Exclusive Interview With American Retirement Corp.

Steve Monroe, Editor of The SeniorCare Investor Interviews Bill Sheriff, CEO of American Retirement Corporation

Steve Monroe: You just completed a 3.45 million-share public offering priced at $26.60 per share, but a little over three years ago your stock was trading below $2.00 per share. That’s got to be the industry turnaround story of the decade. Did you ever think this scenario would be possible during the summer of 2002?

Bill Sheriff: Quite frankly, we had absolute confidence that we would work through our issues, though the pace has been faster and stronger than I might have predicted. With 27 years of industry experience, we knew that industry fundamentals would swing back into balance. We also felt strongly about the value we had built in our Retirement Centers and, while it was more difficult to monetize because of the capital markets’ flight, we knew that these values would ultimately be recognized.

SM: Going back to that period, when some bondholders were pushing for a bankruptcy filing, what did you tell employees?

BS: We actually didn’t have anyone – lenders, shareholders – pushing for bankruptcy. There were others willing to offer that comment, but it was all rumor. We did communicate with our employees, who expressed their confidence in the management team and the platform we all had built. We did make some tough decisions and selected a refinancing option (and we had options with some large equity firms willing to pump in additional equity) that looked excessively burdensome. However, we believed in our ability to execute our plan and, in fact, retired the expensive debt several years earlier. It would have been easy for the management team to ride off into the sunset with an equity firm, but this company was built on doing the right thing, not the easy thing. With our belief in our employees and community values, we felt it would have been a failure of our fiduciary duties not to try a refinancing plan that left the existing shareholders in a position to benefit from the expected turnaround.

SM:What was the biggest reason for the financial problems back then?

BS: We did not have enough strength in our balance sheet to withstand the downturn. We erred by issuing a large amount convertible debentures with a five year term, rather than straight equity. We also hadn’t anticipated how quickly the capital markets would retreat from both assisted living and CCRCs – leaving us to scramble to replace the debentures as they matured without having converted.

SM: If you had to do it all over again, what one thing would you have changed?

BS: Again, it would have been to issue straight equity in 1997, rather than converts. We do not regret our modest assisted living development program. It is an important part of our business and the industry.

SM: At the end of 2001 your 34 freestanding ALFs were at 65% occupancy, and by the end of the third quarter last year they were 91% with an average facility margin of 30.9%. What are you expecting them to be by the end of 2006?

BS: At the end of 2001, we were opening up the last of our AL buildings. We have made steady progress since then. We have been consistently telling the investment community that we expect the assisted living portfolio to operate at 93% to 94% occupancy and expect to get there by the end of 2006. We have shown over the last three years the considerable leverage of filling the buildings beyond breakeven. We also have brought to nearly all of our buildings a significant amount of added margin dollars through our ancillary services programs. You will see us continue to produce some of the highest operating margin dollars per unit of anyone in the industry. The name of the game is return, not margin percent, and we will continue to increase the margin dollars per unit.

SM: Will you now grow the freestanding ALF side of the business and why (or why not)?

BS: Yes, we will continue to grow the AL side of our business as witnessed by our recent Epoch transaction, which added eight additional AL communities to our portfolio. Over the last 10 years, our strategy has been to build a local market critical mass in deep and growing markets. The free-standing ALs are an important part of our platform that strives to create a continuum of services within a market. And it is working. It helps to keep our communities full, to build ancillary revenues and to keep overheads low.

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