American Retirement Corporation

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American Retirement Corporation

111 Westwood Place, Suite 402
Brentwood, Tennessee 37027
U.S.A.
Telephone: (615) 221-2250
Fax: (615) 221-2269
Web site: http://www.arclp.com

Public Company
Incorporated: 1997Employees: 7,600
Sales: $206.1 million (2000)
Stock Exchanges: New York
Ticker Symbol: ACR
NAIC: 623311 Continuing Care Retirement Communities

American Retirement Corporation (ARC) owns, leases, and manages more than 60 luxury and upscale senior living communities in 15 states. With resident capacity at more than 14,000 units, ARC provides independent living, assisted-living, skilled nursing, and memory-enhanced (Alzheimer’s care) services at its retirement centers and freestanding assisted-living centers. Approximately 95 percent of ARC’s revenues originate from private pay sources.

Focusing on the Dignity of Residents: 1978

Jack C. Massey, Dr. Thomas F1. Frist, Sr., and a group of Nashville businessmen began what would become American Retirement Corporation in 1978 to provide consulting and management services to retirement communities. Frist and Massey, also cofounders of Hospital Corporation of America, wanted to create environments for senior citizens that offered quality of life by preserving personal freedom, independence, privacy, and dignity in years of declining abilities and health. They emphasized wellness care, such as basic health screening services, exercise classes, and social activities, for emotional and physical well-being.

The company offered marketing, management, and development assistance, and direct management of retirement community properties, seeking customers nationwide. Property management involved administration; human resources; marketing; and resident care, including nursing and nutritional services. The property owner paid for the expense of operations and ARC received a monthly fee for managing the property, either as a percentage of revenues or as a fixed sum, under a three- to five-year contract. Among the properties ARC managed during this period were Burcham Hills in East Lansing, Michigan, begun in 1978; and Williamsburg Landing in Williamsburg, Virginia, begun in 1985.

In the 1990s, ARC began to purchase or lease properties, bearing the full expense of operating and managing the facilities. ARC leased Trinity Towers in Corpus Christi, Texas, in 1990, and Holley Court Terrace in Oak Park, Illinois, in 1993. In 1992 the company purchased the Broadway Plaza in Cityview, near Fort Worth, and Summit at Westlake Hills in Austin, paying $37 million for the two retirement communities. In 1994 the company acquired Santa Catalina Villas in Tucson; Parkplace in Denver; Westlake Village in Cleveland; and The Hampton at Post Oak in Houston. In addition, in 1992 ARC merged with National Retirement Corporation, a senior living management firm.

ARC focused on upmarket and luxury retirement housing, with more than 90 percent of its resident care revenues originating from private pay sources, rather than Medicare or Medicaid. These life care communities incorporated interesting architectural elements and elegant surroundings in traditional or contemporary interior designs. Although each independent living unit included a kitchen for home cooking, residents had the option of taking meals in the dining room amidst the ambiance of a fine restaurant, replete with tablecloths and cloth napkins. Intimate social spaces at many properties included a lobby, lounge, card room, and billiard room, and were designed to encourage interaction among residents, preventing the isolation that had formerly plagued the elderly. Interior design of these properties accounted for the effects of aging, for example, with handrails disguised as moldings along the hallways and dining room chairs with arms that patrons used to steady themselves when sitting or rising. The homelike atmosphere of the independent living facilities extended to assisted-living and special care facilities. ARC marketing was directed to seniors 75 years of age and older.

Until 1995 ARC actually operated as several independent companies. That year the American Retirement Communities Limited Partnership (ARCLP) formed in preparation for further development of the company, including an initial public offering of stock. Revenues of the combined entities reached $61 million in 1995, garnering a net income of $2.1 million. Revenues represented an aggregate annual growth rate of 43 percent since 1992, when the companies recorded combined revenues of $17.8 million and a combined loss of $500,000. Revenues derived primarily from operations at leased and owned properties, with management fees and revenues from seven home healthcare agencies contributing to the balance.

Plans for future growth involved development of freestanding, assisted-living facilities and expansion of existing properties into continuing care communities, providing appropriate care for aging residents, such as assisted-living units, memory-enhanced units, and skilled nursing units. New property acquisitions at this time included the Heritage Club in Denver and Richmond Place in Lexington, Kentucky in 1995 and the Carriage Clubs of Charlotte and Jacksonville in 1996. In May 1997 ARCLP purchased the Remington in Corpus Christi and leased the Remington in nearby Victoria. The company changed the name of the Remington properties to its new brand, Homewood Residence.

By the time of the initial public offering of stock, the company owned ten properties, managed seven, and leased two, spread across 12 states, maintaining an aggregate resident capacity of 5,500 units. Development projects involved 19 freestanding, assisted-living facilities with 55 to 110 units, serving a total of 1,684 residents, and eight expansion facilities serving 702 residents.

Funding Ambitious Development Plans: Late 1990s

In preparation for the public offering American Retirement Corporation was formed to purchase the assets of ARCLP in a stock transaction. The June offering of 3.1 million shares of stock at $14 per share raised $43.4 million to fund the purchase of healthcare agencies, expansion projects, and development of assisted-living facilities. ARC completed two acquisitions shortly after the IPO, that of an assisted-living center in Tarpon Springs, Florida, renamed Homewood at Tarpon Springs, and a retirement center in Charlotte, Wilora Lake Lodge. The latter included adjacent land and zoning rights to build a 40-unit assisted-living center.

A new strategy ARC employed in its growth involved leasehold agreements. The agreements gave ARC an operating lease, from four to 20 years in duration, with an option to renew the lease or to purchase the property when the lease expired. In some cases ARC obtained the right of first refusal to purchase a property or to purchase a property at a predetermined formula based on occupancy and revenues. Special-purpose entities were formed to purchase a property, which ARC then managed. John Morris, a director of the company, and others formed these companies. The company initiated its first leasehold agreement in October with the lease of the Imperial Plaza, a 1,000-resident facility in Richmond, Virginia. In the spring of 1998 ARC began leasing operations at the Rossmoor Regency, a retirement community in Laguna Hills, California, and the Bahia Oaks Lodge, an assisted-living center in Sarasota, Florida, both under five-year leasehold agreements. An operating lease for the Park Regency in Chandler, Arizona, which commenced in September, included rights to expand on land adjacent to the facility. ARC opened two company-owned properties in 1998, Village at Homewood in Lady Lake, Florida, a joint venture, and Homewood at Deanne Hill in Knoxville.

In July 1998 ARC acquired Freedom Group Inc., which owned and managed large, luxury senior housing properties. The transaction involved $23.2 million in cash, $9.4 million in assumed debt, $14.9 million in stock, and $5.5 million for two property management agreements with purchase options. ARC obtained three new communities with a total resident capacity of 1,590 at Freedom Plaza Sun City Center in Florida, Freedom Village Holland in Michigan, and Lake Seminole Square in Florida. Three managed communities served a total of 2,100 resident units at Freedom Plaza Arizona in Phoenix, Freedom Square in Seminole Florida, and Glenview at Pelican Bay in Naples, Florida.

A secondary offering of stock, 4.5 million shares at $16 per share, net $64.9 million in July 1998, provided funds for continued development. At the end of 1998 ARC development projects involved 35 freestanding, assisted-living facilities to serve 3,200 residents and six expansion projects to serve 500 residents. In November ARC became an equity partner in LifeMed LLC, a joint venture with Omnicare, a geriatric pharmaceuticals firm, and LifeTrust America, a well-care services provider. LifeMed attended to the special needs for pharmaceuticals at assisted-living residences. The company offered consultation on medication management and distribution and provided health and wellness services at senior life care communities. ARC discontinued its poorly performing home healthcare agencies in 1998.

Company Perspectives:

American Retirement Corporation is committed to the principle that well-planned and well-managed senior living communities offer the best settings within which to meet the physical, mental and social needs of our residents and their families. As the senior living industry evolves, ARC is committed to playing a significant and socially responsible role in its development grounded in providing family values and involvement .

In February 1999 ARC announced its intention to develop Senior Living Networks offering continuing care facilities in a metropolitan region. The networks included facilities with independent living units, various levels of assisted-living care, and skilled nursing care. The services were to be available at one site or through nearby locations, preferably within a 30-minute to 45-minute driving radius. Potentially, continuing care increased a resident’s stay with ARC and improved occupancy rates, yet it eased the transition of relocation during times of declining abilities and health. ARC hoped to attain economies of scale and market penetration while providing excellent service to the elderly and their families.

Facilities already existed for network development in Denver, Houston, Tampa/St. Petersburg, Cleveland, and Phoenix. In February 1999 ARC commenced operations through a leasehold agreement with the Oakhurst Towers in Denver, adding 171 independent living apartments to that region’s Senior Living Network. ARC acquired the leasehold for a continuing care facility in St. Petersburg, operated as Homewood at Bay Pines, and completed an assisted-living facility project in Safety Harbor, managed as Homewood at Countryside. The two facilities brought the Tampa/St. Petersburg network capacity to more than 2,200 residents at seven communities.

Four ARC-developed properties opened in the Houston area, assisted-living centers that operated under the brand name The Hampton. ARC operated The Hampton at Cypress Station and The Hampton at Spring Shadows under lease/purchase option agreements. The Hampton properties at Shadowlake and at Willowbrook were managed communities, from which ARC received a percentage of gross revenues, but took responsibility for losses of more than a certain amount. Other new facilities included the Freedom Plaza Health Center, a skilled nursing center adjacent to a managed property in Phoenix, and an assisted-living facility, Homewood at Sun City Center, a joint venture in Florida. The company also began to develop the Heritage Club brand in Denver, adding two managed assisted-living centers in the area’s Senior Living Network, for a total of more than 1,100 resident units at six communities.

Two retirement centers developed by ARC in Alabama initiated a new network in urban markets there. Somerby at Jones Farm in Hunstville and Somerby at University Park in Birmingham provided 258 independent living units, 153 assisted-living units, and 15 memory-enhanced units. The management agreement provided ARC with the option to purchase the properties when occupancy had stabilized.

Cautious New Development amid Changing Market: Late 1990s to Early 2000s

In late 1999 ARC decided to postpone certain development projects, as existing spaces remained open in an overbuilt industry. Higher staffing, insurance, and other expenses influenced the decision. By December ARC made definite arrangements to halt certain projects as high construction costs made acquisition a more attractive growth strategy. ARC halted work on all freestanding, assisted-living projects in the pre-construction or early development stage and delayed development of two expansion projects. The company also sought to focus on existing Senior Living Networks by divesting properties where a significant network had not been established already.

The termination of these projects resulted in a $12.5 million write-down in the last quarter of fiscal 1999. The company reported revenues of $175.3 million in 1999, a 23 percent increase over 1998. Operating income, at $15.1 million compared with $29 million in 1998, declined due to lower management fees, slower new unit sales, and vacancies at Freedom Square and Freedom Plaza in Peoria, Arizona. ARC finished 1999 with net income of $2.1 million, compared with $6.9 million in 1998.

Several construction projects came to completion in 2000. ARC completed two joint venture projects, Homewood at Flint in Michigan, and Homewood at Brookmont Terrace in Nashville, the latter being the first property that the company had ever operated in its home city (Brentwood being a suburb of Nashville). Leasehold properties opened under the Homewood brand name in Boca Raton and Naples, Florida, and in Fort Worth, Austin, and San Antonio, Texas. Two Hampton properties opened in Houston, bringing the total capacity for that Senior Living Network to 766 residents, including 451 assisted-living units. New managed properties provided assisted-living and memory-enhanced services under the Homewood brand in Greenville, South Carolina; Cleveland; Austin; and in Boynton Beach, Delray Beach, and Coconut Creek, Florida. Pursuant to its acquisition agreement with the Freedom Group, ARC purchased Freedom Village Brandywine in Glenmore, Pennsylvania. ARC did start a new development project with the March acquisition of 12.8 acres of land in Belmont, Massachusetts, adjacent to McLean Hospital. ARC planned to construct a continuing care retirement center with 350 independent living units and 136 assisted-living, skilled nursing, and memory-enhanced units.

At the end of 2000 ARC counted 62 properties, which it owned, leased, or managed, with total capacity for 14,506 residents. ARC maintained a stabilized occupancy at owned and leased properties open for at least a year at 92 percent, while total occupancy declined to 83 percent, compared with 86 percent the previous year. Market overcapacity in assisted living facilities resulted in longer time to lease new space; ARC nonetheless added nearly 800 new assisted-living resident units in 2000. While revenues increased to $206.1 million, operating and interest expenses increased as well, leaving ARC with a net loss of $5.9 million.

Key Dates:

1978:: Jack Massey, Thomas Frist, Sr., and a group of Nashville businessmen launch a consulting and management service for retirement communities.
1990:: Company begins to lease and manage existing retirement communities.
1992:: Company purchases first property.
1995:: Separate operating entities are combined into American Retirement Communities Limited Partnership.
1997:: American Retirement Corporation (ARC) is formed prior to first public offering of stock.
1999:: ARC begins to develop Senior Living Networks as regional continuing care services.
2000:: ARC adds almost 800 resident units at freestanding assisted-living centers.

ARC sought to counter losses by halting operations in areas that did not fit with a Senior Living Network. In 2000 the company leased certain properties, including an assisted-living facility in Marietta, Georgia, to third parties. ARC also sold a retirement center, Westlake Village in Cleveland, and leased the property back from the buyer, for $26 million in deferred income. In June 2001 ARC sold its leasehold for the Rossmoor Regency in California for $21.5 million as projects related to developing a Senior Living Network in the area had been terminated.