Alerislife Inc (ALR) 2007 Q3 法說會逐字稿

Good day, and welcome to the Five Star Quality Care third quarter 2007 financial results conference call. This call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to the Manager of Investor Relations, Mr. Tim Bonang. Please go ahead, sir.

Thank you, Eddie. Good morning, everyone. Joining me on today's call are Evrett Benton, President and Chief Executive Officer, and Bruce Mackey, Chief Financial Officer. The agenda for today's call includes 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 the federal securities laws. These forward-looking statements are based on Five Star's present beliefs and expectations as of today, November 8, 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 & 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 & 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 today. Last night, Five Star reported net income from continuing operations in the third quarter of $0.26 per share basic and $0.23 per share on a fully-diluted basis. This compares with net income from continuing operations of $0.19 per share basic and diluted in the same period a year ago.

As we said in the past, it's the nature of our business that in any given quarter there can be an amount of unusual items that have a positive impact on our earnings and an equal amount that have a negative impact. The third quarter of 2007 was weighted more decisively to the positive and included several unusual items associated primarily with benefits and insurance, which I'll discuss in more detail in a moment.

While there is only $0.01 per share of non-recurring items this quarter, we believe that $0.18 per share fully diluted for the third quarter is a more proper estimate of our present basic level of business operations and provides a solid foundation for sustained growth and margin expansion.

I would note that our key labor metric was also at an all-time low in the third quarter. Wages and benefits as a percentage of senior living revenues was 49.4% for the third quarter of 2007 compared to 51.6% for the third quarter of 2006. It's our stated goal to keep this metric between 51% and 52%, so slightly less than 50% is a very positive result.

Now let's discuss these unusual items briefly. As you may remember on last quarter's call, we told you we were in the process of finalizing renewals of our insurance, including workers' compensation, liability, and property. We said that after fine-tuning these programs we expected to save about $0.01 per share per quarter going forward. The combination of this fine tuning and an unusually light quarter for medical claims on our health insurance and workers' compensation resulted in a better than expected quarter.

This strong quarter was really the result of particularly strong operational improvements. The most notable of these improvements was occupancy, which at the end of the third quarter had risen to 90.6%. Overall average occupancy for the quarter was 90.4% compared with 89.9% last quarter and 91% for the same period a year ago. The 90.4% occupancy for the quarter is the average of the daily occupancy for all 90 days in the third quarter.

To be clear, our resident count has increased steadily over the last five months. Since we reported first quarter earnings on May 8 until November 2, we have increased the number of paying residents in our communities by 280, an approximate 175 basis point increase. Let me emphasize that point. On May 8, we had 16,062 residents. On November 2, we had 16,342 residents. While this continued occupancy increase was achieved in part by repeating several of the programs we designed to drive traffic to our buildings in response to our occupancy drop earlier this year, it is mainly the result of following the same disciplined, consistent steps that we take every single day.

As in the second quarter, rate increases were a strong contributing factor to third quarter performance. On a same-store basis, the average daily rate increased 5% to $140 in the third quarter versus $133 in the same period a year ago. As a reminder, these results include a 3.3% increase in our Medicare rates and a 3.1% increase in our Medicaid rates. As of October 1, 2007, Medicare rates increased on average by an additional 3.6%.

A third contributing factor to our strong performance in the third quarter was our 3% labor initiative which we implemented during the second quarter of this year. As we mentioned, it's just a name, but as a result of the reduction in census that we experienced earlier in the year, we required executive directors and administrators in our communities who were not at budget to find ways to remove labor hours. We also took steps to make our labor and agency tracking systems far more robust, and we expanded the labor initiative to include our two rehabilitation hospitals.

With that, let's further discuss those rehab hospital operations. In the second quarter, the hospitals were a drag on our overall business. At the time, we told you about some positive signs we were seeing as we right-sized labor and we moved to get the hospitals working together in several areas. Our hospital expenses in the third quarter were $22.6 million compared to $24.2 million for the second quarter of 2007. We are pleased to report that with these changes, our rehab hospitals have moved very close to break even in the third quarter, and we expect these hospitals to be minimally positive during the fourth quarter.

Now let's review our institutional pharmacy business. Revenues in our pharmacy business increased 29% to $18.1 million in the third quarter compared to $14 million in the same period last year and moved up sequentially from $16.9 million last quarter. Our EBITDA margins in this business improved slightly compared to second quarter to just over 3.6%. This was accomplished in part by adding several hundred residents from Five Star and other communities to our pharmacy platform. We currently have over 10,400 customers and we've targeted 600 additional residents at our communities that can be transitioned to our pharmacy platform. You may recall when we started the year we had approximately 8,500 customers serviced by our pharmacies.

Finally, we anticipate continued margin improvement in our pharmacy business in the fourth quarter and remain on target to reach our stated goal of being on a 5% operating margin run rate by early 2008. We still believe we will be at a revenue run rate of around $75 million per year. In sum, given recent changes in the reimbursement environment and the present difficult operating conditions, we continue to review all the options for each of our pharmacy operations.

On the acquisition front, following the end of the quarter we entered into an agreement with Senior Housing Properties Trust to lease and operate six senior living properties contingent upon completing the diligence process. The revenues at these communities are derived predominantly from residents' private resources and contain a mix of 565 independent and assisted living units, as well as 142 skilled nursing beds and are located in areas where we have strong bases of operations.

We recognize that some people might be wondering why we'd enter into a sale lease-back agreement to operate these communities while we have the resources to complete an acquisition such as this on our own. First, these were sourced by Senior Housing and second, we're focusing on using our own capital to purchase properties that generate higher returns on investments.

As you know, in the first quarter of 2007, we moved two communities to discontinued operations in anticipation of a sale. We've now closed one of these properties and have moved some of the residents to our other communities in the area. To date, we have no sale pending, but are actively marketing these properties. Finally, we anticipate disposing of several skilled nursing properties we've mentioned that are underperforming.

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

Great. Thanks, Evrett. Let's review the third quarter numbers. Senior living revenues were $203.7 million for the third quarter and increased by 9.1% when compared with the third quarter of 2006. This increase was primarily due to revenues from the 11 communities we acquired in the third and fourth quarters of 2006, the one community we acquired in April 2007, and higher per diem charges for residents partially offset by a decrease in occupancy.

We have noted that other providers in the skilled nursing arena have given information on the quality mix of their residents, being Medicare, insurance, and private pay. While skilled nursing is not our primary focus, we would like to note that our quality mix for all of our 6,122 skilled nursing units is 49.7% on an occupancy basis and [50.6]% on a revenue basis. Indeed, the number of Medicare residents has increased from 789 in the third quarter of 2006 to 888 in the third quarter of 2007. As of November 2, we had 948 Medicare residents or 18.2% of our skilled nursing occupancy.

All operating expenses for our senior living communities increased by 7.4% in the third quarter to $151.6 million from the third quarter of 2006. This increase in the third quarter was primarily due to the 11 communities we acquired in the third and fourth quarters of 2006, the one community we acquired April 2007, wage increases, and increased charges from third parties.

Senior living revenues for the communities that we operated in continuously since July 1, 2006 was $194 million for the third quarter, and increased by 4.9% when compared to second quarter of 2006. This increase is primarily due to higher per diem charges to residents partially offset by a decrease in occupancy.

Community expenses on a same-store basis for the communities that we operated continuously since July 1, 2006, was $143.8 million for the third quarter and increased by less than 3% when compared with the third quarter of 2006. This increase was primarily due to wage increases and increased charges from third parties. Let's reiterate our margin expansion. On a same-store basis while year-over-year expenses increased less than 3%, our revenues increased by almost 5%.

G&A expense for the third quarter increased by 25% to $10.8 million from the same period a year ago. The increase in G&A expense primarily results from our acquisition of 11 communities in the third and fourth quarters of 2006, from the communities we began to operate in 2006 that were previously managed for us by Sunrise, and from the relocation hospitals we began to operate in October 2006. Even with these additional items, G&A expense for the third quarter was still only 4.4% of total revenues, which is down sequentially from 4.5% and remains the lowest in the industry. Going forward, we expect this G&A percentage to remain relatively flat.

Rent expense during the third quarter for the communities and hospitals that we lease increased by 22% to $32.5 million from the third quarter of 2006. This rent expense increase is due to the communities and hospitals that we began to lease in 2006 and our payment of additional rent for capital improvements purchased by Senior Housing since January 1, 2006.

In the third quarter of 2007, we incurred $277,000 for federal income taxes. This income tax expense is primarily related to alternative minimum taxes that are payable without regard to our tax loss carry forwards. We anticipate that this amount will be approximately $300,000 per quarter.

EBITDA increased from $8.9 million to $12.2 million or 36.2% between the third quarters of 2006 and 2007, respectively. For the quarter, we reported net income per share from continuing operations of $0.26 basic and $0.23 fully diluted.

I would like to note that during the fourth quarter we will recognize certain one-time expenses attributable to the devastating wildfires in Southern California. At Remington Club outside San Diego, we evacuated over 400 residents. By all accounts, our staff and volunteers acquitted themselves very well. No residents were harmed and the minor damage to our community resulted predominantly from soot and smoke. Nevertheless, we anticipate a negative impact of about a penny per share attributable to this disaster in the fourth quarter.

I would now like to briefly discuss some high-level cash flow metrics. In the third quarter of 2007, after discounting amounts invested in trading securities, we had $16.5 million of cash flow provided by operating activities. In addition, we had $19.5 million of capital expenditures, $17.7 million of that will be reimbursed by Senior Housing in future periods. We anticipate the bulk of those amounts will be paid by Senior Housing by the end of the first quarter of 2008.

In the past, we've discussed the possibility of expanding a number of units at our existing communities. There are four projects that we've broken ground on, up from two in the second quarter and 12 additional projects that are currently in the planning stages. Altogether, these total over 200 additional units.

Moving on to the balance sheet and some more items of note. Cash and cash equivalents were $19.9 million at the end of the third quarter and we had investments in securities of $77.5 million. In this volatile market environment, we believe our cash position strengthens Five Star's ability to efficiently carry out the Company's long-term growth strategy.

Accounts receivable at the end of the second quarter were $58.6 million. Our days sales outstanding including the relocation of hospitals and pharmacy operations is an industry leading 21.8 days.

At the end of the second quarter, the market value of our long-term HUD insured mortgage notes was $15.9 million and we had no amounts outstanding on our $40 million revolving credit facility. We have $132.9 million of net property and equipment including 15 properties making up 1,066 independent assisted living units and 271 skilled nursing beds. Eleven of these 15 properties are unencumbered. We believe that we are currently in compliance with all material terms of our mortgages, convertible notes and revolving credit facility.

To sum up, through sustained census growth, improvements to our[ancillary businesses, solid rate increases, and the ability to hold our labor costs in check, we achieved impressive continued margin expansion and very solid sequential growth to our normalized bottom line in the third quarter. Approximately 67% of our senior living revenues are derived from residents' private resources, and the quality mix of our skilled nursing facilities compares very favorably with the best operated in the industry.

With 15 owned properties that have an estimated fair market value approaching $150 million, over $97 million of cash in investments, as well as an uncapped $40 million revolving credit facility, Five Star is solidly positioned for growth. We believe Five Star is an attractive choice for either growth or value investors.

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

Thank you, sir. (OPERATOR INSTRUCTIONS.) And our first question will come from Jerry Doctrow from Stifel Nicolaus.

Nice quarter. I want to just cover a couple things. I think, Evrett, if I understood you right, you were saying that -- while there might be like $0.01 of unusual, that, you know, $0.18 is kind of a more representative of the run rate and you went through then a bunch of things, but I was wondering if I could get a little bit more specific. I mean, is most of that just in the wages, or where would I -- you know, I'm trying sort of the right base to kind of go forward on.

You bet. I'll start and then maybe -- and then Bruce can come back at it. Maybe that's -- what's that, a scalded cat fears even cold water. The reality is that there really -- there is probably $0.01, about a penny, of a non-recurring item in there just from some PPO adjustments that really can to go the prior couple of quarters. But we just saw that our medical claims for health insurance for employees, as well as workers' compensation, were particularly low. And so that while that's certainly not a non-recurring item, we wanted to be just a little bit more cautious. Now, the reality is that during the first quarter, we saw that those were particularly high and that probably over the course of the year evens out. But, so we're just trying to say, so, let's see. We were at $0.13, $0.13 in the second quarter. This is a barn burner of a quarter by any estimation. Perhaps we want to model this and see. And that's what Bruce did and had his folks to go through, and so we're just trying to be -- cautious might be too strong a word, but with regard to where we really believe that we'd be moving from here. Bruce, any thoughts on that then?

No, I just really -- yes, we just are very unseasonably low claims in both our medical costs and our workers' compensation. (Inaudible) this also translated to our liability costs, as well.

And all of that would be in labor? I'm just trying to understand which items --?

The vast majority of it is in labor, without wages and benefits, correct. Health insurance is there and workers' compensation is there.

Okay.

We also tried to then model, Jerry --.

Also, Jerry, just one other. PTO is there, as well, what Evrett just talked about.

Yes, yes.

What's PTO?

Paid time off.

Paid time off. Okay.

So, it's the combination of holidays, sick days, and vacation.

Okay. Okay, so and if you add that back in, we're like at your 50 or 50.5 or something where -- just what's the right way to think about that?

You mean as a percentage of revenue?

Yes.

Yes, we were looking at that. It is between 50 and 50.5. I think that that's the best way we've -- it depends on how conservative you want to be. Are we at 50.5? I think Bruce would probably say that we are.

Yes.

Okay. Okay. Great. And then, you know, you're adding units, both the new stuff with S&H and then also starting to talk about these expansions, so I was wondering if I could get a little bit more color as to timing and sort of the impact on your earnings. I mean, should we just be assuming that those 707 units kind of come online mid fourth quarter? Are they going to be right at the end or is it going to be first quarter?

In terms of the acquisitions, most of the impact will be in the first quarter. We expect to close both those acquisitions by the end of the fourth quarter, but they really won't have any impact on that. And then if you're going to talk about our new additions --.

Yes.

Yes, and maybe just two things. So --.

And there's nothing --. Go ahead.

Obviously, we have told you in the past that we beefed up what we call our area chief engineers. We're now starting to see -- Bruce noted that really we've got about 16 projects underway. We're still small stuff. It's not enough to even move the needle, but we're starting to see that so these first ones are a couple hundred units. We -- I think we told you that we hope that we've got about 700 units, but also, over time that we can add to 40 of our properties. The real fun thing is that we're figuring out how to do this now and give us time and you'll see that we'll be able to get in the area of expanding by building, you know, "free-standing buildings," if you will.

Secondly, just one fun point. We noted this, I think, in a couple of investor conferences. We're seeing these -- the market come back toward us with regard to pricing so that one of these two deals that we told you about actually was were they'd actually chosen somebody else to buy it. They couldn't close it because they had financing contingency and they took our, or I should say Senior Housing's, prior bid. So, we're seeing the market come back in that regard, and I think it's very positive.

We have about a dozen properties that, you know, you can't -- is there anything there? No. We can say it because we're on this call right now, but we've got about a dozen properties beyond these that we're truly in the running for and that probably will also be, hopefully, sometime during the first quarter and so that -- you know, it's been a year since we've actually purchased anything. We purchased one in April, but that was a small one. We, I think, are getting back in this business. It's given us some real opportunity to sort of "let the concrete on the foundations dry." We're seeing the benefits of that just in how we're operating these things, and so we're looking forward to getting back in a growth mode again and hopefully where they're accretive right off the bat.

But you had a further follow-up, Jerry?

Just -- so, on the 200, we're assuming -- if I assume 16 of those, they're all about the same size. You know, the 200 units, say the couple that you've broken ground on or the four that you've broken ground on, you know, will they -- is that a year process or --?

No, no. It's about -- but, you know, it's within next year, but is it probably six months for those units? We're not talking about big things. One's 15, one's, you know, 20 and that type of thing.

Okay. And just in terms of the [707] coming online, is there anything peculiar about those or if we just add sort of 700 units, you know, in again right at the end of the fourth quarter for first quarter, average rents, all of that stuff, average occupancy?

I think that's fair, yes.

Okay. And I think the only other thing that I've got, and I want to -- then I'll jump off, let some other people ask. Just in terms of the cash, I mean, I just want to get a little more color on how you're investing this? The yields have seemed actually pretty good and I'm just trying to understand a little bit better. You know, want to make to sure you're not out buying SIVs or something like that.

We are not.

No. I mean, most of the stuff's really overnights, you know, money markets, (inaudible) preferred, things like that.

Clearly, it's just cash management. We are not in the investment business at all, and so Bruce is -- we have averaged about 5.25, is that right, Bruce?

Five, 5.25. Other than, Jerry, we do have some stuff in our captive insurance programs that are long-term investments. You know, those are [on] bond securities and things like that. So, I mean, we -- you'll see that, but those are, again, long-term investments.

And we're not going to sell those.

Okay. All right. That's fine. Thanks..

And our next question comes from Donald Hooker from UBS.

Hey, guys. Thanks, thanks for my question. Following up from the earlier question regarding this sort of unusual strength you saw in keeping insurance costs down, is this something -- Bruce, did you say that's seasonal?

There might be some seasonality. It's just the health insurance. Less people going to the doctors in the summer and things like that. But, it was very, very low in the third quarter.

Okay.

So, if you -- what Bruce did is we took them all and then we looked at the last several quarters and then looked at prior years. We probably are conservative, but we're thinking the fourth quarter it's going to obviously move up.

Okay. And then I noticed that your -- you know, with regards to occupancy,, your rates are growing very fast in the private pay side. Is that hurting your occupancy at all? Are you seeing any effect there?

Well, let me just start that. We've had 175 basis point increase. We've moved up 280 residents, and we added a whole bunch of Medicare. I'd --

No, I'm talking about the -- the rate increase is so large.

Well, yes, but you asked me has it hurt our census. It clearly hasn't. But, you know, we are right now in the final throes of deciding the increases for the coming year. We send out letters the first of December and the first of January and really the reality is that we're still in a 5% plus range.

Yes, you'll see our private pay rates be very comparable in 2008, Don, to where they were in 2007.

Okay. Okay, and then I just had one other topic. In the rehab hospitals, you mentioned that's improving and that clearly is. Can you kind of loosely map out how this looks going into '08 in terms of when you're done with some of the renovations and how that finishes off?

Well, last quarter, and I think on some investor conference, we noted that the -- unfortunately, the -- it's called a DON, or the Determination of Need process, here in Massachusetts because of a change in administration has added a year, so that there are three parts to this; the outside which we're almost done with everything on the outside and that caused us to lose some patients and we're almost done with that. Then the outpatient parts of this we're able to do without a DON and so we're doing that, as well. What you can't do is any sizable changing around of rooms and stuff and so that's -- you'll see us starting that about this time next year, hopefully, if all goes well. But we are doing what we can, as far as, you know, making sure that the -- we get in better equipment, better furnishings. We're doing wallpaper and painting and stuff like that, so we're feeling pretty good. We're seeing some real opportunities in just a number of the programs that we have as well.

We're trying to make it not only to be very, very enhanced clinical programs, but also concierge is probably too strong a word, but we're adding a bunch of touches that make us -- that set us apart and you'll see us continue to move that up. One interesting statistic, folks look at the increase in compliant patients. Those patients that comply with the CMS 13 and both hospitals are actually year-over-year above 5% increase in compliant patients. And I noted that a couple of other large operators are dramatically less than that. In addition, we're seeing that it's actually seemed to be increasing in the increase, as well. As we go into this fourth quarter, hopefully that'll be the case. Also, probably the most significant thing is that the good folks at Braintree and at New England rehab hospitals both work very hard at consolidating a lot of operations and moving that labor down so that it was more right sized.

Okay. Thanks for all that color. Have a great day. Thank you.

Thank you.

And our next question comes from Kevin Ellich from RBC Capital Markets.

Good morning, guys.

Good morning.

Nice quarter. Just wanted to ask about the cash flow. It looks really strong. Any updated thoughts there and plans on how you plan on using that cash and deploying it on [further] developments and acquisitions?

Well, I mean, I think we've talked about it. We're solidly building our cash position for future potential acquisitions that will be accretive. We're seeing a lot of deals come back to us like Evrett talked about. A lot of the stuff that we have previously mentioned had been really sourced by Senior Housing, but there are a lot more things that seem to be coming in within our pricing guidelines and we hope to take advantage of using some of our cash for those opportunities.

You know, there are a couple of, we hope, sizable is probably too strong a word, but larger deals out there that -- you know, a dozen or two dozen or whatever that would allow us to really, along with, perhaps Senior Housing, have a concerted effort at bringing the [dollar] in and we think that the prices will get down over the course of this coming year allowing us to more properly utilize those funds.

So, is --?

And the cash obviously just gives us the strength to do that.

Right. Now, Evrett, you mentioned previously that you're looking for some higher ROI investments. Is size pretty much the limiting factor there or is there any other type of investment that you're looking at?

You mean size by the number of communities?

Yes.

No. No, it's just that it would be nice to -- first, we think that we're seeing a little bit of a sea change, so we're going to be -- we're watching that. Second, we haven't sourced anything ourselves that looks that great so far, but we think it's coming, and third, we're obviously looking for the right deal. We want to make it, but we're not going to wait forever.

Got it. Nope, that's helpful. And then you've mentioned a little bit about the institutional pharmacy business. Just wondering if we could get updated thoughts and plans on going forward with the pharmacy business?

Yes. You know, our guys are doing pretty darn well in a very difficult environment, and I recognize that a number of folks have asked us, "So, what are we going to do?" And we've always said we're looking at all the options and that during the fourth quarter, we would be trying to make some decisions. We have one pharmacy that we just need to confront some issues. It's just a little too small. We need to understand what we're going to do there, and the mail order interest (inaudible) seem to be operating a little bit better. It's like e-commerce and the margins there are very, very flat. So, we're looking at all of the options and that happens to be a process that we're going through right now. Our guys that are operating it though are doing a pretty good job. We're seeing a number of things that we've asked them to do are coming about. Not to say that we're, you know, we're trying to figure it out.

I see. And then, you know, in your prepared remarks, you mentioned that 600 additional customers from Five Star Properties will be transitioned. I was wondering if you had a time frame on that?

Yes. That'll be over the next several months. We had hoped that we'd get it done by year-end, but there's always -- just with the holidays and stuff, and it's not an easy thing. Some of the huge juggernauts can do it, but we use all of our personnel and so it takes us a little while.

Sure.

It'll -- hopefully, well before the first quarter is over.

Okay. And then on the 16 new living properties coming from being sourced by S&H, I was wondering if you had the occupancy rate on those properties?

We don't have them exact, but I will tell you they were all pretty much at a pretty decent level.

Yes, they were around 90%.

Yes.

Around 90? Okay.

You've got to remember that one of those, it's a little bit of a CCRC campus. It actually has some skilled nursing beds. So, when you model that, just look back at it.

Sure.

Hopefully, we'll have a more definitive analysis for you once we close it.

Okay. Excellent. Well, I appreciate the answers, and I'll hop back in queue. Thanks.

Thank you.

Thank you.

And our next question comes from Derrick Dagan from Avondale Partners.

Good morning, and thanks for taking my question. I just wanted to ask -- go back to kind of the CapEx and you mentioned the capital expenditures in the quarter and what was reimbursable from S&H, and I guess on the cash flow statement, will we see any funds that you've received during the quarter from S&H?

You will. During the quarter, we received -- it's close to what is going to be reimbursed in the future and that's more just an oddity than anything else, but we received during the quarter about $16 million of CapEx reimbursement from Senior Housing.

And does that relate to the rehab hospital spending?

Some of that does, but the vast majority of it's on our (technical difficulty) living properties.

Okay. And when you look at the rehab hospitals and the extension of the timeframe on when you're going to work on the inside of the properties, does that extend the time for when S&H pays you back on the outside work?

A little bit. The way the financing of CapEx works is, as you know, every discreet project, if it's a boiler, when the boiler's in there and finished, they'll reimburse us. If it's a redoing a wing, it's when that wing is done. If it's the exterior, it's when that's happening, so a lot of these things are being, you know, complete during the whole days of the -- you know, the overall rehab hospitals will get reimbursed for that. So, some of that has been reimbursed already and but obviously, if you do push out that work a year, obviously, some of it's going to get pushed out a year, as well.

Okay, so it's more -- much more project specific than I had thought. Let me ask you -- one quick -- on the acquisition update, you mentioned that the operators may be coming back to your price range. Can you give us a feel for what you're seeing on cap rates? Will you give us a number?

Yes. You know, obviously, dependent upon the type and the location, we -- we're seeing it move into the eights and actually nine, so 8.5 to 9.5 but interestingly enough on some of the stuff that we'll take. The other thing, though, is that we'll always look at it from the standpoint of how it will fit into our operations, what really it's going to take from a G&A standpoint for us to operate and finally, whether it's accretive.

Okay. So, assisted living property is closer to the higher end of that range and independent on the lower end? Is that fair to say?

Absolutely.

Yes.

Okay. Thank you very much and good quarter.

Thank you.

Thanks.

(OPERATOR INSTRUCTIONS.) And our next question comes from George Walsh from Gilford Securities.

Evrett, in the previous quarter, you had engaged in some marketing initiatives to help with the census. Were those efforts continuing in this quarter? Did they help?

Yes. We said that. We actually had what we called Super Sale September. It worked very well. It continued on and we do a lot of these things. We've got this Signature treat that we've put out and we now have a recipe book out called Five Star Signature Foods, and we're trying to move through in just a number of areas. We've got a number of programs where we've got -- we highlight a chef of the month type of thing and bring in a chef who will actually cook for us at the site, but the reality is that while those certainly impacted it, we have three calls a week with each of the divisions. Every single day we look to see where we are and we -- if somebody looks like they're -- something is happening, we quickly jump on it and we track through our software programs how many folks have been sourced, how many people have been brought in to review the operation and then of those referrals, how many are actually closed on. So, it's every single day being very consistent, but we clearly have seen a real benefit from a number of these spot programs that we're continuing with.

Okay. Very good. And would the rehab hospitals in the 75% rule that's -- you're still progressing with that?

We are. We're right on. We're right on and the -- one is already at 65%, Braintree, and the other is required to be at 65% by year end and they actually, last time I looked, were 63 and really there was no --.

A tad under.

Yes, there was no problem in them getting the 65%.

Okay, and as you get to break even, how do you feel the hospitals will contribute, the rehab hospitals, in 2008?

Well, you know, we still like to think that once we get all this -- the DON stuff done that we'll be moving up to the 15 or mid percent -- mid teens and the percentage on contribution margin, EBIDARM, if you will, and we still look at that, but we are seeing some real fun things. For example, the third party payors other than Medicare, we took the old Health South contracts that were actually several years old and we're seeing some opportunity for increasing what we're to pay for under those. We're moving around these other programs, et cetera, so, look, I believe, hopefully, that you're going to see that were profitable this quarter and we'll then continue to be profitable in the coming quarters. And then by next year at this time we should have in place the various things that we're talking about or at least starting to see those come into place, which would allow us to get up into the mid teens.

Okay. So, hopefully it's a series of incremental improvements over the next year?

You bet. You know, it's never quite that steady --

Right.

-- plane, but we've got some great guys there.

Okay. And Bruce, could you just elaborate a bit on the insurance investment portfolio that you're running?

Sure. I mean, most of it's in A-rated securities, bonds, and things like that. I mean, we're required under agreements with our insurer, you know, the re-insurers, what we're limited to invest in, and most of it, like I said, is in A-rated securities.

Okay. Well, ratings are under a little scrutiny these days just as it -- there's nothing really esoteric. I mean, there's things that, you know, some of the esoteric instruments that are out there that may have some exposure, I mean, can you elaborate a little more in the portfolio in reference to that?

I don't know really what you're looking for.

Well, you know, just some of the CDOs, the SIVs, all these kind of things. I mean, do you -- you're in pretty plain-vanilla type instruments?

I'd like to think so, yes.

We are absolutely, and we're holding them long-term. These are all -- none of these -- and I know what you're going at. I mean, the markets have been roiled in that regard.

Right.

We're not in that business. We're putting them in securities that are long-term and we're happy with where those investments are.

Okay. Excellent. Very good. Thank you.

And our next question comes from Liam Burke from, Ferris Baker Watts.

Good morning. This is J.T. Rogers sitting in for Liam Burke.

Snuck in there.

Yes. Actually, most of my questions have been answered. I was wondering if you could run back through the cash flow from operations and CapEx for the first nine months again.

I just gave you the three-month during the call. Are you looking for the three-month or the nine-month?

The three months would work, too.

Sure. We had cash flow after taking into account the investment from the trading securities kind of (inaudible) that because that goes through operating and so we've had about $16.5 million generated from operating activities. And then we spent $19.5 million of capital expenditures during the quarter. Of the $19.5 million, though, $17.7 million will be reimbursed by Senior Housing. The reimbursement will take place by -- some of it's taking place, you know, as we go right now, but it'll be -- the majority will be done by the end of the first quarter.

All right. Thanks a lot.

All right. Thank you.

And our next question comes from Jerry Doctrow from Stifel Nicolaus.

And just because, again, I'm not sure I quite follow. In terms of just your net cash outflow for CapEx, the right way to think of it is like the $19.5 million minus the $16 million you got from -- you know, in terms of what actually came in and out the door this quarter, so it's like a net $2.5 million in CapEx. Is that --

That's fair, yes.

Yes.

Okay. And then just one or two other things if I could. Evrett, you had mentioned sort of the -- you closed one, you've got a couple up for sale, you've got I think two or three other skilled nursing facilities you said for sale. You know, is that something that we should be thinking about? Sort of -- does the stuff -- does the one you close help the margins and, I guess, by about how much? And, you know, is the rest of this stuff, going off-line something we should be thinking is helping and about when might it come?

Well, Bruce will actually start on that.

The one we closed, Jerry, has always been in discontinued operations.

Okay.

So, it really -- and it's been there for the last three quarters.

Okay.

So, it didn't affect that. Now, your other question, we -- these others are small properties in rural areas that -- where they've changed some regulations and really as we've looked at it, we've just said perhaps someone on a mom and pop level can operate that better and there's nothing in disco operations, though. We're just --.

Okay. But, so these others were a small drag, but they're not going to move the numbers much one way or the other?

They would not.

Yes, a couple pennies, but not much. That's right.

Okay.

Annually, yes.

Okay. And Bruce, just one thing that I think you said in response to another question I just want to clarify. You said something about private pay rates the same as '07 as '08? Did I misunderstand that? Are you basically growing about the same rates or --?

Yes. Correct.

Okay. So, you expect -- is it kind of 5 percentish growth for you guys or what do you --?

On our private pay side of the business, yes. It'll be in the 5% range.

Okay. All right. Thanks. That's all I've got.

Thank you.

Thanks, Jerry.

And our next question comes from Kevin Ellich from RBC Capital Markets.

Hey, guys. Just a couple follow-ups.

Yes.

And sorry to beat up on the cash flow here, but I'm just trying to get a handle on operating cash and free cash. Q3 was strong. Is that sustainable or is there any seasonality that you're expecting in Q4?

I wouldn't say significant seasonality. I mean, obviously, if our medical claims go up, the thing that we kind of talked about earlier in the call, that'll obviously impact cash flow, but if you look at our cash flow in the second quarter and the third quarter, very comparable. I mean, we were up in the third quarter, but, I mean, it was still very decent.

So, then, kind of thinking about going into 2008 really shouldn't be that different from what we're seeing in '07, I guess? Is that kind -- what we're looking at now, is that kind of a normalized typical year for you guys?

I'd say what you're seeing in the second and the third quarter are very normal. (Inaudible) in the first quarter, we had some things that, if you look at our cash flow from operating activities, you know, we got some insurance moneies that came through our cash flow that was kind of one-time thing, and we had a large build-up in our receivables from the hospitals because we couldn't bill. If you remember that --

Yes.

-- back in the end of 2006 and that all came in in 2007. That's why I think Q2 and 3 are a better number to look at in terms of normalized cash flow.

I see. And then would the CapEx reimbursement from S&H also be kind of normalized in Q2 and Q3, do you think?

I think so. Yes, at least for the next probably four or five quarters. I mean, we're, you know, putting a lot of money out, taking care of our buildings, especially some of the ones that we got back from Sunrise.

Okay.

We had looked at a program which took us through 2008, so it's just what Bruce said.

Okay. So, if we have --.

Next four or five quarters.

If we use 14 as a run rate for free cash, $56 million looks pretty good. Thinking about your comment about the one-time EPS impact for the California fire, will that actually be reflected in revenues or is it more -- where do you --?

Expenses.

Expenses.

Expenses? Okay.

All the other operating for the most part and actually, you know, wages is going (inaudible). A lot of overtime had to be -- we had to pay and then just cleaning the buildings and then there might be some reimbursements. We might have to pay another operator to take some of our residents. We had to put them in skilled nursing facility, for example. You might see some of that flow through.

Right. Right. Okay. And then you'd given the quality mix metrics a while back. I was wondering if you could go over those again. I got some, but didn't get it all.

Yes. On an occupancy basis, I think we were about 46 and change.

Well, it's a little higher than that, but --.

Forty-nine point seven percent on an occupancy basis --.

Right.

Okay.

-- and [50.6]% on a revenue basis.

On a revenue basis. Okay. Excellent. Thank you.

And our --

(Inaudible).

Yes. The Medicare, which is pretty sizable, I'd just maybe restate again. So, last year we were at for the third quarter 789 Medicare residents. Average of third quarter of '07 was 888 and as of November 2 we are at 948 or 18.2% of the skilled nursing occupancy, 948. That's a sizable increase. We're very pleased with some of the new programs and software that we're using to help us in that arena.

I see. Okay. Thank you.

And we have a follow-up question from George Walsh from Gilford Securities.

Hi, Evrett. I just missed, I think there was just a question just asked about the California facility with the wildfires. I just wanted to make sure I had that. Are you back in that facility that was cleaned up and that's what that penny impact was about?

We are. We were back in there within about three days.

It was. It was 72 hours. We -- what Bruce is noting is we actually had a number of our residents, the independent residents that went to Qualcomm Stadium, which was all over, they were saying that the seniors were going up into the boxes. Well, those were our folks, and then we had to take the skilled nursing folks -- remember, this is a huge campus, 416 residents. One of the finest campuses in that Southern California area. Had to pull every one of those. We had a bunch of buses, moved them in. All of our workers actually went with residents to Qualcomm Stadium, stayed with them 24 hours, and just did an outstanding job. But within 72 hours we had shipped in folks from -- workers from all over the country, whether they were clinical or clean-up folks, and then we had a rapid response for disaster that helped us in the cleanup, so we --

(Inaudible) the air filters (inaudible).

We replaced everything in the building. When you couldn't even get them, we just brought in our own and these guys were able to do a great job with that. So, we were back in 72 hours.

Do you have existing procedures for that kind of --?

Absolutely. We --.

Every building.

We put that into play just after we took over some Sunrise properties after the hurricanes down in Florida, so we have a disaster tool kit that we actually helped implement through the Assisted Living Federation of America.

All right. Well, good job on that.

Thank you.

And it appears we have no further questions. Mr. Benton, I'll turn it back over to you for any additional remarks.

Well, great. Thank you. Thank you very much for joining us on today's call. Looking ahead, we'll be attending the Credit Suisse Healthcare Conference in Phoenix, Arizona on the 14th and 15th of November, and of course, we look forward to speaking with you on our fourth quarter call sometime in February. Thanks again. Bye-bye.

Thank you, ladies and gentlemen. That does conclude today's call. We appreciate your participation. You may now disconnect.