
|
|
7,437
|
|
|
11,978
|
|
Less
current portion of capital lease and lease financing
obligations
|
|
|
16,946
|
|
|
16,868
|
|
Long-term
debt, excluding current portion
|
|
$
|
273,872
|
|
$
|
295,154
|
|
At
March
31, 2006, the aggregate scheduled maturities of long-term debt were as follows
(in thousands):
|
|
Long-term
Debt
|
|
Capital
Lease and Lease Financing Obligations
|
|
Total
Debt at March 31, 2006
|
|
|
|
|
|
|
|
|
|
For
the twelve months ending March 31, 2007
|
|
$
|
7,437
|
|
$
|
16,946
|
|
$
|
24,383
|
|
For
the twelve months ending March 31, 2008
|
|
|
9,997
|
|
|
17,524
|
|
|
27,521
|
|
For
the twelve months ending March 31, 2009
|
|
|
18,753
|
|
|
18,316
|
|
|
37,069
|
|
For
the twelve months ending March 31, 2010
|
|
|
8,569
|
|
|
19,099
|
|
|
27,668
|
|
For
the twelve months ending March 31, 2011
|
|
|
25,443
|
|
|
20,048
|
|
|
45,491
|
|
Thereafter
|
|
|
54,829
|
|
|
81,294
|
|
|
136,123
|
|
|
|
$
|
125,028
|
|
$
|
173,227
|
|
$
|
298,255
|
|
In
addition, the Company has $15.3 million of standby letters of credit issued
under a letter of credit facility from a commercial bank, which is
collateralized by a mortgage on three free-standing assisted living communities.
As of March 31, 2006, no amounts have been drawn on these letters of
credit.
First
Quarter Financing Activity
On
January 26, 2006, the Company repaid a $8.9 million loan to a commercial bank
bearing interest at a variable rate (7.33% at December 31, 2005), due April
1,
2006 and a $4.5 million mortgage loan bearing interest at a floating rate (6.81%
at December 31, 2005), due January 1, 2007. These mortgage loans were secured
by
first mortgages in substantially all the property and equipment of two
free-standing assisted living communities. On February 14, 2006, the Company
paid off a $15.2 million mortgage loan bearing interest at 9.25%, due September
16, 2016. The loan was secured by a first mortgage in substantially all the
property and equipment of a retirement center. The repayment of these loans
will
result in a $1.8 million reduction in interest expense for the year ending
December 31, 2006, based on rates in effect at the time of repayment. The
Company used a portion of the proceeds of the January 24, 2006 public equity
offering to retire these obligations.
In
addition to the obligations reflected on the Company’s condensed consolidated
financial statements, it has various construction loan commitments totaling
approximately $54.6 million at March 31, 2006.
9. Operating
Leases
As
of
March 31, 2006, the Company operated 43 of its senior living communities under
long-term leases (34 operating leases and nine capital lease or lease financing
obligations). Of the 34 operating lease communities, 26 are operated under
four
master lease agreements, with the remaining communities leased under individual
lease agreements. The Company also leases its corporate offices and is obligated
under several ground leases for senior living communities. The base lease terms
vary from three to 19 years. Many of the leases provide for renewal, extension
and purchase options. Many of the leases also provide for graduated lease
payments, either based upon fixed rate increases or a specified formula. In
addition, several leases have provisions for contingent lease payments based
on
revenue, occupancy levels or other measures. Contingent rent that depends on
factors directly related to the future use of leased property is accrued when
it
is deemed probable such amounts will be due. In addition, a majority of the
Company’s lease agreements impose certain restrictions or require pre-approval
for certain changes such as expansions or significant modifications to the
leased property.
Net
lease
expense for the three months ended March 31, 2006 was $15.3 million, which
includes lease payments of $17.3 million, plus accruals for future lease
escalators (straight-line lease expense) of $1.0 million, net of the
amortization of the deferred gain from prior sale-leasebacks of $3.0 million.
Net lease expense for the three months ended March 31, 2005 was $15.5 million,
which includes lease payments of $17.0 million, plus accruals for future lease
escalators of $1.5 million, net of the amortization of the deferred gain from
prior sale-leasebacks of $3.0 million.
Future
minimum lease payments at March 31, 2006 are as follows (in thousands):
|
|
|
|
|
Twelve
months ending March 31, 2007
|
|
$
|
68,687
|
|
Twelve
months ending March 31, 2008
|
|
|
69,198
|
|
Twelve
months ending March 31, 2009
|
|
|
68,519
|
|
Twelve
months ending March 31, 2010
|
|
|
69,567
|
|
Twelve
months ending March 31, 2011
|
|
|
70,160
|
|
Thereafter
|
|
|
338,404
|
|
|
|
$
|
684,535
|
|
The
following table provides a summary of operating lease obligations at March
31,
2006 by lessor:
|
|
Future
Minimum Lease Payments
|
|
|
|
Twelve
Months Ending
|
|
Remaining
|
|
|
|
March
31, 2007
|
|
Lease
Term
|
|
Master
lease agreements for eleven communities. Initial terms ranging from
10 to
15 years, with renewal options for two additional ten year terms.
|
|
$
|
25,363
|
|
$
|
218,660
|
|
Operating
lease agreements for three communities with an initial term of 15
years
and renewal options for two additional five year terms or two additional
ten year terms.
|
|
|
9,344
|
|
|
126,189
|
|
Master
lease agreement for nine communities. Initial 12 year term, with
renewal
options for two additional five year terms.
|
|
|
11,117
|
|
|
83,913
|
|
Operating
lease agreement for a community which has a 23 year term, with a
seven
year renewal option. The Company also has an option to purchase the
community at the expiration of the lease term at fair market
value.
|
|
|
4,344
|
|
|
44,683
|
|
Operating
lease agreement for a community with an initial term of 15 years
with two
five year renewal options and a right of first refusal to repurchase
the
community. The Company previously recorded a deferred gain of $11.7
million on the sale, which is being amortized over the base term
of the
lease.
|
|
|
3,893
|
|
|
39,372
|
|
Master
lease agreement for six communities with an initial ten year term,
with
renewal options for four additional ten year terms.
|
|
|
6,178
|
|
|
34,988
|
|
Other
lease agreements for three communities, as well as a lease for the
home
office. Initial terms ranging from eight to 17 years, with various
renewal
options.
|
|
|
8,448
|
|
|
68,043
|
|
Total
operating lease obligations
|
|
$
|
68,687
|
|
$
|
615,848
|
|
10.
Commitments and Contingencies
The
Company is subject to various legal proceedings and claims that arise in the
ordinary course of its business. In the opinion of management, the ultimate
liability with respect to those proceedings and claims will not materially
affect the financial position, operations, or liquidity of the Company. The
Company maintains commercial insurance on a claims-made basis for medical
malpractice and professional liabilities.
Insurance
The
delivery of personal and health care services entails an inherent risk of
liability. Participants in the senior living and health care services industry
have become subject to an increasing number of lawsuits alleging negligence
or
related legal theories, many of which involve large claims and result in the
incurrence of significant exposure and defense costs. The Company currently
maintains general and professional medical malpractice insurance policies for
the Company's owned, leased and certain of its managed communities under a
master insurance program. Premiums
and deductibles for this insurance coverage have risen dramatically in recent
years. In response to these conditions, the Company has significantly increased
the staff and resources involved in quality assurance, compliance and risk
management during the past several years, and has also modified its insurance
programs.
Beginning
January 2006, the Company formed a wholly-owned “captive” insurance company for
the purpose of insuring certain portions of its risk retention under its general
and professional liability insurance programs. The captive insurance company
is
subject to applicable reserve requirements and regulations. The
Company currently maintains single incident and aggregate liability protection
in the amount of $25.0 million
for
general liability and $15.0 million for professional liability, with
self-insured retentions of $1.0 million and $5.0 million,
respectively.
The
Company operates under a self-insured workers’ compensation program, with excess
loss coverage provided by third party carriers. As of March 31, 2006, the
Company’s coverage for workers’ compensation and related programs, excluding
Texas, included excess loss in an aggregate amount of $6.3 million, with a
deductible amount of $350,000 per claim prior to January 1, 2006 and $500,000
thereafter. For work-related injuries in Texas, the Company is a non-subscriber
under Texas state law, meaning that work-related losses are covered under a
defined benefit program outside of the Texas Workers' Compensation system.
The
Company carries excess loss coverage of $1.0 million per individual, with a
deductible of $250,000 per individual under its non-subscriber program.
The
Company maintains a self-insurance program for employee medical coverage, with
stop-loss insurance coverage of amounts in excess of $250,000 per associate
prior to January 1, 2006 and $275,000 thereafter. Estimated costs related to
this self-insurance program are accrued based on known claims and projected
settlements of unasserted claims incurred but not yet reported to the Company.
Subsequent changes in actual experience (including claim costs, claim frequency,
and other factors) could result in additional costs to the Company.
During
the three months ended March 31, 2006 and 2005, respectively, the Company
expensed $3.3 million and $4.2 million, respectively, related to premiums,
claims and costs for general
liability and professional medical malpractice,
workers’ compensation, and employee
medical insurance
related
to multiple insurance years.
Management
Agreements
The
Company’s management agreements are generally for terms of three to 20 years,
but certain of the agreements may be canceled by the owner of the community,
without cause, on three to six months’ notice. Certain of these management
agreements provide the Company with long-term renewal options. Pursuant to
the
management agreements, the Company is generally responsible for providing
management personnel, marketing, nursing, resident care and dietary services,
accounting and data processing services, and other services for these
communities at the owner’s expense and receives a monthly fee for its services
based on either a contractually fixed amount, a percentage of revenues or
income, or cash flows in excess of operating expenses and certain cash flows
of
the community. The Company’s existing management agreements expire at various
times through December 2021.
In
connection with these management agreements, the Company has guaranteed mortgage
debt of $8.3 million related to a joint venture which the Company manages.
Regulatory
Requirements
Federal
and state governments regulate various aspects of the Company's business. The
development and operation of health care facilities and the provision of health
care services are subject to federal, state, and local licensure, certification,
and inspection laws that regulate, among other matters, the number of licensed
beds, the provision of services, the distribution of pharmaceuticals, billing
practices and policies, equipment, staffing (including professional licens-ing),
operating policies and procedures, fire prevention measures, environmental
matters, and compliance with building and safety codes. Failure to comply with
these laws and regulations could result in the denial of reimbursement, the
imposition of fines, temporary suspension of admission of new patients,
suspension or decertification from the Medicare programs, restrictions on the
ability to acquire new communities or expand existing communities, and, in
extreme cases, the revocation of a community's license or closure of a
community. Management believes the Company was in compliance with such federal
and state regulations at March 31, 2006.
Other
A
portion of
the
Company’s skilled nursing revenues and the majority of the Company’s therapy
services revenues are attributable to reimbursements under Medicare.
Certain
per person annual limits on therapy services, which were temporarily effective
beginning in September 2003 before being deferred, became effective again as
of
January 2006. Administrative procedures regarding automatic exceptions to these
limits and approval processes for other exceptions by individual are being
implemented by Medicare representatives. While the Company expects that these
limits will reduce its therapy revenues from certain residents, it does not
expect them to have a significant impact on its overall business. There continue
to be various federal and state legislative and regulatory proposals to
implement
cost
containment measures that would limit payments to healthcare providers in the
future. Changes in the reimbursement policies of the Medicare program could
have
an adverse effect on the Company’s results of operations and cash
flow.
11.
Recent Accounting Pronouncements
In
June 2005, the EITF reached consensus in EITF 04-5, Determining
Whether a General Partner, or the General Partners as a Group, Controls a
Limited Partnership or Similar Entity When the Limited Partners Have Certain
Rights,
to
provide guidance on how general partners in a limited partnership should
determine whether they control a limited partnership and therefore should
consolidate it. The EITF provides that the presumption of general partner
control would be overcome only when the limited partners have either of two
types of rights. The first type, referred to as kick-out rights, is the right
to
dissolve or liquidate the partnership or otherwise remove the general partner
without cause. The second type, referred to as participating rights, is
the right to effectively participate in significant decisions made in the
ordinary course of the partnership’s business. The kick-out rights and the
participating rights must be substantive in order to overcome the presumption
of
general partner control. The consensus is effective for general partners of
all
new limited partnerships formed and for existing limited partnerships for which
the partnership agreements are modified subsequent to the date of FASB
ratification (June 29, 2005). For existing limited partnerships that have
not been modified, the guidance in EITF 04-5 is effective no later than the
beginning of the first reporting period in fiscal years beginning after December
15, 2005. The January 1, 2006 adoption of EITF 04-5 did not have a
material effect on the Company’s financial position, results of operations or
cash flows for the period, however, the accounting related to future acquisition
activity could be affected by the provisions of this consensus.
On
October 6, 2005, the Financial Accounting Standards Board (“FASB”) released
FASB Staff Position (“FSP”) FAS 13-1, Accounting
for Rental Costs Incurred during a Construction Period. This
FSP
affects companies that are engaged in construction activities on buildings
or
grounds, which are accounted for as operating leases. The FSP requires companies
to expense rental costs associated with these leases starting on the date that
the tenant is given control of the premises. As a result, companies must cease
capitalizing rental costs during construction periods. The FSP is effective
for
the first reporting period beginning after December 15, 2005. Retrospective
application is permitted but not required. The January 1, 2006 adoption of
SFAS
No. 154 did not have a material effect on the Company’s financial position,
results of operations or cash flows for the period, however, the accounting
related to future acquisition activity could be affected by the provisions
of
this statement.
In
May 2005, the FASB issued SFAS No. 154, “Accounting
Changes and Error Corrections”,
a
replacement to APB Opinion No. 20, “Accounting
Changes”
and
SFAS No. 3, “Reporting
Accounting Changes in Interim Financial Statements.”
SFAS
No. 154 changes the requirements for the accounting for and reporting of a
change in accounting principle. SFAS No. 154 requires retrospective application
to prior periods financial statements for changes in accounting principle,
unless it is impracticable to determine either the period-specific effects
or
the cumulative effect of the change. This statement also requires that a change
in depreciation, amortization, or depletion method for long-lived, nonfinancial
assets be accounted for as a change in accounting estimate effected by a change
in accounting principle. Additionally, SFAS No. 154 carries forward the guidance
in APB Opinion No. 20 for reporting the correction of an error, a change in
accounting estimate and requires justification of a change in accounting
principle. This pronouncement is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15,
2005. The
adoption of SFAS No. 154 did not have a material effect on the Company’s
financial position, results of operations or cash flows.
12.
Subsequent Events
On
April
1, 2006, the Company completed the acquisition of two retirement centers
with a
total of 204 units located in Shawnee, Kansas. The Company funded the aggregate
cash purchase price of $29.5 million with cash.
On
March
17, 2006, the Company announced that a joint venture in which it is a member
entered into an asset purchase agreement to acquire a 760-unit entry-fee
continuing care retirement community located in Bradenton, Florida. The joint
venture, which will be owned 20% by the Company, will acquire the community
for
approximately $95 million plus the assumption of certain resident refunds.
This
transaction is expected to close on or before May 31, 2006.
On
April
27, 2006, the Company announced that it had entered into an agreement to
acquire
the lessee’s interest in a 237-unit retirement center located in Denver,
Colorado that the Company currently operates pursuant to a management agreement.
Upon the closing of the purchase, the community will convert from a managed
community to a leased community, and its operating results will be included
in
the Company's consolidated financial statements. The expected purchase price
of
$1.2 million will be funded with cash. This transaction is expected to close
in
May 2006.
Overview
The
senior living industry is experiencing growth as a result of demographic changes
and various other factors. According to census data, the over age 75 population
in the United States is growing much faster than the general population. We
have
seen increasing demand for services at both our retirement centers and our
free-standing assisted living communities during the past year, and expect
that
this demand will continue over the next several years. As a general rule,
economic factors that affect seniors will have a corresponding impact on the
senior living industry, including general economic concerns, energy prices,
and
uncertainty caused by world events. On the other hand, the strength of the
home
resale market in most areas of the country in recent years has been beneficial
to seniors, since the equity from the sale of a home is a significant source
of
funding for senior living care in many cases. In addition, overall economic
conditions and general consumer confidence can impact the senior living
industry, since many adult children subsidize the cost for care of elderly
parents, and share in decisions regarding their care.
The
assisted living industry is maturing and rapidly evolving. The demand for
assisted living services increased significantly beginning with the emergence
of
the industry segment in the mid-1990s. However, the development of new assisted
living communities across the country outstripped demand during that period,
resulting in oversupply of unit capacity, longer fill up times, price pressures
and deep discounting. The steadily increasing demand for assisted living
services, coupled with minimal new development activity, reduced much of the
oversupply in many of our markets in 2002 and 2003. As a result, we have been
able to increase occupancy, increase rates and reduce promotional discounting
for our free-standing assisted living communities since that time. Based on
available industry data, we believe that new assisted living development in
the
near term will remain at sustainable levels and, accordingly, expect this trend
to continue. The average length of stay in our free-standing assisted living
community segment is approximately two years, which represents a challenge
and
an opportunity for us. We must find a number of new residents to maintain and
build occupancy. However, we also have the opportunity to “mark-to-market” if we
are able to attract new residents at higher current market rates, replacing
prior residents with lower or discounted rates.
Our
retirement center segment is a more mature segment of the industry, and has
seen
demand and price increases in recent years, with new unit capacity entering
the
market at sustainable levels. Management expects this growth in demand and
selling rate increases to continue over the next several years. The average
length of stay is much longer in our retirement centers, approximately five
to
seven years in the rental communities, and approximately ten to twelve years
in
the entrance fee communities. In addition, we believe that many of our
retirement centers benefit from significant barriers to entry from competitors,
including the significant cost and length of time to develop competitive
communities, certificate of need requirements for nursing beds in certain
states, the difficulty in finding acceptable development sites in the
geographical areas in which our retirement centers are located, and the length
of time and difficulty in developing strong competitive
reputations.
We
earn
our revenues primarily by providing housing and services to our residents.
Approximately 83% of our revenues come from private pay sources, meaning that
residents or their families pay from their own funds (or from the proceeds
of
their privately funded long-term care policies). All private pay residents
are
billed in advance for the next month’s housing and care. In addition, we receive
private pay revenues from the sale of entrance fee contracts at our entrance
fee
communities. While this cash is received at the time the resident moves in,
the
non-refundable portion of the entrance fee is primarily recognized as income
for
financial reporting purposes over the actuarial life of the
resident.
Our
most
significant expenses are:
|
·
|
Cost
of community service revenues
-
Labor and labor-related expenses for community associates represent
approximately 64% of this line item. Other significant items in this
category are food costs, property taxes, utility costs, marketing
costs
and insurance. We have experienced significant increases in utility
costs
during the past year.
|
|
·
|
General
and administrative
-
Labor costs also represent the largest component for this category,
comprising the home office and regional staff supporting community
operations. Other significant items are liability reserve accruals
and
related costs, travel, and legal and professional service costs.
In
response to higher liability insurance costs and deductibles in recent
years, and the inherent liability risk in providing personal and
health-related services to seniors, we have significantly increased
our
staff and resources involved in quality assurance, compliance and
risk
management.
|
|
·
|
Lease
expense
-
Our lease expense has grown significantly over the past several years,
as
a result of the large number of sale-leaseback transactions completed
in
connection with various financing transactions. Our lease expense
includes
the rent expense for all operating leases, including an accrual for
lease
escalators in future years (generally, the impact of these future
escalators is spread evenly over the lease term for financial reporting
purposes), and is reduced by the amortization of deferred gains on
previous sale-leaseback transactions.
|
|
·
|
Depreciation
and amortization expense
-
We incur significant depreciation expense on our fixed assets (primarily
community buildings and equipment) and amortization expense related
primarily to leasehold acquisition
costs.
|
|
·
|
Interest
expense
-
Our interest expense is comprised of interest on our outstanding
debt,
capital lease and lease financing obligations.
|
Significant
First Quarter Events and Results of Operations
Completion
of 2006 Secondary Public Offering
On
January 24, 2006, we completed a secondary public offering of 3,450,000 shares
of our common stock, including the underwriter’s over-allotment of 450,000
shares. The shares were priced at $26.60. The net proceeds of the offering,
after deducting underwriting discounts and commissions and expenses, were
approximately $89.8 million. A portion of the proceeds of this offering were
used primarily to repay higher cost debt and fund certain acquisitions during
the quarter ended March 31, 2006. The Company expects to use the remainder
of
the proceeds to fund acquisitions and expansion and development activity, and
for general corporate purposes.
Acquisitions
On
February 28, 2006, two newly-formed joint ventures in which we own a 20%
interest acquired four senior living communities from affiliates of Cypress
Senior Living, Inc. for an aggregate purchase price of $146.3 million. These
retirement centers are located in Arlington, Dallas and Ft. Worth, Texas and
Leawood, Kansas. At closing, we also entered into long-term management
agreements pursuant to which we agreed to manage the communities. The
acquisition of these communities added 893 units to communities we manage with
partial ownership through joint ventures. See Note 7 to the unaudited condensed
consolidated financial statements. We will account for our interest in the
joint
ventures under the equity method of accounting.
Highlights
of Operating Results
Our
statements of operations in recent years should be considered in light of the
following factors, some of which are likely to influence our future operating
results and financial outlook:
|
·
|
Our
statements of operations for the three months ended March 31, 2006
show
significant improvement versus the respective prior year period.
Net
income for the three months ended March 31, 2006 was $4.8
million
versus $2.6 million for the three months ended March 31, 2005.
|
|
·
|
In
order to continue to increase net income, we are focusing on improving
results in our retirement centers and free-standing assisted living
segments, while controlling our general and administrative costs
and
reducing our
|
debt
service costs. We are also focused on the growth of our ancillary service
revenues, as well as the expansion of capacity at several
communities.
|
·
|
We
are focused on increasing the revenues and operating contribution
of our
retirement centers. Revenue per unit increases at our retirement
centers
resulted primarily from increases in selling rates, increased therapy
and
ancillary service revenues, as well as annual billing rate increases
to
existing residents. In addition, a significant component of the average
revenue per unit increase stems from the “mark-to-market” effect of
resident turnover. Since monthly rates for new residents (current
market
selling rates) are generally higher than billing rates for current
residents (since annual increases to billing rates are typically
capped in
resident agreements), turnover typically results in significantly
increased monthly fees for the new resident. This “mark-to-market”
increase is generally more significant in entrance fee communities
due to
much longer average length of stay (ten or more
years).
|
|
·
|
For
the three months ended March 31, 2006, retirement center revenues
were up
8.3%
versus prior year, and segment operating contribution was up 12.0%
versus
the same period last year. Operating contribution per unit per month
increased 10.9%
for the same period, from $1,195
to
$1,325.
|
|
·
|
We
are also focusing on increasing our free-standing assisted living
segment
operating contribution further primarily by increasing occupancy
above the
current 92% level, and by increasing revenue per unit through price
increases, ancillary services, and the “mark-to-market” effect of turnover
of units that are at lower rates, while maintaining control of our
operating costs. Since monthly rates for new residents (current market
selling rates) are generally higher than billing rates for current
residents, turnover typically results in significantly increased
monthly
fees for the new resident. We believe that, absent unforeseen market
or
pricing pressures, occupancy increases above 90% should produce high
incremental community operating contribution margins for this segment.
The
risks to improving occupancy in our free-standing assisted living
community portfolio are unexpected increases in move outs in any
period
(due to health or other reasons) and the development of new unit
capacity
or renewed price discounting by competitors in our markets, which
could
make it more difficult to fill vacant units and which could result
in
lower revenue per unit.
|
|
·
|
Our
free-standing assisted living communities have continued to increase
revenue and segment operating contribution during 2005 and 2006,
primarily
as a result of a 9.0% year over year increase in revenue per occupied
unit
as of March 31, 2006, as well as an increase in ending occupancy
from 90%
as of March 31, 2005, to 92% as of March 31, 2006. The increased
revenue
per unit in our free-standing assisted living communities resulted
primarily from selling rate increases, reduced discounting, and turnover
of units resulting in new residents paying higher current market
rates. In
addition, our residency agreements provide for annual rate increases.
The
increased amount of ancillary services, including therapy services,
also
contributed to the increased revenue per
unit.
|
|
·
|
Our
free-standing assisted living community incremental increase in operating
contribution as a percentage of revenue increase was 65%
for the three months ended March 31, 2006 versus the same prior year
period. Our free-standing assisted living community operating contribution
per unit per month increased 24.1%
during the three months ended March 31, 2006, versus the same period
last
year, to $1,266
per
unit per month.
|
Segment
Results
We
operate in three business segments:
retirement centers, free-standing assisted living communities, and management
services.
The
following table presents the number, total unit capacity and total ending and
average occupancy percentages of our communities by operating segment at March
31, 2006 and 2005.
|
|
Number
of Communities /
|
|
Ending
Occupancy % / |
|
Average
Occupancy % /
|
|
|
|
Total
Ending Capacity
|
|
Ending
Occupied Units
|
|
Average
Occupied Units
|
|
|
|
March
31,
|
|
March
31,
|
|
Three
Months Ended March 31,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
|
33
|
|
|
29
|
|
|
95
|
%
|
|
95
|
%
|
|
96
|
%
|
|
95
|
%
|
|
|
|
9,901
|
|
|
9,072
|
|
|
9,378
|
|
|
8,585
|
|
|
8,815
|
|
|
8,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free-standing
ALs
|
|
|
41
|
|
|
33
|
|
|
92
|
%
|
|
90
|
%
|
|
91
|
%
|
|
89
|
%
|
|
|
|
3,836
|
|
|
3,007
|
|
|
3,518
|
|
|
2,694
|
|
|
3,509
|
|
|
2,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
Services
|
|
|
6
|
|
|
5
|
|
|
96
|
%
|
|
95
|
%
|
|
96
|
%
|
|
95
|
%
|
|
|
|
1,416
|
|
|
1,187
|
|
|
1,362
|
|
|
1,131
|
|
|
1,357
|
|
|
1,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
80
|
|
|
67
|
|
|
94
|
%
|
|
94
|
%
|
|
94
|
%
|
|
94
|
%
|
|
|
|
15,153
|
|
|
13,266
|
|
|
14,258
|
|
|
12,410
|
|
|
13,681
|
|
|
12,325
|
|
We
measure the performance of our three business segments, in part, based upon
the
operating contribution produced by these business segments. We compute operating
contribution by deducting the operating expenses associated with a segment
from
the revenues produced by that segment. The following table sets forth certain
selected financial and operating data on an operating segment basis(1)
(dollars
in thousands, except for per unit amounts).
|
|
Three
Months Ended
March
31,
|
|
2006
vs. 2005
|
|
|
|
2006
|
|
2005
|
|
Change
|
|
%
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
$
|
98,606
|
|
$
|
91,046
|
|
$
|
7,560
|
|
|
8.3
|
%
|
Free-standing
Assisted Living Communities
|
|
|
29,180
|
|
|
25,607
|
|
|
3,573
|
|
|
14.0
|
%
|
Management
Services
|
|
|
3,307
|
|
|
1,302
|
|
|
2,005
|
|
|
154.0
|
%
|
Total
revenue
|
|
$
|
131,093
|
|
$
|
117,955
|
|
$
|
13,138
|
|
|
11.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
occupied units (2)
|
|
|
8,578
|
|
|
8,585
|
|
|
(7
|
)
|
|
-0.1
|
%
|
Ending
occupancy % (2)
|
|
|
95
|
%
|
|
95
|
%
|
|
0
|
%
|
|
|
|
Average
occupied units (2)
|
|
|
8,615
|
|
|
8,532
|
|
|
83
|
|
|
1.0
|
%
|
Average
occupancy % (2)
|
|
|
96
|
%
|
|
95
|
%
|
|
1
|
%
|
|
|
|
Revenue
per occupied unit (per month)
|
|
$
|
3,815
|
|
$
|
3,557
|
|
$
|
258
|
|
|
7.3
|
%
|
Operating
contribution per unit (per month)
|
|
|
1,325
|
|
|
1,195
|
|
|
130
|
|
|
10.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resident
and healthcare revenue
|
|
|
98,606
|
|
|
91,046
|
|
|
7,560
|
|
|
8.3
|
%
|
Cost
of community service revenue, exclusive of depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expense
presented separately below
|
|
|
64,351
|
|
|
60,454
|
|
|
3,897
|
|
|
6.4
|
%
|
Segment
operating contribution (3)
|
|
|
34,255
|
|
|
30,592
|
|
|
3,663
|
|
|
12.0
|
%
|
Operating
contribution margin (4)
|
|
|
34.7
|
%
|
|
33.6
|
%
|
|
1.1
|
%
|
|
3.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free-standing
Assisted Living Communities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
occupied units (5)
|
|
|
2,669
|
|
|
2,562
|
|
|
107
|
|
|
4.2
|
%
|
Ending
occupancy % (5)
|
|
|
92
|
%
|
|
90
|
%
|
|
2
|
%
|
|
|
|
Average
occupied units (5)
|
|
|
2,653
|
|
|
2,537
|
|
|
116
|
|
|
4.6
|
%
|
Average
occupancy % (5)
|
|
|
92
|
%
|
|
89
|
%
|
|
3
|
%
|
|
|
|
Revenue
per occupied unit
|
|
$
|
3,666
|
|
$
|
3,364
|
|
$
|
302
|
|
|
9.0
|
%
|
Operating
contribution per unit (per month)
|
|
|
1,266
|
|
|
1,020
|
|
|
246
|
|
|
24.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resident
and healthcare revenue
|
|
|
29,180
|
|
|
25,607
|
|
|
3,573
|
|
|
14.0
|
%
|
Cost
of community service revenue, exclusive of depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expense
presented separately below
|
|
|
19,103
|
|
|
17,847
|
|
|
1,256
|
|
|
7.0
|
%
|
Segment
operating contribution (3)
|
|
|
10,077
|
|
|
7,760
|
|
|
2,317
|
|
|
29.9
|
%
|
Operating
contribution margin (4)
|
|
|
34.5
|
%
|
|
30.3
|
%
|
|
4.2
|
%
|
|
13.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
services operating contribution
(3)
|
|
$
|
1,224
|
|
$
|
500
|
|
$
|
724
|
|
|
144.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
segment operating contributions
|
|
|
45,556
|
|
|
38,852
|
|
|
6,704
|
|
|
17.3
|
%
|
As
a % of total revenue
|
|
|
34.8
|
%
|
|
32.9
|
%
|
|
1.9
|
%
|
|
5.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
expense
|
|
|
15,333
|
|
|
15,510
|
|
|
(177
|
)
|
|
-1.1
|
%
|
Depreciation
and amortization, inclusive of general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
depreciation
and amortization of $364 and $943, respectively
|
|
|
9,407
|
|
|
9,271
|
|
|
136
|
|
|
1.5
|
%
|
Amortization
of leasehold costs
|
|
|
592
|
|
|
699
|
|
|
(107
|
)
|
|
-15.3
|
%
|
Loss
on the sale or disposal of assets
|
|
|
84
|
|
|
12
|
|
|
72
|
|
|
NM
|
|
General
and administrative (6)
|
|
$
|
9,942
|
|
$
|
6,591
|
|
$
|
3,351
|
|
|
50.8
|
%
|
Income
from operations
|
|
$
|
10,198
|
|
$
|
6,769
|
|
$
|
3,429
|
|
|
50.7
|
%
|
(1)
|
|
Selected
financial and operating data does not include any inter-segment
transactions or allocated costs.
|
(2)
|
|
Occupancy
data excludes four retirement centers we partially own through
nonconsolidated joint ventures for the one month ended March 31,
2006.
These joint ventures are not included in the retirement center segment
results since we do not hold a controlling financial
interest.
|
(3)
|
|
Segment
Operating Contribution is calculated by subtracting the segment operating
expenses from the segment revenues.
|
(4)
|
|
Segment
Operating Contribution Margin is calculated by dividing the operating
contribution of the segment by the respective segment
revenues.
|
(5)
|
|
Occupancy
data excludes nine free-standing assisted living communities we partially
own through joint ventures for the three months ended March 31, 2006.
Occupancy data excludes two free-standing assisted living communities
we
partially-owned through joint ventures for the three months ended
March
31, 2005. These joint ventures are not included in the consolidated
free-standing assisted living segment results since we do not hold
a
controlling financial interest.
|
(6)
|
|
Includes
$1.5 million and $0.2 million in stock-based compensation expense
for the
three months ended March 31, 2006 and 2005,
respectively.
|
Three
Months
Ended March 31, 2006 compared with the Three Months Ended March 31,
2005
Retirement
Centers
Revenue
-
Retirement center revenues were $98.6 million for the three months ended March
31, 2006, compared to $91.0 million for the three months ended March 31, 2005,
an increase of $7.6 million, or 8.3%, which was comprised of:
|
·
|
$7.6
million from increased revenue per occupied unit. This increase is
comprised primarily of selling rate increases and increased ancillary
services provided to residents (including a $1.8 million increase
in
therapy services revenue, which is net of the impact of the initial
uncertainty surrounding caps on therapy revenues, which regulators
clarified during February of 2006). We do not expect the new therapy
caps
to have a significant impact on our therapy services revenue. Rate
increases include the mark-to-market effect from turnover of residents
(reselling units at higher current selling rates), and annual increases
in
monthly service fees from existing residents. We expect that selling
rates
to new residents will generally continue to increase during 2006
absent an
adverse change in market conditions.
|
|
·
|
These
amounts exclude the revenue and occupancy for four retirement centers
partially-owned through nonconsolidated joint ventures for the one
month
ended March 31, 2006.
|
Cost
of
community service revenue - Retirement center cost of community service revenue
was $64.4
million
for the three months ended March 31, 2006, compared to $60.5 million for the
three months ended March 31, 2005, an increase of $3.9
million,
or 6.4%,
which
was comprised of:
|
·
|
$2.0
million of increased labor and related costs. This increase is primarily
a
result of wage rate increases for associates and additional staffing
costs, including approximately $1.1 million supporting the growth
of our
therapy services program. Although wage rates of associates are expected
to increase each year, we do not expect significant changes in staffing
levels in our retirement center segment, other than to support community
acquisitions or expansions or the growth of ancillary programs such
as
therapy services.
|
|
·
|
$1.9
million of other year-to-year cost increases. This includes increases
in
operating expenses such as utilities, property taxes, marketing,
food,
ancillary costs and other property-related
costs.
|
Segment
operating contribution - Retirement
center segment operating contribution was $34.3
million
for the three months ended March 31, 2006, compared to $30.6 million for the
three months ended March 31, 2005, an increase of $3.7
million,
or 12.0%.
|
·
|
The
operating contribution margin increased to 34.7%
from 33.6%
for the three months ended March 31, 2006 and 2005, respectively.
|
|
·
|
The
operating contribution margin in 2006 reflected continued operational
improvements throughout the retirement center segment resulting from
increased average occupancy and revenue per occupied unit (including
continued growth of the therapy services program), and control of
community operating expenses including labor, employee benefits and
insurance-related costs.
|
Free-standing
Assisted Living Communities
Revenue
-
Free-standing assisted living community revenues were $29.2
million
for the three months ended March 31, 2006, compared to $25.6
million
for the three months ended March 31, 2005, an increase of $3.6
million,
or 14.0%,
which
was comprised of:
|
·
|
$2.8
million
from increased revenue per occupied unit. This increase includes
the
impact of price increases, reduced discounting and promotional allowances,
and the mark-to-market effect from turnover
of residents (reselling units at higher current rates), and
includes
$0.7
million
related to increased revenues from therapy services. We remain focused
on
increasing revenue per occupied unit, subject to market constraints,
through
|
price
increases, as well as the mark-to-market turnover of residents with prior
discounted rates, and an increase in ancillary services such as therapy.
|
·
|
$0.8
million
from increased occupancy. Total ending occupancy increased from
90%
at March 31, 2005 to 92%
at March 31, 2006, an increase of two
percentage points.
We are focused on continuing to increase the occupancy in the
free-standing assisted living communities, and believe that over
the
long-term, this segment of the industry should be able to achieve
average
occupancy levels near those achieved in our retirement center segment.
We
are focused on increasing our number of move-ins, increasing average
length of stay, and expanding our marketing efforts and sales training
in
order to increase occupancy.
|
|
·
|
These
amounts exclude the revenue and occupancy for nine free-standing
assisted
living communities partially-owned through nonconsolidated joint
ventures
for the three months ended March 31, 2006 and for two free-standing
assisted living communities partially-owned through nonconsolidated
joint
ventures at March 31, 2005.
|
Cost
of
community service revenue - Free-standing assisted living cost of community
service revenue was $19.1
million
for the three months ended March 31, 2006, compared to $17.8
million
for the three months ended March 31, 2005, an increase of $1.3
million,
or 7.0%,
which
was comprised of:
|
·
|
$1.2
million
of
additional labor and labor related costs. This increase is primarily
a
result of wage rate increases for associates and additional staffing
costs
of approximately $0.1 million supporting the growth of our therapy
services programs. We do not expect significant increases in staffing
levels in our free-standing assisted living communities as occupancy
levels increase over the current 92% level, since most of our communities
are nearly fully staffed at current occupancy levels. However, growth
of
ancillary revenue programs such as therapy may require additional
staff to
support incremental activity. As a result of higher
recruiting and retention costs of qualified personnel, we
expect
increased wage rates each year, subject to labor market
conditions.
|
|
·
|
$0.1
million
of other net cost increases such as marketing, utilities and other
community overhead costs, as well as food costs and various other
cost
increases.
|
Segment
operating contribution - Free-standing
assisted living segment operating contribution was $10.1
million
for the three months ended March 31, 2006, compared to $7.8 million for the
three months ended March 31, 2005, an increase of $2.3
million,
or 29.9%.
|
·
|
For
the three months ended March 31, 2006 and 2005, the operating contribution
margin increased to 34.5% from 30.3%,
respectively, an increase of 4.2
percentage
points.
|
|
·
|
The
increased margin primarily relates to strong increases in revenue
per
occupied unit and occupancy increases, coupled with control of operating
expenses. The incremental increase in operating contribution as a
percentage of revenue increase was 65% for the three months ended
March
31, 2006 versus 61%
for the three months ended March 31,
2005.
|
|
·
|
We
believe that, absent unforeseen cost pressures, revenue increases
resulting from occupancy increases should continue to produce high
incremental segment operating contribution margins (as a percentage
of
sales increase) for this segment.
|
Management
Services.
Management
services operating contribution was $1.2
million and $0.5 million
for the three months ended March 31, 2006 and 2005, respectively. This increase
is primarily attributable to service revenue related to certain construction
and
development projects we manage.
General
and Administrative.
General
and administrative expense was $9.9
million
for the three months ended March 31, 2006, compared to $6.6 million for the
three months ended March 31, 2005, an increase of $3.3
million,
or 50.8%, which was comprised of:
|
·
|
A
$1.3 million increase in stock-based compensation expense associated
with
the January 1, 2006 adoption of SFAS No. 123(R) and performance-based
restricted stock compensation. Our total stock-based compensation
expense
for the year ending December 31, 2006 is expected to be approximately
$6.3
million.
|
|
·
|
$2.0
million related to increased payroll, insurance and other costs associated
with general corporate growth and expansion, including expansion
of our
ancillary service programs and support for new
acquisitions.
|
|
·
|
General
and administrative expense as a percentage of total consolidated
revenues
was 7.6% and 5.6% for the three months ended March 31, 2006 and 2005,
respectively.
|
|
·
|
We
believe that measuring general and administrative expense as a percentage
of total consolidated revenues and combined revenues (including
unconsolidated managed revenues) provides insight as to the level
of our
overhead in relation to our total operating activities (including
those
that relate to management services). General and administrative expense
as
a percentage of total combined revenues was 6.5% and 5.0% for the
three
months ended March 31, 2006 and 2005, respectively, calculated as
follows
(dollars in thousands):
|
|
|
Three
Months Ended March 31,
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
Total
consolidated revenues
|
|
$
|
131,093
|
|
$
|
117,955
|
|
Revenues
of unconsolidated managed communities
|
|
|
23,374
|
|
|
13,244
|
|
Less
management fees
|
|
|
1,224
|
|
|
500
|
|
Total
combined revenue
|
|
$
|
153,243
|
|
$
|
130,699
|
|
|
|
|
|
|
|
|
|
Total
general and administrative expense
|
|
$
|
9,942
|
|
$
|
6,591
|
|
|
|
|
|
|
|
|
|
General
and administrative expense as a % of total consolidated
revenues
|
|
|
7.6
|
%
|
|
5.6
|
%
|
General
and administrative expense as a % of total combined revenue(1)
|
|
|
6.5
|
%
|
|
5.0
|
%
|
(1) |
Included
in the above percentages are 1.0% and 0.1%, respectively, of non-cash
equity compensation for the three months ended March 31, 2006 and
2005.
|
Lease
Expense.
Lease
expense was $15.3
million
for the three months ended March 31, 2006, compared to $15.5 million for the
three months ended March 31, 2005, a decrease of $0.2
million,
or 1.1%.
|
·
|
Lease
expense decreased $0.5 million as a result of the acquisition of
the
assets of a retirement center in July 2005 that was previously operated
pursuant to an operating lease. This decrease was partially offset
by
scheduled rent increases.
|
|
·
|
A
lease agreement in which we previously accounted for as a lease financing
obligation due to our continuing involvement reverted to an operating
lease as a result of the expiration of an underlying earnout. As
a result,
lease expense related to this community increased $0.1 million for
the
three months ended March 31, 2006.
|
|
·
|
Net
lease expense for the three months ended March 31, 2006 was $15.3
million,
which includes current lease payments of $17.3
million,
plus straight-line accruals for future lease escalators of $1.0
million,
net of the amortization of the deferred gain from prior sale-leasebacks
of
$3.0
million.
|
|
· |
As
of March 31, 2006, we had operating leases for 34 of our communities,
including 18 retirement centers and 16 free-standing assisted living
communities.
|
Depreciation
and Amortization.
Depreciation and amortization expense was $9.4
million
for the three months ended March 31, 2006, compared to $9.3
million
for the three months ended March 31, 2005, an increase of $0.1 million, or
1.5%.
|
·
|
Approximately
$0.3
million
of the increase was related to the 2005 acquisitions of two retirement
centers of which one was previously operated pursuant to an operating
lease.
|
|
·
|
Depreciation
expense decreased $0.6 million for the three months ended March 31,
2006
compared to the three months ended March 31, 2005 due to the sale
of
certain rental assets during 2005.
|
|
·
|
The
remainder of the increase was attributable to increased development
and
expansion activity. Depreciation and amortization expense for the
three
months ended March 31, 2006 was $9.4
million
and is expected to increase as development assets are placed into
service
throughout the year.
|
Amortization
of Leasehold Acquisition Costs.
Amortization of leasehold acquisition costs was $0.6 million for the three
months ended March 31, 2006, compared to $0.7 million for the three months
ended
March 31, 2005, a decrease of $0.1 million. This decrease relates to the
acquisition of the real assets of a retirement center in July 2005. This
community was previously operated pursuant to an operating lease.
Interest
Expense. Interest
expense was $4.3 million for the three months ended March 31, 2006, compared
to
$3.6 million for the three months ended March 31, 2005, an increase of $0.7
million, or 20.0%. This increase was primarily the result of:
|
·
|
The
debt associated with the acquisition of a retirement center and current
development and expansion activity. These obligations increased interest
expense $1.0 million for the three months ended March 31, 2006 compared
to
March 31, 2005.
|
|
·
|
The
writeoff of $0.2 million in deferred financing costs associated with
debt
repayments during the quarter ended March 31,
2006.
|
|
·
|
The
expiration of a contingent earnout included in lease agreements for
a
free-standing assisted living community. These leases are presently
accounted for as operating leases (versus lease financing obligation
treatment for these leases for periods prior to December 31, 2005).
We
will continue to evaluate our other lease earnouts in light of our
cash
needs and the cost and terms of alternative financing, and may consider
extending earnout terms in certain cases. Interest expense for the
three
months ended March 31, 2006 decreased $0.2 million related to this
free-standing assisted living community.
|
These
increases in interest expense were partially offset due to the repayment of
$28.7 million in outstanding loans during the three months ended March 31,
2006.
We used a portion of the proceeds of our January 2006 public equity offering
to
retire these obligations. The
repayment of these loans resulted in a $0.2 million reduction in current quarter
interest expense for the three months ended March 31, 2006 and will result
in a
$1.8 million reduction in interest expense for the year ending December 31,
2006, based on rates in effect at the time of retirement.
Interest
expense is expected to approximate a quarterly amount of $4.1 million, before
the impact of any increase in the interest rates of our variable rate debt
or
other refinancing or transactional activity.
Interest
Income. Interest
income was $1.6 million for the three months ended March 31, 2006, compared
to
$0.7 million for the three months ended March 31, 2005. This increase is
primarily attributable to increased short-term interest on investments resulting
from the 2006 public equity offering and on amounts funded related to certain
third-party development projects.
Income
Taxes.
Our
effective tax rate was approximately 37.0% for the three months ended March
31,
2006.
Minority
Interest in Losses (Earnings) of Consolidated Subsidiaries, Net of
Tax. Minority
interest in losses (earnings) of consolidated subsidiaries, net of tax, was
$0.2
million and ($0.1 million) for the three months ended March 31, 2006 and 2005,
respectively. This increase was primarily attributable to the buyout of the
minority interest in two of our retirement center communities coupled with
increased management fees at a retirement center community we manage and
consolidate.
Net
Income. We
experienced net income of $4.8 million or $0.14 earnings per basic and diluted
share, for the three months ended March 31, 2006, compared to $2.6 million,
or
$0.09 loss per basic and diluted share, for the three months ended March 31,
2005.
Liquidity
and Capital Resources
We
believe that our current cash and cash equivalents and expected cash flow from
operations will be sufficient to fund our operating requirements, capital
expenditure requirements, periodic debt service requirements, and lease and
tax
obligations during the next twelve months.
Our
primary sources of cash from operating activities are the collection of monthly
and other billings for providing housing, healthcare services and ancillary
services at our communities, certain proceeds from the sale of entrance fees,
and management fees from the communities we manage for third parties. These
collections are primarily from residents or their families, with approximately
17% coming from various reimbursement programs (primarily Medicare). The primary
uses of cash for our ongoing operations include the payment of community
operating expenses, including labor costs and related benefits, general and
administrative costs, lease and interest payments, principal payments required
under various debt agreements, refunds due upon termination of entrance fee
contracts, working capital requirements, and capital expenditures necessary
to
maintain our buildings and equipment.
We
have
substantial payment commitments on our outstanding debt, capital leases and
lease financing obligations and operating lease obligations. As shown in the
Future Cash Commitments table below, we have significant payment obligations
during the next five years. These commitments and our plans regarding them
are
described below:
|
·
|
We
have long term debt of $125.0 million and capital lease and lease
financing obligations of $173.2 million, for total debt of $298.3
million
at March 31, 2006. We guarantee $37.8 million of third party senior
debt
in connection with five retirement centers and a free-standing
assisted living community that we operate.
|
|
·
|
Our
long-term debt payments include recurring principal amortization
and other
amounts due each year plus various maturities of mortgages and other
loans. We have scheduled debt principal payments of $125.0 million,
including $7.4 million due during the twelve months ending March
31, 2007.
We intend to pay these amounts as they come due primarily from cash
provided by operations.
|
|
·
|
As
of March 31, 2006, we leased 43 of our communities (34 operating
leases
and 9 leases accounted for as lease financing obligations). As a
result,
we have significant lease payments. Our capital lease and lease financing
obligations include payments of $16.9 million that is due in the
twelve
months ending March 31, 2007. During the twelve months ending March
31,
2007, we are also obligated to make minimum rental payments of
approximately $68.7 million under long-term operating leases. We
intend to
pay these capital leases, lease financing and operating lease obligations
primarily from cash provided by operations. See our Future Cash
Commitments table below.
|
As
of
March 31, 2006, we had approximately $84.2 million in unrestricted cash and
cash
equivalents and $32.6 million in restricted cash. For the three months ended
March 31, 2006, the Company’s cash provided by operations
was
$9.6
million. At March 31, 2006, we had $31.8 million of negative working capital,
which includes the classification of $123.0 million of entrance fees and $4.6
million in tenant deposits as current liabilities as required by applicable
accounting pronouncements. Based upon our historical operating experience,
we
anticipate that only approximately 9% to 12% of those entrance fee liabilities
will actually come due, and be required to be settled in cash, during the next
twelve months. We expect that any entrance fee liabilities due within the next
twelve months will be fully offset by the proceeds generated by subsequent
entrance fee sales. Entrance fee sales, net of refunds paid, provided $7.3
million of cash for the three months ended March 31, 2006.
On
January 26, 2006, we completed a public offering of 3,450,000 shares of our
common stock, including the underwriter’s over-allotment of 450,000 shares. The
shares were priced at $26.60. The net proceeds of the offering, after deducting
underwriting discounts, commissions and expenses, were approximately $89.8
million.
We
plan
to add additional units to our portfolio, primarily through the expansion of
our
existing communities. We currently have expansion projects in various stages
of
development relating to our communities. Many of these projects are under
construction or are expected to begin construction during the next twelve
months, and would increase our unit capacity over the next several years. These
projects are expected to be financed through a combination of our cash
investment, lessor and lender financing, and entrance fee sale proceeds (for
certain projects).
We
may
also, from time to time, selectively pursue the development and construction
of
new senior living communities and potential future acquisitions of senior living
communities and businesses engaged in activities that are similar or
complementary to our business. Such transactions, if significant, would
generally require us to provide a portion of the funding and to arrange separate
lease, mortgage or other financing for the remaining cost. Certain development
projects may be structured as joint ventures with other third party capital
partners.
We
do not
expect changes in interest rates to have a material effect on our income or
cash
flows in 2006, since 73.9% of our debt has fixed rates. There can be no
assurances, however, that interest rates will not significantly change and
increase our future debt service costs.
Certain
of our indebtedness and lease agreements are cross-collateralized or
cross-defaulted. Any default with respect to such obligations could cause our
lenders or lessors to declare defaults, accelerate payment obligations or
foreclose upon the communities securing such indebtedness or exercise their
remedies with respect to such communities, which could have a material adverse
effect on us. Certain of our debt instruments and leases contain financial
and
other covenants, typically related to the specific communities financed or
leased. We believe that projected results from operations and cash flows will
be
sufficient to satisfy these covenants. However, there can be no assurances
that
we will remain in compliance with those covenants, or in the event of future
non-compliance, that our creditors will grant amendments or
waivers.
We
have
primarily used a combination of mortgage financing, lease financing, and
convertible debentures to finance our cash needs over the past several years.
In
the future, subject to our performance and market conditions, we would expect
to
utilize various types of financing including mortgage financing, lease
financing, and public debt or equity offerings as well.
Cash
Flow, Investing and Financing Activity
During
the three months ended March 31, 2006, we experienced a positive net cash flow
of $43.5 million. Net cash provided by operating activities was $9.6 million,
net cash used by investing activities was $30.7 million and net cash provided
by
financing activities was $64.5 million. Our unrestricted cash balance was $84.2
million as of March 31, 2006, as compared to $40.8 million as of December 31,
2005. Primarily, cash was provided from improved operating results and strong
entrance fee sales, and proceeds from our January public offering, while cash
was used primarily for acquisitions and related investment, debt service and
lease obligations, debt repayments, capital expenditures, taxes and working
capital.
Net
cash
provided by operating activities was $9.6 million for the three months ended
March 31, 2006 as compared to $11.9 million for
the
three months ended March 31, 2005, a decrease of $2.2 million. This decrease
was
the result
of
improved operational results partially offset by increased working capital
requirements associated with recent acquisitions.
Net
cash
provided by entrance fee sales, net of refunds, increased $1.0 million for
the
three months ended March 31, 2006 as compared to March 31, 2005, as
follows:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Proceeds
from entrance fee sales - deferred income
|
|
$
|
8,789
|
|
$
|
7,805
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from entrance fee sales - refundable portion
|
|
|
2,896
|
|
|
4,996
|
|
Refunds
of entrance fee terminations
|
|
|
(4,370
|
)
|
|
(6,517
|
)
|
|
|
|
|
|
|
|
|
Net
cash provided by entrance fee sales
|
|
$
|
7,315
|
|
$
|
6,284
|
|
|
|
|
|
|
|
|
|
This
increase results primarily from increased occupancy at the Galleria Woods
retirement center. We are focused on maintaining strong entrance fee sales
for
the remainder of 2006. Excluding the February 2005 acquisition of Galleria
Woods, our existing entrance fee communities’ independent living units average
98% occupancy, and additional growth of entrance fee sales at these communities
may become a function of the available inventory of vacant units.
We
routinely make capital expenditures to maintain or enhance communities under
our
control. Our maintenance capital spending is primarily for refurbishing
apartments and maintaining the quality of our communities. Capital spending
for
the three months ended March 31, 2006 was $14.0 million, including $4.0 million
of maintenance capital spending and $10.0 million of capital expenditures
related to development and expansion activities related to consolidated
communities. Our expected fiscal 2006 maintenance capital spending is
approximately $24.0 million. In addition, capital spending on expansion and
development activities is expected to increase over the next twelve months.
During the three months ended March 31, 2006, we invested $12.6 million in
three
joint ventures in which we have a partial ownership. Two of the joint ventures
own four retirement centers and the other joint venture provides prescription
services.
Net
cash
provided by financing activities was $64.5 million and $15.3 million for the
three months ended March 31, 2006 and March 31, 2005, respectively. During
the
three months ended March 31, 2006, we received proceeds of $89.8 million from
the January 26, 2006 public offering of 3,450,000 shares of our common stock
and
$7.7 million from the proceeds of debt obligations. Furthermore, we repaid
$33.4
million on various mortgages and made distributions to minority interest holders
of $0.8 million. In connection with certain entrance fee communities, we made
principal payments under master trust agreements of $0.2 million and paid $4.4
million in entrance fee obligations during the three months ended March 31,
2006.
Future
Cash Commitments
The
following tables summarize our total contractual obligations and commercial
commitments as of March 31, 2006 (amounts in thousands):
|
|
Payments
Due by Twelve Months Ending March 31,
|
|
|
|
Total
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt obligations
|
|
$
|
180,684
|
|
$
|
16,227
|
|
$
|
18,419
|
|
$
|
26,368
|
|
$
|
14,459
|
|
$
|
30,093
|
|
$
|
75,118
|
|
Capital
lease and lease financing obligations
|
|
|
206,076
|
|
|
21,582
|
|
|
21,879
|
|
|
22,355
|
|
|
22,816
|
|
|
23,408
|
|
|
94,036
|
|
Operating
lease obligations
|
|
|
684,535
|
|
|
68,687
|
|
|
69,198
|
|
|
68,519
|
|
|
69,567
|
|
|
70,160
|
|
|
338,404
|
|
Refundable
entrance fee obligations(1)
|
|
|
85,434
|
|
|
9,398
|
|
|
9,398
|
|
|
9,398
|
|
|
9,398
|
|
|
9,398
|
|
|
38,444
|
|
Other
|
|
|
920
|
|
|
920
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
contractual obligations
|
|
|
1,157,649
|
|
|
116,814
|
|
|
118,894
|
|
|
126,640
|
|
|
116,240
|
|
|
133,059
|
|
|
546,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
receivable and related interest(2)
|
|
|
(67,041
|
)
|
|
(2,901
|
)
|
|
(2,693
|
)
|
|
(2,693
|
)
|
|
(8,671
|
)
|
|
(4,135
|
)
|
|
(45,948
|
)
|
Contractual
obligations, net
|
|
$
|
1,090,608
|
|
$
|
113,913
|
|
$
|
116,201
|
|
$
|
123,947
|
|
$
|
107,569
|
|
$
|
128,924
|
|
$
|
500,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
of Commitment Expiration Per Period
|
|
|
|
Total
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
Thereafter
|
|
Guaranties(3)
|
|
$
|
37,836
|
|
$
|
15,308
|
|
$
|
7,041
|
|
$
|
7,072
|
|
$
|
440
|
|
$
|
477
|
|
$
|
7,498
|
|
Construction
commitments
|
|
$
|
54,617
|
|
|
38,109
|
|
|
16,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
cash funding requirements(4)
|
|
$
|
26,407
|
|
|
26,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
commercial commitments
|
|
$
|
118,860
|
|
$
|
79,824
|
|
$
|
23,549
|
|
$
|
7,072
|
|
$
|
440
|
|
$
|
477
|
|
$
|
7,498
|
|
(1)
|
Future
refunds of entrance fees are estimated based on historical payment
trends.
These refund obligations are offset by proceeds received from resale
of
the vacated apartment units. Historically, proceeds from resale of
entrance fee units each year completely offset refunds paid and generate
excess cash to us.
|
(2)
|
A
portion of the lease payments noted in the above table is repaid
to us as
interest income on a note receivable from the
lessor.
|
(3)
|
The
mortgage debt we guarantee relates to a retirement
center under a long-term operating lease agreement and to a free-standing
assisted living community in which we have a joint venture interest.
This
amount also includes the guaranteed debt service payments under first
mortgage financing in connection with the Cypress joint ventures
entered
into during the first quarter of
2006.
|
(4)
|
We
have committed to fund the construction of a free-standing assisted
living
community for an unrelated non-profit entity. We will finance this
commitment through internal sources and a $26.3 million construction
loan
from a commercial bank.
|
Critical
Accounting Policies
Certain
critical accounting policies are complex and involve significant judgments
by
our management, including the use of estimates and assumptions, which affect
the
reported amounts of assets, liabilities, revenues and expenses. As a result,
changes in these estimates and assumptions could significantly affect our
financial position or results of operations. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities. Actual results
may differ from these estimates under different assumptions or conditions.
The
significant and critical accounting policies used in the preparation of our
financial statements are more fully described in our Annual Report on Form
10-K
for the year ended December 31, 2005 and our consolidated financial statements
and the notes thereto.
Risks
Associated with Forward Looking Statements
This
Quarterly Report on Form 10-Q 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 us or our management including, but not
limited to, all statements concerning our anticipated improvement in operations
and anticipated or expected cash flow; our expectations regarding trends in
the
senior living industry; the discussions of our operating and growth strategy;
our expectations regarding the “mark-to-market” effect of resident turnover and
the incremental operating margin from increasing occupancy at our free-standing
assisted living communities; our liquidity and financing needs; our expectations
regarding future entrance fee sales or increasing occupancy at our retirement
centers or free-standing assisted living communities; our alternatives for
raising additional capital and satisfying our periodic debt and lease financing
obligations; the projections of revenue, income or loss, capital expenditures,
interest rates and future operations; and the availability of insurance
programs. All forward-looking statements involve risks and uncertainties
including, without limitation, (i) the
fact
that we have generated losses prior to the fourth quarter of 2004, (ii) the
risks associated with our financial condition and the fact that we have
significant debt and lease obligations, (iii) the risk that we will be
unable to improve operating results at our free-standing assisted living
communities, sell our entrance fee units or increase our cash flow or generate
expected levels of cash, (iv) the risk that alternative or replacement
financing sources will not be available to us, (v) the risks associated with
market conditions for the senior living industry, (vi) the risk of adverse
changes in governmental reimbursement programs, including caps on certain
therapy service reimbursements, (vii) the risks associated with the inability
to
successfully integrate acquired communities and new managed communities into
our
operations, (viii) the risk that we will be unable to obtain liability
insurance in the future or that the costs associated with such insurance or
related losses (including the costs of deductibles) will be prohibitive,
(vix) the likelihood of further and tighter governmental regulation, (x)
the risks and uncertainties associated with complying with new and evolving
standards of corporate governance and regulatory requirements, as well as the
costs and management time associated with these activities, (xi) the risk of
rising interest rates, (xii) the risk that we will be unable to
successfully complete and fill up certain community expansions or new
developments, and (xiii) the risks and uncertainties set forth under
the caption “Risk Factors” in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2005 and our other filings with the Securities and Exchange
Commission.
Should
one or more of those risks materialize, actual results could differ materially
from those forecasted or expected. Although we believe 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 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 us or any other person that our
forecasts, expectations, objectives or plans will be achieved. We undertake
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.
Disclosure
About Interest Rate Risk We
are
subject to market risk from exposure to changes in interest rates based on
our
financing, investing, and cash management activities. We utilize a balanced
mix
of debt maturities along with both fixed-rate and variable-rate debt to manage
our exposure to changes in interest rates. For
fixed-rate debt, changes in interest rates generally affect the fair market
value of the debt, but not income or cash flows. Conversely, for variable-rate
debt, changes in interest rates generally do not impact the fair market value
of
the debt, but do affect future income and cash flows. We generally cannot prepay
fixed-rate debt prior to maturity without penalty. Therefore, interest rate
risk
and changes in fair market value should not have a significant impact on the
fixed-rate debt until we are required to refinance such debt. We have $77.8
million of variable-rate debt at March 31, 2006 of which a one percentage point
increase in the market interest rate would result in an increase in interest
expense for the coming year of approximately $0.8 million. A one percentage
point decrease in the market interest rate would result in a decrease in
interest expense for the coming year of approximately $0.8 million.
In
addition, we have entered into an interest rate swap agreement with a major
financial institution to manage our exposure to fluctuations in interest rates.
The swap involves the receipt of a fixed rate interest payment in exchange
for
the payment of a variable rate interest payment without exchanging the notional
principal amount. Under the agreement, we receive a fixed rate of 6.87% on
the
$32.7 million of debt and pay a floating rate stated by the swap agreement
based
upon LIBOR and a foreign currency index with a maximum rate of 8.12%.
We
do not
expect changes in interest rates to have a material effect on income or cash
flows in 2006, since 73.9%
of our
debt has fixed rates. There can be no assurances, however, that interest rates
will not significantly change and increase our future debt service costs.
In
connection with the preparation of this Quarterly Report on Form 10-Q, our
Chief
Executive Officer and Chief Financial Officer reviewed and evaluated the
effectiveness of our disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this
quarterly report. Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and
procedures effectively and timely provide them with material information
relating to us and our consolidated subsidiaries required to be disclosed in
the
reports we file or submit under the Exchange Act.
Changes
in Internal Control Over Financial Reporting
There
were no changes in our internal control over financial reporting during the
quarter ended March 31, 2006 that materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.
Period
|
Total
Number of Shares (or Units) Purchased
|
Average
Price Paid per Share (or Unit)
|
Total
Number of Shares (or Units) Purchased as Part of Publicly Announced
Plans
or Programs
|
Maximum
Number (or Approximate Dollar Value) of Shares (or Units) that May
Yet Be
Purchased Under the Plans or Programs
|
January
1, 2006 to
January
31, 2006
|
—
|
|
|
|
February
1, 2006 to
February
28, 2006
|
|
|
|
|
March
1, 2006 to
March
31, 2006
|
24,486(1)
|
|
|
|
Total
|
24,486
|
|
|
|
(1)
On
March 31, 2006, the forfeiture restrictions on 93,999 shares of restricted
stock
awarded to certain employees of the Company lapsed. The Company withheld and
retired 24,486 of those shares to satisfy tax withholding requirements for
these
employees.
10.1 |
Credit
and Security Agreement dated as of February 28, 2006, between Cypress
Dallas, L.P. and Cypress Ft. Worth, L.P. collectively, as borrowers,
and
Merrill Lynch Capital, a division of Merrill Lynch Business Financial
Services, Inc., as Administrative Agent and as a
Lender
|
10.2 |
Credit
and Security Agreement dated as of February 28, 2006, between Cypress
Dallas, L.P. and Cypress Ft. Worth, L.P. collectively, as borrowers,
and
Merrill Lynch Capital, a division of Merrill Lynch Business Financial
Services, Inc., as Administrative Agent and as a
Lender
|
10.3 |
Amended
and Restated Limited Liability Company Agreement, dated February
28, 2006,
of Cypress Dallas & Ft. Worth JV, LLC, a Delaware limited liability
company, by and between Dallas & Fort Worth Senior Housing, LLC, a
Delaware limited liability company, and ARC Cypress, LLC, a Tennessee
limited liabilty company, as
members
|
10.4 |
Amended
and Restated Limited Liability Company Agreement of Cypress Arlington
& Leawood JV, LLC, a Delaware limited liability company, dated
February 28, 2006 by and between Arlington & Leawood Senior Housing,
LLC, a Delaware limited liability company, and ARC Cypress, LLC,
a
Tennessee limited liabilty company, as
members
|
10.5 |
Purchase
and Sale Agreement by and among Town Village Leawood,
LLC, Town Village Arlington, L.P., Town Village Dallas, L.P.,
and Town
Village Fort Worth, L.P., collectively as seller, and ARC Cypress
LLC, a
Tennessee limited liability company, as Purchaser, dated as of
February
28, 2006
|
10.6 |
Asset
Purchase Agreement, dated March 22, 2006, by and between Allen
Park Two,
Inc. and Allen Park Three, Inc., collectively as sellers and ARC
Sweet
Life Shawnee, LLC as Buyer
|
10.7 |
Asset
Purchase Agreement, dated March 17, 2006, by and among Westport
Holdings
Bradenton, Limited Partnership, a Delaware limited partnership,
Westport
Nursing Bradenton, L.L.C, a Florida limited liability company,
ARC
Bradenton Management, Inc., a Tennessee corporation, and Senior
Housing
Partners III, L.P., a Delaware limited
partnership
|
31.1 |
Certification
of W.E. Sheriff pursuant to Section 302 of the Sarbanes-Oxley Act
of
2002.
|
31.2 |
Certification
of Bryan D. Richardson pursuant to Section 302 of the Sarbanes-Oxley
Act
of 2002.
|
32.1 |
Certification
of W.E. Sheriff, Chief Executive Officer of American Retirement
Corporation, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
32.2 |
Certification
of Bryan D. Richardson, Chief Financial Officer of American Retirement
Corporation, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to
Section 906 of the Sarbanes-Oxley Act of
2002.
|
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: May
5,
2006 |
By: |
/s/ Bryan
D.
Richardson |
|
|
|
Bryan
D. Richardson
Executive Vice President - Finance and
Chief Financial Officer (Principal
Financial
and Accounting
Officer)
|