Alerislife Inc (ALR) 2007 Q4 法說會逐字稿

Good day, welcome to the Five Star Quality Care fourth quarter and year-end 2007 earnings results conference call. This call is being recorded. At this time for opening remarks an introductions I would like to turn the call over to the Manager of Investor Relations, Mr. Tim Bonang. Please go ahead, sir.

Thank you, Anthony and good morning, everyone. Joining me on today's call are Evrett Benton and Bruce Mackey. The agenda for today's call includes a presentation by management followed by 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, March 3, 2008. 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 filings with the SEC. Investors are cautioned not to place undue reliance upon any forward-looking statements. And with that, I'd like to turn the call over to Evrett Benton.

Thanks, Tim and thanks to everyone for joining us today. This morning, we reported net income from continuing operations in the fourth quarter of $0.22 per share, basic, and $0.20 per share on a fully diluted basis. This compares with net income from continuing operations of $0.24 per share basic and diluted, for the fourth quarter of 2006, when excluding the effects of the charge related to the terminations of the Sunrise Management agreements. Like we said on our third quarter call, it's the nature of our business that in any given quarter there are several unusual or one-time items that can have a positive impact on our earnings, and an equal amount that can have a negative impact. The fourth quarter of 2007 was again weighted more decisively to the positive, and includes some one-time items primarily associated with old insurance reserves attributable to our communities, previously managed for us by Sunrise.

All together there is approximately a net $0.02 per share pick up related to these one-time items. As a result, we believe that $0.18 per share fully diluted for the fourth 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. Even taking these one-time items into account, the fourth quarter was a strong one for Five Star. Shortly, I will turn it over to Bruce to run through the details of our operations and our financial results, but before I do I want to spend a moment on our full year results. In hindsight, 2007 provided two major challenges. First, the occupancy decline in the first half of 2007 contributed to an overall decline of 60 basis points for the year and second, our plans at the rehabilitation hospitals went much slower than originally expected due to changes primarily in the state government approval process. That said, 2007 was a very solid year for Five Star. We were able to push rates in our senior living communities, our average daily rate grew by almost 10% to $137.00 compared with the prior year while our overall expenses grew about 8%. Even on a same-store basis, our numbers are impressive.

We grew senior living revenues by 5% while holding community level expenses to a 4% increase when compared with 2006. Finally, I would ask that you review Five Star's last three reported quarters. You'll see consistent strong operating metrics. These facts speak volumes about the performance of our core business in 2007 and bode well for 2008. At this point, let me turn the call over to Bruce.

Great, thanks Evrett. Our solid fourth quarter was the result of continued operational execution. Overall average occupancy for the fourth quarter was 90.3% compared to 90.1% for the same period a year ago and 90.4 % a quarter ago. The 90.3% occupancy for the quarter is the average of the daily occupancy for all 92 days in the fourth quarter. As a reminder, the fourth and first quarters historically have weaker occupancy levels than the second and third quarters.

Current occupancy for the day, Friday, February 29, was 90.0%. Coincidentally, the average census for January and February was 90.0% as well. We recently completed our regular companywide marketing blitz program. As you may recall, we sent out several teams from each building over a three day period to deliver signature treats and information about our communities. The initial results indicate that the deposits and admissions for several hundred residents should come to fruition over the next month or two. In addition, we have targeted a number of focus communities for special attention from regional and corporate sales and marketing folks. As has been the case throughout the year, rate increases contribute strongly to our performance. On a same-store basis, the average daily rate increased 6% to $148.00 in the fourth quarter versus $140.00 in the same period a year ago. You remember, last quarter this increase was 5%.

As a reminder, these increases -- I'm sorry, these results -- include our increases related to Medicare and Medicaid rates which are normally in the 3% range. We are projecting healthy rate increases in our private pay rates for 2008. Right now, we see our base rates for private pay increasing by about 5% so far.

Moving on to wages and benefits. Our wages and benefits as a percentage of senior living revenues were 49.8% for the fourth quarter of 2007 compared to 51.1% for the fourth quarter of 2006. We did a great job throughout 2007 of controlling our greatest variable expense, keeping it below our stated target of 51% - 52%. Now, moving on to our rehabilitation hospitals. We had a slight set back in the fourth quarter with regard to our hospital operations. This set back was predominantly caused by rent of compliance with regards to the 75% rule and additional accruals required for bad debt expense. As a result, the hospitals were $460,000 drag on earnings in the fourth quarter of 2007.

EBITDA margin was 9.6% which is down from the fourth quarter of 2006 at 10.0%. The real story at the rehab hospitals at years end was congress's decision to roll back the 75% rule to 60%. During the fourth quarter, we actually turned away a number of patients at both of our hospitals to meet the increase in compliance. Thus far in 2008, we are averaging about 10 patients more than we were in the entire fourth quarter because of the roll back to 60%. As an example, a pick up of 10 patients would bring about $1 million to the top line per quarter. This should help us drive margins in this business in 2008. We also continue to make positive head way with regard to our CapEx programs at these hospitals. We expect to begin work on the interior wings of the hospitals by the beginning of the third quarter of 2008. Each hospital currently has a closed wing, so we will refurbish the closed wings, transfer patients from the existing wings accordingly and then move work to the next wing. Approaching the project this way will minimize the disruption to our hospital operations. Now, let's review our institutional pharmacy business.

Revenues in our pharmacy business increased 35% to $17.3 million in the fourth quarter compared to $12.8 million in the same period a year ago. Our EBITDA margins in this business was 6.3% for the fourth quarter, a dramatic improvement. Including the pharmacy we are selling, we currently have just over 11,000 customers. Excluding the pharmacy to be sold, we still have approximately 10,550 customers. For 2008, we have targeted about 2,000 additional customers at our existing communities that can be transitioned to our pharmacy platform. This does not include possible cost estimates from any of our 2008 acquisitions. You may recall when we started the year we had approximately 8,500 customers serviced by our pharmacies. To the extent we add communities in 2008 where we have pharmacies, this provides an additional upside opportunity. In the fourth quarter, we made the decision to sell two parts of our pharmacy business. First, we are selling a small institutional pharmacy in California and second, we are selling our mail order business. Both of these businesses lost money for us in 2007 and we've concluded that we cannot run these two pieces of our pharmacy business profitably.

The rest of our pharmacy business is operating well. We exceeded our target margin in the fourth quarter and are confident we should be able to add about 2,000 additional customers to our platform in 2008. As I mentioned before, this amount does not include any potential upside to provide pharmacy services to our 2008 senior living community acquisitions. Our current business plan is to keep can our pharmacy business less the two components I mentioned earlier. We still need to prove we can sustain this business at an acceptable margin and at the same time insure it is not a distraction from our senior living operations. We believe we can demonstrate that in 2008. Moving on to acquisitions.

Thus far in 2008, we have added nine communities, with 1,032 units through lease agreements Senior Housing Properties Trust. As of today, Five Star and Senior Housing have an additional 15 communities under agreement with 772 units. These are subject to normal closing conditions, but we expect by the end of the second quarter that we will be operating these communities. A few important items to note about our 2008 acquisition pipeline. First, the properties we are acquiring are predominantly assisted living properties. There are some units of independent living an skilled nursing and a CCRC setting. Also, a large portion of the assisted living units care for senior living senior residents with dementia. Second, the majority of revenue at these communities are derived from residents with private resources and third, these acquisitions will be accretive to earnings based on historical financials, not pro forma, or projected amounts. Each community on its own will only add a small amount to our bottom line, but if we can acquire 30 properties, this will help drive our bottom line and cash flow growth in 2008. We still remain confident that we will be able to add at least 30 communities to our portfolio in 2008.

I would like to update you on the status of the two Pittsburgh senior living communities that we have had in discontinued operations. These communities are still being actively marketed and we hope to choose a buyer by the end of the second quarter. Our rent will go down by 9.5% of the net sales proceeds received by Senior Housing. We still regularly review some of our under performing communities and as of now have taken no action. But there may be a handful of smaller communities that we will dispose of in 2008.

Before getting into the fourth quarter financials, I wanted to provide you with an update of the search for Five Star's next Chief Financial Officer. As mentioned on our January call, we are reviewing a number of internal and external candidates. The board is focused on hiring it candidate that has a good mix of industry, accounting and SEC experience, as well as the ability to communicate effectively with the Street. We hope to have this position filled by May 1 of this year.

Moving on to the financial side of things let's review the fourth quarter and year-end numbers. Senior living revenues were $208.6 million for the fourth quarter and increased by 6% when compared with the fourth quarter of 2006. This increase was primarily due to revenues from the six communities we acquired in the fourth quarter of 2006, the one community we acquired in April 2007 and higher per diem charges to residents. Operating expenses for our senior living communities increased by 6% in the fourth quarter to $156.8 million when compared with the fourth quarter of 2006. This increase in the fourth quarter was primarily due to the six communities we acquired in the fourth quarter of 2006, the one community we acquired in April 2007 and increased charges from third parties.

Senior living revenues for the communities we operate continuously since September 1, 2006, was 100 -- $204.1 million for the fourth quarter and increased by 6% when compared with with the fourth quarter of 2006. This increase was primarily due to higher per diem charges to residents, partially offset by a decrease in occupancy. Senior living expenses on a same-store basis for the communities that we have operated continuously since September 1, 2006 , was $153.1 million for the fourth quarter and increased by 5% when compared with the fourth quarter of 2006. This increase is primarily due to wage and benefit increases. Let's reiterate our margin expansion: on a same-store basis , while quarter-over-quarter expenses increased 5%, our revenues increased by 6%.

G & A expense for the fourth quarter increased by 17% to $11.7 million, from the same period a year ago. The increase in G & A expense primarily results from our acquisition of six communities in the fourth quarter 2006, from the communities we begin to operate in 2006 that were previously managed for us by Sunrise and from the rehabilitation hospitals that we began to operate in October 2006. Even with these additional items, G & A expense for the fourth quarter was still only 4.6% of total revenues which is up slightly from Q3, but still remains the lowest in the industry. Going forward, we expect those G & A percentage to remain relatively flat.

Rent expense during the fourth quarter for the communities and hospitals that we lease increased by 4% to $32.5 million from the fourth quarter of 2006. This rent expense increase is due to the communities that we've been leasing in the fourth quarter of 2006 and our payment of additional rent for capital improvements purchased by Senior Housing since October 1, 2006. In the fourth quarter of 2007, we incurred $650,000 for federal income taxes. This income tax expense is primarily related to alternative minimum taxes that the are payable without regard to our tax loss carry forwards. While this amount is higher than in quarters past, it is slightly misleading, as it includes a reclassification of some state taxes which were previously included in our other operating expenses. We anticipate this amount will be approximately 7.5% of income from continuing operations before taxes in 2008. This percentage includes those state taxes that were reclassed this quarter, as well as a slight increase in our AMT tax rate in 2008.

EBITDA increased from $8.4 million to $11.3 million or 34% between the fourth quarters of 2006 and 2007 respectively, when excluding the effects of the charge related to the termination of Sunrise Management Agreements. I would now like to briefly discuss some high level cash flow metrics. In the fourth quarter of 2007, after discounting amounts invested in trading securities, we had $10 million of cash flow provided by operating activities. This amount is slightly less than previous quarters due to scheduled year-end pay outs of accrued paid vacation time and bonuses. In addition we had $17.3 million of capital expenditures, $14.2 million 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.

Moving on to the balance sheet and some more items of note, cash and cash equivalents were $31.0 million at the end of the fourth quarter and we invested securities of $69.3 million. As we noted in the press release last week, as of December 31, 2007, we had $62.3 million in auction rate securities which is we classified as current assets. Subsequent to December 31, 2007, we had participated in successful auctions. However, as a result of credit current negative conditions in the global credit markets in February 2008, $43.3 million of our option rate securities failed to settle on the respective settlement dates. We have the ability to hold these auction rate securities until a recovery of the auction process. These investments are AAA rated securities that are 97% federally guaranteed under the Federal Family Education loan program and to our knowledge, none of these securities have been downgraded. We have no immediate need for these auction rate securities. As of December 31, 2007, we had had $100 million of cash and investments. We have operating cash to maintain our working capital needs and we have an untapped revolving credit facility of $40 million. Also, each quarter we generate positive free cash flow.

As I mentioned earlier, all the properties that we expect to take on during the first six months of 2008, are sale leased after Senior Housing so our current growth program will not be slowed by this issue. Accounts receivable at the end of the second quarter were $59 million. Our days sales -- days sales outstanding, including the rehabilitation hospitals and pharmacy operations, is still an industry leading 21.5 days. At the end of the fourth quarter, the market value of our long term HUD insured mortgage notes was $15.8 million and we had no amounts out amounts outstanding $40 million revolving credit facility. We now have $131.7 million of net property and equipment including 15 properties, making it 1,068 independent and assisted living units and 271 skilled nursing beds. 11 of these 15 properties are unincumbered. We believe that we are currently in compliance with all material terms of our mortgages, convertible notes and revolving credit facility.

As we look ahead to next quarter most people on this call know our first quarter is historically the most challenging for our company. These challenges are driven primarily by census declines for several known reasons and there's one less day in the first quarter as compared to the fourth quarter; however, the momentum we built on all fronts throughout 2007 have us well positioned as we enter 2008. We expect that our core business will grow organically. We have proven our ability to control labor cost, improve occupancy and push rate. Our core business will grow externally; already in 2008, we have added over 1,000 units and have an additional 800 units under agreement with several other potential acquisitions in review. Our pharmacy margins are stronger. We believe that by shedding unprofitable portions of this business, and through anticipated customer additions, we should strengthen this business even further. Our rehab hospitals should benefit from the 60% rule. Our ability to begin interior renovations will further solidify this business in 2008. That concludes our prepared remarks. Operator? We are now ready to

Thank you, sir. (OPERATOR INSTRUCTIONS) We'll take our first question from Frank Morgan at Jefferies & Company.

Good morning. I was hoping you could tell me a little bit on the nursing home -- or was any way the nursing home business responsible for the decline in occupancy year-over-year, and was it because of a, perhaps a growing percentage of your mix coming from short stay Medicare? Thanks.

Frank, thanks for joining us on today's call. It certainly is a pleasure to hear your voice. I'll start just a couple of things. Yes, in fact, I think one of the concerns that people have is there is a decline in the independent and assisted living. While there is always a decline with that by virtue of just the wintertime, sickness, past the holidays, etc, it has not been precipitous as perhaps was the case last year. We have seen a normal decline so the people don't want to come in in the fourth quarter for any type of surgery that might land them into rehabilitation hospital, and they certainly don't want to show up there if they can get away with it and so, yes, we did see, the biggest drag was on the skilled side. There was an interesting indication though, for the first time, we've actually gone over a thousand Medicare residents, so we were very pleased with that, but that just shows you that people are having the flu or going to the hospital or for other reasons, but that happened actually earlier last week.

Yes, the only thing I would add to that, Frank, is our short-term Medicare stay is up significantly from where it was after year-end, so we have added to that post-12-31-'07.

Okay, thanks.

We'll take our next question from Jerry Doctrow at Stifel Nicolaus. Please go ahead.

Thanks. And we're going to sort of tag team you today. We're -- Dan's going to come back with some detail, but just a couple higher level things from me. I guess one is on the rehab hospitals, I was curious if you could give us any color as to how fast things might be coming back post -- really after the first of the year, now that the legislative change has been made, and any additional color as to when either approval or then ultimately completion of some of the interior improvements you are making on those might occur?

Sure, Jerry. First, the first part, I think things have come back a little bit so far in January and February. We're seeing now we're about 10 patients higher than we were in 2007, the fourth quarter of 2007 and like I said in the prepared remarks, that should add about $1 million to our top line per quarter that will help us get there, at least significantly to a break even, we believe. And then the second part of the question, we do expect to really begin interior work in the third quarter, so we are moving ahead on that front. We're seeing some positive headway with regard to getting the approval done, and we're actually starting to think about getting a model room done in the next, I'd probably say two months, and then full blown construction, like I said, beginning of the third quarter.

And then does the renovation disrupt occupancy or disrupt the top line at all, or you're really building out sort of what's vacant space now?

We're building out what's vacant space, so we'll tackle that each hospital has a closed wing, completely shut off from the other areas of the hospital. We'll tackle those areas, get those done and then start moving things around accordingly, closing down the next wing so we really do expect to minimize disruption to the the top line at the hospital.

And in terms of when all of that renovation might really start driving numbers, then that's sort of a -- what's the whole buildout like? Is it a one year or six months or longer than that?

No, it's not -- it's about a year. Each wing will take about three months, three or four months, so we expect to really see improvement, I would say early '09 in terms of our margins getting to the targets of where we expected these should be when we took over these operations.

Okay. And then, I guess just on sort of acquisition environment a little bit more, obviously there's a lot of discussion about this on the S&H call already, but you had talked about your 30 properties. It seems like you shifted gears a little bit here, and a lot of this acquisition was on Alzheimers care which has not been a major emphasis, although you certainly have done it elsewhere. What's -- just a little color on sort of what the acquisition environment is like, what would be your preferences either from geography or segment or whatever as we go forward, and is 30 kind of a minimum and we could can see more, given the acquisition environment? Again any color there would be helpful.

Yes, I'll start with the second part of your question first. We could see more than 30. That's really what we're targeting for the first half. There are additional acquisition opportunities we are still sourcing right now and they're in various stages of looking at them, getting information, but right now, we think 30 is a good target number to bring in the door. We always have been in the dementia. A number of our buildings right now service dementia across the country, and we have an internal program called the [Elan] Program that we've been sourcing over the last, I'd say year or so and bringing that along and it's working very well for us. We do very well servicing dementia residents. A number of the communities that we have taken on, we actually just closed a community over the weekend in Minnesota that has over 100 dementia residents, so it's a large community and also has a large assisted living component as well, and them an acquisition we hope to complete by end of this first quarter or early April, has a large component of dementia as well.

They're all assisted living, obviously, but just to buttress just a couple of things what Bruce said. The reality is that we've always been in the business in a number of our places. Like I think you were at Saverna Park and Elicott City, they both have wings which are associated with that, and so from our perspective , it's part of what we have and perhaps we should have touted it a little bit more,

And go forward, do you prefer AL Alzheimers independent, or it just depends where the opportunities lie, and are you focusing more on sort of geographic concentration or just --

Yes, I apologize. I do recall you asking that the question [inaudible]. I think we'll go with the opportunities lie, but I think we are going to focus on areas where we have a geographic concentration already, so we can kind of add them to our current portfolio without incurring too much overhead to bring them on.

Okay.

In each instance on this Alzheimers though, it's usually that they're part of an already --

Existing campus.

-- already existing campus.

Okay. All right, thanks and congratulations, both of you, on your I guess CEO and -

And Emeritus. Give me the Emeritus --

And CEO Emeritus and new CEo and I was trying to think of -- and your work with the [inaudible] go forward.

Thank you.

Good luck.

Thank you, Jerry, appreciate it.

We'll take our next question from Liam Burke at Ferris, Baker, Watts.

Bruce, Evrett, how are you today?

Good Liam, how are you?

Thanks for being on the call, Liam.

Thanks, Everett, it's nice to be here. Bruce, on the accounts receivable you did give the days, but the step down is pretty dramatic, vis-a-vis, your sales. Is there anything that you've done differently?

You saying from where it was at year-end?

Yes.

At year-end, you might recall, one of the reasons we actually did the convertible debt, or as much as we did, we were trying to get as much working capital because in the hospitals we couldn't bill Medicare for literally, could amount to six plus months or so, so at year-end, you had three months of Medicare revenues built up in our AR last year and you didn't have it this year.

Okay.

And that's the biggest driver between the difference in the two.

And did you give a full year free cash flow number? I know, I think you gave it for the quarter.

We gave for the quarter, we have not given it for the year-end, but we'll be filing a K within a day or two, so you should be able to get it from that fairly easily.

Okay, thank you.

Alright Liam, good talking to you.

And we'll take our next question from Donald Hooker at UBS.

Great, good morning, everyone. Thanks for taking my questions.

Thank you, Don.

Great. You talked about the insurance reserves and it was like a $0.02 share hit or something. Can you elaborate on that a bit, and where does that actually show up in the P & L so we can sort of consider that going forward.

Sure, Don, just to give you history, when we took back the Sunrise communities, the communities formerly managed by Sunrise, we had a tail out under the old Sunrise insurance programs, so it's literally as if we bought a tail from Sunrise if you will, although we didn't buy a tail, but all the old reserves had to wind their way down and as you know, some of these workers compensation and professional and general liability claims can go three to five, even a little bit longer in terms of years.

Got you.

So this is that tail that we had built up when we pulled them down, and we had that actuarially reviewed as of year-end, and we were able to pull-down those reserves by about $1 million. Now, it came about, almost really 50/50 workers comp and professional general liabilities so you realize our reduction in both our senior living wage and benefits and other operating expenses, not exactly 50/50, but it was close to it from rounding purposes.

And then from that though, we had some reductions in some other things, that's why we said it rounded to about $0.02.

Okay. And then also, kind of another elaboration if you don't mind , Bruce. You talked about the, maybe I was sort of taking notes and I missed exactly what you said, but about the tax -- income tax line you mentioned there were some state tax

Yes.

Can you just quickly go over that again and elaborate what that is exactly going forward?

Sure. I know I highlighted this on our first quarter call, but we had an increase in state taxes related to the state of Texas, and we had -- it was about $500,000 in total for the year, and we had classified those in our other operating expenses and we got down to the year-end audit, our audit and tax accountants, so it was more appropriate they be included in the income tax line item.

Okay.

So the taxes were always there, we're just now shifting out of one location to another.

Okay. And then you gave some, I guess on another topic, you talked about the hospital renovations and sort of it -- I took it from your comments that it's more sort of a 2009 kind of story from our perspective to see the results in the hospital.

I think so, to really get the interior work, but it's been that's been the story for the last two quarters or so. Maybe even longer.

That's fine. Is it still kind of your vision to get that 10% margin or so? Is there a vision in terms of how profitable you think that could be? Has that changed at all?

Well, we're very close to 10% EBITDAR margin right now, we think there's at least 500 basis points of improvement to be added to that margin.

Got you. Okay. I'll jump off and let others ask, thank you very much.

Alright, thanks, Don.

(OPERATOR INSTRUCTIONS). We'll go next to Derrick Dagnan at Avondale Partners.

Good morning. On the pharmacy business, could you talk about the margin and any seasonality there, and when you're looking at the remaining business going into 2008, I mean, I guess there's a big significant increase in margin and I'm just trying to get a feel for, if that's the way I should look at the business.

There is seasonality to that business. It swings with our senior living occupancy, a fair amount about a third, maybe a little bit greater at this point of our customers right now come from our own Five Star communities, so if there are occupancy declines in those communities. To that extent that will impact a little bit of our pharmacy margins but in terms of the acquisitions, like I said, not even counting the acquisitions, we'll add about 2,000 customers to our pharmacy platform and then the acquisitions we have taken on, I have to say right now, but at least half of them will ultimately be serviced by our pharmacy platform and then the future acquisitions we're looking at as well that we still hope to close in 2008. Again, another half of those should fall within that pharmacy platform service area.

But when we look at you, as you're adding the 2,000 units and then anything that comes from the acquisitions, should we -- should we just think about this in terms of what's happened in the past where you've had declines in margins because of system implementation?

You'll -- yes, I mean as really, the system implementations are behind us. We still have one or two pharmacies to go that are not on our pharmacy platform, and we'll be converting those throughout 2008, but that's a very small piece going forward. The majority of our pharmacy is on what's called the [rescost] system.

Right.

Number two though, as we do bring on new acquisitions to the pharmacy -- or new customers to the pharmacy, there are some start up costs associated with that, so that that will -- I think that's a long term positive as we're adding 2,000 customers and then any other customers from new acquisitions, yes, expenses will go up in the short-term, but long term, once the customers are there and you don't have the non-recurring expenses associated with transitioning them over, that will be a positive.

Okay, and can we switch to the balance sheet and cash flow real quick? You gave some -- your operating cash flow metrics, and I was just looking at the changing cash from the third quarter to the end of year and could you give us an idea of what has happened to maybe your investment balances between the third quarter and end of year? Will we see like what we saw last quarter with a shift from, I think cash to short-term investments, will we see any movement there this quarter as well?

Yes, you will. And you say in the first quarter or the fourth quarter from the third quarter?

From the fourth quarter of '07.

Yes, we did shift more of our cash to investments in the fourth quarter and fortunately, we probably shifted even a little bit more post the fourth quarter as we talked about, if you saw we had $69 million I think it was invested in auction rate securities as of year-end, and then in the press release we talked about last week that number had grown to $75 million.

Okay. All right, thank you.

Alright, thanks, Derrick.

And then we'll go next to Daniel Bernstein at Stifel Nicolaus.

Good morning.

Good morning, Dan.

Just wanted to go back over the CapEx numbers for the quarter and what is the absolute CapEx needs for 2008?

I think CapEx, you'll see in 2008 trend very close to what it was in 2007. We spent about $17 million a quarter in that range, of which the vast majority, $14 million at least in the fourth quarter it was reimbursed by Senior Housing, you'll see very consistent levels throughout all of 2008, we still have a lot of large projects that we're tackling, a lot of revenue enhancing projects like they were in 2007.

That doesn't include the CapEx to the IRS?

No, those numbers do include the CapEx for the IRS. At least historically they were in there, but you're right. That will ramp up a little bit as we include the IRS in 2008. That will be the second half.

Okay, and on the interest income on the cash balance or investment balance, should we be expecting that the to go up a little bit in first quarter, with the auction rate bonds should bump up a little bit in rate, because you couldn't, re --the auction rates failed?

That is a fair assumption, yes.

Is that a fair assumption? Okay.

Yes.

That's the only questions I have.

Great, thank you.

We'll go next to Phillip [Wait] at Morgan Stanley.

Yes, I just have a question. I've asked before in terms of stock buyback, I guess the answer before was, we've looked into it. At what price, or what events, or how much cash on hand would you be willing to buyback some shares of Five Star and then second question, on the auction rates, as those options start to work correctly again, will you move away from that or stay in that area?

I'll -- think the second part is the easiest one. We'll move away from the auction rate securities, and then long term, if that plays out, it gets to be something that is more attractive, we'll look at it then but right now, our intent is to move out of that as soon as we can. The buyback is an issue the board looks at from time to time. Historically it's been the board's opinion that there's a better use for our cash than buying back our stock in terms of future potential acquisitions. The board also knows that four years from now, that we've got to pay back that convertible debt offering that we did in 2006, that is a possibility. Then we've also gotten a lot of feedback from some of our shareholders that they can can only play in our stock if you will, because of there's such a small float out there right now, that if we do do an extensive buyback, that almost precludes them from buying our stock and could have a detrimental effect as well, so it's something the board weighs all angles, but right now, have taken no action and we don't expect to take any action, I think, in the near term.

Okay.

And we'll take our next question from Mike LeConey at Bishop Rosen.

Hi, guys.

Michael are how we doing?

Good. Congratulations on a remarkable accomplishment in the last four years.

Thank you.

We appreciate that.

Thanks for joining the call.

That's specifically to Everett, you lead the Company in astonishing better shape than you arrived at it -- arrived at it with. I remember -- I'm somebody who remembers. Okay.

Well, Bruce and I remember very well.

I could imagine. All right, my -- [inaudible] I have been trying to get our arms around, sort of a, I don't know, kind of define a free cash flow number before and then isolate maybe maintenance CapEx, and then investment CapEx, am I on the right track that -- and maybe you've already issued this number, but the recent quarter was the gross, the free cash flow before maintenance CapEx or capital spending was around $9 million in the quarter? That's just taking EBITDA and subtracting the interest.

I think I take EBITDA, subtract the interest and then, yes, to get free cash flow, as you said, we really don't break it up between maintenance CapEx and CapEx. It's what did Five Star spend that ultimately is not going to get reimbursed by Senior Housing, and that amount was about $3 million in the fourth quarter.

Okay, so I mean, if you subtracted that, you'd be running $6 million and then if you multiply that by four, okay, $ 24 million.

You get a fourth quarter run rate, yes.

Yes, and I mean, and so what -- but -- so then the next question, I guess going forward on cash flow would be, you have a substantial amount of money to invest and to expand the portfolio, and thus expand the earning power of the portfolio, so I don't know , we'll have to take a hard look at -- but we need to think through that in order to get a more of a honest stable state cash flow number once that money is invested. I mean, you have a good deal of money available for investment in

Yes, I think you're right.

Okay, I'm on the right track. We haven't finished it, and I just wanted to ask as well as congratulate you in which you deserve, boy, what you accomplished the last five years. Thanks a lot. We'll talk more, how about that?

All right, Mike, appreciate it.

We'll go next to George Walsh at Gilford Securities.

Good morning, gentlemen.

Good morning.

Just a question on the auction rate securities as you go into the first quarter here. Those are assets, I guess, will shift from short-term to longer term type of asset, and is there any impact that will have on your balance sheet working capital and therefore, anything in terms of perhaps covenants that on the mortgages that convert to your line of credit, and do you think maybe you'd draw on your line of credit for any reason, if you have to do those things according to the balance sheet?

Yes, let me take that one, George. First, you could be right. Right now, we haven't assessed that situation, but if the auction rate security process hasn't come back, we will need to evaluate if these are long term or current assets as of 3-31. Second, none of our covenants are based on current assets. There's no current liquidity test or anything like that. They're all fixed charge and debt to EBITDAR and things like that, so there's no impact from a covenant point of view with regard to our auction rate securities and third, we do have significant operating cash right now to meet our working capital needs. Our line -- the security process has gone on through all of February, and we haven't had to tap our line of credit right the now. I don't see any short-term plans to do so, but we do have it there so it is a possibility if we need it but as of right now, there is no need. And we don't see any need.

And do you know the accounting treatment as far as the auction rates will be, particularly in the first quarter? Are you going to have to deal with, is it mark-to-market? Is there -- what are the parameters of the accounting treatment if the market fails?

These investments have always been mark-to-market because of the high liquidity of them and just the fact that we've classified them Five Star as trading securities, so we've always had them mark-to-market. I believe because they're 97% federally guaranteed, there should be no impairment issues going forward. It really is just a reclassification issue and as of right now our auditors concur with that opinion.

So you've reviewed that so far and that's what you're getting?

Correct.

All right, very good, thank you.

Okay, George, thank you.

With no further questions left in the queue, I'd like to turn the conference over to Mr. Benton for any additional or closing remarks.

Thank you, this will be my last earnings call for Five Star. In a few months my wife and I will be headed to Buenos Aires, Argentina for three years to head up a mission for our church. As I have previously stated in many respects, it is a bitter sweet parting. The company is in tremendous shape and I truly mean this when I say our future prospects are bright indeed. Fortunately, I leave knowing that Five Star is in the capable hands of Bruce Mackey and Rosemary Esposito and our superior Five Star Management team. It has truly been a pleasure to be -- to work with all of you listening on this call. I'll cherish these memories, but remember, like all bad pennies, I will return, (LAUGHTER). Well, look, thanks for joining us on today's call. Bruce and the team look forward to speaking with you on our first quarter conference call in early May. Thank you. Bye-bye.

This does conclude today's presentation. We thank everyone for their participation. You may disconnect your lines at any time.