Alerislife Inc (ALR) 2007 Q1 法說會逐字稿

Good day, and welcome to the Five Star Quality Care first quarter 2007 financial 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, Robbie. 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 9th, 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 reliance 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.

Today, Five Star reported income from continuing operations for the first quarter on a fully diluted basis of $0.17 per share. This is a $0.03, or 21% increase over income from continuing operations in the first quarter of 2006 of $0.14 per share.

First, I'm pleased to report that despite some occupancy setbacks, our core operations are performing well. On a same-store basis, our average daily rate increased 4% to $138 in the first quarter. We achieved this increase despite limited increases in our Medicare and Medicaid rates. Compared with the first quarter of 2006, our same-store net revenues increased by 4%, whereas our community expenses only increased by 3% during the first quarter, thereby growing operating cash flow at our same-store communities, which are those we have operated continuously since January 1st of 2006.

The percentage of our revenues that came from residents' private resources, not including the rehabilitation hospitals, nor pharmacy revenues, were 67% in the first quarter, which is up slightly from 66% in last year's first quarter and even sequentially. These results are especially impressive, given the difficult operating environment we have encountered during the last couple of quarters. Occupancy for the quarter was 90%, which is down 1% from last year; however, if we look deeper into the numbers, occupancies declined more than might otherwise be indicated. In fact, there has been an over 200 basis point decline in occupancy between October 2006 and April of 2007.

In October of 2006, our occupancy was 91.9%. As of today we are at 89.7% occupancy. Stated another way, in the first quarter of 2007, we had almost 600 more discharges than in 2006, because of deaths and transfers to facilities licensed for higher levels of care. As you can imagine, we've begun a number of strategic initiatives to counteract this occupancy drop, which we anticipate will bear fruit in the coming quarters.

Now let's look at our labor costs. Labor costs as a percentage of net revenues from residents increased from 50.2%, to 51.6%, between the first quarters of 2006 and 2007. However, as we discussed on our last quarter's call, as a result of taking back operations from Sunrise, we have allocated certain costs to labor in 2007, which Sunrise had previously allocated to other areas. We did this in order to be consistent with our own reporting procedures, but as a result on a year-over-year basis, it doesn't present an accurate apples-to-apples comparison. As we stated before, while we are always looking for ways to drive this number down, it may fluctuate from quarter to quarter. We think that we're in good shape if we can keep it in the 51% to 52% range, and we believe that our first quarter results are a good gauge of our continuing ability to control labor costs.

Now, let's review our institutional pharmacy business. Revenue in our pharmacy business increased 44% to $16.2 million in the first quarter, compared to $11.3 million in the same period last year. More importantly, I'm pleased to report that our margins in this business improved sequentially. This was accomplished in part by moving over 500 beds at Five Star and other communities to our pharmacy platforms during the quarter. We have targeted 2,000 additional beds at our communities that can be transitioned through the remainder of the year. Finally, we anticipate continued margin improvement in our pharmacy operations for the second quarter.

Now, let's review our rehabilitation businesses. We continue to work on improving the physical plant and efficiencies at our two rehabilitation hospitals. During the first quarter, there were still some transition costs flowing through the financials. In addition, as many people know, we have two wings shut down for renovation. As we complete portions of renovations to the physical plant and integrate the operations of these two hospitals, we expect them to make more of a contribution to our bottom line in the second half of the year. We also continue on track for compliance with the 75% rule. In fact, both hospitals are far ahead of schedule. Finally, even with these higher compliance levels, presently we have about 10 more patients than when we took over operations in 2006.

Before I turn the call over to Bruce, I would like to discuss a few additional items. First, we completed one acquisition during April at a cost of $4.9 million for a 47-unit assisted living community in Tennessee. In addition, we also have four more properties under agreement. Subject to normal diligence contingencies, we expect these acquisitions to close in the next few months.

Second, in the first quarter, we moved two quarters to -- excuse me, we moved two properties in Pennsylvania to discontinued operations. We made every effort over the last few years to make these communities profitable, but given certain negative changes in regulations, we determined after taking a number of approaches, that we're better off deploying our resources elsewhere in our portfolio. These properties are currently being offered for sale.

In conclusion, although we are pleased with our results for the quarter, we have seen significant declines in occupancy across the portfolio. Every day until this challenge is met, we will be focused on returning our occupancy levels to the low 90% range.

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

Thanks, Evrett. Let's review the first quarter numbers. Senior living revenues were $196.7 million for the first quarter, and increased by 9%, when compared to the first quarter of 2006. This increase was primarily due to revenues from the 11 communities we acquired in the third and fourth quarters of 2006 and higher per diem charges to revenues.

Moving on to expenses. Wages and benefits from our senior living communities increased by 12% in the first quarter to $101.6 million from the first quarter of 2006. This increase in the first quarter was primarily due to wages and benefits at the 11 communities we acquired in the third and fourth quarters of 2006, and wage increases. Other operating expenses for our senior living communities increased by 2% in the first quarter to $49.5 million as compared to the same period in 2006. This increase was primarily due to the other operating expenses at the 11 communities we acquired in the third and fourth quarters of 2006 and increased charges from third parties.

The management fee to Sunrise was zero in the first quarter of 2007, compared to $3.5 million in the same period a year ago. This expense decreased because of our termination of management agreements in 2005 and 2006.

G&A expense for the first quarter increased by 39% 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 take over the rehabilitation hospitals and certain increases in clinical oversight. Even with these additional items, G&A expense for the first quarter was still only 4.2% of total revenues, which is flat sequentially and among the lowest in the industry. As we stated in our Q4 call, we believe that with our relatively new divisional structure and other support services, we anticipate a modest increase in this percentage during 2007.

Rent expense during the first quarter for the communities and hospitals that we lease increased by 16% to $32.2 million from the first quarter of 2006. This rent expense increase is due to the communities and hospitals that we began to lease in 2006, percentage rent for some of our communities, and our payment of additional rent for capital improvements purchased by Senior Housing since January 1st, 2006.

You will note that in the first quarter of 2007, we incurred $208,000 of income taxes. This income tax expense is primarily related to alternative minimum taxes that are payable without regard to our tax loss carryforwards. We anticipate this amount will be approximately $300,000 per quarter, during the second quarter of 2007.

For the quarter, we are reporting $0.17 in earnings per share from continuing operations; however, during the quarter we also recorded a one-time gain of $3.6 million for the early extinguishment of debt. EBITDA increased from $5.7 million to $9.7 million or 72% between the first quarters of 2006 and 2007 respectively. At the end of the first quarter of 2007, taking into account the convertible note offering in October 2006, our fully diluted shares outstanding is now $41.4 million.

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 first quarter, and we had investments of $40.8 million. Accounts receivable at the end of the first quarter were $60.2 million, our days sales outstanding including the rehabilitation hospitals is an industry leading 23 days.

At the end of the first quarter, the market value of our long-term HUD insured mortgage notes was $11.4 million, and we had no amounts outstanding on our $25 million revolving credit facility. During the first quarter we paid off the HUD mortgages on five properties for $22 million, using some of the proceeds from the convertible debt offering. In April, we paid off one additional mortgage at one of our properties for $5.9 million. We now have $120 million of net property and equipment, including 15 properties, 11 of which are unencumbered. We believe that we are currently in compliance with all material terms of our mortgages, convertible notes and revolving credit facility.

With the exception of occupancy, all of our key operating metrics continue to show year-over-year improvements which we believe speaks to the strength of our core business. We are applying all of our resources to push occupancy levels back up into the low 90s during the remainder of 2007, and we are focused on producing the type of margin expansion that delivers increases to our bottom line.

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

Thank you. (OPERATOR INSTRUCTIONS). We'll go first to Derrick Dagnan with Avondale Partners.

Hi, good afternoon. I have a couple of housekeeping questions. One, did you have a cash flow from ops number and maybe a CapEx number for the quarter?

CapEx was approximately $17 million. The majority of that was reimbursed by Senior Housing, about $10 million. And then some of that stuff -- we build up products over time, a lot of the hospital stuff, for example, we won't get reimbursed until the project is completed, [and we have the] larger projects. But we put out about $17 million of CapEx and we had about $10 million reimbursed from Senior Housing.

Okay. And did you say cash flow number from operations?

Oh, I'm sorry. Hold on a quick second. It's going to be about $40 million, close to it.

Okay.

That will be in the cash flow. We will be filing the Q tomorrow probably.

Okay. And then I guess, could you discuss maybe -- are there some seasonal items in some of the operating expenses for the senior living segment, maybe on salaries and wages or on the other operating expense lines? Because I was just looking at kind of the sequential change in that, especially the other operating expense line between the fourth quarter of '06 and then the first quarter of '07, and it looks like you -- there may have been about a 100 basis point increase in that expense ratio when you look at it on a percentage of revenue.

Nothing significant between those two quarters, Derrick, but I do want to hearken back to the thing that Evrett said during his prepared remarks, is we account things slightly differently than how Sunrise accounted for them. So you're seeing some of that swing. We took back those seven remaining properties. That might be some of that driver between the two quarters.

Okay. I guess last question and I will jump back. On the pharmacy business, I thought the top line looked pretty strong, and if you look at, I guess, the 500 new beds that you rolled into that, is that the primary driver of kind of top line growth there, I guess again on a sequential basis from the fourth quarter to the first quarter?

Well, there are two things in that. Last year we acquired one more pharmacy in the fourth quarter, but obviously these 500 beds coming in, in addition to the fact that we actually had a, quote, positive EBITDA was because we straightened around some of these AR and inventory concerns that we had.

Okay. Thanks. I will drop back. Thanks.

Thank you.

Thank you. We'll take our next question come from Donald Hooker with UBS.

Hi, guys. Thanks for taking my call.

Thanks for being on our call.

In any case, following up on the earlier question about the other operating expense line. I know there are a lot of little items in there. Going in, how much of that is fixed?

We actually -- someone else asked us this in our office. We probably need to look at that because, in fact, there hasn't been anything that is a marked increase. And, really, when we first looked at this, Bruce and I were saying, well, there are just a number of things that Sunrise put in other bailiwicks and so we will gladly give some more color to that. But I don't know that we could necessarily -- and I'm glad that Derrick asked the question too, and then somebody in our office asked the question and we'll dig deeper.

Yes, but, I mean you had some fixed and some variable, Don, just to answer the straight question on that. A lot of our food costs go in there, which is variable, insurance costs, which can be variable, but then you have got some fixed costs like real estate taxes and other things.

Got you. Okay. And, I guess in terms of some of the insurance savings, I know you took out these Sunrise management fees over the past year. Are a lot of the insurance savings now built into their numbers?

They weren't --

Still some more savings? I'm just trying to get a run rate here.

I'm sorry, to answer your question, in Q1, yes. They weren't in the fourth quarter but they are in the first quarter. They're all in our insurance portfolio now.

From the Sunrise, we've continued to press some things and we've started some positive things that we hope will start bearing fruit in the third quarter probably.

We are actually going through our insurance renewals right now.

So that's more of a third quarter kind of savings event?

Yes, overall, but --

For our whole program, not just including the Sunrise.

I got you. And then regarding the pharmacy expenses, I know you had these very expensive software conversions. Can you maybe talk about where you are there with regards to -- I know you have acquired another pharmacy in the fourth quarter. Are the conversions --

Go ahead, Bruce.

Yes, I'll start and then Evrett can tail on. We have six pharmacies as you know now. And of the six, I want to say four of the pharmacies are fully converted to our new software and you shouldn't see any cost flowing through as a result of that. The last two pharmacies that we've taken on, what we are doing is we are converting all our new business to the new software and then once we've got that done, and as we've talked about, we're going to be bringing on those additional beds that Evrett talked about, once we are done with that initiative, which we believe will be in the fourth quarter, we will complete those remaining beds on those old pharmacies to the Rescot software platform.

Let me just amplify just a little bit on what Bruce said. First of all, these two, Expert Care and Progress were pharmacies that had better operating software than the others. And it's easy for us to see their numbers, first, and second, as you all know, the fourth quarter and certainly a portion of this first quarter we spent some time working through some concerns. The thought was, let's not burden ourselves with what's happening with Rescot until we've got all of these other things covered. Because we know that we've got systems that, in fact, work for us and we didn't have that in literally all of the other pharmacies we acquired.

So we felt stronger about that. And then once we are able to bring on this additional business in the -- starting in the third quarter, we will then start queuing up those Rescot systems again. It's our anticipation that until we have fully taken care of everything here in the pharmacy, we are not buying any more pharmacies. And as you know, we are making sure that what we are doing here is moving it to higher levels of EBITDA margins and then we'll see how the whole thing is looking. And that's still we are on track to do that near the end of the year.

Got you. Let me ask a couple of last quick questions to get my run rates right. Of the four properties that you are -- that you have yet acquired but you are going to, is there a total unit count there that we can use?

You know, these are all small. It's going to be around 200 --

(multiple speakers) around [250].

Yes, it's a little over 200. But really those won't even come in until the third quarter. They'll be coming in at the end of the second quarter.

Yes. We'll be closing in the second quarter.

Yep.

Okay and then finally in terms of occupancy, can you break that out between roughly between skilled nursing and assisted living?

We looked at, as you can imagine, and I want to make sure that everyone recognizes this, we really are pretty proud of what occurred. Literally on a same store basis, we had almost 400 people, just in deaths and in people that we moved out to higher levels of care. Now, that -- you know, that's not something that -- they didn't leave because they hated us. They didn't leave because they ran out of money. They left because they were -- they passed away or we weren't licensed to handle it. So we're -- this is a little bit like a tsunami that washes over us. I think that we're doing a pretty good job.

If you look at where we are, we've actually -- the number of influx, if you will, admissions is dramatically higher year-over-year. But it's just that we've got this huge, huge number of people that, unfortunately were discharged. As we have looked, it was across every portfolio and every region. We, in fact, have a number of properties which took a much bigger hit for one reason or another, and, in fact, as you know, we have shut down portions of a few properties, which results in, obviously a greater decrease, but overall, it's because of the things that I told you.

We just have looked at all the numbers, whether it's the legacy portfolio, which is skilled nursing, the CCRCs, or the independent and assisted living. Every one of those portfolios had a drop. Look, I'm not trying to say -- if you, however, look at others in our industry, it's interesting to me that we've seen every other major operator had a similar decline. I don't know why theirs was. We had a bunch of people pass away.

Yes, I got you. I was trying to get more of a run rate looking ahead. I know the economics of the two businesses are different. Is there a different occupancy rate at this point between the skilled nursing and the assisted living or the senior living?

Well, our independent and assisted living has always run a couple -- 200 to 250 basis points higher and that's still the case now.

Okay. Thank you.

You bet. You bet.

We'll take our next question from Jerry Doctrow with Stifel Nicolaus.

Thank you for being with us, Jerry. We need all the help we can get.

Yes, I wanted to zero in on a few things and Evrett, I think in addition to understanding the quarter a little better, I would like to kind of think through how some of this progresses as we go through the year. But let me start. The way we are looking at the numbers, they are certainly not $0.17, because, as Bruce mentioned, you have got that gain. So, if I tax effect that, I think I'm backing off $0.08, so I've got you coming in at $0.09, which is way below our estimate and consensus, and, clearly the payoff of the early extinguishment is a one-time item, I think --- isn't that the right way to think about it?

Let me go through a couple of things. We always use the word choppy. Okay? There are things which go up and down. Bruce, we purposely didn't want to hide any ball on this thing. Certainly on a base -- you are right at it, okay? That's certainly number one. Number two, again, we always are choppy. Number three, we are not going to stay at this level of occupancy.

But just think about it. Pull out the hospitals. Pull out the pharmacy. Let's say that you are around $800 million. If you have a 1% drop, that's $8 million a year. And that's $2 million a quarter. I mean -- unfortunately, that is the number. You can look at everything else. You can say, well, we are out there.

We had a whole bunch of people leave our buildings and it wasn't because we were giving bad service. Just by virtue of that, we have done a pretty marvelous job in my opinion, of handling that and grabbing hold of it. But if you look, yes, you are probably close to the, quote, new correct run rate. There are always some other factors that go into that choppiness. Is there a little that you could probably add on to that? Maybe, but as Bruce and I struggle with this, you are probably more correct than not.

Okay.

Is that fair, Bruce?

Very fair.

Okay, but in terms of the way our numbers were, you know, I think you usually think of occupancy as affecting revenue. The revenue number came in, actually, I think fine where we were expecting it on -- just thinking about Senior Housing for a minute. The two areas that were higher or that led to kind of the miss, if I can call it that, were all on the expense side. We talked some about both of those, but I would like to go back a bit. One was on the wages. You had said there's not a seasonal adjustment, as we go back and look over the past years it looks like there's been a 50 to 70 basis point swing fourth quarter to first quarter on wages.

Are you resetting salaries for January 1? Do you have workers' comp? Is there anything else that moves in on that? Is that just not the case? And what's -- where did -- does that trend down as a percentage of revenue from here or, you know, should we -- I mean, you are talking about 51 and 52, but it's up decently. Where does that go from here?

Okay. Let me start and then I think Bruce can add. First, one thing as we were obviously looking through that, we -- we have a very good -- what we call customer-driven healthcare insurance plan. And we tell folks it's actually not a plan, it's insurance. And -- but we did see sequentially, quarter over quarter, a dramatic increase in the number of claims. And that probably is what you are seeing flowing through other than the concepts of this Sunrise change. And we can give you a little bit more on that, and Bruce and I are working on that.

Our HR folks are looking at it. It seems to be an aberration. There is a seasonality with regard to folks that have elective surgery, for example, and this is a plan which has been in place since August. So as we're looking at it, that actually could account for a significant portion of that 100 basis point increase. And we're struggling to figure that out because those numbers come in and then they -- they get pulled apart and we try to look at them and see what, in fact, happened. Beyond that, we're going to probably have to help -- help in looking at that a little bit more in perhaps some follow-on discussions. Bruce, anything you want to add to that?

No, that is a big thing, now that you reminded me about that, that we did have that. I just want to point out that for health insurance, not that we can control our claims, obviously. I just wanted to point out that we are fully self-insured with regard to health insurance.

Yes.

It's really just claims driven and then each quarter the actuary will adjust our reserves as needed to tail the program out. It's a pretty simple thing.

Yes, I'm sorry to Derrick and to the other guys that -- it didn't hit us until we just were kicking -- because we -- we've been working on that pretty assiduously, we have a very good group that's come in to help us this year in understanding how we might change that up in August.

So there's claims, there's the Sunrise issues, but there's not just -- you don't reset all your wages in --

No, no, we don't.

Okay. And then on the other expenses which were also came in again as a percentage of revenue well above where we had expected. I mean, you've talked about a couple things there. Insurance, and Bruce mentioned other third parties. I mean, again, is that -- is there anything else that we can get any color to understand that? And is that run rate likely to continue or are there opportunities to sort of bring that down?

I don't think there's anything significant. We talked -- we briefly went over what it was. It's food costs, real estate taxes. It's other insurance, like liability, property, general and administrative costs and there's some choppiness in that. I think the biggest pieces of choppiness, again, on the reserve side, for those insurance reserves, we have our actuaries adjust it each quarter and we book whatever the actuary tells us. But the other stuff is just straight food costs or if real estate taxes are going up, utilities, et cetera.

So other than insurance, which you're going to rebid and may come down in the third quarter, this run rate -- is the right way to think of it as a percentage of revenue or in absolute dollars but that percentage of revenue run rate might well continue?

It will be in that range.

Okay. Okay. And then I think there were just a couple of other things. You've got -- I want to just clarify on the acquisitions, whether you are buying stuff on balance sheet or whether these are Senior Housing-funded acquisitions. And then you've also got $62 million of cash. So I'm trying to understand where that gets put to work or why it hasn't gotten put to work now, go forward.

Okay. I will probably take the first part and then I will turn it over to Evrett. Those four that we talked about on the call, that's probably a combination of using some of the cash on our balance sheet and using some of the real estate -- the real estate financing from Senior Housing. And then in terms -- one of the --

The first one, we bought that one.

Oh, yes. The one we (multiple speakers) we purchased. Right now I am talking about the four that we have on the deck.

Okay.

Two will be cash and then two will be real estate [daily spec] financing.

Maybe I will take just a couple of things. Number one, anything that we're looking at now, we are looking at deployment of our own capital. It happened those others in fact included S&H. They always did a great job. We appreciate what they bring to the table with us. The reality is, you're right -- we haven't deployed this capital and that might be one of the reasons why you don't see us, quote, moving up in certain of the areas.

But we're trying to be judicious and it's pretty darn difficult. There are still -- the stuff that we buy has to have something fixed to it, which is fine. We do a pretty darn good job of that. The stuff we bought in the end of last year, in fact, still has a drag. We've actually slowed the drag a little bit but it certainly still drags on. And this -- two of these four that we're bringing -- excuse me, bringing on, are troubled properties. That's probably too strong a term, but they are not going to contribute anything for the first six months probably.

It's difficult for us to find places to put this money without getting a lesser return, even after we figure it all out and say, what can we do than we are presently getting. And we are looking all over the place. We probably have 20 deals that we're looking at and we're either outbid or we see that they're just not going to work. And so I would like to say that we deploy that 60 much more quickly. We haven't been able to make that work.

Okay. So in terms of just, again, thinking forward, if you are buying assets that are not going to be contributors, I guess the REIT stuff will presumably contribute. These others that you are buying on your own account aren't going to contribute initially, you know, we shouldn't see a lot of additional earnings power sort of coming off of some of those acquisitions until some --

Not at the first. Our goal is never to buy anything unless it's accretive. But to get back into the market, we have to take a longer term view and we are being -- we have several different guys look at it from a financial basis. We have our own operator. We say you're going to have to operate this. What are you telling me? And then we have Rosemary Esposito, makes a final call with regard to this. We had a deal that we thought was going to work. It was in the southwest part of the country, and then right at the end, we just realized, we're ---

Walked away yesterday.

-- we're kidding ourselves and we walked away from it yesterday.

I appreciate the discipline. In retrospect, would you be better off not upsizing the convert so that you can have the cash?

Well, in retrospect, I probably should have taken growth hormones but I didn't. And therein lies the problem. You know, I -- everybody is 20/20 in hindsight. I believe we will have a proper deployment of those funds. I'm glad that --- I know that it adds [expanses] on a fully diluted basis. But as I look at it and review it, I'm happy that we can deploy -- we didn't know how much we were going to need for the hospitals, for example. And look, we're at 23 days outstanding. I would have never thought, including the hospitals that we would have taken care of our A/R problems that quickly, first; and second, we also thought that we would have ready use for those funds and that we would be able to deploy it. That having been said, we're able to take over the Sunrise because of that. We're able to do the hospital deal, and overall, I'm pretty pleased that we're going to be able to move forward with it.

Okay. And then I had just one or two more things. I don't want to monopolize this, if I could. Evrett, trying to just think through how quickly you can regain some of that occupancy, and then also, if you could just touch on -- I know you have a couple of properties already on the books that are, either because you are undergoing rehabs or were potentially bought as sort of turnarounds. Just trying to think through the rest of the year, how should we be thinking about any improvements sort of coming out of the existing portfolio either in occupancy or just kind of turnaround stuff?

I go over to our -- to the guy that oversees our sales and marketing. He has various signs up. I won't give you the names but he has these big printed signs so he knows these are properties that I have to work on. Everyday. Everyday we get this printout of where we are. And now three days a week, we're going through significant things with regard to what we are doing. Just -- let me just give you a couple of things. We are hosting myriad traffic building events at every building where we are down a certain number.

For example, our very, very beautiful Remington Club in San Diego is hosting 20 events in May, including the mix of entertainment and educational programs and seminars on Alzheimer's, et cetera. In addition to that, we have a number of programs where we are bringing in professional referral sources in all of our properties. We are equipping our sales directors with flexible concession tool boxes that allow them to sort of craft a particular program for bringing people in. We've targeted print and broadcast media advertising beyond what we normally do. We have crafted special move-ins and in addition, we have got a review of every one of our marketing programs and marketing personnel so that we know that we are putting the best team with the best plan on the block.

We have -- with regard to all of these renovations, we are going through -- and I have these guys literally, yesterday, one of them called me with the things on something that I felt we weren't moving fast enough on. So that whether it's Deer Creek or Fountain View, which -- another one we call Tuscany Villa now, Memorial Woods, huge projects we've got going on that are dragging us, we are looking at those on a weekly basis. So just a few of the things that we are attempting to do.

How does that play out? I've seen these things bounce back fairly quickly, but, given this, if you just look at how hard we worked over the last couple of years, to slow -- we started at 83% occupancy when we first took over the very legacy properties and we moved it up and we were so proud of ourselves. And then we touched 92% and you think you are invincible. And then you have a slide. How much can you gain every quarter? We are working so that we move it back quickly. Before the third quarter, to even think that we could do anything would be foolhardy. I'm hopeful that by the end of the year, we are back where we should be.

Okay. And then just my last little technical one and then I will jump off. Just Bruce, if you have it there. If not we'll get it offline. But just --- we were having some trouble just reconciling the diluted numbers to kind of what we had. So is there an -- just the -- the actual interest add back for the -- for the convert, if you have that there or if there's something else that we're missing when you go through to go from basic to diluted.

I don't have it with me, Jerry, but when we file our Q, which will be tomorrow, I mean, I have a full footnote for the dilution. You will see exactly what we add back and what we have done.

If we can get it beforehand, I'll come back to you offline, that would be helpful just because we are trying to get notes out maybe tonight.

Okay. That would be fine.

Thank you. (OPERATOR INSTRUCTIONS). And we'll go next to Joel Ray with Davenport.

Good afternoon. I was wondering if we could get into some of the specifics. I think on a sequential basis, the rehab business, the margins were actually down in the first quarter versus the fourth quarter. I was wondering if you saw some seasonality there or if there's something else going on that I should be thinking about.

Well, there are two things, Joel. We ran through a one-time item with regard to a settlement. And secondly, we actually ran through some additional costs in this quarter ---

Around a quarter of a million.

Yes, that pushed around. And then during the first quarter, in February, as an example, we had one of these two hospitals that we were worried about where we were with regard to compliance. They actually start coming and look at you in February -- in March, excuse me. And so we did --

We discharged a fair amount of --

Significant discharges.

When we were not taking on new residents.

Yes, so that we could meet our compliance levels. Since then, that building is actually at 65%, which they are supposed to be next March. So we are very --

With a higher census.

Yes, with a higher census, so we are pretty proud of them. That's you why see the dip. And also we just -- these renovations have a little bit of a cost associated with them. Some of them we ran through with regard -- as expenses.

The point is we may see some recovery or some improvement in the rehab business over the balance of this year, versus what we saw in the first quarter.

We think so, yes.

Oh, clearly, clearly. The second half of the year -- the remainder of this quarter and then we anticipate the second half of the year, it should come to where we want it to be.

Do you have a feel for what it is that's causing -- I know you've -- causing the overall weakness in occupancy? I know I've heard that you had deaths, discharges et cetera. But in the past, we haven't seen these types of dips in spite of these things. Do you think it has something more to do with the general economy, the housing markets? If I can't sell my grandmother's house, can I go and have the money to put her into an assisted living facility or senior housing? Do you think that is a factor, or what?

Well, just a couple of points. We actually had a greater number of admissions in this quarter than we had in the first quarter of last year. Literally. Like 200 more admissions. But that's why we are not down even more. So we're working pretty hard so that we can combat this.

Secondly, there are some things that we're seeing. Now it's not that a person says, well, I don't think I want to sell my house because there's been a 5% drop. Most of these folks own their houses outright. It's that the number of months -- number of weeks, if you will that a house is on the block has stretched, even when a person says I want to move in they usually have to dispose of a house. And when that's the case, especially into our first independent living and these CCRCs, it's no longer eight weeks or 12 weeks. It's now 30 weeks. And so we're seeing a decided drag with regard to that.

There's two other points. Always in the first quarter, there is a seasonality. It's an unfortunate event of life that people actually make it through the holidays and then they struggle in the winter. And so just after the 1st of the year, we see an increased number of deaths or people needing to move to a higher level of care, than in other quarters of the year. It happened that this year, quarter-over-quarter, where that seasonality shouldn't have that effect, we had a dramatic increase in the number of deaths and transfers to higher levels of care.

And we did see that last year as well. Same quarter we saw a decrease but we recovered a lot faster than we've recovered so far right now.

We were out on the road. We told everyone in the last conference call, we're down. And it's the -- and we told why and we said this is a, quote, seasonal thing. And then it just continued to go down and each week we'd think, okay, it's going to be coming back. And we just continued to see -- I have never seen in the seven years that we have been running this particular operation, this many deaths. That's a point in fact.

Okay. Let's shift gears a bit. Pricing power. Do you see that as having changed at all?

Well, we don't reduce our rates. We give concessions, which allow people to come in. But then as soon as you say it's no longer $3,000 a month, it's $2,800 a month, the first time that they come into the dining room, everybody knows and they're lining up to get their reduction. So we don't do it on that basis. But that, in fact, has a drag on the revenue side.

But base rates, we are still pushing a little -- we were a little under 5%, which again is very similar to where we were when we announced in the first quarter, the fourth quarter results. That is just base rates. We are still pushing other charges on top of that, levels of care to where we can get some of those move-in deposits, et cetera.

Okay. And lastly. Anything changing on the outlook on the Medicare and Medicaid front, as far as reimbursement trends?

No. We've gotten some --

Probably see two things. One, Medicare we know that the --

Skilled nursing.

Skilled is up 3.3, and with regard to the market basket on -- on the rehab hospital, it says it's three but the reality is, and taking into account various factors, it's about 2.4.

2.5. Yes, I'd say 2.4. And that will be effective 10/1/07.

Medicaid continues to be a mixed bag and we continue to roll that out at 2%.

Okay. Thank you very much.

Thank you.

Thanks, Joel.

Thank you. We'll go next to Sean McMahon with Kennedy Capital Management.

Hi, guys. I just wanted to ask on the tax rate. Is 9% good for this year? Where are you at on that?

No, it should be a lot less than 9%. The ballpark is going to be 3%.

Okay.

The AMT is around 2, and there's some other minimal tax in there but it's primarily AMT.

And when do you think you will go into a full tax rate?

It's probably going to be -- I mean, we won't be paying taxes at a full tax rate until we burn up our NOLs. We still have about $200 million of those. But from a GAAP point of view, you just show, sustained profitability, which is generally going to be about two to three years. So '07, '08, probably looking at sometime in maybe '09 before we are showing a fully taxable --

Okay. On G&A, is this a good level?

It's -- we're happy that we kept it flat sequentially quarter-over-quarter, but, I still think, just looking at my own internal budget and, the new [height] that we've added, I think it might go up a little bit. We will be happy with the 4.2, but I did point out in my prepared remarks it might go up a little bit more.

10 to 20 basis points.

20 basis points. Okay. Thank you.

We'll go next to JD Padgett with The Boston Company.

Hey, JD.

I was looking at the December quarter report. The occupancy you cited there was similar to what you reflect in this report. Just given some of the commentary about the discharges, shouldn't that have come down some?

Yes, unfortunately, we -- we don't put a decimal point there. Remember, it dropped way down, but for example, it happened that in the fourth quarter, it was in October. It moved up to 92 and then started sliding down. And on a same store basis, for example, it was actually 90.4 and then when you go to 89.5, it still shows as 90. Do you see what I mean?

Yes.

So 90 basis points is 150-some, 160 residents. Multiply that times $138 a day, and you can see that it's just the drag that we are talking about.

Okay. The 600 that you cited was year-over-year in discharges.

Yes.

Okay.

They were just discharges, yes.

So it's a bit of a rounding dynamic.

Yes.

Okay. And the other thing I had a question on was the discontinued operations from the December quarter. Was that for the one remaining property that you had yet to sell?

In December, we had -- so you are talking about the fourth quarter disco?

I guess just more appropriately for this quarter, was it just the two --

We had two new properties that we moved into the first quarter of '07.

Okay, was there already one in there from before?

No.

There was trailing costs with regard to a sale of (multiple speakers) prior year.

It's a pretty [normal] level.

Okay, so the impact we see this quarter is primarily the two new ones that you moved there.

That's right. We sold those two other properties in late '06. I want to say it was November 1st of '06.

Okay, I thought there was three in there, two you had sold and then one was still in there. Maybe I was wrong. I don't know.

No, we had a shutdown. We sold two in Connecticut, and then you are right, we had to shut down one in Wisconsin that was also sold in the fourth quarter as well.

So what we are looking at here is the two that you put in.

(multiple speakers) 90%, yes.

And the last question from me was just on the hospital margin side. What do you think is the right way to look at that exiting the year?

We continued to be hopeful that we're going to be in the mid-teens. It obviously wasn't there this quarter and we don't think that we'll be there until sometime in the third or fourth quarter.

And what were the couple things? You said there was a one-time settlement this quarter as well as the --

No, it was a one-time settlement in the fourth quarter. What Joel Ray was asking is why did it seem to go down.

Okay. So you had a gain in the Q4 period?

Yes.

So it kind of helped you. But this quarter it sounds like you still had some transition costs.

That's correct.

Yes, $250,000 went to the hospitals.

How did that compare to Q4?

Probably a little down.

Okay. And then you weren't able to push as hard on filling the facilities up, just given the --

[The clients' need] to the 75% rule.

Okay, but now we are kind of at the point where you can push on that full steam?

Yes. We are actually, as I stated, we are up about 10 residents from the time that we took over and we have been for a while, and we are averaging that. February is really what took down that first quarter with regard to the rehab hospitals. A resident in the rehab hospital business is about $1,000 a day.

Okay. Thank you.

Great. Thank you.

We'll take our next question from George Walsh with Gilford Securities.

Is there any efficiencies available, still, in terms of the Sunrise properties in terms of controlling costs there or getting any benefits on that?

Yes, thanks for joining us, George. We have, in fact, started the labor initiatives and we actually expanded it to all of our properties, even more than are under our present staffing ladders and competition control and open position reports. We just went through and did everything. And you will actually see one of the reasons that year-over-year our -- we are only up, quote, 3%. When you look at some of other operators in the industry, they were actually up higher on a percentage basis. It's because of those labor initiatives.

We believe that those will continue to bear fruit. Besides pushing that top end, this -- this labor initiative that we pushed is company-wide and it's region-wide. So that you are only -- we have 14 properties which are at 100% occupancy. And even those we -- and we have an additional 51 properties which are at 95% or higher. Each of those actually have held pretty strong and obviously, that we had 16 that were at 100%. Now we have 14. And then we have these -- these 51 that were above 95%, they actually unfortunately also showed a decrease. But the point that I was getting to is that those are about the only ones that weren't required to have significant reductions in some of their labor. And since the -- since a few months ago, we've seen some benefits starting to flow through with regard to that.

Okay. And just once again, on the occupancy, with the drop, was it a particularly bad flu season, was that what was --

We had three different things that struck us. There's Norwalk flu and sepsis, those are predominantly, you'd think, in the skilled nursing, but we don't have that many. In Florida, we had an outbreak there. And it just tends to run through -- I hate to say it like this but sepsis actually comes from hospitals. A lot of these folks that come back into our communities will have brought it in and we won't really know. And while there was that, it just seemed that we had a number of -- it was across the board. I would like to say it was just one thing, but it wasn't.

Given what's going on right now with that, do you feel you want to take any further expense control measures, or, do you feel you want to spend the marking dollars and get that occupancy up?

Well, we are doing both. I guess I should have stressed a little bit more and actually, thanks, George for asking the question, because if you ask any of our operators, they will tell you that we are squeezing them pretty hard but you are seeing some of that benefit flow through. We didn't have nearly the increase that others have and we increased less than we increased our revenues. I think that's a hallmark of a good operating company, but on the other side, we should see some additional things in that area. The one concern that we see is we haven't figured out yet what's happening with regard to this healthcare insurance. But that renews August 1. We'll have that figured out by then.

Okay. And what was that, I'm still a little unclear on the benefit on the extinguishment of debt. What was that related to?

What that was related to is when we took over some properties in November of 2004, they had HUD mortgages that were above market. GAAP requires you to essentially mark those mortgages to market, essentially. And you write them up. And we had a premium on our books, a liability, if you will. When we retired the mortgages, we had to write off that premium, so you take that into income, and that's what that relates to.

Is that a noncash item?

That is correct.

All right. Thanks.

Thank you.

We'll take our next question from Charles Lipson, with CSL Associates.

Hi, there. In the last two years we've issued quite a bit of equity and maybe a little too much convertible debt to acquire the Sunrise properties and rehab hospitals and what have you. I think investors may have a problem seeing the strategic relationship in all this, and maybe that's why the stock has acted poorly. My question is, seeing the high prices out there and us not being able to put the cash to work, is there any thought given to maybe selling some of our assets that are underperforming and maybe buying back stock since the convert is at 13 and the stock is under 10?

Let me take both of those. I certainly appreciate the question, Chuck. From our -- from our perspective, first of all, we have several other properties that are under review. These all happen to be skilled nursing properties and, we put them on sort of a purgatory list, if you will. And so we are always looking at that, obviously from one of the prior questions, you see that we have, in fact, moved properties in the past to discontinued operations and sold them. We've tried very hard to see if we can make these things work, but we are just moving some of those through. A lot of times you don't necessarily get a lot of cash back. You just take care of the negative drain.

Secondly, look, we -- we look -- of course, we're going to look at buying shares back and try to see what, in fact -- whether it works or not. The analysis does not prove to be beneficial over the long term. And you know, if it really got crazy out there, then we'll revisit it. But at present, it would not be the best use of our funds.

But it seems like money that you are paying 3% for. With a stock that's over 30% under the conversion price, that would be a pretty interesting return, just to buy your own stock back. And --

Yes, well, we did the analysis -- you are correct. You are correct. We did do the analysis and, you know -- and if it drops any further, it may well make sense. But at present, it doesn't.

Okay. Thank you.

You bet.

Thank you.

Thank you. We'll go next to Daniel Aaronson with Pilot Advisors.

Hey, fellows how are you doing?

Hey, Dan, thank you for being with us.

So talking about the linearity of this occupancy trend, where we are today, obviously I know you guys keep a tab on it, on a daily basis. So what is occupancy right now?

It's just what we said. It's 89.7%.

Today, right now.

Yes.

That seems to be, if I do my math right, the average for the quarter or where we ended the quarter.

Well, it dropped -- it's fluctuating and when we say 90, you're right, it was certainly under 90 and it just averaged up. But right now today, we are at 89.7.

So -- I mean, this is quite a decline. I don't think the -- did the others really have this much of a decline?

Well, some of them did.

So what exactly are you guys anticipating over the course of the year? I know you --

Well, we have certainly -- I don't want to rehash it. We've probably rehashed it more than anything. It is actually a good point. You can look at everything else, but the unfortunate fact is we had a decline in our occupancy, which we believe is not tied to what we do and it is the direct cause of why we're here. We are moving heaven and earth to make this thing change. We anticipate that we will see some benefit in this quarter and some benefit in the third quarter and my goal is to be back where we were by the fourth quarter.

It is interesting. I mean if you look back several quarters, your occupancy was quite strong.

We intended to continue to move up. At some point you think you are 10 feet tall and made of galvanized steel. And then something like this happens and you recognize that you need to pull back and look at everything. Trust me, we are not one to rest here. Everyone is out moving as quickly as they can.

All right. Okay. Nothing you can do about it, I suppose.

Oh, we are doing everything. We are doing everything that we said. We are cutting back on all our labor initiatives. We are looking at every particular area, and -- but more particularly -- and I didn't answer this other part. We are deploying resources appropriately so that we can actually grow. We are never going to -- never going to downward spiral. That would be the wrong view of it. We are always going to add to and look to add to it, so that over the long haul we become a stronger company.

It doesn't sound like -- you guys have mentioned that you are controlling your expenses from [years] going up more than they are, but it doesn't sound like you are making -- taking drastic measures to try to increase profits during this time. I mean, it sounds like G&A is going to go up as a percent of sales, so you're going to lose leverage there. It sounds like wages and benefits can't go down, sequentially on an absolute basis. They have to continue to go up. Am I reading that right?

I believe that you will see that -- that we are going to have a -- hopefully we'll be able to report it, some, even maybe slight but some even more benefit from some of the savings initiative that we've put into place. But, it's always the case, whenever one metric goes down, it makes the other metrics look worse on a relative basis.

I didn't know that you guys -- that was supposed to mean that wages and benefits could go down sequentially?

I think that we are working --

We have an initiative. That's right.

That's the idea to take -- not as a percentage of sales, just on an absolute dollar basis.

Absolute dollar basis. I wish we had Ms. Esposito in here with me. She's the queen of that, and she's pushing it, and her mantra is no, I don't want to see this on a relative basis, because we continue to hire folks and increase -- people get promotions, et cetera. I want to see this on an absolute dollar basis and that's what we are working on right now.

When you -- we're not making too much money and Senior Housing is making all the money. At what point can we negotiate on these leases if they are not working right?

Well, we are at arm's length. Look, I'm grateful that we have them. We would not be where we are today if we didn't have them. We talk about various initiatives but at this point what we've got are fair deals. The last deal we did was at 8%, which was at a market rate. We have to make sure that they work on the whole spectrum of things and we will move forward.

Thank you.

That is all the time we do have for today's question-and-answer session. At this time, I would like to turn the program back over to Evrett Benton for any additional or closing comments.

Thank you, all, for joining us on today's call. We plan to be out on the road meeting with investors in the coming months and we plan to present on May 24th at the Citigroup Global Conference and in late June at the Jefferies Healthcare Conference. Both conferences are in New York City, and we hope to see you at one of these events. Again, thank you. Thank you for joining us.

That does conclude today's conference. You may disconnect your lines at any time.