Alerislife Inc (ALR) 2005 Q4 法說會逐字稿

Good day everyone and welcome to the Five Star Quality Care fourth-quarter 2005 earning results conference call. Today's call is being recorded. At this time for opening remarks and introductions, I'm happy to turn the call over to the Manager of Investor Relations, Mr. Tim Bonang. Please go ahead, sir.

Thank you Debbie. Good afternoon 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 a presentation by management followed by a question-and-answer session.

Before we begin today's call, I'd 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, March 1st, 2006. The Company undertakes no obligation to revise or publicly release the results of any revisions 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 we're turning the call over to Evrett Benton.

Thank you, Tim. And welcome to everyone that is joining us for today's conference call. Before getting into the details regarding our results of operations, I hope that everyone noticed that we revised our press release announcing our financial results this quarter. As part of this new format, we've included some new information about our operations which is a result of feedback that we've received from investors and analysts. We hope this new format and information will help investors better understand our operations.

Now let's turn to our results. The fourth quarter was a strong one for Five Star as we executed on our growth initiatives by integrating the 12 communities formally managed by Sunrise, continuing to improve our existing operations and further in the development of our ancillary institutional pharmacy and rehabilitation businesses. This morning we reported a loss per share from continuing operations of $0.06 for the fourth quarter. However, included in our results was a charge of $4.8 million for the termination of a management agreement with Sunrise for a community located in Florida.

As you remember from our discussion last quarter when we terminated the 12 management contracts, the GAAP treatment of a contract termination is not handled the same way as an acquisition. The termination of a services contract is accounted for as a one-time expense. In total since November we've now terminated 13 management agreements with Sunrise. Today Sunrise continues to operate 17 communities where Five Star is the tenant, and Senior Housing Properties Trust is the property owner.

Without the $4.8 million in termination fees, income from continuing operations for the fourth quarter we would have been $0.18 per share. Now while these results are positive, it's important to note that our fourth quarter has always historically been one of our strongest. We're very excited about the job we've done with the operations in the 12 communities since we took back from Sunrise on November 1st. As I've said before in many ways this transaction can be likened to an acquisition.

Since becoming public in late 2001, we've acquired over 100 independent and assisted living communities. So we have had plenty of experience in integrating acquisitions. It's our experience that when you make an acquisition there is a good chance that there will be a drop in census, sometimes in the range of 5%. This is often driven by the seller trying to cut costs to dress things up to complete the sale.

The difference in this situation is that we know the Sunrise communities intimately. We've had a group shadow manage them for years so there was no surprise when we took over. From a stabbing standpoint, we were helped by the fact that all but two of the executive directors came over from Sunrise to Five Star and more than 99% of the staff accepted our invitation to join us. More importantly, we're gratified to report that occupancy at these 12 communities did not drop. In fact, over the last four months there has been a slight increase in the average occupancy since we took over. We're off to a good start but we will stay focused on completing this job.

This morning we also announced in a separate news release that we have reached agreement with Senior Housing to lease from them two rehabilitation hospitals in the Boston area. This agreement is contingent on Five Star's ability to obtain all regulatory approvals and licenses to operate these rehabilitation hospitals. As many of you know, these rehabilitation hospitals are owned by Senior Housing but currently operated by HealthSouth. Senior Housing has been involved in litigation to terminate the contract with HealthSouth based on various defaults. Recently a Massachusetts Superior Court has decided that Senior Housing had validly terminated HealthSouth lease and ordered them to cooperate with the transfer of these rehabilitation hospital operations to a new tenant. HealthSouth has appealed these decisions and the appeal is currently pending within the Massachusetts core system.

The two rehabilitation hospitals have a total of 364 beds and the terms of our agreement with Senior Housing call for annual rent payments equal to $10.25 million. There was a rent reset date that is built into the agreement that will permit either Five Star or Senior Housing to request a reset as of July 1st of 2008. This will allow us to run the rehabilitation hospitals for a period of time, make sure they are stabilized, and determine what the true cash flows are as well as work through the recent changes in the Medicare rate formula or the 75% rule which is applicable to rehabilitation hospitals.

Now let's take a look at why we're more than qualified to operate these rehabilitation hospitals. First, because we came public as an operator of skilled nursing facilities and continue to operate over 50 SNFs, we have a heritage in rehabilitation services that permeates all of our operations.

Second, these two rehabilitation hospitals are hospitals only by virtue of a special license. In fact they were originally skilled nursing facilities and they are actually more akin to large SNFs than they are to hospitals. For example, there is no cardiac unit; there is no oncology or emergency services available at these rehabilitation hospitals. And no surgeries are performed.

Third, we have the executive level oversight and staff in place to take on this opportunity. Three of our Board members have long-term hands-on experience in running rehabilitation hospitals. Personally I have prior experience in the rehabilitation hospital business and we have other corporate staff that have been in charge of rehabilitation hospitals in the area and a few have worked at these actual facilities. Also to help ensure a smooth transition, we will offer to hire all of the employees including the CEOs at the two rehabilitation hospitals.

Finally, these rehabilitation hospitals are in the backyard of our corporate headquarters. One of them is right around the corner from the Gables at Winchester which is one of our communities.

Now why does it make sense for Five Star to take these on? We believe that we will be able to operate these rehabilitation facilities profitably. While we cannot determine the amount of profits at this time, we believe it may be material. Even taking into account the uncertain future affect of the 75% rule, we believe there may be significant upside and the future.

In addition, we see this as an opportunity to grow the Five Star brand -- excuse me -- we believe that successful operation of these rehabilitation hospitals will enhance our reputation as a provider of health and rehabilitation services throughout the company. We also believe this opportunity will augment the abilities of our existing and growing rehabilitation services business.

Now let's make one point clear, however. Taking on these operations of these rehabilitation hospitals should not be interpreted as a change in our strategic direction. Although these operations will increase the amount of revenues that we receive from Medicare, this type of payment is very different from the Medicare payments we receive from operating skilled nursing facilities. If you're going to be paid by Medicare, these are types of services that you want to be paid for.

So while we are excited about this opportunity to operate these two rehabilitation hospitals, still a lot has to happen. We have to get approved and licensed by the Commonwealth of Massachusetts and set up our operating systems before we can take over operations. The state approval process may take a number of months. And a reasonable scenario may be that we would start operations by the end of 2006. Stay tuned.

Also during the fourth quarter, we ceased operations at two unprofitable facilities both of which we leased from Senior Housing and which are located in Milwaukee and Los Angeles. Senior Housing has sold one of two of these facilities as well as sold a facility that we previously closed in 2004. These combined sales will result in an approximately $800,000 reduction in our annual rent. We're working with Senior Housing to sell the Milwaukee facility and upon its sale there will be an additional reduction in our rent.

Now let's review our existing operations. Turning to occupancy, overall occupancy in the fourth quarter was 91% which is an increase over the 89% we reported in the same quarter of 2004. Occupancy in our same-store communities also continues to improve. For those communities we have operate continuously since October 1 of 2004, occupancy it was 91% in the fourth quarter up from 90% for the same period last year.

Now let's take a minute and review some trends in our other operating statistics. The average daily rate per resident in the fourth quarter increased by 9% to $132 from $121 in the fourth quarter of 2004. On a same-store basis which we think is the more relevant number, the average daily rate has increased by 6% to $142 in the fourth quarter from $134 during the same period last year. The percentage of our revenues that came from resident's private resources was 64% in the fourth quarter which is a 400 basis point increase over last year's fourth quarter and flat sequentially. Even with the addition of the two rehabilitation hospitals, we expect the private pay percentage will remain approximately 60%.

Now moving onto labor costs. As you know, labor costs have been historically more than 50% of our revenues. In many ways controlling these costs is half the battle for us. While we've done a great job on keeping these costs down, I have said that we will continue to focus on improvement but the improvement will be incremental at best. Having said that, labor costs as a percent of net revenues from residents declined 200 basis points from 52.4% to 50.4% between the fourth quarters of 2004 and 2005. I think that this is indicative of the power of our four proprietary software programs that focus on labor as well as our dogged pursuit of improvement in this metric. Rest assured we will do our best to keep it there.

Now moving on to our pharmacy and rehabilitation businesses. Revenues in our pharmacy business increased 134% to $10.8 million in the fourth quarter compared to $4.6 million in the same period last year. Operating margins for our pharmacy business are still below our target 9% to 10% range. We are just working through normal pharmacy start-up issues that we talked about last quarter.

First, we closed on our third acquisition midyear and just completed another acquisition in the fourth quarter. We're in the process of consolidating operations and moving our own communities to these pharmacies. Second, we're putting all our pharmacies onto one software platform and this process as planned has been drawn out and costly. It requires each drug and prescription to be cataloged by a licensed pharmacist or a technician. Third, we're beginning to implement the federal government's prescription drug program known as Medicare Part D.

In summary, let me assure you that we are on track with our plan for our pharmacy business. We're simply incurring normal start-up costs. We're hopeful that operating margins of our pharmacy business will begin to improve in the second half of 2006.

Our outpatient and rehabilitation services are also continuing to grow. As of today, we have 22 clinics up and running. By the end of 2006, we expect to have outpatient rehabilitation clinics in 40 of our communities. Obviously upon taking over the two rehabilitation hospitals, this business will grow dramatically. In addition, we're also beginning to add some external contracts with home health agencies.

At this point I'd 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'd like to review the fourth quarter numbers. Our net revenues from residents were $188.9 million for the fourth quarter and increased by 17% when compared to the fourth quarter of 2004. This increase was due primarily to revenues from the 47 communities we acquired in November of 2004, the six communities we acquired in June 2005, higher per diem charges to residents and a 2% increase in occupancy. I would also note that a 7% increase in same-store net revenues from residents from those communities continuously operated since October 1st, 2004, is due primarily to 6% higher per diem charges to residents and a 1% increase in occupancy.

Moving on to expenses. Wages and benefits increased by 12% in the fourth quarter to $95.2 million from the fourth quarter of 2004. This increase in the fourth quarter is primarily due to wage and benefits at the 47 communities we acquired in November 2004, the six communities we acquired in June 2005 and wage increases.

Other operating expenses increased by 19% in the fourth quarter to $50.1 million as compared to the same period in 2004. This increase is primarily the result of the other operating expenses at the 47 communities we acquired in November 2004, the six communities we acquired in June 2005 and increased charges from third parties.

The management fee of Sunrise fell by 15% in the fourth quarter to $4.3 million from $5.1 million in the same period a year ago. This expense decreased predominantly because of the 12 management agreements that we terminated effective November 1, 2005.

G&A expenses for the fourth quarter increased by 47% to $7.7 million from the same period a year ago. The increase in G&A expense primarily results from our increased operations at the 47 communities which we acquired in November of 2004, the six communities when we acquired in June 2005 and increased audit and professional service fees for compliance of the Sarbanes-Oxley Act of 2002. As a reminder, Five Star is incurring additional costs for Sarbanes-Oxley 404 compliance in 2005 rather than 2004 because we are a Small Cap Company. Even with these additional items, G&A expense for the fourth quarter was still only 3.9% of total revenues.

The termination expense of $4.8 million arose from our agreement with Sunrise to terminate our management contracts for a community that Sunrise managed for us in Florida. We began to operate this community on February 1.

EBITDA was a positive $906,000 in the fourth quarter compared to a positive $2.8 million in the fourth quarter of 2004. Excluding the $4.8 million termination charges described earlier, EBITDA would have been $5.7 million from the fourth quarter of 2005, more than doubling EBITDA reported in the fourth quarter of 2004.

Rent expense during the fourth quarter for the communities that we lease increased by 17% to $25.9 million from the fourth quarter of 2004. This rent expense increase is due to the addition of communities that we began to lease in 2004 and 2005 and our payment of additional rent for capital improvements purchased by Senior Housing since October 1, 2004.

Loss per share from continuing operations for the fourth quarter was $0.06 per share compared to income per share from continuing operations of $0.15 in the fourth quarter of 2004. To reiterate what Evrett said earlier, without the $4.8 million of termination charges we would have recorded income per share of $0.18 in the fourth quarter of 2005.

Moving on to the balance sheet and some more items of note. Cash and cash equivalents were $16.7 million at the end of the fourth quarter. Accounts receivables at the end of the fourth quarter were $46.1 million. Our days sales outstanding still remain an industry-leading 21 days. As a reminder this was achieved while factoring in that 36% of our revenues for the quarter ended December 31st, 2005 for receipts and Medicare/Medicaid programs that generally pay 30 days in arrears.

At the end of the fourth quarter, we had $96.7 million of net property and equipment. As of today we own 14 properties, five of which are unencumbered. These communities further break down by type as 12 independent living communities and two skilled nursing facilities. The market value of our HUD insured mortgage notes is $44.7 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 contain standard HUD covenants.

At the end of the fourth quarter we had no amount outstanding on our $25 million revolving credit facility. As of today, March 1, 2006, we have $5 million outstanding on this facility. We believe we are currently compliant with all material covenants of our mortgages and revolving credit facilities.

In summary, we have made significant progress during the fourth quarter by integrating the 12 communities formally managed by Sunrise and have added a 13th to this group in the first quarter. Our continued focus on the efficiency of our operations has produced strong results. We've also closed two unprofitable facilities late in the fourth quarter which will result in a reduction of our rent expense going forward. And our investments in the development of our institutional pharmacy and rehabilitation services has positioned Five Star to grow these businesses in the future. These factors, we believe, combined with the opportunity we may have to operate the two rehabilitation hospitals owned by Senior Housing make Five Star an appealing chase for investors.

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

(OPERATOR INSTRUCTIONS) Liam Burke at Ferris, Baker, Watts.

Evrett, you mentioned you made an acquisition in this quarter in the institutional pharmacy area. What geography was it? Was it mid Atlantic or Southeast?

It was a small operation in Los Angeles.

Okay. Not even close. Do you have any more keyed up or what is the pipeline on the acquisitions?

Thanks, Liam. We had talked about the fact that we have one in the mid Atlantic. It's still under contract and just because of working through a number of concerns with regard to the Part D, we've put it off until the second quarter. In addition, we have a couple of opportunities in Georgia that we're looking at and one in Colorado.

As you know, these are always under the radar as far as they are small, they are usually mom-and-pop operations. And they take a fair amount of time to work through. I wanted to just buttress what I said earlier, the reality is that whenever on a small company like this anytime you do anything as far as the expenses incurred in making sure that things are going the way that you want them in putting it together, it's going to create a tremendous amount of expenses compared with the revenues and the EBITDA. That is really what we're seeing in the fourth quarter.

On the acquisition of the two hospitals. Normally if I look at the profitability of a SNF versus an assisted living independent living center, usually be delta, part of a Delta is that the skilled nursing requires a lot more professional labor which would squeeze the profitability. Why would the hospital show more profitability than say a nursing home? Or can you sort of walk through that?

That is a very valid point. There was special licensure with regard to rehabilitation hospitals that if you add inpatient rehab on the short-term basis, then you're going to receive a much, much higher rate of payment than you would if that person received the same type of rehabilitation in a skilled nursing facility. So that in just looking at it -- and look I would ask you to just look at what is going on with regard to the rehabilitation hospital industry and you'll see that they are dramatically higher than skilled nursing facilities.

We hesitate though to put out definitive numbers because although Bruce has looked at this stuff very, very strongly, these came from HealthSouth and as you HealthSouth has gone through a lot of trouble with regard to getting their numbers straight. We want to be cautious when we talk about these things. Bruce, do you want to add anything to that?

I think it's a great point, Evrett. We've analyzed the numbers two different ways. I don't think we'll really know what we expect until we get in there and start to operate the hospitals.

It's around 100 million in revenues give or take and maybe 70% of that is Medicare; the rest is more or less private paid. But the Medicare that we're talking about here is different than taking care of people in nursing homes. It's a real positive from our perspective. Reiterating again, we're not changing or we're not making some tact here with regard to the direction that we're headed.

Great, thank you.

Carrie Montague at Davenport.

Great quarter. First just a couple of questions on the fourth quarter. Could you give -- is there any detail or can you offer some color on the decline in wages and benefits as a percent of revenue sequentially? And then also what was -- can you tell us what was behind specifically what's in the other operating expenses?

Yes, well I will cover the first and then maybe Bruce can cover the second. I hate to sound like a sort of a broken record. The reality is it really is in fact the things that we put into place. There are a number of reasons why it goes down. We just are very, very careful with regard to it. First of all I think that I'd noted before that our agency costs when we first put this on were double what they presently are and that is a tremendous amount of continuing this push down.

And second, as you take on a number of these different communities we have 11,500 employees but we have full-time equivalents of 7700. We have a great deal of persons who are part-time or per diem, if you will, and by virtue of that, we're able to flex a tremendous amount of what's going on there.

Carrie, I think beyond that though the one thing that we're trying to say is that I think incrementally we're not going to see quite the tremendous drop that we've seen. We're focusing on making sure that we are continuing that at what we think is a pretty good solid level. Bruce, do you want to cover the other part?

Sure. Carrie, in other operating expenses some of the bigger items that you'll see in there are our liability insurance, food costs for residents, utilities and real estate taxes.

Does that help you?

Yes. And some of that again -- bring your -- or I'm sorry the 13 facilities under your own umbrella into your own captive insurance?

Proactive.

That is where the savings will be in that line item?

Yes you will see some savings in that provided -- you'll also see some savings in the wages and benefits and just in terms of insurance now like with Workers' Compensation insurance you usually post through wages and benefits.

Great. And then could you just also on that rehab hospitals, are these -- obviously they were HealthSouth but are these the former Advantage Health Facilities?

I don't believe so. I don't believe that they are.

Okay. And could you refresh us on the 75% rule and how you think these facilities fare in that regard?

First, just first very quickly, the 75% rule says that at least 75% of your patients have to come from this diagnostic group if you will. The reality is that it's presently actually only 60% and there are various bills in Congress to either delay or change around that. But we anticipate that over the next two years that's going to be straightened out and that was one of the reasons why we wanted to talk or to work through this with Senior Housing Properties Trust to just see how it would impact the 75 -- how the 75% rule would impact the operations.

I will say this that we've seen and HealthSouth has indicated that they've actually tried to position these two communities or facilities, if you will, to be in line with the 60% that is now required. And it looks out as if that's the case. And that's one of the problems in just getting up the numbers because the revenues have changed and obviously the reimbursement from a Medicare perspective would therefore switch around. And so we're just trying to figure out how that fits in with regard to it.

The second part of your question, Carrie, or did I get both of those?

You got to it.

The other one was who operated them prior to HealthSouth? And like I said, I don't think we know the answer but they are located on Braintree in [Woburn] Massachusetts.

I was wondering, there is a company, Advantage Health and I --?

No. Let's see Horizon had purchased them before them. It was Horizon that operated them and then they have a long history of other operators before them.

Great, thank you.

Eric Gommel at Stifel Nicolaus.

Good afternoon. Just a few questions. This quarter what was the amount of money you spent on property improvements?

Bruce, can you take care of that?

We spend probably $7 million each quarter on property improvements. The majority of which are funded by our landlord, Senior Housing. The amounts we really spent on our property improvement itself are the 14 communities that we own. Ballpark it's probably $1 million just on those 14 communities.

Eric, thank you for joining us. What are you trying to get at?

I think last quarter there was about $3.8 million that you did on funds. And I was just trying to figure out this quarter what it was and kind of get an expectation for next quarter.

I'm sorry that we don't have that. We will in further review probably when our 10-K comes out it will be there. And then we can refer to it. The reality is that this stuff generally heats up and that second and third quarter just because of the summers and so that third quarter is usually a little bit higher. And then we are just a little down especially given the wintertime. But if anything, we are ginning that up more and we can talk about it more once the K comes out.

Great. And then on the pharmacy business, what kind of issues -- we've talked -- we cover another company, Omnicare, and also another company that does institutional pharmacy. Just curious what you are seeing impact-wise from Medicare Part D and kind of where you are operationally with taking in some of the changes that that created as of January 1?

Yes, maybe three points. At first you've got to remember that we're really relatively small overall. We're starting this thing out. We're very that we are pleased that we're well over $40 million in revenues on an annual basis. Our own operations really aren't impacted from that perspective. There are two parts that happen. First in a skilled nursing facility, as you may know you're actually assigned to a PDP, one of these preferred providers. That is all taken care of.

Then with regard to independent or assisted living, these persons that are our residents deemed competent, they're supposed to be choosing their own and there is a little bit of disconnect that the federal government is really working through with regard to that. Now we had every one of our executive directors and our wellness and directors of nursing go through a learning process with regard to how this thing was to impact them. And so from our perspective, we've been able to help the individuals look at what they needed to do. Now that is just the people that are in fact in our communities.

On the other side of this, our own operation is predominately at the present time predominately fuels people that are in skilled nursing facilities. So they've already signed up. And we purposely signed up with every one of these providers so we haven't seen a problem with regard to that. We will tell you however, though, that there just is a natural lag in getting the payments. So if anything we've seen just a little drag on our AR but that is it and it hasn't been significant. It's as if each day the thing sort of works its way out a little bit more.

I want to go back, does that solve that question, Eric?

Yes. And I think the more important thing for me is understanding -- it looks like this quarter that the pharmacy business was more of a break even business. I'm trying to understand -- I think you touched on it in your prepared comments but in second half, we should see margins I guess more in line with what your expectations are --?

Absolutely, absolutely. And really a lot of these are one-time things that just -- they are all niggling but you just go through and when you're putting them together it's like birthing a baby, to be candid. There's just a fair amount that goes on. We added two new -- so we have four. So we doubled the pharmacies from that perspective. Bruce might give a little color just on our investment.

I want to go back and answer Carrie's question though. In fact someone with more knowledge than us said Advantage Health had these two rehabilitation hospitals before HealthSouth and before Horizon. So it does go back a fair amount.

Bruce, maybe on just our investment and the pharmacy business.

We haven't spent a great deal of money so far on the pharmacies. Our all-in costs on the four pharmacies are a little under $10 million, somewhere between the $9 million and $10 million range. And if you look at what we've actually earned all of 2004 even taking into account a breakeven fourth quarter, our return on investment is still probably a little north of 13%. So overall we're not doing too bad. We do have like I said, some of agent margin of 8% to 10% that I was alluding to earlier.

You bit. And really we're also just at the front end still of adding communities to the new pharmacies that we've acquired. That is why we say it takes a long time and I'll be doggone, but this Rescot software system is just very, very time-consuming. And very, very expensive to get it up and running.

Just to clarify something in you're prepared remarks. Did you say you would start operating the rehab hospitals by the end of 2006? Was that correct?

Yes, I think I said that that scenario puts us closer to the end of 2006. It's a long drawn out process with regard to licensure, getting the operation set up.

And just to clarify, could this be something that is more of a temporary or is this really something that you plan to do long-term? It sounds like by the sound of the rent reset that you were in this for the longer haul.

And then the other part of that is there anything I guess any piece to the agreement that allows you to flip this out to maybe another operator, the IRS?

Just to answer your question. We're going into this with a mind frame that we're doing it for the long term. The rent reset is there really, almost to protect both parties in all honesty because of the uncertainties of financial history of the two hospitals. We as well as Senior Housing can look back and create a new deal if it's not fair to either side. We're looking at obviously it is in our interest if we get in there and the operating margins aren't what we expected, the rent reset will be there for us to take advantage of and likewise for Senior Housing if we get much more than what we expected. It goes both ways. So we're planning on it to be in the long haul.

Let me amplify, Eric, on what Bruce said. This isn't short term. This is going to be a piece of our business that will enhance our operations throughout every portion of what we do including the independent and assisted living. We're not going to -- I wouldn't go into it on a part-time or short-term basis. It really wouldn't -- it would require us to take our eye off the ball of many other things. This is going to be an integral part of what we do.

And really my final question. So from an acquisition standpoint, or looking at future growth and what area you're going to grow in -- SNFs versus private space senior housing versus IRS. If you could just give a little color as to what your goals are maybe in 2006 from an acquisition front? What areas do you plan to concentrate in? Thanks.

It's just as I said, this is not a tact for a different strategic course. We have always said that unless something it makes real, real tremendous sense from a profitability we're really only interested in independent and assisted living private pay. This happened to make a lot of sense and it actually buttresses our operations in those two other areas. So we are not a bunch of rehab hospitals.

All right, thanks.

George Walsh at Gilford Securities.

Congratulations on the quarter, it was nicely done. Could you speak a little bit -- it was good to see the margin improvement sequentially and otherwise. Can you speak to particularly with regards to the Sunrise properties that now you have, where the margin improvements how that contributed during this quarter? And what moves are being taken to enhance margins further as you go out through this year?

I'll handle the first part of the question, George. I mean I think with the senior communities we took them on November 1st. We immediately eliminated the management fee that we paid at Sunrise. That was an incremental savings right off the bat. In addition, I know Carrie mentioned it earlier, we moved them onto our active insurance companies effective immediately as well. So we saw improvement from there.

In addition a third area where we had noticeable improvement was the -- we really went in and resell a lot of their contracts especially in terms of the rehabilitation services they provide, Sunrise rather; they generally outsource rehabilitation where we actually have the services to take them in house. And we have done that at a number of our communities. We still have a number more to work through the system.

And then I know the third here, we've always talked about in terms of margin improvement with the Sunrise communities is the overall labor expense. We don't plan on making any changes there for a while. We want to get them up and running on our report and be there for quite some time so we can actually analyze what is going on. And then as things seem to make sense, we can make changes at that point.

Bruce didn't leave me anything to talk about to be honest. I think he did an outstanding --.

Nice improvement in 2006.

-- yes, an outstanding job with regard to what we've been telling folks. Look, Sunrise is a good operator let's not to kid ourselves, they did a fine job. We have the opportunity of focusing more on the bottom line and they were focused more on the top line. We are very pleased that really the handoff has gone thus far over the last four months very well. We're very pleased with the folks that are there. It is the four areas that I think Bruce did a good job of talking about.

From our perspective you're just going to see incremental increases and then once we get a lot of these reports and can have folks talk to us about what they think is going on then we will tweaks some changes. But our goal is to make sure that we didn't drop the baton, if you will, in the handoff. And thus far, we're doing pretty doggone good.

That is great. Could you speak a bit also about conceptually the acquisition environment and the idea of the remaining properties with Sunrise and the potential whatever the potential buyouts on those contracts. I mean I don't expect you to do those for awhile but the potential returns versus the current acquisition environment out there?

Okay, there are actually several parts to your question, George. And I appreciate that. I want to say up front that we at present have no plans for contacting Sunrise with regard to taking over these properties. How much of the elephant can you eat at one sitting so to speak? You make a valid point though. It's a frothy market out there with regard to the cost for acquiring stabilized, independent and assisted living communities. We find it to be very difficult. We have bid on every significant deal. We've been in every horse race. It just happens that when we look at it and we've just determined that the cost at present seemed to be too high. We look at these and we evaluate all the time. But from our perspective it's as if something that is a sub 7% cap rate or now a sub 6% cap rate is just a little bit too steep compared with for the 12 communities which we took back from Sunrise, amounted to above a 10% cap rate. So from that perspective when you look at it you can say, well wait a minute that really looks fairly good.

We continue to be out in the market sourcing things and looking toward the opportunity of acquiring some additional communities and to the extent that we can then make sure that we're stabilized and done everything we can with regard to Sunrise, then we will look at opportunities perhaps with present managed properties. But right now we have no plans and we're going to continue to source and hopefully acquire a few communities that are out there.

Okay. And just one more thing in reference to the rehab hospitals. As you take these on, you're getting to the point here where the operating margins are improving and your ability to run these things is starting to hit the income statement. Is there such -- as you take over these hospitals, is that going to be some type of drag a bit on the margins? Or is it something that -- are there start-up costs or whatever kind of integration costs that you're going to have to deal with that may slow things down a little?

Thanks for talking about that. I want to assure you that we are equally aware of just what you have raised. We are setting it up so that it's not going to be directly part of the operations that we've got. Rosemary Esposito, our COO, has tremendous amount of experience in literally operating hospitals, acute care hospitals, and I think that she is going to be taking the laboring oar and making sure that we set this up separately though, first.

But second, really don't get -- while they are hospitals -- don't get so hung up on that fact, they are 300 some residents or patients, if you will, that are in two communities that are literally in our backyard. There is plenty of revenues that allow us to put together the personnel to oversee this stuff. And we'll make sure that while it's going to be our goal that we don't have any drag with regard to the momentum which you have obviously seen that we are making.

The way it is done, the revenues are going to start flowing through your income statement. Will that happen in the next -- we really won't see that for a year or is it going to happen this year?

As Evrett said earlier, we're expecting that to occur late in 2006.

Okay.

You're not going to see anything. We won't take it over until late this year probably.

Okay. But you'll be in there one way or another starting fairly soon or is that still going to be a little --?

No, it's a long process. If all goes well, it is still a number of months away.

Is it where you are able to get to know it over this interim time period that would be of an advantage once you take it over?

Absolutely. One of them is ten minutes from my house and another is about 30 minutes from my house.

Okay, very good. Thank you.

[Derek Gagnon] at Avondale Partners.

Evrett and Bruce, I would like to ask a question about the Medicare business on the SNF side and RUGs refinement. If you could talk about sort of the daily rate and what you see on the impact there?

Bruce, do you want to handle that?

Sure. Our daily rate is probably in the 330, 335 in that range. We actually for the fourth quarter we got a slight bump, cost of living adjustment in that rate of about 3%. That has gone away effective 1-1-'06 with the whole RUG refinement. They've added I think nine new RUG categories.

11.

Oh, 11. And they have actually taken away some additional add-ons -- taken away those additional add-ons that were put in place a number of years ago. We're still working that through our system. Our initial expectation is based on our current population of Medicare residents. We really didn't see any material change with where our rates were back prior to the 10-1 increase. We think we're going to be flat overall with where we were again pre-10-1 increase.

Okay. And on the independent living, assisted living side, are you seeing any development pick up versus last year or the year before in certain markets?

Development I think overall in 2005 remained relatively flat with '04 and '03 really. I think about 20,000 new units came on and that is really between almost the entire IL, AL and CCRC industry. We haven't seen anything spike up so far in 2006 that would lead us to believe that there is a new surge coming on.

Maybe just to reiterate that. I think that that's a reasonable question, Derek. This is a local business as much as we'd like to think so. You can see four new communities that are in your city and they can decimate what you are doing. But the reality is that we have I think about three communities that have some new properties that are in their catchments area if you will, five or so miles away from them. But beyond that, we haven't seen any new properties. For the present we're probably okay.

There is implied in your question a good analysis though which is at the prices that we are seeing, we've got to see some increase in the construction. We haven't seen quite seen it yet. But I think it's only a matter of time before it will.

Okay. Well, good quarter and thanks for taking my call.

Sean McMahon with Kennedy Capital.

Great quarter, guys. I just had a quick couple of questions on Part D. If you can kind of tell me how many seniors you guys are actually taking care of? And how many are dual eligibles that you guys signed up in the quarter?

Well we have 16,000 residents, 16,000 residents, 4.500 of those are in or a little bit more in skilled nursing. 4,800 actually with regard to the new Sunrise communities that have come on. And as far as the dual eligibles, I don't have that directly at hand. But in all candor, the majority of that 4,800 are in fact -- fit into that dual eligible.

Do you go to each individual and walk them through Part D and then sign them up through your facility or how does that work?

The facility, they basically are sort of automatically signed up. Every building though we do have it so that they are charged with walking through and making sure that they are set up and we have for our own communities there is always some little thing but we don't have anything which is overarching of great concern. Things seem to be going better than what we read in the papers.

We actually started getting ready for that probably in the middle of 2005 knowing the Part D was coming and getting our people trained in what to do in helping them move on.

Okay. I don't know if you can comment because the numbers haven't come out yet. But the next phase of this is low income seniors. I think May 15th of this year they are supposed to release data on that. Have you guys started a ramp up talking with those individuals?

We don't when you say low income seniors, no, we haven't. Think about two-thirds of our communities are private pay. And so from that perspective we're not dealing with them. Then the remainder of our communities are in fact these skilled nursing and that's where you get into this dual eligible. Really it doesn't as we presently envision it, apply to us.

Okay. My next question had to deal with you guys kind of ginning down some of your revolver it sounds like this quarter. Is that normal seasonality or is that something new?

That is a great catch. Bruce?

We do drive down the revolver from time to time. I mean it is there for obviously revolving credit now to help pay rent and smooth out the streamline but generally at quarter end or at month end, it is fully paid off. However, when we actually terminated the contract with Sunrise, effective February 1, we did draw down to pay that $4.8 million.

Okay, that is what I thought.

And then the acquisition of the pharmacy that we did late in the fourth quarter as well contributed to that.

Okay, thanks guys. That's all I had.

Alex Washburn at Summit Capital.

Hi Bruce and Evrett. Great quarter. I just have two questions I just wanted to make sure I had my figure straight. First what was the date that you closed on that large Sunrise deal?

The large one was November 1.

Okay so you only benefited for --?

Two months.

Two months during the quarter?

Correct.

And secondly on the call you mentioned two closures of nursing homes. Are these closures accretive going forward?

They will be. Both of these homes have lost money in 2004 in 2005. So actually shutting down their operations alone is a positive. But when Senior Housing sells the assets we get a percentage of reduction in our rent expense and that is what Evrett talked about the 800,000 going forward. So not only do we cease the losses at the communities, we also benefit from the rent reduction going forward. It will be a positive.

Great. That's all I have. Keep up the good work.

J.D. Padgett at Founders Asset Management.

Couple of questions on the expenses. One, I think you partially answered with the wages and benefits. But is this a level that seems sustainable just looking at the dollars sequentially fell quite a bit from last quarter's levels and obviously the ratios are outstanding. How should we be thinking about that going forward more specifically?

We believe they are sustainable. We've actually brought on a new person that starts I think in a week that will -- his job is literally to be the focus of labor. So we're actually stepping it up a notch, if you will, are hopeful that we will make sure that this level continues on.

What would describe the fall from I think it was over like $99 million or something or $100 million last quarter down to $95 million for wages and benefits? Just more tightly managing the system or something to do with --?

There are just a number of different reasons. More tightly managing is part of it. It is how the mix of the residents and the number of employees. Basically we've just been dogged with regard to what we are doing.

So hopefully going forward the expense -- the complexion of the business doesn't change much maybe that ratio stays in the 50% to 51% range kind of thing?

That is absolutely our goal.

J.D., one thing to add. I don't think it had a big effect but in the third quarter those two committees that we closed those operate -- those wages were in that that number and in the fourth quarter they move down to wages and benefits. I'm sorry -- they moved down to discontinued operations. Like Evrett said, I think we're going to try to sustain that 95.2 million that we reported.

In dollars or as a ratio?

In dollars -- well as a ratio, I'm sorry.

As a ratio.

And then the other question just on the other operating expenses -- kind of the inverse happened this quarter where that seemed to step up quite a bit.

I didn't hear what he --.

The other operating expenses.

Yes, the other operating expenses. And anything special behind that?

Nothing special. I mean in all honesty we've had about 800 million on our run rate now of our annual revenues. Things come through from time to time. I can't think of anything else off the top that really stuck out in that. I think as a percentage of revenues, it was somewhat in line.

Okay. So just kind of look for that to bounce around a bit?

Yes, I think you'll see that for the quarter.

Okay. And then for some of us that are less familiar with the industry dynamics. All of the proposed budget pressures and so forth, how will that impact your business outside of the discussion we've already had around the inpatient rehab facilities but more the core business?

The core business I think the biggest piece probably is already affected us effective 1-1, that was the Medicare changes that I talked about earlier with a new RUGs categories. Medicaid -- I mean, we kind of fall back on our portfolio theory. We expect in some states we will kind of go up in rates this year; some states will go down and some states will remain flat and that has really been the way it's been for the last five years since we've been in business. We are projecting overall rate increase. That's what our budget model is. But I guess that's really a culmination of some states going up and some going down and some being flat.

Early on I was always very, very concerned about what is going to happen with all these rates, etc. Since then, two-thirds at our revenues come from resident's private resources. It has alleviated a tremendous amount. That is point one. Point two is Medicare -- while Bruce has pointed out that it's basically flat and actually down from the fourth quarter, it really is a good source of revenues. And 20 some% comes from Medicare. The remaining 15% is Medicaid. If there is an area that I always sort of obsess about or get worried about, it's that area.

And the reality is it is what Bruce said. We're in a bunch of states and some states are up and some states are down. But overall we get a few percentage points. We've been able to see that and I'm just grateful that we're in the type of business that our portfolio isn't really decimated by the stroke of the pen. And that's certainly the case with regard to the Medicaid.

Overall we've limited that and we will continue to move into areas where we're predominately in a quality mix where it is private pay and to the extent that we're in this rehab and other business and Medicare.

Okay, great. And then I guess just one kind of last conceptual question. If we were to freeze the business as it is currently constituted today, what would you hope to drive in terms of revenue growth and margin expansion over time?

Well freeze I guess that's a great term. We will never -- you'll never catch us frozen first of all. But let's make sure that we go back. If I'm going to look at it we continue to press one, our census and our occupancy. We started out at 83%. And I said let's see if we can get to 85 and then 87 and then we said 88 and then we continued to push one percentage point at a time, 88, 89, 90, 91. I had this deal where I said let's say it's 200 years after Columbus, 1692, 16% Medicare and 92% occupancy. And I'll be doggone if we aren't closing in on that and I wouldn't have thought that.

Someone asked me, they said you know we can almost round up to those in each area. I said well what does 1793 sound like? So that's certainly number one. And as I've told folks, this is not rocket science. It's a difficult business but if you can handle two areas, one your labor; and two, the occupancy, you're going to do well. And we've always focused on that.

We always look at, as you know, we have two captive insurance companies and we look over our health insurance costs, our liability costs and our Workers' Compensation costs. And we look at that regularly. We hold meetings on Wednesday that literally look at that. Friday's we collect the money and we work on that and make sure that our collections are on there and on Mondays we focus on the management of our operations including two meetings; one that focuses on all of our census building. We would continue to plug on each of those areas.

We've pushed, as you know, what we presently have with regard to rehabilitation. We had zero rehabilitation before hand and we've got we believe, 40 communities that we can spread these outpatient clinics into. We'd worked right on where we were with regard to that.

And finally, we've put into place a pretty sophisticated capital expenditures group that is now spanning across the United States. We'd probably upgrade the properties that we've got, continue to do that, so that can press not only the rates but also the occupancy. It's a fun esoteric question. We will never freeze though, big guy.

I understand that. That was a good explanation. It sounds like there is still more room on rate and occupancy and then you layer in some of the rehab and pharmacy stuff and continue to drive top-line managed cost and improve the margins.

Thanks, I think that is a great summary.

Carrie Montague with Davenport.

Actually my follow-up question has been answered. Thanks.

Thank you Carrie. Operator, Debbie, anybody else?

Mr. Benton, I'll go ahead and turn it back to you for closing remarks.

Well thank you. All right. Well thanks to all of you for joining us on our fourth-quarter conference call. During 2005 we've developed some strong momentum that we look to bring into 2006 and beyond. During the next few months we will be making a concerted effort to get out on the road and tell our story to investors and we hope to see you somewhere along the line.

We also look forward to speaking with you on our first-quarter conference call to update you on our progress. Thanks for joining us.

Ladies and gentlemen, thank you for your participation. This does conclude the conference and you may now disconnect.