ARC Backs Out of Developing CCRCs and Back to Acquiring Them

It's starting to look like déjà vu all over again at American Retirement Corporation. Having just come off a disappointing year, the Nashville-based provider plans to get out of the development business and back to its roots in what some observers say it does best: acquiring and maintaining existing properties.

ARC announced the shift December 20 in a press release anticipating break-even earnings for the fourth quarter, excluding one-time charges, gains and increased general and administrative expenses. (Had those fees been included, losses would have been between $0.35 and $0.39 a share.) Even at break-even, the numbers fall far short of the $0.12-per-share earnings that had been expected. Final results are due in February.

The company attributes the weak performance to several factors, including a $2 million-plus shortfall in management fees resulting from lower-than-expected sales and higher-than-expected attrition at its Freedom Plaza and Freedom Square CCRCs in Peoria, Arizona, and Tampa, Florida.

Ross Roadman, ARC's senior vice-president of strategic planning, also cites a "major highway renovation" that disrupted traffic to its newly acquired Park Regency CCRC in Chandler, Arizona, and the fact that "a lot of assisted living product popped up" in Corpus Christi, Texas, where the company has a Homewood assisted living facility. Both properties are "doing well now," he adds.

Among other strategies, ARC plans to sell about half a dozen assisted living properties that fall outside the urban-hub communities it calls Senior Living networks. But perhaps its most significant move will be turning off the development spigot for good after it opens 14 new Homewood Residences within the next six months that are currently under construction.

"The only thing we'll pursue after those open is the expansion of large CCRCs," says Roadman, noting that ARC sees continuing care retirement communities as "not overbuilt, unlike assisted living." The company has identified Boston as a candidate for a new Senior Living network. Other than that, he says, "we're evaluating lots of different portfolios. We're waiting to see where the prices go."

The shift is seen as a smart move. Since its founding in 1978, ARC has "been very good at acquiring assets at attractive prices and keeping them at full stabilized occupancy," says James Kumpel, an analyst with Raymond James & Associates. Kumpel believes that in 1997, when ARC ramped up its development focus and became dependent on one-time development fees, "perhaps they strayed a little outside their strengths."

Acquiring and developing are "different animals," Kumpel adds. "When you're running a stable facility, you only have fill 20% of beds a year." And when even a few "significant" developments underperform, the effect can ripple throughout the company.

For his part, Roadman sees ARC's reborn acquisitions focus as "an indication of where the market is going." Not only is access to capital "much more difficult than it was even a year ago," but interest rates and construction costs have risen – the latter significantly. As a consequence, "we think there will be an oversupply, with opportunities to buy existing properties cheaper than we can build them."

Looking ahead, the challenge will be to keep those properties full. Douglas Simpson, an analyst with Merrill Lynch, believes ARC is on the right track. "When the company recognizes the problem, they can focus from the markets standpoint or the field level." Merrill Lynch considers ARC a long-term buy and is optimistic that move-in rates will accelerate in 2000.