Alerislife Inc (ALR) 2006 Q4 法說會逐字稿

Good day, and welcome to the Five Star Quality Care fourth quarter 2006 financial results conference call. This call is being recorded.

Now at this time I'd like to turn the conference over to the Manager of Investor Relations, Tim Bonang.

Mr. Bonang, please go ahead.

Thank you, Dwayne.

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, March 1, 2007.

The Company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call other than through filings with the Securities and Exchange Commission regarding this reporting period. Actual results may differ materially from those projected in these forward-looking statements. Additional information concerning factors that could cause those differences is contained in our Form 10-K and 10-Q filed with the Securities and Exchange Commission. Investors are cautioned not to place undue alliance upon any forward-looking statements.

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

Thanks, Tim.

And thanks to everyone for joining us this afternoon.

Before I begin with the specifics of the quarter, I wanted to mention a step that we've taken to assist with our marketing to potential residents and investors. In February, we launched a new website for the Company, at www.fivestarqualitycare.com. In addition to a more user-friendly design, Five Star's new website provides investors with an increased level of information about the Company. A prominent feature of the new website is a Find a Community section, with an interactive map of the United States that allows users to view individual pages for the communities that Five Star operates. Finally, we'll be working on future enhancements throughout 2007.

This morning we reported income from continuing operations of $0.20 per share, excluding the effects of an approximately $40.1 million charge for the termination of management agreements with Sunrise covering seven communities that they previously managed for us. This compares to $0.19 per share for the fourth quarter of 2005, which also excluded termination charges. On a full-year basis, excluding the Sunrise termination fees, we reported earnings per share of $0.62, versus $0.34 last year. This is almost a doubling of earnings per share.

From an operational standpoint, the fourth quarter was a solid yet fairly complicated quarter. Let's review some of the key events.

On November 1, we took over operations of two rehabilitation hospitals in the Boston area, and we've been very busy integrating these facilities into our operations. At the same time, Five Star reached an agreement with HealthSouth to settle numerous transition matters and claims, including costs relating to our assumption of the operations of these two rehabilitation hospitals.

Immediately upon taking over the hospitals in October, we conducted a comprehensive review of the physical plants. Based on this assessment, we have planned $15 million in capital improvements over the next 18 to 24 months that we believe will strengthen their market position and allow us to increase occupancy and grow revenues. Members of the investment community saw our renovation plans during a tour of these facilities which we hosted in late January.

At this point, we've been operating these hospitals for five months, and we're pleased to report that they are on an annualized revenue run rate in excess of $100 million. While our expectation was that the hospitals would be neutral to earnings in the fourth quarter, they actually contributed about $0.01 per share to our bottom line. These two hospitals are stabilized, and I would characterize our outlook for 2007 as cautiously optimistic.

In mid-October, we completed an offering of convertible senior notes due in 2026, raising net proceeds of approximately $123 million. Some of the proceeds from this offering were used to pay the $40 million of termination fees to Sunrise and to cover about $30 million of short-term working capital needs and transition costs associated with the takeover of the two rehabilitation hospitals.

At this time, we have approximately $50 million of cash left over from the offering, and after we recapture the short-term working capital needs at the rehabilitation hospitals, we should have about $65 million of cash. During the first quarter of this year, we are prepaying HUD mortgages on six properties that we own. These payments will reduce our cash balances by about $29 million. We consider this to be an excellent opportunity to pay off debt with a weighted average cost of over 7%, with the proceeds from the convertible debt offering at a cost of 3.75%. Another benefit with prepaying these HUD mortgages is that it allows us to move forward faster with expansion plans at some of these communities.

We continue to be in the running on a number of small acquisitions that would allow us to put the remainder of this money to work for solid returns, but we have nothing to report at this time.

As I mentioned earlier, on December 1 we took over the operations at the seven remaining communities that Sunrise had managed for us. As we've said on a number of occasions, the operation of these seven are the lowest of the 30 that we've taken back from Sunrise. We've also talked about how this group has gone the longest period, well over a year, without knowing if they're fish or fowl. That having been said, while the transition went smoothly, operations continued to lag our expectations. Now that we're operating these seven communities, we can look closely at all of our options.

In addition, we took over operations at another 11 independent and assisted living communities during the latter half of 2006. While in general these are fine communities, two of the properties in the group have occupancies in the 60% range. We believe that provides a great opportunity for us in the longer term. That having been said, these communities were a drag on earnings of about $0.02 per share in the fourth quarter. As you can imagine, we have our full team addressing the operational needs of these properties.

I'd like to point out that since June of 2006 we've increased the communities we operate by 28, plus the two rehabilitation hospitals, and have added about 6,000 residents and patients, as well as 5,500 employees. In total, we now have 162 communities, the two rehabilitation hospitals, all with a resident and patient capacity of over 18,000, and with 17,000 employees.

As a much larger organization, we felt the need to take a closer look at our management to maintain our highly efficient operations. To that end, we've divided our organizational structure into four divisions -- the Western Division, based in Los Angeles and led by [Scott Herzig], which covers 51 properties in 11 states; the Central Division, in Dallas and led by Steve Johnson, which covers 44 properties in 11 states; the Eastern Division, based in Atlanta and led by [Jerry Andreatis], which covers 67 properties in 10 states; and, finally, the Rehabilitation Hospital and Pharmacy Division, headed up by [Kerry Nielsen] here in Boston.

These divisional vice presidents will report to Rosemary Esposito and me. We believe this new structure will maintain our organization at the highest level, and that the best interests of our residents and employees will remain aligned with the financial interests of our investors.

In addition, we've committed to a number of programs that we believe will further enhance our operations, including a complete overhaul of our rehabilitation software reporting systems, new software reporting for levels of care in our assisted living communities, and a new centralized rate increase process.

Even though we've experienced tremendous growth and change in 2006, I'm especially proud that we've taken on these opportunities without sacrificing the performance of our core operations. Across the board, all of our core operation metrics on a same-store basis continue to show improvement. On a same-store basis, the average daily rate increased 3%, to $134, in the fourth quarter. As a reminder, these results reflect no increase on Medicare rates and only a 2% increase on Medicaid rates. On same-store net revenue -- our same-store net revenues increased by 3%, whereas our community expenses only increased by 2%, thereby increasing operating cash flow at our same-store communities during the fourth quarter.

Overall occupancy was 90% in the fourth quarter of 2006, compared to 91% in the same period a year ago. At present, our occupancy is at 90%. This decrease is due to three factors -- first, the takeover of a number of new properties with lower occupancy levels; second, significant discharges at a number of our communities from flu, sepsis and Norwalk viruses; and, third, significant remodeling projects at several of our communities.

The percentage of our revenues that came from residents' private resources, not including the rehabilitation hospital or pharmacy revenue, was 67% in the fourth quarter, which is up slightly from 65% in last year's fourth quarter and up 1% sequentially.

Now let's take a look at our labor costs. Labor costs as a percentage of net revenues from residents increased from 49% to 51.2% between the fourth quarters of 2005 and 2006. This seeming increase requires some explanation. As a result of taking back operations from Sunrise, we've allocated certain costs to labor in 2006 which Sunrise had previously allocated to other areas. We did this in order to be consistent with our own operating procedures. As we've stated before, while we're always looking for ways to drive this number down, it may fluctuate from quarter to quarter. We think we're in good shape if we keep it in the 51 to 52% range. The base for proper comparison will be best gauged from our first quarter numbers.

Now let's review our institutional pharmacy business. As was clear when we reported our third quarter results, our institutional pharmacy business has not performed to our expectations, and that was again the case in the fourth quarter. Revenues in our pharmacy business increased 40%, to $15 million, in the fourth quarter, compared to $10.8 million in the same period last year.

During the first quarter for 2007, we hope to break even in our pharmacy business, and we're aiming to achieve 6% EBITDA margins by the end of the year. At the end of 2007, we believe that the pharmacy business will be contributing between $0.10 and $0.15 per share annually, on a run rate basis. We think that this potential outcome is worth the pain that we are now experiencing.

Now let's review our rehabilitation businesses. We've continued on plan in the development of our outpatient rehabilitation services business. We've told you that we expect to have outpatient rehabilitation clinics in 40 of our communities by the end of 2006. I'm pleased to report that we've eclipsed that number and now have 48. In addition, there are 21 outpatient clinics associated with our two rehabilitation hospitals, bringing our total number of clinics to 69.

During the last year, there has been a lot of noise in our quarterly results, which has made it difficult at times for many investors to see clearly the growth opportunity in front of us. It's our expectation that 2007 will be an easier year to interpret our results of operations.

When comparing the Five Star that began in 2006 with the Five Star that ended 2006, it was a transformational year for our company. Looking to the future, our industry is supported by increasingly compelling demographic trends, and, based on all of our actions in 2006, we're strongly positioned for growth in 2007.

At this point, I'd like to turn the time over to Bruce Mackey, our Chief Financial Officer.

Great. Thanks, Evrett.

Let's review the fourth quarter numbers. Our net revenues from residents were $196.5 million for the fourth quarter, and increased by 8% when compared with the fourth quarter of 2005. This increase was primarily due to the revenues from the six communities we acquired in June 2005, the 11 communities we acquired in 2006 and higher per diem charges to residents.

Moving on to expenses, wages and benefits for our senior living communities increased by 12% in the fourth quarter, to $100.6 million, from the fourth quarter of 2005. This increase in the fourth quarter is primarily due to wages and benefits at the six communities we acquired in June 2005, the 11 communities we acquired in 2006 and wage increases.

Other operating expenses for our senior living communities decreased by 4% in the fourth quarter, to $47.5 million, as compared to the same period in 2005. This decrease was primarily the result of a decrease in insurance costs at the communities historically managed for us by Sunrise, offset by some increased charges from third parties, as well as what Evrett had discussed earlier. As a result of taking back operations from Sunrise, we have allocated certain costs to labor in 2006 which Sunrise had previously allocated to other areas. We have done this in order to be consistent with our reporting procedures.

The management fee to Sunrise fell by 78% in the fourth quarter, to $952,000, from $4.3 million in the same period a year ago. This expense decreased because of our termination of management agreements in 2005 and 2006. Starting with this quarter of 2007, we will no longer pay Sunrise any management fees.

G&A expense for the fourth quarter increased by 28%, to $10 million, from the same period a year ago. The increase in G&A expense primarily results from the 30 communities we began to operate that were previously operated for us by Sunrise, the 11 communities we acquired in 2006, as well as expenses related to the takeover of the rehabilitation hospitals and certain increases in clinical oversight. Even with these additional items, G&A expense for the fourth quarter was still only 4.2% of total revenues, which we believe to be among the lowest in the industry. Note that with the new divisional structure and other support services, we anticipate a modest increase in this percentage during 2007.

Rent expense during the fourth quarter for the communities that we leased increased by 24%, to $31.8 million, from the fourth quarter of 2005. This rent expense increase is due to the communities that we began to lease in 2005 and 2006, the hospitals we began to lease in October 2006 and our payment of additional rent for capital improvements purchased by Senior Housing since January 1, 2005.

EBITDA, excluding Sunrise termination fees, increased from $3.7 million to $7.4 million, or almost 100%, between the fourth quarters of 2005 and 2006, respectively. At the end of 2006, we had 31.7 million shares outstanding. Taking into account the convertible note offering in October, our fully diluted shares outstanding is now 41.4 million shares. This is important for investors to note, because, starting the first quarter of 2007, we will be presenting financial results on both a basic and fully diluted basis. For comparison purposes, the fourth quarter 2006 earnings per share, excluding the termination fee to Sunrise, on a fully diluted basis, was $0.19.

Moving on to the balance sheet and some more items of note, cash and cash equivalents were $46.2 million at the end of the fourth quarter, and we had investments of $50.4 million. Accounts receivable at the end of the fourth quarter were $67.8 million. Our days sales outstanding, not including the rehabilitation hospitals, still remained an industry-leading 19.5 days. As a reminder, this low level was achieved while factoring in that 33% of our revenues for the quarter ended December 31, 2006 were received from Medicare and Medicaid programs that generally pay 30 days in arrears.

At the end of the fourth quarter, the market value of our HUD-insured mortgage notes was $44.8 million, and we had no amount outstanding on our $25 million revolving credit facility. During the first quarter of 2007, we will pay off the HUD mortgages on six properties for $29 million, using some of the proceeds from the convertible debt offering. After these mortgages are paid off, we will have $115 million of net property and equipment, including 14 properties, 11 of which will be unencumbered. We believe that we are currently in compliance with all material terms of our mortgages, convertible notes and revolving credit facility.

In summary, the fourth quarter and full year 2006 were important in solidifying Five Star's position as a leader in the senior living industry. In our core business, our operating metrics have remained strong, and our ancillary businesses provide opportunities for additional incremental growth. Overall, we believe that our proven track record as an acquirer and operator of senior living communities, our focus on maintaining high occupancies in operating margins, and focus on increasing the percentage of revenues that come from residents with private resources, make Five Star an appealing choice for investors.

That concludes our prepared remarks.

Operator, we are now ready to take questions.

Very good.

[OPERATOR INSTRUCTIONS]

Our first question will come from Donald Hooker, with UBS.

Great. Thanks for taking my call. With regard to the pharmacy business, can you maybe -- I mean, I understand you have potentially some one-time write-offs, AR and inventory, when you acquire these mom-and-pop pharmacies. I mean, can you quantify if there are any type of write-offs, or -- in that business, or perhaps maybe quantify the IT investment you made in that business?

Thanks, Don. We appreciate the question. Before we start, we anticipated that perhaps one, if not most, of the questions would probably be with regard to the pharmacy. I want to make sure that we understand that, as a company, we're really doing very well, that 95%, 99% of our operations are really doing what we expect them to do and growing very strongly. And so I don't want to make -- don't want to have everyone start focusing on one area, which really isn't part of our core business, which we still have a great view that we're going to make this thing work. But, so from that perspective I just don't want to have it ruin what I know has been a great year and a very excellent quarter.

With regard to your question, and maybe Bruce can strengthen this a little bit more, first, remember, we said that we're not going to be losing money in the first quarter. We hope that we actually have a little, but -- in the profit side -- but we're -- don't want to be anything but realistic with regard to it. There is a large amount of accounts receivable and inventory relating to periods prior to the fourth quarter, obviously, which we, in fact, wrote off. In addition, there were some employment contracts, or one employment contract, which had some substantial sums that were attributable to it and in prior quarters. So you can look at that and say if you want to see what were the one-time, probably that which was on the negative side of that earnings release.

Bruce, you want to add anything?

I think the only thing I would add to that, Evrett, is the [inaudible]. There are still some costs associated with our [inaudible] in that loss. But, again, that would get you up to the full amount of the loss, as well.

So you're sort of, I guess, a break-even number for pharmacy, excluding one-time, if you will, items?

I think that's fair to say. Some guys would say that we were above that, but we're being very realistic with regard to everything that we've got going on. As we have -- as you can imagine, we've spent a considerable amount of time looking into these numbers and making sure that what we're having at the end of the year -- we anticipate that with everything that we've got on our plate, so to speak, we'll add about $20 million in revenues, $15 to $20 million of our own and other outside properties, before the end of the year. And, on that basis, you're going to be at a run rate of $80, $85 million. And, as I said in the prepared remarks, if, in fact, you're at a 6% run rate, then you get to some of the numbers that we had anticipated.

I want to go back and state just a couple of things. First, when we started this four years ago, Part D wasn't even on the horizon, and there have been a number of things that have changed. By virtue of that, we need to recognize that we're reviewing what we, in fact, have here. But we're three-fourths of the way through this project. I think there is pain. It's a tremendous amount of pain. But, nonetheless, once we get to the other side, if you will, and we've completed the project, and it's the end of the year, we believe that we're going to have something that's worthwhile. If that's not the case, trust me, I'm not going to be one to butt our heads against the wall on an eternal basis. We'll look and see what we've got.

I want to put another bookend on this. Everything else that we've got's doing pretty doggone good, and the reality is that the rehab hospitals have been a pleasant surprise. We're now a pretty big organization. Please don't necessarily just focus on that. Yes, we have this. But, yes, in fact, we think it's something that we're going to have fixed and that's not going to be a drag on earnings as we go forward.

Okay, I appreciate the commentary. And then I guess the other item, you had briefly mentioned the G&A. Obviously, you're -- included in that number now you mentioned the rehab hospitals. Is there any way you can quantify the sort of, I guess, rehab hospital -- kind of break out the rehab hospital expenses, you know, where they fall into, I guess, G&A and -- I mean, you have a hospital expense line here, I see, $23.3 million. Can you kind of break out some of the other rehab hospital-related expenses in G&A and some other lines that there are other expenses to break out?

Sure, Don. It's Bruce Mackey. In our G&A in the fourth quarter was very, very little related to the rehab hospitals for G&A, very negligible. I'd probably say less than $200,000. Overall, the other real big expense that you would break out would be rent expense. We probably had about $10.3 million of rent expense associated with the hospitals. I'm sorry, [$2.3] million.

Okay, $10.3 of annualized.

Yes.

Okay. And then I guess I'll ask one more question, then I'll jump out. I mean, I guess in the other -- the interest and other income line, is there a -- can you break out interest income there? That seems like a big number. The $3.7 million?

Yes. That includes the settlement with HealthSouth that Evrett talked about in the call.

Okay, I apologize.

And then the remainder of that would be interest income.

Okay. Thank you for your comments.

You bet. We had a number of things this quarter that went positive and that went negative that are in fact one-time things, many of which are associated with either the takeover of the rehab hospitals or the takeover of the Sunrise properties. And so we're saying, well, if you break all this stuff out, you know, it was -- it got to be close to a wash when it was all said and done.

Our next question is from Frank Morgan, with Jefferies & Co.

Good afternoon.

Hey, Frank.

I was wondering if you could comment on the opportunity -- you mentioned the assets that you've acquired over the last year or so, I guess non-Sunrise-managed properties, just the other acquisitions. What are the margins collectively on the assets, and therefore what's really the opportunity that you see to drive [inaudible] those assets? And then, secondly, with regard to these takeover expenses, how much of those are related to the IRS? How much of those do you expect to really to bleed over into your 2007 numbers? And then the last one, I'll ask a pharmacy question, but I'll try to be nice here. Do you expect to do any more acquisitions in pharmacy this year, or is this basically fixing what you've got and getting those margins up to 6%? Thanks.

You bet. I'll take the first and the last and let Bruce take on the takeover charges. First, the margins in nine of the 11 are in line with what you'd expect during the 30 plus or minus range up to 40%, but the margins on two of them were in fact of such a nature that they're -- they were negative. We anticipated it. They were larger than we thought, however. And so that's created the drag. Those two, one in California and one in Florida, have some significant opportunities, if you will, involving things such as capital expenditures. But also, in both places, we had to remove substantial portions of the leadership there.

As far as the pharmacy, you make a good point. We've determined that we're not going to be adding any more pharmacies until we've got straightened out what we've got.

Bruce?

And then your last question, Frank, was in regards to kind of one-time expenses associated with the hospital takeover. We have about $250,000 to $500,000 associated with the hospital transition in the fourth quarter. I would project that same level in the first quarter and then probably start to tail down thereafter.

Okay. Thank you.

Thank you.

Our next question is from Jerry Doctrow, with Stifel Nicolaus.

Jerry, your line's open. You may have to pick up your handset, or unmute your phone. I guess he's not hearing now. Jerry, are you there?

Yes.

Okay, go ahead.

Oh, sorry. Let's see, I had just a couple things which I don't think were covered. On the rehab hospitals, I just want to make sure that we're clear on the transition. You basically only had two months in the quarter, so should the run rate -- I think the revenue was like $26.1 million. We should assume that needs to get increased by a third for the right run rate going forward?

No, Jerry, we took all those off as of October 1, so that is a full quarter.

Okay. I thought -- and the same way for the rent, we have a full quarter there?

That is correct.

Yes.

Okay. Okay. I thought Evrett had said November 1. So, okay. Let's see, second, I think a lot of this may be related to rehab as well, but, you know, the AR and AP were both up a bunch, and is there other things going on there other than sort of the rehab hospitals or --

It's predominantly related to the rehab hospitals. As Evrett talked in his prepared remarks, we had about $30 million of working capital. Most of that short term into the hospitals are AR related to the hospitals. If you look at our AR compared to where we were, say, in the third quarter or the second quarter, we're up significantly, probably about $25 million, all related to the hospitals.

And just, first, I apologize if I misspoke on my prepared remarks, Jerry. It was October 1. But, second, remember, we had to do two things when we took this over. We really didn't have much time, and so we put into place some [team] software, and we actually couldn't bill -- physically bill -- until sometime in December, and then we couldn't get "clearance" to bill from the fiscal intermediaries until the end of the year. We started then. So you can imagine we built up a fair amount of accounts receivable. We actually received the first monies off of our billings under Medicare in January. And we are now on track to probably have that cleared up over the next several months as the bills are processed in order.

Okay. And CapEx, I know from the SNH call the other day that I think they're talking about funding maybe $10 million a quarter, and maybe adding 700 units, I think, for you guys over some period here. What was CapEx, actually, in the quarter, and do you have -- can you give us any more color on sort of what the spending level will be next year?

Sure. CapEx in the fourth quarter was probably a little bit up from the third quarter. And I expect -- you know, we were running, up until about the fourth quarter, around $10 million of CapEx. The predominant amount was financed by SNH. We'll probably be closer to $12.5 million a quarter starting in the 2007 year. Again, a lot of that's related to the hospitals. Evrett mentioned we'll be spending about $15 million over the next 18 to 24 months when we take on additional properties that we'll be [spending] out. Two of those are turnarounds. So $12.5 million, $10 million financed by SNH in a quarter basis. That is a reasonable figure.

Okay. And did you -- could you give me an exact number for the quarter, or do you have it there? I can get it offline.

I don't have an exact figure [inaudible].

Okay. I'll come back to you. And then on the -- just so that I'm clear on this, on the -- when SNH sort of funds you, you know, sort of the $10 million a quarter, does that become sort of a current pay, or is it capitalized, or does those lease payments basically start right away on that?

Lease payments start right away.

Okay. So if I'm thinking like you're adding -- leave aside the rehab hospitals now -- on one of your more typical residential properties, if you're adding -- one, I was wondering if you could just give us some color on how many units you expect to add, but essentially there's a drag, because you're currently paying the rent and then you may not bring units on for whatever, six months or 12 months, however long it starts -- takes to finish construction and lease up. So --

Jerry, as we put money out of Five Star and then "sell them" to Senior Housing, if you will, or have them finance it, that stays on our books, because they're not going to help our sales, so we're not paying rent on those costs. We generally wait until a project's complete.

Oh, okay. Okay. So, and then they step up the rent. So when -- so if, say in the first quarter of '07, you basically transfer or sell $10 million of CapEx to SNH, I also need to be thinking that there's a revenue stream that's associated with that, as well.

Correct. Well, the majority of those CapEx, they're revenue enhancing. We expect to kick off a few of those projects that David alluded to in his call yesterday.

Okay. And --

In 2007.

Can you, then, just give us a sense of how many -- I mean, I guess not all of them are units, but how many units we might be adding, or -- and a better sense of how we could gauge sort of the revenue enhancing impact?

I would -- the best way of saying it is that you're looking to really about a year's time. One of the interesting facts in why we paid off some of these is that -- some of these HUD mortgages is that four of the properties we had plans on bringing on about 70 units, but the HUD process was going to take us literally a year just for that. We're now going to be able to free that up. And so, for the next several quarters, really, not even until probably the first quarter of 2008, would you see anything of any significance.

Okay. Okay, and so the CapEx funding, it's being done on your books, capitalized at this point, not -- most of the stuff, then, you're -- well, again, that's what I'm trying to sort of sort out. You're saying stuff that's not yet income producing you're funding on your books. But if SNH is actually funding like $10 million a quarter for you, I assume those are finished projects and generate some revenue.

That's correct.

And, Jerry, just to put a point on that, I mean, a lot of the projects we do, while we might not be adding rooms, are revenue enhancing. For example, we did a fairly large makeover, if you will, of one of our communities down in the Aspenwood area in Maryland, Evrett, right?

Yes.

And that's an example. We didn't add any net new rooms, but we were able to gain significant occupancy growth of that community through that CapEx.

Yes, and, actually, Jerry, you went to see that building with us.

Yes, yes, I --

And now that's a great example, because we were down 40, and we're now down 10 on total. So they're at 94% occupancy. So you can see that just by virtue of the few million dollars that you put in there, it pays itself back. One, to put a fine point on this, we'll look at things quarterly, and while -- and so we're going to -- we will say, "Is the project done?" And if it's done, then we'll probably move it over. It may well be that it doesn't instantly start giving us a return, if you will, because there is going to be a fill-up or the need to implement the increased rates.

Yes, and all I'm really trying to get at, without beating it to death, and I can come back offline, is just get a sense of is there some additional growth because of the CapEx funding that we should be thinking about over the course of 2007?

Well, there is, but it has, for example, to do with the property in Florida and the property in California. And then there's a property in North Carolina that we just completed, and another property in the mid-Atlantic, Virginia, that we've just completed. And so those, one, dramatically decreased -- and, actually, I'm sorry, and one in Pittsburgh. For example, in Pittsburgh we dropped 50 residents, because we had to move the whole floor out. And so it created, obviously, a drag on our census and a drag on the earnings that we've otherwise produced. That Pittsburgh property is supposedly done in a couple of weeks, yes, or up to a month. Same with the property in the Carolinas.

And so, as you go through, yes, we'll be seeing those add-ons to those, and it's just a pickup of hopefully the percentage census. And then the other ones that are in fact true expansions, you're going to start seeing some of that come on at the end of the year.

Okay. Again, I think it would just be helpful to get something more in the way of a schedule or whatever of those things so that we could -- we could model a little bit more effectively.

I appreciate that. And we -- I've written that down.

Okay. I think that's all for me. Thanks.

Thank you.

[OPERATOR INSTRUCTIONS]

We'll next go to Derrick Dagnan, with Avondale Partners.

Hi, good afternoon. Just a couple of quick questions. I was wondering, on the older Sunrise management transitions that you had, how have the margins been playing out there in the fourth quarter versus, say, the second or the third quarter of 2006?

Thanks, Derrick, I appreciate that. Thanks for joining the call. The reality is that they're actually up. All of the -- we're doing some of the things that we said we were going to do. We're going to increase that. From our perspective, the second half of the year, as you can imagine, had a fair amount to do with taking on the remainder of the Sunrise properties, taking on the rehab hospitals and taking on these two pharmacy acquisitions and trying to figure that out.

That having been said, we're -- we've increased the margins, and we'll show on the first group -- or, excuse me, overall on the first two groups, and we anticipate doing the same thing with this third set of properties. I might note that all three sets of properties, if you will, the ones that we took over in November of '05, those that we took over in June of '06 and those that we just took over, have all had overall census increases. We also took care of things on the insurance, as you know. And we really haven't dealt, to the extent that we'd like to, in moving a lot of our labor costs where we want them to do. And we're -- we literally are on -- we've started a full press initiative with regard to that.

I think the only thing I would add to that is one of the major reasons for our divisional realignments in late 2006, early 2007 is really to help us take advantage of anything that might be there in margin expansion on those communities, as well as our regular portfolio.

Okay, thanks. That's helpful. And also, could you just comment on your ability to sort of pass on the normal annual rate increases?

Sure. Each -- on the private pay side of our business, which is about 66% of our senior living business, each of these leases, they're annual leases that we enter into. And we've actually -- Evrett mentioned it in his prepared remarks -- we centralized that rate process back in the fourth quarter of '06 to out here at corporate. So all our rate increases, we study each property, the occupancy, what's going on in the surrounding area in terms of new competition or competitors, what they're doing, and we come up with rate increases that are signed off by all our regional directors of operations. And all those rate increase letters really come from corporate. So it happens, some communities all the residents get increased once a year, other communities it's as the lease [rolls]. So you could see it effectively as a twelfth of the community roll each month.

And did you say that in the fourth quarter that that increase was about 3%?

We were 3% quarter over quarter for our average daily rate. Evrett talked about the fact that we had no Medicare rate increases in that period, and Medicaid rate increases were about 2%.

Okay. And, I guess, one last quick one, did you guys mention -- I didn't see, like, a cash flow from ops number. Did you mention that? I might've missed it.

We haven't mentioned it yet. We'll be filing our 10-K shortly, probably next week, so that will be in there.

Okay. Thank you.

Thank you.

Our next question is from J.D. Padgett, Boston Company.

Yes, hi, guys. I had a couple of quick ones. One, Bruce, I missed at the top of the call the rundown on sources and uses of cash that are expected over the next couple of months. Could you just walk through that real quick again?

I think, if I'm referring -- was that the --

That was spinning off the HUD mortgages, and then I think you were going to get some working capital back that was more --

Correct, that was in Evrett's remarks.

Right. Basically, we know that we have about $65 million left over, if you will, from the convertible debenture offering, and that from that you can subtract about $29 million for the payoff of mortgages on six properties. By virtue of that, that leaves us with roughly $36 million. And we have anticipated looking at some deals out there. Does that help you?

Yes, I thought you said you had some working capital, though, that might be coming to you, as well.

Well, that's the $65 million. Once the working capital --

That takes that into account.

Okay.

It's started to come back right now.

Okay. So once all's said and done, we'll have $36 million and a line available.

Correct.

Yes.

Okay.

As well as 14 properties, 11 of which are unencumbered --

Right.

[Inaudible] unencumbered.

Right. So cash would go down, but your mortgage debt will go down as well.

Correct.

Yes.

Okay. And then where will that leave us in terms of interest income, interest expense in Q1, Q2?

Both would fall, you know, in terms of the numbers. It's fairly, I wouldn't say it's simple, but paying off the -- we've got [$28] million of debt that we're paying off with a cost around 7%, and then taking that out of interest income. I mean, I think those would be the two big drivers.

Okay.

And the change in that.

And then some of the transitory expenses for the rehab hospital thing, does that show up in the EBITDA margin there, because we can --

Yes.

-- see that it was whatever, 10.6, but you'd probably argue that was somewhat depressed because of ineffiencies initially?

Correct.

Well, and just a fair amount of payments that we made to lawyers, accountants, consultants, IT folks.

Okay. What's your expectation there in terms of when that might normalize, and at what level that might normalize?

Bruce?

Well, like I said earlier in the call, I expect another probably $250 to $500,000 in transitional costs flowing through in the first quarter, and then it'll probably [inaudible] shortly thereafter.

And what is it optimally, in terms of margin on that operation, as you look at it?

Well, we've said it's mid to high teens in the operating margin.

Is that operating, or that's EBITDA?

That's operating.

Yes. After -- yes, that's before rent and before management. But really --

[Inaudible] break it down. I'm sorry.

But management is pretty much contained within the hospitals.

Okay. So the incremental rent's about $10 million a year, and maybe there's some incremental G&A that you have to put on to --

That's correct.

-- manage that.

It's not that significant on a quarterly basis.

Okay. And I guess when you make the comment that it was $0.01 accretive in the fourth quarter, that's kind of stripping out some of the transitional expenses?

No.

No, no, that's --

With the transitional expense.

-- including the transitional expenses.

Really?

Yes.

Okay. What is it if you do the 26.1 less the 23.4 gives you 2.7 left over, I think you said.

As a ballpark, you could probably add --

Rent was --

-- between 250 and 500 of transitional expenses and you could see where we were on our run rate.

Yes.

But then rent is 2.3, so that would leave 400,000.

Well, no, it's -- it's certainly higher than that.

Okay. And then just one last comment on the pharmacy business, growing the revenue from here. You mentioned you're not going to go out and acquire any additional pharmacies. What is it that allows that run rate to expand up to the 80, 85?

Right. We presently have a number of our own communities which are now within the range, if you will, of the two pharmacies which we picked up in the mid-Atlantic and Washington, D.C. area. And, because of that, over this year we'll be adding those into our own pharmacy operations.

Okay. Good. Thank you.

Thank you.

And we return to Jerry Doctrow, with Stifel Nicolaus.

I think, actually, my question was just answered. Thanks.

Fair enough. And next, then, to George Walsh, with Gilford Securities.

Bruce, could you clarify the abbreviated balance sheet in the news release? I'm just -- you have the mortgage payable reduced to 11.4 versus the 44 million, but that's not the HUD loan, is it?

Those are HUD loans, George, and my current liability there's about another 30-odd million. I reclassified those to comp because we're paying them off.

Okay.

When we file the detailed K, you'll see that.

Okay. That's [inaudible]. Also, Evrett, you mentioned that there were two facilities, the California-Florida, where you were -- removed some management. Are they replaced? And when you go through something like that, does that kind of do another dip to the occupancy, or does it stabilize things?

Well, number one, they've been replaced. And, number two, there usually is a slight shakeup. And I personally haven't looked at -- one, there was a dip in California, and the one in Florida is more recent. So I haven't seen the exact effects.

Okay.

[Inaudible] whenever we've done this, though, it's been a real positive.

Yes. How does recruitment go for you in getting people to run facilities? Is there -- there's talent available?

Well, it clearly is, depending upon whether you are. Whether it's a professional in the clinical area or a professional in rehab, there can be a real -- a dearth of folks. But, first, we have five full-time recruiters that do all of this -- that do all of this stuff, that go out and find folks for us, etc. Second, we're pretty much a national organization, and it allows us to draw on talents all around.

And so, for example, when we changed up management in one of our properties in Texas, we brought down a star player, if you will, from one of our other regions. And we've done that several other places. And it allows us to move these folks around. We're pretty pleased with the person that we've just brought on in California -- excuse me, in Florida -- and the one in California seems to be working out, as well.

Okay. And they're kind of turnaround specialists? Is that what you were looking for?

No, they're just -- I mean, are they -- we [sag] in all sorts of folks that "turn these things around." But we've done this a dozen times, and it's these that we've taken over. So it's sort of a norm for us, and we have tried to pick the best person. Most of the time we get it right. Sometimes we don't.

Okay. And the wage costs still came in a good range. Any update just in terms of the marketplace and trying to hold in on the wage costs?

Well, certainly, the wage costs are something that we always battle. I want to make sure that, from my prepared remarks, that you guys understand, in fact, what happened. Our numbers on the labor basis have flat to a little bit down when you look at things. Unfortunately, we got, in the 2005, we sold some properties in Connecticut that caused some changes with regard to the revenues and all the other expenses, etc., and then, in 2005, we had gross numbers, if you will, from Sunrise.

In 2006, as we took on all of the Sunrise properties at the end of 2005 and throughout 2006, we switched around the mapping of where they put various expenses. They had certain labor expenses categorized in other areas, so that when we in fact then put them into the categories that we use, we couldn't necessarily go back and have an apples-to-apples comparison, 2005 over 2006. We know that looking at the properties that we operated before Sunrise, we pulled those on, that we're doing a pretty good job. What I tried to say was, once you add in all the rehab hospitals, all of the new Sunrise, etc., let's probably restart, and then that's what we're going to do in the first quarter, and we'll use those numbers as the base upon which our labor should be then gauged. Does that help, George?

Yes, okay. Thanks a lot, Evrett.

Okay. Thank you.

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

Well, thank you all for joining us on today's call. Just one last review. Really, we're pretty happy with where we are. I want to make sure that folks look at our core operations and how well we've done there. It's been a great year. We've made some transformational changes, and we look forward to updating you on our progress in the future. Thanks a lot. Bye-bye.