Alerislife Inc (ALR) 2005 Q2 法說會逐字稿

Good day and welcome to the Five Star Quality Care second-quarter 2005 earnings results conference call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the manager of Investor Relations, Mr. Tim Bonang. Please go ahead, sir.

Thank you and good morning, everyone. Joining me on today's call are Evrett Benton, President and Chief Executive Officer, and Bruce Mackey, Chief Financial Officer. The agenda for today's call includes the presentation by management, followed by a question-and-answer session.

Before we begin today's call, I would like to state that today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and federal securities laws. These forward-looking statements are based on Five Star's present beliefs and expectations as of today, August 11, 2005. The Company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call other than through filings with the Securities and Exchange Commission regarding this reporting period. Actual results may differ materially from those projected in these forward-looking statements.

Additional information concerning factors that could cause those differences is contained in our Forms 10-K and 10-Q filed with the Securities and Exchange Commission. Investors are cautioned not to place undue reliance upon any forward-looking statements.

And with that, I would like to turn the call over to Evrett Benton.

Thank you, Tim, and welcome to everyone that is joining us for today's conference call. Five Star's second quarter continued the solid trends that we've established over the past 18 months. By maintaining our focus on occupancy levels, keeping an eye on costs and with judicious acquisitions, we've achieved our sixth consecutive quarter of profitability.

This morning, as on last quarter's call, I would like to briefly discuss our financial results and give you some color on our growth initiatives, our occupancy, rental rates, labor expenses, EBITDA and, finally, our pharmacy and rehabilitation businesses. Bruce will then give you some more detail on the numbers before we take your questions.

Let's start with earnings. This morning, we reported basic and diluted net income per share of $0.10 in the second quarter of 2005 as compared with $0.11 in the same period last year. The primary reason for this decline in net income per share is the integration costs associated with our acquisitions of independent and assisted living communities and pharmacies acquired in 2004 and 2005.

At the end of the second quarter of 2005, we had 50 more communities and approximately 3400 more resident capacity than we had at the end of the second quarter of 2004. That's an increase of over 50% in the number of communities which we operate. In one year, we have become a dramatically larger company.

As for that matter, there is no question that we are a different company than we were two years ago. At that time, out of necessity, we laid a foundation built on cost control which continues to permeate everything we do today. We have also been able to layer on some real year-over-year growth in operating income by applying our efforts to increasing occupancy levels.

While dramatically growing the size of our Company, we've delivered positive results during the past year. Our trailing four-quarter net income per share is $0.41. We believe this compares favorably within our peer group.

We remain very optimistic about the long-term growth of Five Star. However, you should not expect net income to increase in a consistent manner. Specifically, as we continue our aggressive growth through acquisitions, there may be some short-term integration issues which will affect our operating results. This is largely what occurred in the second quarter of 2005. In the longer term, we expect to build on our historic track record of delivering increased value to our shareholders.

Now, let's review our growth activities in the quarter. During the second quarter, we closed on two acquisitions. The first was with Gordon Health Ventures for six assisted living communities in Western Pennsylvania for a purchase price of $58 million. These communities have a resident license capacity of 654. The occupancy at these facilities on the date of closing was 85%, and 100% of the revenues at these communities are paid from residents' private resources.

Unfortunately, shortly after the closing on this acquisition, the occupancy dropped to 80%. However, since taking over these communities, we have stabilized the operations and occupancy has started to slowly increase. As of last week, occupancy at these communities was 83%. Because of these operational difficulties, we believe it may take some time to return these communities to their historic occupancy levels. We still plan, however, on this acquisition being accretive to net income in late 2005.

The second acquisition was for Heartland Pharmacy located in Omaha, Nebraska. Heartland provides institutional pharmacy services to approximately 1900 residents from 44 senior care facilities and operates a mail-order pharmacy business serving approximately 25,000 customers located in 38 states. This new pharmacy has an annual revenue run rate of well over $15 million, and with this acquisition, our pharmacy business is on a combined $40 million annual revenue run rate.

We have additional pharmacy acquisitions on our radar in areas of the country where we have critical mass with our communities and hope to be able to add capacity to this growing piece of our business. In addition, we also continue to source and evaluate several independent and assisted living acquisition opportunities. I'd also like to point out that we took a blended approach to financing these acquisitions, which Bruce will talk about in his presentation.

Now, let's turn to occupancy. Overall occupancy in the second quarter was 90%, which is an increase over the 89% occupancy we reported in the second quarter of 2004. This is level sequentially with the 90% we reported in the first quarter of 2005.

I would like to provide some additional color on the second-quarter occupancy. Even though our occupancy rate seemed to remain constant for our first-quarter results, we're very pleased with our performance during the quarter. At one point during the early part of the quarter, occupancy had dropped a full percentage point because of an unusually large number of discharges, the vast majority of which were deaths. As an example of the effectiveness of our operations, we were able to recognize this trend and quickly make the necessary adjustments to bring the occupancy back to their prior levels in a short period of time. Furthermore, this 90% occupancy rate for the second quarter includes the results of owning the six Gordon properties, where occupancy dropped soon after the closing of the acquisition in early June.

In other words, occupancy in our other communities continues to improve. For example, on a same-store basis, for those communities we have operated continuously since April 1, 2004, occupancy has increased to 90% in the second quarter of 2005 from 89% in the second quarter of 2004.

Now, let's take a minute and review some trends in other operating statistics. The average daily rate per resident in the second quarter of 2005 decreased to $126 from $133 in the second quarter of 2004. The reason for our overall average rate daily rate decrease was because we acquired more independent and assisted living communities that have a lesser average daily rate than do skilled nursing units.

As I mentioned last quarter, however, we believe that the same-store sales average daily rate is the more relevant metric. On a same-store basis, the average rate has increased 3% to $137 in the second quarter of 2005 from $133 in the second quarter of 2004. The percentage of our revenues that come from residents' private resources was 62% in the second quarter, which is a 5% increase over the second quarter of 2004.

While we have generally diminished our reliance on Medicare and Medicaid since our inception, we recently received some good news when it was announced that the anticipated Medicare rate cuts will actually be a 3% increase in rates in the fourth quarter. As always, we are reviewing Medicaid rates on a state-by-state basis, but as we've said before, we think that there will be a slight overall increase in rates. For example, Colorado, Nebraska, California and Connecticut have already announced rate increases, while Michigan and Georgia have implemented slight decreases.

Moving onto labor costs, labor is by far our biggest expense, equal to more than 50% of our revenues. We are continuing to do a good job of keeping these costs down. In fact, labor costs as a percent of revenues have declined 160 basis points from 53.1% to 51.7% between the second quarters of 2004 and 2005.

Now let's review our results from an EBITDA perspective. Through a combination of revenue growth and cost control, EBITDA more than doubled in the second quarter, to $3.9 million from $1.7 million in the second quarter of 2004. That's so good that I want to say it again. We more than doubled EBITDA in the second quarter to $3.9 million compared with the prior year.

I would now like to touch briefly on our pharmacy and rehabilitation businesses. Revenues in our pharmacy business increased 149% to $7.1 million in the second quarter of 2005 compared to the second quarter of 2004. In addition, our operating margin for our pharmacy business increased to almost 10% in the second quarter, compared to 4.4% in the first quarter of 2005.

With the Heartland Pharmacy acquisition in June, we now own three pharmacies, one in Wisconsin and two in Nebraska. We've transitioned 14 of our planned 26 communities over to our pharmacies as of the end of the second quarter. We are able to roll these communities over to our pharmacies at a rate of about one or two per month.

As we've previously discussed, we've started putting outpatient rehabilitation services in our independent and assisted living communities. At the present, nine of our independent and assisted living communities have our Company's rehabilitation services on site. By the end of the year, we plan on opening outpatient rehabilitation service in approximately 10 more of these independent and assisted living communities. We've targeted approximately 40 total communities where we think the introduction of outpatient rehabilitation services makes sense.

There are three benefits to providing these outpatient rehabilitation services. First, each is a profit center on its own. Second, it's a wonderful selling point for potential residents because it's another level of service that many of our local competitors really don't have. And third, it promotes the well-being of our existing residents and helps them stay in our communities longer.

I would now like to turn the time over to Bruce Mackey, our Chief Financial Officer, who will discuss our financial results in more detail. Bruce?

Great. Thanks, Evrett. I would like to review the second-quarter numbers. Our net revenues from residents were 179.1 million for the second quarter, and increased by 19% when compared to the second quarter of 2004. This increase in revenues from residents is due primarily to the 47 LTA communities we acquired in November of 2004, the six Gordon communities we acquired in June 2005, higher per diem charges to residents and a 1% increase in occupancy.

I would also note that same-store net revenues from residents for those communities which we have operated continuously since April 1, 2004, have increased by 4%, due primarily to 3% higher per diem charges to residents and a 1% increase in occupancy.

Moving onto expenses, wages and benefits increased by 16% in the second quarter to 92.7 million from the second quarter of 2004. This increase in the second quarter is primarily due to the 47 LTA communities we acquired in November 2004, the six Gordon communities we acquired in June 2005 and wage increases.

Other operating expenses increased by 18% in the second quarter to 46.5 million as compared to the same period in 2004. This increase is primarily a result of the 47 LTA communities we acquired in November 2004, the six Gordon communities we acquired in June 2005 and increased charges from third parties. As a percent of revenue, other operating expenses have actually decreased slightly year-over-year.

The management fee to Sunrise rose by 22% in the second quarter of 2005 to 5.6 million from 4.6 million in the same period a year ago. This expense increased predominantly because of the increased revenues of these communities and a contractual fee increase in our management agreement with Sunrise.

Rent expense during the second quarter of 2005 for the communities that we leased increased by 20% to 24.6 million from the second quarter of 2004. Rent expense increased due to the addition of communities that we began to lease in 2004 and 2005 and our payment of additional rent for capital improvements, which had been funded by Senior Housing Properties Trust, since January 1, 2004.

In connection with our June acquisition of the six assisted living communities from Gordon, Five Star entered into a sale leaseback transaction with senior housing for four assisted living communities with 299 living units which we previously owned. The sale leaseback was for 24 million and requires initial rent of 180,000 per month or 9% per annum of the purchase price. We financed the balance of the 58 million purchase price by entering into a first mortgage line of credit with senior housing secured by the six Gordon communities and drew 10 million from our recently expanded revolving credit facility.

G&A expense for the second quarter of 2005 increased by 35% to 6.5 million from the year-ago period. The increase in G&A in 2005 is primarily due to costs resulting from our expanded operations as a result of the LTA acquisition in November 2004, integration costs associated with our acquisition of those communities, as well as increased audit and professional service fees attributable to Sarbanes-Oxley 404 compliance. As some of you may not know, Five Star is incurring additional costs for Sarbanes-Oxley 404 compliance in 2005 rather than 2004 because we are a small-cap company. Nevertheless, G&A for the second quarter was still only 3.5% of total revenues.

Depreciation and amortization increased year-over-year by 146% to 2.1 million in the second quarter of 2005. The increase is primarily attributable to our purchase of furniture and fixtures related to the communities managed by Sunrise and our acquisition of 16 communities as part of the LTA acquisition in November 2004 and the six Gordon communities that we acquired in the Pittsburgh area during June 2005. Included in second-quarter amortization is a onetime charge of approximately 200,000 related to the early termination of our prior revolving credit facility. These factors contributed to operating income for the second quarter of 2005 of 1.8 million, which is an 89% increase over the second quarter of 2004.

Interest expense in the second quarter of 2005 increased to 899,000 from 98,000 in the second quarter of 2004. This was primarily due to the mortgages we assumed in connection with the LTA acquisition and the mortgages related to our June 2005 acquisition of the six Gordon communities.

Income per share from continuing operations for the second quarter was $0.10, compared with $0.13 in the second quarter of 2004. We are reporting net income per share of $0.10 in the second quarter of 2005, compared with net income per share of $0.11 a year ago. As Evrett mentioned, EBITDA increased 116% year-over-year to 3.9 million in the second quarter of 2005 from 1.7 million in the second quarter of 2004.

Now, moving onto the balance sheet and some more items of note. Total current assets at the end of the second quarter were 69.3 million or a decrease of 8.8% from the end of the year. Cash and cash equivalents decreased to 18.7 million, which was a 29% decreased from year-end. This decrease was primarily due to our acquisition of the Heartland Pharmacy in June 2005.

Accounts receivable at the end of the second quarter were 39.3 million. Our days-sales-outstanding remains an industry-leading 19 days. To put this figure into perspective, 38% of our revenues from the quarter ended June 30, 2005, were received from Medicare and Medicaid programs that generally pay 30 days in arrears.

Our property and equipment rose to 147.2 million at the end of the second quarter versus 95.2 million as of year-end 2004. This is primarily related to our acquisition of the six Gordon assisted living communities. As of today, we own 24 properties, five of which are unencumbered. The market value of our HUD-insured mortgage notes is 45.1 million. The cash interest costs on these notes has a weighted average rate of approximately 7% per year. Principal and interest is due monthly through varying dates ranging from 2032 to 2039. These mortgages are secured by nine of our communities and contains standard HUD covenants.

As I mentioned earlier, senior housing provided us with a 43.5 million first mortgage line of credit secured by the six assisted living communities that we acquired from Gordon during the second quarter. We borrowed 24 million when we closed the Gordon purchase and the balance may be drawn by us to finance future acquisitions or for other business purposes. The mortgage bears interest at 9% per annum and may be prepaid at any time before it expires on June 30, 2007.

As of the end of the quarter, we had 5.5 million outstanding on our revolving credit facility. As of today, August 11, 2005, we believe we are in compliance with all material covenants of our mortgages and the revolving credit facility.

To sum it up, we continue to deliver consistent financial results while increasing the financial strength of our Company. As of June 30, 2005, we had 18.7 million of cash, 13.1 million available on our revolving credit facility and 19.5 million available on a first mortgage line of credit with senior housing. We have a net worth of 99 million and own five independent and assisted living communities unencumbered with a gross book value of approximately 28 million.

That concludes our prepared remarks. Operator, we are now ready to take questions.

(Operator Instructions). Liam Burke, Ferris, Baker Watts.

I had a question on the pharmacy business. A., the margins got dramatically better sequentially. And can you give us a sense as to what -- are you at peak margins here or can you do better there? And then the second question, still on the pharmacy line, is you're looking for acquisitions. What territory makes the most sense for you, or are you looking at a bunch of different ones?

Okay, well, I heard about three different parts. I'm going to take some of it and ask Bruce if he will take some of it. As we've looked, these various acquisitions that we've been able to pull on have between 8 and 12% margins. It just depends from an EBITDA perspective, and it -- the way it works for us is because we are able to layer on communities which we have in the area, from our perspective, 9% is not at the height. There are a lot of operating synergies that we have to continue to bring about.

The reality is that we are still a very, very, very young company. We just acquired the largest in June, so obviously, we are putting into place the new Rescot software system, our operations and policies continue to work out, but as we've said, we are approaching a 40 million annual revenue run rate. That's pretty impressive from -- less than two years ago, we were at zero.

The first part you talked about, the difference between this quarter and the last quarter. Whenever you bring on these acquisitions, and we had just brought on our second acquisition at -- it was really the third or near the end of the third quarter of last year, but we saw a lot of changes in inventory, things that we needed to take care of, and we took care of those in the first quarter. And so that it was an aberration and probably artificially low 4.4% in the first quarter. 9 is probably more correct to where we are. But we see with these synergies and continuing acquisitions that we're going to be able to push it higher than that.

Bruce, do you want to talk about where we're looking and what might be from an optimum standpoint what we're looking for?

Yes. Liam, what we do is we target pharmacies in areas where we have a base of operations. I think areas that we are looking, just based on that, we're looking obviously in Colorado, we've got a lot of communities, and in the southeastern part of the United States -- Georgia, Alabama and the Carolinas would be another area, and in California. I think those are some of the areas that we are still targeting on our horizon. And then to add to a little bit of what Evrett said during his prepared remarks, we mentioned we have transitioned 14 of the 26 (multiple speakers) of these over; we still have 12 to go. We think that will add something to that as well.

Is the -- I mean, I know the competition for independent and assisted living is fairly stiff, and pricing can get tough. Are you seeing the same thing on pharmacy, or has the pricing still been within an acceptable limit for you?

Well, you've got to remember this is just a little bit different. There might be a dichotomy there with regard to skilled nursing facilities, and so in certain states, Medicaid is included in the rate or they will pay it separately, for the most part, and Medicare, they, in fact, Medicare, we have to pay for it. But in an assisted and independent community, especially with Part D, the new drug act that President Bush signed which goes into effect in January, those drugs are paid for by Medicare. And so what's going to be set are some intermediaries, if you will, contract providers that we'll work through, and we are already working with them right now. But we don't see any drop in the prices that we will be paid for the drugs which we provide for assisted and independent living.

Just -- I want to point out one thing, which is really an interesting fact, that you -- there are actually more scrips per resident in an assisted and independent living, or I should say than we find in our skilled nursing communities. There are a number of reasons for it, so when Bruce was pointing out that we're looking at in the Carolinas or the mid-Atlantic, we've actually targeted a couple, as I noted in my prepared remarks, that we're trying to work through. There's nothing that we can announce right now, and in the other portions of the United States, but really, we see that we're going to grow that part of it. We've got a significant number of communities in the mid-Atlantic seaboard area, and so I think that you will see us taking advantage of that opportunity. And really, when you say stiff competition, it doesn't apply just because of the things that I told you as far as how drugs are paid for.

(Operator Instructions). Carrie Montague.

Do you all have any comments on the underlying D&A run rate, given acquisitions, some of which occurred near the end of the quarter?

Could you repeat that question, please, Carrie?

Yes. Do you have any comment on the underlying D&A run rate, now that you've made some acquisitions towards the end of the quarter?

The G&A run rate?

Yes.

Yes, I think we're getting close to -- Q1 was definitely a lot higher because we had a lot more of those integration costs in there. You still have some of that as well with the Gordon acquisition; there's definitely some still flowing through there. I expect it to stabilize. And that all depends on what we do with future acquisitions, as well, but -- you know, Q3 into Q4.

Okay. And what about the tax rate for the balance of this year and going into next year?

The balance of this year, it will be consistent with what we've done in the first and second quarter. We're still going to utilize our net operating loss carryforwards, remainder of this year, and then going forward in 2005, depending on what's happening, we'll probably be at a blended tax rate of around 35% (multiple speakers)

2006.

In 2006.

Right.

Okay. And the last question is just basic outlook on the acquisition front.

You know what, let me -- my good colleague, Mr. Mackey, pointed out that Liam might have been asking about pharmacy prices. I bet that is the case, Liam, because obviously, you've got an understanding of pharmaceutical prices. So, Carrie, I'm going to use the time to just point that out as well, and then we will go onto the acquisition of communities.

Pharmacies -- we do see that there's been an increase in what people are asking for, predominantly on the carriers out there, and they are able to command or pay a higher price than perhaps we would be willing to pay. We have found, however, that smaller pharmacies where it's just much more difficult for them to integrate is a lot easier for us and we compete on that basis. It takes us longer just because they are smaller, but our multiples have been four and five times EBITDA, which, if you look at it after you layer in some other properties that we might be able to have contract with the pharmacy, is really darn right super. It really makes a lot of sense.

Let's go onto the frothy communities that we're trying to acquire. It seems that every month, we see lower cap rates being requested on these purchases or sales that people are trying to put out for independent and assisted living. We're still -- we source every one of the significant acquisitions that they are offered across the United States and we compete on every one of them. It's actually a pretty significant part of what we do in the rigors of our daily operations. We look at everything, we write it up, we see if we can make it fit, we make a bid on those that we think work, and then often just like in fishing, oftentimes you come up a little short, but many times, we are able to see something through and we continue to do that. We are sourcing right now and evaluating right now things that we believe that we will be able to bring in.

As to skilled nursing, just a brief point. We continue to see some skilled nursing opportunities as well. As you know, over the last couple of years, we've acquired nothing but independent and assisted living with private pay. It has to be a very stellar opportunity for us to look at something in the skilled nursing. But interestingly, the prices which are being charged for those as well continue to increase.

Overall, we find it harder to do deals, but we will continue to do deals. I think back to the trepidation of about a year ago that we were experiencing when we were about to sign a contract and announce the acquisition of the Life Trust America. It almost looks like a super bargain price at one year later, and so we are pretty pleased about that. We're going to continue to look at things that makes sense though, Carrie. Bruce, do you have any further comment on that?

No.

Michael Potter, Monarch Capital Group.

A couple of questions. Evrett, I'm getting the feeling that you are almost preparing us that going forward, due to the increase in pricing on the acquisition front, you are looking at acquisitions right now that may be dilutive at first in order to get I guess a better bargain on the acquisition. Is that the case? Are you also now considering acquisitions that would not be immediately accretive?

Absolutely not. We have always looked to things that work and not try to put something together that might be for some ego or trophy or something that might be too far in the future. There are always, however, integration concerns, and just a simple analogy, if you've ever seen a relay race, when one runner comes up with the baton and he will slow down. As the other runner is stopped, he reaches back to back to grab the baton. So there's always a little bit of a handoff slowdown, if you will, and that's what we're seeing in our -- in some of these.

I will point out very quickly to say that Life Trust America was a dramatic hit with regard to us just doing well immediately off the bat. We actually had a stable situation and we were able to increase our occupancy and move our systems and software in fairly quickly. But generally speaking, when I'm talking about some of these integration issues, that's just a normal thing, then. As to purchasing in the market, the reality is it's just frothy, and Michael, that's really all I'm trying to point out, that sourcing the best acquisitions is more difficult. But from our perspective, we're not going to mortgage the present day for something down in the future.

Bruce, any further on that?

No. I'll just echo what Evrett said. I mean, we are looking at a lot of really high-quality product right out there right now, but we haven't signed anything, and that's really an example why -- we're not going to bet the farm.

Do you anticipate that we will see another acquisition this year?

You know, it is like fishing. We've got our lure out there. And just look at our past and it's going to be the very best indicator. It's just I don't want to get too far out on a limb, but we are always and at present, as I said in my prepared remarks, we have sourced and are evaluating some deals. And so what have we done? Every year, I've been able to -- we've been able to put deals together and bring them to the table. I do not believe that we're going to deviate from our positive historical past.

On the occupancy rate, we held flat Q2 versus Q1 at 90%. Can you give us -- has it moved up any further since quarter-end?

That's a great question, because I realize that I probably tripped over a word when I was saying it. The fun thing was is that during the quarter, we had an unusually large number of deaths and dropped 1 percentage point. But if you look -- you say, well, boy, you guys seem to be flat. Our effectiveness was so stellar, I believe, that we literally just gutted it up, got down the road and moved us back to over 90% very quickly.

We look every day at these numbers, and there is -- when you've got 9000 residents that we operate, as well as the other properties that we have Sunrise operate for us, there's always going to be a little bit of volatility, and you know, you can bounce up and down 30 or 60 residents on a daily basis. But as I looked at it, we actually were slightly higher, if you looked at yesterday or the day before or last week, than we were at the end of the quarter. Slightly higher. So it's a positive thing.

And what do you have targeted for the second half of the year as far as occupancy rates? Do we have an internal goal?

Well, we have a lot of goals. We try to stress several very, very hard -- I don't want to get into that. You should know that we always press it. You get so close to this -- what is prognostication or what is telling people about the future? But if you are at 90%, we are slightly above 90%. We will always push. Ask all the great people in our -- when we hit a milestone, my next point is, hey, what's the next milestone? And that's what we do every single time on every metric that really is of some significance.

Bernard Noble, PA Partners.

Two quick questions. Any comments on Medicare/Medicaid rates going forward? And two, can you give us any guidance at all, rough guidance in terms of earnings and EBITDA going forward?

I'll take the first part of your question on the Medicare/Medicaid rates. As we said in the prepared remarks, we actually were quite pleased with the Medicare rates for the fourth quarter. Everyone was expecting a Medicare rate decrease. We didn't know what it was going to be, and it's going to be a 3% increase really effective October 1 of this year. Starting in January of this year, the system is going to kind of reset itself and how it's going to work, and we think that we're going to be well-poised to take advantage of that in terms of at least keeping flat that 3% rate that we're going to get in October. So, we think that's a positive.

On the Medicaid side, it's really a portfolio theory, as we like to say. Some states are going to go up and some states are going to go down, and some states will do nothing. We've had the State of Connecticut the last three years has really do nothing, and they're actually getting a rate increase this year, which is a pleasant surprise. But we've seen the predominant number of states that we operate in have gone up slightly. A few have gone down, as Evrett pointed out, and we've got one or two that are staying neutral. Overall, we think it's going to be a slight positive to the Company, and we're pleased with that.

Let me just add a little bit. Bernard, thank you for joining us on the call. We -- you know, what is that old saw? We really don't give guidance. It just is (multiple speakers)

I know.

Especially with regard to how we are -- and what I've said in our prepared remarks, it's always going to be -- we are always moving up. We're hitting on all cylinders; our operations right now are very, very good. Integration we do very well. Our sense is, as we've said, you know, we just -- on a very evenhanded foot, forward, forward, forward is always going well. But you know what? The reality is that it's just what I said, it's not necessarily consistent -- it's always going to have a -- it's going to be a little lumpy. And so to give guidance first, it just gets you in a trap, I believe. But second, it doesn't necessarily say what we are looking toward over -- when I say long-term, I don't mean five years or whatever. But the things that we're doing are bearing fruit and we really are operating these assets in a very, very high-level manner.

Bill Gordon, Gordon Capital.

Quick question. I'm a little confused. We purchased the Gordon facility, as you mentioned, in Pennsylvania, and it had an 85% occupancy rate. And shortly thereafter, it went down to 80. Can you shed a little light on what happened?

Yes. I think that there are two points that I will say and then maybe Bruce, if you want to add anything. First of all, this is one of the areas where we had an unusual number of deaths -- an unusual number of deaths. We dropped a large number of persons. But, and secondly, though, you've got to think that Mr. Gordon's operation was not holding together. People knew that he was selling. You had people that were worried about what was going on, and had a couple of his Chief Operating Officers left and went to a place and he actually picked up a couple of their very, very good marketing folks. A couple of the Executive Directors left. And so right about the time -- this thing was falling a little bit as we were coming into it.

When we first announced it, if you look back at our announcement for this acquisition in January, and when it was on the market and a couple of the industry writers out there pointed out that this was at 95% occupancy. By the time we closed, it was at 85% and it was dropping. You didn't have anybody in there doing any of the work. We rushed in one of our best Regional Directors. We also brought in one of our best marketing persons from another region, stabilized immediately, started acquiring folks or hiring folks to bring them in, and now we've started it moving back up.

We're very good at this. We're very good at this. We know what we're doing. These are excellent communities. A couple of them are really the type that you would put on the front of your -- any offering or 10-K. So, from our perspective, we still remain positive. It's just a point that that's how things happen. The passing of this baton was not as crisp as we would've liked it to be. And it was in part to things that we really couldn't control.

But we got the assets. We got it -- we started out at $63.5 million purchase price, and the purchase price was reduced to $58 million. As Tim Bonang likes to say, we used the money to buy Heartland Pharmacy. So overall, we're still very, very positive on these assets. We've gotten a hold of it. I've been down there an awful lot, and it's moving forward the way we want it to at this point.

Bruce, any--?

No, I was just really going to echo what you said. I think a lot of it is really passing that baton. We've seen that in some of our past acquisitions as well. LTA went very, very smoothly, but if you look at some of our acquisitions we did back in 2002, we really saw the same thing. I mean, when you pass that baton, when you go from one company to another, occupancy does tend to dip. Prior companies do tend to move out the best people in management in terms of the Executive Directors, the marketing people, and we need to get in there, find new people, stabilize the operations and then move up from there. So I think we're doing that right now.

Yes. We're doing a lot of fun stuff on some short-term concessions and things like that so that we can -- we know what we're doing in that area. This will be just fine.

Brian Wilkinson, Lewis Asset Management (ph).

You had a good quarter. I was just wondering when more of this might pass the bottom line. But most of my questions were answered. I was really sort of wondering about the occupancy drop-off with LTA, and going forward, what kind of gives you the visibility to say that these increases are coming and what the traction was within this quarter that has just begun. But you've pretty much answered those questions; if you have any further comments on that, you can go ahead.

No, no further comments, Brian. Just briefly, I just want to point out with LTA, we really didn't have that occupancy drop-off. I think you might have been referring to Gordon, and our latest acquisition in June 2005. LTA actually was I guess one of the few acquisitions we've done where we really -- things stabilized immediately and we just kind of -- that upward track seemed to keep going.

Yes, well, maybe I was confused because that -- because things haven't been accretive, I wasn't exactly sure whether it was coming from LTA or Gordon.

You bet. You bet. Appreciate that, though, Brian.

Chuck Lipson, CSL Associates.

I've seen this industry through long periods of time, and it always goes through a boom-bust type cycle. Right now, we're at market cap rates that are the lowest we've seen in some time, and people are going to get attracted to it and some buyouts coming. Why should I have great confidence now that the market cap rates are either going to go lower and that's where we should be acquiring properties? I know you can add different services and enhance the value there, but -- why -- what confidence -- why should I have great confidence now that we shouldn't be sellers rather than buyers of properties?

You know what, Chuck, I appreciate that, because I think that's a question that a lot of folks have to ask themselves. I'm going to let you guys decide on the industry, but let's look at us as a company. In every area, and obviously I'm going to brag and obviously I am going to be biased, but in every area, we have proven to truly be five-star. We really know how to acquire things. From my background to the folks that brought me on on our -- on the Board of Directors to the type of people that we've got here who can source and review and analyze, we don't need to go outside. We've got all that capability in here.

So we really do know what we're doing with regard to acquiring things. I, in another life, built a pharmacy of $300 million, an institutional pharmacy with revenues of $300 million. I know how to do that. I was on the executive committee of a company that controlled 40,000 units, and so we've got some of the finest operating folks around. Our rehabilitation services division really is doing a crackerjack job. We've got a little bitty peanut of a company that we've started out, but we've got our whole Part B company that -- our work that goes on in our existing skilled nursing communities. We know what we're doing with regard to rates. We know how to get out there and do that.

Clinically, clinically, we add a part that others in the assisted and independent industry really don't have. We are seeing more and more that people are coming in at a higher age rate with some significant needs when they come through the door as opposed to might have not have been the case 10 years ago. So if you were just a developer of real estate, you're not going to necessarily be able to offer the types of services that we've got.

So one, we know what we're doing in acquiring. Two, we really are a very good operator. Three, we have access to capital by virtue of our -- just where we are now. The wonderful points that Bruce made at the very end, we're very, very strong and we continue to gather strength. And we have a solid relationship with Senior Housing Properties Trust, the REIT from which we were spawned.

So, from my perspective if you're looking at it, you throw in with us because I think that you will see that our multiples, if you will, are compared with other types of companies -- I think that you are correct, Brian, are very, very low, and I think that we're going to see that we as just the operator and the acquirer that we are, we're going to continue to grow strength. We're the fifth-largest operator of assisted and independent living communities. So, Chuck, from my perspective, we are seeing that we're moving this in the right direction. I hope that wasn't too lengthy, but I hope that got some (multiple speakers)

No, it did. I mean, the market is obviously disappointed today with the results. It's down about 7%, the stock, and had been up strongly. So there seems to be a disconnect. We don't have quite the coverage or the ability to spread the message that we are a cheap stock. Sometimes, you know, we've had the discussion before, why do we buy stock back when it was in the sixes rather than acquire properties? If we are such a low multiple stock, why not buy our own currency, which we know best? Because when we go outside, like with this Gordon facility, it seems that there were certain things that happened that I guess were beyond your ability to foresee, but that turned out to be somewhat of a disappointment for the quarter. And I don't know, sometimes I -- having been through this industry for quite some time, it seems that there's a time to buy and there's a time to manage the portfolio, and I see you guys are doing a great job in managing the portfolio, but not wanting to be too aggressive on the acquisition front here.

Bruce, you have any thoughts?

No, I mean (multiple speakers)

Because in the pharmacy area, I think you do a great job, and in the rehab area -- those are great services to layer on.

I appreciate your remarks. Maybe a couple of points. Historically, stock buybacks really don't work in the long term, and from our perspective, we're a forward-looking, growing company. We're not going to retrench. When you use a point or the word disappointed, we really never gave guidance. We believe that everything that we've said is going to come about, and we continue to show strength, which -- compare us to others in the industry, in our sector, and you will see that we continue to perform above average in that area.

There are always going to be things that we look to. I think there are several things that Bruce -- just look at Bruce's remarks with regard to, you know, whether it was the early extinguishment of the line of credit, the integration things, many other points -- just parse through the things that Bruce said -- the increase in the Sarbanes-Oxley cost that hit us this year, and you know, just whenever you are rolling out and when you birth a baby, if you will, when you increase by 50% -- 50% -- in your operations, it takes a little bit. You've got to change some diapers and get things going.

But on the long term, it's pretty impressive, that massive -- we had a wonderful opportunity of getting some more shareholders in. We've had a wonderful opportunity of getting a lot more communities to operate. We're spreading more pharmacy work and now putting into play this rehabilitation services. So things I think are very good. It's just that there shouldn't be disappointment, really, but I recognize that the market has different ways of looking at it. We never said that we would have X or Y. But we continue to do what we say we're going to do, and I know that it will bear fruit.

Keep up the good work.

Thank you. At this time, I would like to turn the call over to Evrett Benton for closing remarks.

Well, I could go through a long soliloquy, but it's obvious that we just want to thank you all for joining us on this second-quarter conference call. We look forward to speaking to you again on our third-quarter conference call, I think about the middle of November. So, thank you all very, very much. Bye-bye.

This concludes today's conference. You may now disconnect.