Alerislife Inc (ALR) 2006 Q1 法說會逐字稿

Good day, and welcome to the Five Star Quality Care first quarter 2006 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, Kevin. 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 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, May 10, 2006.

The Company undertakes no obligation to revise or publicly release the results of any revisions of 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 Form 10-K filed with the Securities and Exchange Commission. Investors are cautioned not to place undue reliance upon any forward-looking statements.

Before handing the call over to management, I would like to point out there was a minor error in labeling in our press release that we issued this morning. On the same store operating data table, the final line item in the table should read community expense growth rather than community expense as a percent of net revenues from residents. All of the financial information is correctly stated. Now, I would like to turn the call over to Evrett Benton.

Thanks, Tim. Welcome to everyone that's joined us today. Five Star had a good first quarter, we had strong financial results improving operations and active financing activities. This morning, we reported earnings per share from continuing operations of $0.13. Although we generated strong earnings, our operating results varied between our independent and assisted living communities, versus our skilled nursing facilities. For example, during the quarter, we experienced a dip in our cash flows from our skilled nursing facilities because a number of these facilities were hit by flu, and Norwalk viruses, which caused a decline in occupancy.

In addition, our payments received for Medicare patients at these facilities were slightly lower than expected during the quarter because the changeover to the additional RUGs categories took a little more training and getting used to than we anticipated. The good news is that the increased cash flows from the independent and assisted communities that we operate, largely made up for this decline. Furthermore, we're back on track regarding our budgeted Medicare rates and the flu virus seems to have largely run its course.

Turning to occupancy, overall occupancy in the first quarter was 91%, which is an increase over the 90% occupancy which we reported in the same quarter of 2005. Occupancy in our same store communities also continues to improve. For those communities we have operated continuously since January 1, of 2005, occupancy was 91% in the first 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 increased by 2% to $134 in the first quarter of 2006. On a same store basis, which we think is the more relevant number, the average daily rate has increased by 4% to $134 in the first quarter. The percentage of our revenues that came from residents private resources was 64% in the first quarter, which is a 100 basis point increase over last year's first quarter and flat sequentially.

Now, moving on to labor costs. While we've done a great job on keeping our labor 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 160 basis points from 52.9% to 51.3% between the first quarters of 2005 and 2006. I think that this is indicative of our laser focus on labor costs.

Now, moving on to our pharmacy and rehabilitation businesses, revenues in our pharmacy business increased 116% to $11.3 million in the first quarter, compared to $5.3 million in the same period last year. Operating margins for our pharmacy business are still below our target 8 to 10% range, but have significantly improved over our fourth quarter 2005 results. We closed on our fourth acquisition at the end of the fourth quarter last year, and just completed a fifth acquisition on May 1, of an institutional pharmacy in Myrtle Beach, South Carolina. This pharmacy services over 30 communities and has annual revenues of over $5 million. Our total institutional pharmacy business now services over 150 communities with over $50 million in annualized revenues. We continue the process of moving our own communities into these pharmacies.

In summary, let me assure you that we are on track with our plan for the pharmacy business. We're simply incurring normal startup costs. We're hopeful that operating margins for this business will begin to improve in the second half of 2006. Our outpatient rehabilitation services are also continuing to grow. As of today, we have 24 clinics up and running. By the end of 2006, we still expect to have outpatient rehabilitation clinics in 40 of our communities.

Now, moving on to financing activities, the most significant event for us occurred just days after the quarter end. Which was the selling of 11.5 million shares of the Company's common stock for net proceeds of approximately $114 million. We intend to utilize the bulk of the proceeds to terminate management contracts with Sunrise Senior Living, and in April, we sent notice to Sunrise that we would terminate the management contracts at 10 communities for an estimated payment of $90 million. We anticipate taking over operations of these communities in the third quarter.

Our decision to raise equity to finance the termination of management contracts with Sunrise was clearly the right thing to do for Five Star, both as a growing company and for the interest of our investors. While it will help simplify our story for investors, the real impact will be seen in our bottom line performance. By taking over the management of these communities, we are eliminating approximately $8 million from the annual management fees we pay to Sunrise. In addition, we believe that we can apply our proven operational expertise to drive savings to the bottom line, while over time continuing to maintain high occupancy levels. While the transition of these communities in many ways can be viewed like an acquisition, the difference here is that we know these communities intimately. As a result, we're hopeful that the transition will continue to move ahead smoothly. I've already personally contacted all of the 10 communities and at present, we believe almost all of the Executive Directors and staff will join us. Having gone through this drill twice before, regarding the takeover of Sunrise managed communities, we do not anticipate any significant concerns during this transition.

Moving on to other areas. As I mentioned on last quarter's conference call, we've agreed to lease two rehabilitation hospitals, located in the Boston area from Senior Housing Properties Trust. They have a total of 364 beds, and we believe these hospitals generate in excess of $100 million in revenues annually. In addition, we know the contribution margins generated by hospitals of this type are significantly higher than skilled nursing facilities. The terms of our agreement with Senior Housing call for annual rent payments of $10.25 million. There is 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 1, 2008. We have now filed applications for licensure of the two rehabilitation hospitals and have begun holding meetings with the Massachusetts Department of Health. Recently, that Health Department has made a preliminary determination that a written agreement from Health South is necessary to process the license application. And we and Senior Housing have asked the authorities to reconsider this determination. Nevertheless, we still believe that we will take over these operations by year end.

As a final note, we continue to review several possible acquisitions as well as consider the possible divestiture of one or two underperforming assets. At this point, I'd like to turn the time over to Bruce Mackey, our CFO.

Great, thanks, Evrett. I would like to review the first quarter numbers. Our net revenues from residents were $188.4 million for the first quarter and increased by 8% when compared with the first quarter of 2005. This increase was due primarily to revenues from the six communities we acquired in June 2005, high per diem charges for residents and a 1% increase in occupancy. I would also note that the 5% increase in same store net revenues for residents for those communities continuously operated since January 1, 2005 is due primarily to 4% higher per diem charges to residents and a 1% increase in occupancy.

Moving on to expenses. Wages and benefits increased by 4% in the first quarter to $96.6 million from the first quarter of 2005. This increase in the first quarter is primarily due to wages and benefits of the six communities we acquired in June 2005 and wage increases. Other operating expenses increased by 19% in the first quarter to $49.9 million as compared to the same period in 2005. This increase is primarily result of other operating expenses of the six communities we acquired in June 2005 and increased charges from third parties.

The management fee to Sunrise fell by 37% in the first quarter, to $3.5 million from $5.6 million in the same period a year ago. This expense decreased predominantly because of the 13 management agreements that we terminated effective November 1, 2005, and February 1, 2006.

G&A expense for the first quarter increased by 5% to $7.2 million from the same period a year ago. The increase in G&A expense primarily results from our increased operations due to the six communities we acquired in June 2005. The 13 communities we began to operate, that were previously operated by Sunrise and increase audit and professional service fees in compliance with the Sarbanes-Oxley Act of 2002. Even with these additional items, G&A expense for the first quarter was still only 3.6% of total revenues.

Rent expense during the first quarter for the community that we leased increased by 8% to $26.4 million from the first quarter of 2005. This rent expense increase is due to the addition of communities that we began to lease in 2005 and our payment of additional rent for capital improvements purchased by Senior Housing since January 1, 2005. EBITDA was $5.4 million in the first quarter compared to $3.7 million in the first quarter of 2005. Income per share from continuing operations for the first quarter was $0.13 per share compared with $0.14 in the first quarter of 2005. The reason for the decline, primarily relates to the increase in our shares outstanding. One important point to keep in mind regarding our future earnings per share relates to our recent equity offering and our planed takeover of the 10 Sunrise managed communities. We hasten to remind everyone that we have $90 million in the bank waiting to be utilized for the payment of the termination fee for the management contracts. Until those contracts are terminated, we will not reap the benefits of the $8 million paid annual in management fees to Sunrise.

Thus our second quarter earnings per share will be impacted by having additional $11.5 million additional shares outstanding, but not having any additional income other than minor investment income for the $90 million. Further more, our second quarter financial results will include the $90 million termination payment to Sunrise accounted for as an expense.

Moving on to the balance sheet and some more items of note. Cash and cash equivalents were$12.3 at the end of the first quarter. Accounts receivable at the end of the first quarter were $45.4 million, our days sales outstanding still remains an industry leading 20 days. As a reminder, this was achieved while factoring in that 36% of our revenues for the quarter ended March 31, 2006 were received from Medicare, Medicaid programs that generally pay 38 in arrears.

At the end of the first quarter, we had $99.6 million of net property and equipment. As of today we own 14 properties, 5 of which are an incumbent. These communities include 12 independent communities and 2 skilled nursing facilities. The market value of Hyde insured mortgage notes is $45.2 million. The cash interest cost on these notes has a weighted average rate of approximately 7% per year. Principal and interest as due monthly ranging from 20.32 to 20.39. These mortgages are secured by nine of our communities and contain standard HUD covenants. At the end of the first quarter we had no amounts outstanding on our $25 million revolving credit facility. We believe that we are currently in compliance with all material covenants of our mortgages and revolving credit facility.

To sum it up, we continue to deliver consistent financial results while increasing the financial strength of our company. After giving up debt to our recent equity offering and our anticipated semi termination payments as of March 31, 2006, we had $35 million of cash, $25 million available on our revolving credit facility, and we own five independent assisted living communities, unencumbered, which have a gross book value of over $25 million. Based on yesterday's closing stock price we also have total equity market value of $308 million. That concludes our prepared remarks, operator, we are now ready to take questions.

[OPERATOR INSTRUCTIONS] We go first to the site of Jerry Doctrow with Stifel Nicolaus. Please go ahead.

Hi. Good afternoon. I just had a couple bigger picture things, a couple details. Evrett, I guess, I was wondering if we could kind of review the performance of the Sunrise properties since you've taken over in the fourth quarter. I think the expectation was that you might be able to start realizing additional savings, and I was just wondering how that sort of played itself out.

You bet. Jerry, thank you for joining our call. I'll start and then I'm sure that Bruce might have a couple of points. As we probably discussed in our offering and told folks, after we gave a notice, we saw that there was a decline in the properties that we gave notice on until November. And in their net operating income performances, or what we call our contribution margin, after November, we actually saw a nice pickup in that same metric. And it's continued to do so. We're slightly up on census, and our insurance that we've put into place has made a nice decrease in overall expenses.

I think that we told everyone and we certainly told the folks in these communities that we would not be looking at labor changes until after 6 months was up. And that really starts in June. We're looking at some things. And we're continuing to move on. In contrast, unfortunately, the 7 properties, which are remaining have just been volatile and unpredictable, and they actually have declined just a little bit. Does that answer the question, or Bruce, did you have anything else?

No, I think you hit the big things. I think the other area that we might touch upon in terms of savings would be the rehabilitation services and how we're starting to do that in some of the properties, Jerry, not all where we can move it in and out, we've done that. And that hasn't been as big as the insurance things, but there's been a little bit there.

And just to make sure. We would move it over for all of those communities, except that there are existing contracts for third parties to perform the rehabilitation services. And, really, we have 24 communities that we're performing outpatient services for. We've got some started in North Carolina and Florida. Both of which are a little blocked because of normal licensure.

Okay. And any sense of quantifying how much insurance savings there's been?

For the 6 months, you're probably talking maybe $0.5 million of insurance savings. That's a ballpark figure, but it's in that range.

And on how many properties are we talking about?

That would be 13.

13, okay.

12 of which we took over.

Right. Okay. That's helpful. And there were a couple things, then just about, the labor, obviously you were making the point that you're doing a good job of sort of controlling costs. We're sort of looking at it more quarter over quarter rather than year over year, I think you were up a little bit as a percentage from the first quarter. I was just wondering if we could get any color or sense of how that's going to play out, because it does have a big impact on numbers.

You bet. And we've seen that, as well. When we've been asked. I said that I thought that if we bottomed out -- on a same store basis, and the problem is, is you're adding different types of communities to our portfolio. And then it plays out in what the percentages are. But the reality is that somewhere around a little under 52%, and we saw that the fourth quarter we did a great job. We saw that the first quarter compared to the fourth quarter. There was a slight uptick, but we also see that that's because we added personnel for various reasons. And so overall we think that we're probably stable.

I purposely put in that sentence that said, look, we continue to focus on improvement, but we're getting pretty darn close down to the bottom there. Just as soon as I -- every time I say that, we tend to drop down, but there was a slight tick sequentially, tick up, fourth quarter to first quarter. Bruce, any other thoughts?

I think the only other thing I'd add on that, is this industry has significant wage pressures, both in terms of the skilled nursing and the rehabilitation services. There's a significant shortage both of those areas and we're combating wage pressures continuously. So I think we're doing a pretty decent job of doing that, but that does play against it, as well.

Okay. And there's one or two other things that sort of I think mattered a bunch for the numbers. SG&A dropped, I think, again as a percentage. That's I guess because revenue was up because I guess you had some actual, saw at the increase in the actual dollar on SG&A. But is this like 3.8% sort of a good run rate go forward?

I think it would be in the range, correct, Jerry.

Okay. And my last one and I'll drop off. The pharmacy margins, you touched on -- you guys touched on this, but it came in a bit better. And that was -- than we had expected. As you made initial acquisition, the 5 percentage margin, is that sort of doable with the acquisition? Does that go down? I think you're headed up moving towards 8% or whatever. Give me any feel for how you think that might play out? It also makes a difference in numbers.

Of course it does. It's still pretty much a peanut of a company, Jerry. We picked up this very small pharmacy in Los Angeles. And we are trying to get that operation right. We continued to, unfortunately, it just seems to take forever to get this res cost in and done. We hope to have it done by the end of this quarter. And maybe actually even in the -- Bruce is telling me that we may even be longer than that.

I think at the end of the year will be a more realistic target.

It's just as we added this last pharmacy in Myrtle Beach then we have to go through it. That's just an expensive thing. Once we have looked at, and this is one, it's not audited, and two, it's just sort of our ham-fisted review, we start pulling out these items that are gone. The reason I'm saying we're on track is because once we pull out these items that are sort of start up and just trying to get right sized and correctly operating, it looks like we would be close to the numbers that we talk about. How long that takes us, we said that we would start seeing things in the second half of this year, and I'm pretty confident that we'll continue to do that. In addition, on our own communities, the part D, we seem to be over the major hurdles with regard to that. And we actually delayed the Myrtle Beach acquisition because of our concerns over part D. It looks as if that's over with as far as that acquisition. I know that we gave you a lot of data, did that help, Jerry?

I think the color was fine. And I'll drop off, but maybe if you could also just touch on RUGS a little bit more. Because I think you sort of said you had some extra costs in terms of starting, a number of other, the public companies that reported have said RUGS they're actually seeing, flat to actually increased Medicare revenues, they sort of find enough patients in these higher acuity categories. So if we can get any more color there as to how it's going to play out? That would be great.

You bet. I'm going to say a couple of things, then Bruce might. You got to remember that's a small part of our business. We are now almost two-thirds private pay. And so, one, a lot of, we don't have a lot of urban area communities or facilities that are attached to or close to hospitals. But nonetheless, we've got a pretty robust system. And just in looking at it. We are now flat at what we were. It's just that, I think that a couple of folks weren't necessarily appropriately taking care of how you document for these RUGS categories, and we've now taken care of that. We are looking at the opportunities that are there. But again, ours are perhaps, while they're still -- there are some, that's not one of our main lines of business. We feel pretty good that what we told folks, that the third quarter compared with -- that this year would be flat and that's what we're seeing now. Bruce any?

No, we're seeing that now, we didn't see it at the beginning of the quarter, but we've come back from where that was.

Thanks.

Thanks for being with us, Jerry.

[OPERATOR INSTRUCTIONS] We go next to the site of Liam Burke with Ferris, Baker Watts. Please go ahead.

Evrett, Bruce, how are you?

How you doing?

Good. Evrett, you touched on acquisitions again, I'm presuming it's both, you're looking at pharmacy and facility. Is pricing getting any better out there?

We're looking at two very small pharmacies, but we're just, we just have found them and we're nowhere near even talking about anything. With regard to the independent assisted living, which we're looking at, there's a tremendous deal flow, but it still is about the same as it was. We're seeing certainly sub 8 cap is an absolute, everyone's doing that. And then a number of 7 seven caps. Bruce?

I agree with Evrett on that point. I think we just have to look a little bit harder, look at some one-offs, one-off transactions where we might get a little bit more of in that 9 cap range. But it is difficult.

And we do have a couple that we're looking at right now.

Okay. And, I mean, you're not distracted with basically bringing over the Sunrise homes and then just taking a look at some of the potential facilities?

Well, we look at everything. We've got that set up just as a deal flow how we handle things, so we're certainly not distracted. But the reality is that we have viewed this, the Sunrise as sort of an exclusive opportunity. It's certainly still in excess of 9% cap rate, if you will, and the ability to bring those in and chew on these very, very fine communities is something of some significance to us.

Great. Thank you.

Thanks.

We'll take our next question from the site of Carrie Montague with Davenport Brokerage. Please go ahead.

Hey. Quick question I wanted to get back to the Sunrise managed properties. I know, Evrett, you said that the first 12 or 13 properties that you pulled in at the end of last year, actually improved after you pulled them in. You said the remaining remain volatile, but could you break out for us, how did the next 10 that you plan to take in the second half of this year? How specifically are those doing? And then I guess, maybe even relatively, how do you feel about the remaining 7 that are left and where are the implications for those? And perhaps maybe terminating the remaining contracts.

Okay. So there's two questions there. Bruce?

Yes, Carrie, I think I'll start with at least the first question. When we talk about the Sunrise properties I think Evrett's referring to all 17 properties as kind of being volatile, unpredictable, and down slightly from where it was when we announced the termination back in August. That really just doesn't break up the 10 that we've done versus the 7 that still remain. That was all of them.

Okay.

And then in terms of the remaining 7. We are talking with Sunrise about the possibility of what we want to do with those 7 communities in terms of a potential deal on that. Nothing to report on that. Something we're still working forward with them on.

Okay. And I guess of the 17 that are still out there, 10 you'll probably bring back in.

10 we will bring back in.

You will bring back in I'm sorry. And sometime in the third quarter.

Correct.

Third quarter if not sooner.

If not sooner.

We just have a few issues with -- the normal transition issues. Sunrise has been very good in working with us.

Do you feel like the next 10 that you're bringing in have the same opportunity for improvement that the first 12 batch of 12 that you've seen improvements there?

Well, there were 3 areas that we've talked about, okay. So first let's just remember, there were 30 properties we probably cherry picked the 12 best right at first. And so these are, let's call them the next group. They're still very good properties. We talked about three areas, one, us taking over the insurance, again the insurance, which was required to be on there by virtue of the management contracts had $100 million limit and we don't need that much. Also we have our on captive insurance company. It's easy enough for us to write it and we're doing that.

Two, all of the Sunrise properties, they go on the third party program for handling rehabilitation services, we bring that in house and then provide our own outpatient services if you will, in that area. And we see that as, it really is, it gets close to significant. And finally, we have some good labor packages as obviously we've been able to show you that after everything is settled down, we start implementing with everyone's consensus and approval. Those are the same areas that we -- they don't differ because of these ten versus the original 13 that we took over.

If they're original, presumably, I guess you could argue the first 12 are the best ones, there actually may be more room for improvement in the next 10?

Yes, I don't know that I, it's just--.

It's tough to say it that way, Carrie, when we say that they were the best ones, they were the best ones in terms of where they performed versus a measure that was set in the contracts.

Also we took them because they geographically might fit in, so from an incremental amount it wouldn't cost us anymore from a management standpoint. So there were several, the criteria for best is just a little different.

Okay.

Does that make sense?

Absolutely. And then just back to that, in your proxy, and I guess when the deal was announced. You had been concerned over deterioration at the Sunrise managed facilities. And I think in particular, February had been a very weak month. Did you see improvement in March?

We did, we saw improvement in March. These are still erratic. And there are several reasons for that. They have been erratic, you can understand there might be a morale concern if they don't know whether they're Sunrise or Five Star, that sort of thing, but overall it has been volatile and unpredictable. And we're fortunate there was a slight improvement in March.

Okay. And then last, just a housekeeping question. Is -- what should we be using as an effective tax rate? I know you have those loss carry forwards. But I guess an effective rate the last, or I guess earlier last year?

Yes, we don't anticipate being a GAAP or income tax payer for the foreseeable future, Carrie.

Okay. Great. Thank you.

Thank you.

Thanks for joining us, Carrie.

Next we have a follow-up from Jerry Doctrow with Stifel Nicolaus. Please go ahead.

Hello, again. Just to kind of maybe pick up on the question. When you did the prospectus and the road show on the offering. You categorized the Sunrise assets as sort of have deteriorated. And I guess as you say, volatile and that sort of thing, and you didn't have March numbers, but when we saw the S&H earnings release, it looked like the coverage is actually improved quarter to quarter on the Sunrise manage stuff and actually deteriorated some on yours. I was wondering in both cases, maybe you can give us a little color as to what's going on and if that perception is kind of accurate, and what happened maybe in that last month on your side and their side?

That's a good view. Bruce?

Jerry, I'll start it. On the run coverages, we don't really look at our business from the run coverage. But the numbers that they had were probably the best estimate they had at the time. There were several entries that went into our books after they published their results.

Okay.

There were two affects of that. One they improved the rent coverages on our communities on the 105 that we operate and one actually entry on the Sunrise community that we took back that went the other way. What you were looking at was preliminary, but it was the best estimate that the Senior Housing had at the time of rent coverage. They actually did change from when Senior Housing published their results.

And just so that we can kind of compare. Do you have any sense of what the final numbers would look like?

In terms of final on coverages, I don't, I know the entries, just ballpark, one, we improved the community that we managed by a little over $0.5 million. And on the Sunrise, I think that declined by about $150,000. A little ballpark, but I think they're probably in the range.

Okay.

And then in terms of -- I don't know Evrett if you want to hit on the second part of the question?

Help me again with what were you after?

Just to give a little color that happened in that last month. It sounds like maybe it was just end of quarter accounting entries, but in terms of what your perception was kind of early March or mid March whenever we were out there, to sort of the end kind of what happened good or bad on either side.

Well, I think the most significant things are what Bruce just pointed out to you. Which, in fact were, unfortunately when they're trying to get out front with some good numbers, we, they ask us for and we give them the best data that we've got. But we really hadn't closed our books yet. And so that's one, the most significant thing.

Secondly, the second most significant thing is unfortunately and I've seen this in years past is that we got hit significantly in the legacy portfolio with some devastating is too strong a word, but Norwalk and flu viruses, and these people expire and they go to the hospitals. And so you see a decline on various levels. And finally -- and that happened, literally probably was starting while we were on the road show. And we didn't see that deterioration occuring. And also this whole Medicare thing, we start booking on various ways and then we go back and see so what are our Medicare rates. And as we looked at it, we realized that they were a little down.

Okay. Okay. All right great. That's fine, thanks.

Thanks, Jerry.

We go next to the site of Shawn McMahon with Kennedy Capital Management. Please go ahead.

Hi, guys. Good quarter.

Thanks, Shawn.

I just had one question here. About acquisitions, would you be able to do some kind of debt financing? Or would you have to do on equity offering?

I think we look at all types of financing, Shawn. If you look at one of our larger acquisitions back in late 2004, we did a little bit of debt financing, we did some refinancing and a little bit of equity. So we would look at debt and we'd look at the refinancing, as well.

Okay. I guess maybe another way is, were the stock prices at today, would you do another equity offering?

You can never say -- we always look at deals on the basis of is it accretive, does it strengthen the Company? And not just on the basis of the share price. But it's obvious that we take into account the fact that our share price is presently under our last offering, and that's just one of the many things. But, as we strengthen and as we've seen the market sort of open up, there are many avenues of financing these things. In addition, we are now, we make money and so that is another way that we're on a cash flow basis. So there are many things that perhaps in our early years we didn't have the capability of doing. And Bruce said it. A blended acquisition can be pretty doggone nice. When we use, let's call it mortgage conventional debt or some other type of debt. We use a sales lease back financing, we use cash on hand and equity.

Okay. Great. Just one last thing on the two properties. I guess the two rehab hospitals that you guys are trying to get from Health South?

We believe that from Senior Housing subject to us getting licensure.

Okay. But if I remember right earlier in the call you said that the Department of Health kind of put a block to that unless Health South releases them?

No, it's not a block, it's just that these -- the Health Department has various requirements. And they're interpreting some regulations one way, and they're asking for us to have an agreement with or more perhaps more particularly Senior Housing to have an agreement with Health South regarding the transition. And so we've asked them to review that. But there are many options with regard to that. From my view, and what I said in our call is that we still anticipate taking over at year end. And it's not a block, per se, we just want to let you know that it's -- we filed 3,000 pages in our licensure application. It just takes them a long time and they've come back and said this, we said, please reconsider this. It would make it a little more difficult. That's the point.

Okay. Can you just, I guess, if Health South, is it a next quarter deal when you were kind of hoping they sign a paper, or if they sign the paper next week, then is it six months or? I guess when they--?

We believe that there are several options short of having Health South sign a paper.

Okay. Fantastic, thanks, guys.

Thank you.

We'll go next to the site of Balaji Gandhi with Oppenheimer & Company. Please go ahead.

Hi, everyone.

Hi.

I just had one question also related to the Health South properties. Can you just refresh my memory. I thought you had some type of protection in an event that reimbursement dramatically changed for the rehab hospitals. We actually just have the, obviously the proposed rule come out for next year's rates.

Correct. We do have a rent reset built into our agreement with Senior Housing, that allows us to reset the rent in June of 2008. So that, at that point we should have known what the full affect of those 75% rule on any future potential rate impacts. So that's when we would take a look at that.

So between now and then, so the rates, it looks like for the industry it's going to be an average of about 60 or 70 basis point increase for next year that you're basically on the hook for and then '08 is when you can revise things.

I think the rules that came out this week was a rate increase not a decrease.

Right. Right. Okay. Great, thanks.

Great, thank you.

[OPERATOR INSTRUCTIONS] We go next to George Walsh with Gilford Securities. Please go ahead.

Evrett, you mentioned that the pharmacy business is now at a run rate of about 50 million. Does that include migration more to Five Star facilities and what do you see, if not what kind of impact you can have there?

Yes, why don't we have Bruce?

George, yes, I'll start with that. We still probably have about 20 communities that we need to migrate over to our pharmacies. And those 20 communities will probably add another 3 to 5 million in that range of revenue to the pharmacy.

Okay. And the other is just conceptually going forward. The pharmacy is a roll-up business. As you go forward, as each pharmacy is added, you do have to go through these putting the [RESCOT] system and the cost associated with that. So is that just going to be part of it for a while as you go through something of the roll up phase?

Yes, but you can understand that just getting the first larger base on and just getting used to how you do it was the biggest problem. And really, like any acquisition, the transition, if you will will include moving it on to our quote software operating system.

Okay. Does it get a little easier as you add more? Or is that you have an installed base did you say?

Well, it's gotten easier just in the doing in all candor. At first we didn't -- like anything else.

It's a learning curve.

Yes, it was a learning curve and we seem to be up on it now.

Okay. The other is just, there was some adjustments in general with your rent with Senior Housing. Could you just review that a bit? They said that on their call, or reviewed that. There's some shifting that's going on there with you in this quarter?

I'm not sure that shifting would be the word that I would use. But there was probably two adjustments in all honesty, George. First was a rent decrease with the properties that were sold back in 2005. We sold two communities that were discontinued, we had a rent decrease for that. And then offset that starting in 2006, we are paying a percentage of rent to Senior Housing. So a base year for a fair amount of our properties is 2005. So we pay a percentage increase over that base year.

Okay.

Net/net probably a slight overall pickup in terms of rent to Senior Housing.

Okay. The other thing, just in general with the Sunrise properties. The big thing seems to be in cost savings, labor, and insurance. And as major target areas. As you've had these properties for a while are there any other areas anecdotal or otherwise that you see or some additional cost savings in areas of margin improvement?

Well, just one of them, these are getting to be a little older communities and as is normally the case, if you're able to fix these up, then you always see a nice pop in addition, you see the opportunity of increasing rates beyond what might otherwise be the normal year over year. And for example, the property that we took over called Park Summit in February had been severely ravaged by Hurricane Rita, so when we took that over, we've now put well over $0.5 million just into that property and getting it up. And we're seeing some nice pickups just because they had 195 palm trees and every one of them was knocked down. We immediately went in and that was one of the nice things that Sunrise agreed to do in letting us take that over outside of one of these normal terminations that we've been going through. And because of that, we're able to jump on it. And we're seeing that in other things. We're trying to push a number of areas on a capital expenditure standpoint, just so that we can take advantage there in hours, they're under our control and all of these things are under our control, so it allows us to push it up a little bit. These have always been very good properties. It's just, from relative standpoint, which is the best, and which aren't.

So with those improvements in general, do you think that you'd be able to put through some increases that had been say above the average that had been at those properties previously?

Yes, the easy answer is yes, to quantify it is just a little tough.

Okay, great, thanks, Evrett.

Thanks, George.

Next, we have another follow-up from the site of Jerry Doctrow with Stifel Nicolaus. Please go ahead.

Sorry. For another one. Just on the follow-up there, actually on CapEx. Can you give me what you spent actually on CapEx in the quarter. And then, how much of that was maybe funded by S&H. And on both those points what's the outlook maybe for the rest of the year?

I'll start with what we did in the quarter. Senior Housing financed bout $5 million of CapEx and then we probably had several million on top of that.

It was about 8 in total.

Yes.

Okay.

And we're, we've -- we're looking at a couple of different things, Jerry, and I appreciate your doggedness, actually, I really do, because this is a good thing to get out. We've actually put together some pretty, a pretty good team here of what we call area chief engineers. And so, that each two regions if you will, will have somebody that oversees it and it's allowed us to speed up and have a lot better control over the capital expenditures, both from just a maintenance and review, as well as what are some opportunities. And we've implemented a more regular review where these guys and the guys that oversee the whole thing meet with Bruce and me and Rosemary, our COO. We go all of the expenditures and all of the things that are going on. And we've started a pretty rigorous financial review of those. But it's been real positive, and one of the things that we've told folks is that we're seeing a, a couple of score properties where we can increase the number of units that we've got and we're starting that.

So we're going to -- so not only just enhancing how these things look when you walk through the door, but also in sort of getting your toe wet. Get into the development. I hesitate to use that word, but into the side of it where we're actually building some units on and then going forward with that. So we're very, very bullish on that program. And we really started at the end of last year. And we now have all of the spots filled. So we're feeling pretty good about that.

And just in terms of say dollars expectations for the rest of the year, is 8 million a quarter sort of a good run rate? Is it more or less than that, and I think S&H on their call said they might be funding $5 million in total, but I think it included you and some other folks. So what's kind of a total -- what would be a good quarterly number to use for CapEx? And how much might be funded by S&H?

Okay. Well, we're looking at how we fund these things just because that's on the same basis that we're looking at how we fire anything. But we're starting at 8, the obvious point is once you get a team out there and they start working, you're able to actually do more. So it's going up from 8. How much more? Is it 8, then, 9, then 10? 8 is a good number to start with but we're seeing an increase, is that fair to say, Bruce?

It is, the majority of that, Jerry, is science by Senior Housing.

Okay. All right. Thanks.

Thank you.

There are no further questions at this time. I'd like to turn the conference back to Mr. Evrett Benton for any additional and/or closing comments.

All right. Well, thanks to all of you for joining us on this first quarter conference call. I personally appreciate the questions. We will be presenting at the Jefferies health care conference in New York City on June 7. We look forward to speaking with you there or on our second quarter call. Thanks, again.

Ladies and gentlemen, this does conclude today's conference call, at this time, I'd like to thank you for your participation, you may now disconnect. Thank you and have a great day.