Alerislife Inc (ALR) 2008 Q1 法說會逐字稿

Good day and welcome to the Five Star Quality Care first quarter 2008 financial results conference call. This call is being recorded. At this time, for opening remarks and introductions I would now like to transition the call over to the manager of Investor Relations, Mr. Tim Bonang. Please go ahead, sir.

Thank you Pamela and good afternoon everyone. Joining me on today's call are Bruce Mackey, Five Star's President and CEO and Fran Murphy, Five Star's CFO. The agenda for today's call includes a presentation by management followed by a question and answer session.

Before beginning 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 7, 2008.

The company undertakes no obligation to advise 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 would like to turn the call over to Bruce Mackey.

Great; thanks, Tim and thanks to everyone for joining us this afternoon. Before I begin, I would like to point out a wording error in our press release we just issued. In the fifth bullet from the top, there was extraneous text in the release that should have been removed during our editing process. The text that should have been removed is, "and a gain related to our 2003 sale of a property." I will discuss this further in a moment.

This afternoon, we reported net income per share from continuing operations for the first quarter of 2008 of $0.14 per share, both basic and fully diluted. However, in the first quarter, there were two unusual items. Without the effects of the unusual items in the quarter, net income share from continuing operations was $0.22 per share basic and $0.19 per share fully diluted. This view excludes the net effect of two items.

First, a $3.3 million unrealized loss on our investments in auction rate securities which is equivalent to $0.10 per share basic and $0.08 per share fully diluted. I will talk about our investments in auction rate securities in more detail in a moment.

And second, at approximately $0.03 per diluted share, related to a 2003 sale of a property that we recognized during the first quarter of 2008 when the buyer prepaid our note receivable in full. This gain was included in interest and other income on our income statement.

As a reminder, these results compare with net income per share from continuing operations for the first quarter of 2007 of $0.18 per share basic and $0.17 per share full diluted. However, many of you will remember that our first quarter of 2007 results had a benefit of $3.6 million or $0.11 per share related to the early extinguishment of debt. Excluding this benefit, we recognized net income per share from continuing operations in the first quarter of 2007, of $0.07 pr share basic and fully diluted.

It is our belief that the most accurate year-over-year comparison of Five Star's first quarter results excludes any unusual benefit or loss. That leaves us with net income from continuing operations in the first quarter of 2008 of $0.19 per share fully diluted, compared with net income from continuing operations in the first quarter of 2007 of $0.07 per share fully diluted. We have more than doubled earnings per share on a year-over-year basis. I think it is interesting to note, if you look at our trailing four quarters, minus any unusual items, our fully diluted income per share from continuing operations during that period is $0.72.

I'd now like to go back and talk about auction rate securities. As we discussed on last quarter's call, recent events in the credit market cost auctions for these investments to fail during the first quarter of 2008. During our first quarter close we measure the fair value of these investments with the assistance of a valuation model. Based on the results of this model, this fair value of our auction rate securities declined and we recorded a loss of $3.3 million. We also determined the need to move our auction rate securities from current to non-current, due to our belief that the market for student loan collateralized instruments may take in excess of 12 months to fully recover.

As a reminder, we now have $71.6 million invested in auction rate securities, which are backed by student loans. These investments are all AAA rated securities that are 97% guaranteed under the Federal Family Education Loan Program and, to our knowledge, none of these securities have been downgraded. However, because of the current illiquid nature of these investments, we have taken a conservative approach. At some point in the future, it is our hope to reverse these write-downs.

We have a few additional pieces of information on this subject since we last spoke with you. Last week, on the federal level, the U.S. Congress gave final approval to a measure that granted the Department of Education grater authority to purchase federal student loans. President Bush is expected to sign this legislation into law. The plan is aimed at helping lenders work through the difficult period in the capital markets. We think this action may have an indirect but positive influence on our situation.

Also, on the state level, the Commonwealth of Kentucky recently indicated they will move to redeem investments backed by student loans. I would note that approximately 10% of our investments in auction rate securities are backed by Kentucky student loans.

Despite this, our cash position remains strong. At quarter end, we had $52 million of cash on hand. We've an untapped credit facility of $40 million, which is expandable to $80 million in certain situations and we continue to generate positive free cash flow.

Moving on to operational data; occupancy for the first quarter of 2008 was 89.6%, compared with 90.2% in the first quarter of 2007. I think most people on this call likely have two main questions about our occupancy. First, why has our occupancy declined in 2008, versus 2007? And second, how are the current difficulties in the housing market affecting our occupancy?

Occupancy in the 2008 first quarter was primarily impacted by a severe flu season that began in March. The flu was particularly prevalent in our skilled nursing facilities and, in some case resulted in bans on admitting new patients. The effects of the flu continued into April and we are still working on recovering from this decrease in occupancy.

The problems in the housing market have resulted in some modest pockets of weakness in the first quarter, mostly confined to independent living units, particularly in states that were hit hardest by the housing crisis, like Florida, Arizona and California, where our occupancy is down.

Of course, there are exceptions to these trends. For example, San Diego's real estate market has been hit hard. However, our Remington Club Community, and the San Diego market, which has a very high independent living component, has actually increased in occupancy.

During the quarter, we noticed two other trends. First, in the Southwest, we noted substantially fewer snowbirds coming down for the winter season from the colder climates to the north. Second, we have noticed in some cases, decreases in assisted living or Alzheimer's, where families are choosing home health or other options. Both of these trends are related to these challenging economic times.

As a result of these negative trends, yesterday, our occupancy was 89%. Overall, our occupancy drop is mostly seasonally related. However, until we can improve occupancy, we expect this may have an impact on our future results. As you can imagine, moving our occupancy back up is our number one objective throughout Five Star.

However, there are several other areas that we will expect will help to minimize any potential shortfall. I would point out that our second quarter is historically one of our better quarters. I would remind everyone that we have a (inaudible) success in this area. As recently as last year, we improved occupancy almost 100 basis points to over 90.5% between May and August of 2007. Our abilities to control labor and keep our Medicare census, will also help us buffer against occupancy downturns.

While some may look at the difficult flu season or a difficult housing market as factors that justify occupancy drops, we do not. We are drawing on the years of experience and creativity of our team for ways to drive census in spite of the headwinds that all senior living operators face. These marketing programs and adjustments to the way we do business can take many forms. Let me give you a few examples.

Where possible and appropriate, we are looking to change the mix of room types; for example, converting independent living units to assisted living or Alzheimer units. We are expanding our collaboration with home-held agencies to allow our residents to remain in their independent living units longer. We are increasing the value provided to our residents through our Ambassador Program that provides on-demand expansion of premium services and, our award winning new Guest Chef program, that showcases our food and beverage program to community leaders, referral sources and perspective residents.

In the first quarter of 2008, we were able to produce better bottom line results than the prior year for two reasons. First, we have a higher Medicare census, which has gone from the average of 892 in the first quarter last year, to 942 in the first quarter of this year on a same-store basis. And second, we've done a much better job this year of flexing our labor, as evidenced by the 150 basis point improvement in wages and benefits as a percent of senior living revenues.

In the past year, we've been able to work through occupancy fluctuations because of our ability to push rates. That was the case this quarter as well. On a same store basis, the average daily rate increased 6% to $144.00 in the first quarter, versus $136.00 in the same period a year ago. You may remember that last quarter, this increase was 6% and for the third quarter, it was 5%.

As I mentioned earlier, another driver of the increase in our rates has been a company-wide push to direct Medicare patients to our skilled nursing facilities. We saw an all-time high in our daily Medicare centers during the first quarter of 2008. On the private pay side of our business, we continue to project 5% increases to private pay rates through the remainder of 2008.

As we have talked about on previous calls, 2008, so far, has been a very busy acquisition year. All told, in the first quarter, we closed on five deals and took on 22 communities. Six of the communities are in Maryland; five are in Wisconsin; five are in California; two are in Delaware; two are in Texas; one is in Nebraska and one is in Minnesota. These 22 communities have nine independent living units, 1,506 assisted living units and 142 skilled nursing units. The skilled nursing units are at two of the communities that also have independent or assisted living units.

The average age of the communities is just under 10 years and all the communities fall within Five Star's existing operations footprint. We are pleased to announce that the transitions of these communities have gone very smoothly. We've retained the vast majority of each building's senior leadership team, as well as almost all the buildings' staff. Occupancy is also stable from where it was when we took over.

To date, we've had minimal integration costs in the first quarter related to these acquisitions, but we do expect some increase in them during the second quarter. I don't expect them to be material but they could reach several hundred thousand dollars and I will report on them during next quarter's earnings call.

Because of the timing of the closing of the acquisitions at the very end of the first quarter, we expect to start seeing them contribute to our bottom line in the second quarter. We still have an active pipeline for acquisitions and still hope to acquire additional communities before the end of the year.

Moving on to wages and benefits, our wages and benefits, as a percentage of senior living revenue, were 50.3% for the first quarter of 2008, compared to 51.8% for the first quarter of 2007. Our focus in controlling our greatest variable expense continues to pay off as we remain below our stated target of 51% to 52%. We've been very effective with this metric over the last five quarters, at an average of 50.6%. We will continue to keep a vigilant focus on our largest expense.

Now, moving on to our rehabilitation hospitals, the first quarter was a disappointing one for our hospitals. However, almost half of the loss is attributable to an adjustment to revenue from prior periods. This adjustment was a correction of the contractual allowance for one of our lesser used payer sources. Discounting this correction, we did have some sequential improvement at the hospitals.

The good news here is that we are finally beginning interior renovations. In both hospitals, we have approved mockup rooms and demolition work has begun. Each hospital has four wings and each wing takes about four months. So we should complete the room renovations at both hospitals some time before the end of 2009.

Some of you may have seen that Medicare has rolled back inpatient rehabilitation facility rates to last year's rate. However, we've negotiated higher rates with our largest third-party insurers that should offset this loss from the Medicare rate reduction.

Now, to review our Institutional Pharmacy business; revenues in our pharmacy business increased 24% to $17.2 million in the first quarter, compared to $13.8 million in he same period last year. Our EBITDA margins in this business were 5.8% for the first quarter. Excluding the pharmacy to be sold, we have approximately 11,150 customers. Since our last call, we have added approximately 650 customers. As a reminder, for 2008, we have targeted about 2,000 additional customers at our existing communities that can be transitioned to our pharmacy platform. So, we think we can add another 1,350 customers in the remainder of 2008.

We are very pleased with our pharmacy margins and believe that the 5% to 6% range is sustainable, going forward. I would now like to update you on the sale of our two pharmacies.

Our California pharmacy has several interested parties and our mail order pharmacy currently has a pair of bidders. It is our hope that we will complete the sale of both pharmacies at some point in the third quarter.

As many of you saw, a few weeks ago, we announced the hiring of Fran Murphy, as our new Chief Financial Officer, after a very thorough search where we interviewed a number of external candidates as well as a few internal candidates. Out of a strong pool, Fran distinguished himself with over 20 years of management experience, including a decade with senior living operator, Harbor Side Healthcare Corporation, before it was sold to Sun Healthcare Group.

For the past year, Fran has worked as Five Star's Director of Financial Services. I'm fully confident that Fran's the right person for the job, and look forward to a long and fruitful partnership. At this point I'd like to turn the time over to Fran Murphy, our Chief Financial Officer.

Thanks Bruce, I appreciate the kind words. I'm very excited to be undertaking this new position and greatly appreciate the faith that you and the board have placed in me. I also look forward to getting to know many of you on the call today over the next few months.

Now let's review the first quarter numbers. Senior living revenues were $216.9 million for the first quarter, an increase of 10% when compared with the first quarter of 2007. This increase was primarily due to the communities we began to lease in the first quarter of 2008, and higher per diem charges to residents, partially offset by a decrease in occupancy.

Operating expenses for our senior living communities increased by 7% in the first quarter to $162.5 million when compared with the first quarter of 2007. This increase in the first quarter was primarily due to the communities we began to lease in the first quarter of 2008. Senior living revenues on a same store basis, for communities that we operated continuously since January 1, 2007, were $209.1 million for the first quarter, an increase of 6% when compared with the first quarter of 2007. 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 were $156.7 million for the first quarter, an increase of only 3% when compared with the first quarter of 2007. This increase was primarily due to wage and benefit increases. Now let me underscore that margin expansion again. On a same store basis, while quarter-over-quarter expenses increased 3%, our revenues increased by 6%.

G&A expense for the first quarter increased by 11% to $11.1 million from the same period a year ago. The increase in G&A expense primarily results from the communities that we began to lease in the first quarter of 2008. Even with these additional items, G&A expenses for the first quarter were only 4.3% of total revenues, which are down slightly from Q4 and still remain the lowest in the industry. Going forward we expect this G&A percentage to remain in the 4.5% range.

Rent expense during the first quarter increased by 10% to $35.4 million from the first quarter of 2007. This rent expense increase is due to the additional communities that we began to lease in the first quarter of 2008, and our payment of additional rent for senior living community capital improvements purchased by Senior Housing since April 1, 2007.

In the first quarter of 2008 we incurred $566,000 of income taxes. This income tax expense is primarily related to alternative minimum taxes and certain state taxes that are payable without regard to our tax loss carry forwards. We still anticipate our provision for income taxes to be approximately 7.5% throughout 2008.

EBITDA decreased from $9.3 million to $7.7 million, or 17% between the first quarters of 2007 and 2008 respectively. Discounting the unusual items in the first quarter of 2007 and 2008 that Bruce discussed earlier, EBITDA actually increased from $5.7 million to $11 million, and increase of 93%.

Moving on to some high level cash flow metrics; in the first quarter of 2008, excluding our investment in auction rate securities, we had $35 million of cash flow provided by operating activities. This is an increase of over 50% from cash flow from operations for the first quarter of 2007, excluding investments and securities. In addition we had $17.7 million of capital expenditures, $16.2 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 second quarter of 2008.

Moving on to the balance sheet and some more items of note; cash and cash equivalents were $52 million at the end of the first quarter. Accounts receivable at the end of the first quarter were $61.1 million, our day's sales outstanding, including the rehabilitation hospitals and pharmacy operations, is still an industry leading 21.5 days.

At the end of the first quarter we had $127.5 million of net property and equipment, including 15 properties making up 1,060 independent and assisted living units, and 271 skilled nursing beds. Eleven of these 15 properties are unencumbered. The market value of our long-term HUD insured mortgage notes was $15.8 million, and we had no amounts outstanding on our $40 million revolving credit facility. We believe that we are currently in compliance with all material terms of our mortgages, convertible notes, and revolving credit facility.

In summary, the first quarter of 2008 was one of Five Star's best quarters to date. We achieved healthy margin expansion by controlling costs and pushing rates. These factors, along with contributions from our now stabilized pharmacy business and higher Medicare census, made up for seasonal occupancy weakness and the effects of a challenging economy.

Looking to the second quarter, our primary focus is on increasing occupancy levels as well as successfully integrating our acquisitions. Our ability to do so, along with maintaining our cost control and pricing objectives, will dictate our ability to match or exceed the bottom line performance levels of the last few quarters.

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

Thank you sir. (OPERATOR INSTRUCTIONS) Sir, our first question comes from Mr. Jerry Doctrow of Stifel Nicolaus. Please proceed with your question.

Hi, good afternoon.

Good afternoon Jerry.

And nice, I guess first call, for both you guys, flying solo without Evrett, so we appreciate the information. I just had a couple of things; I think Bruce, in terms of just second quarter, I mean you touched on a number of these things, but I guess I just wanted to step back. It sounds like compared to first, you would expect it to be a little lighter, at least that was my take away, because we've got lower occupancy, 89%. You'll try and grow it, but it may not be back over on the quarter to where it was.

And then secondly, it sounded like on the IRFs there might be a little lighter there. Is that sort of the right sort of take away, or am I missing something there?

No, I think that's fair. You look at where we were in the first quarter; we were at 89.6%, today we're at 89%. But last year we were also off the same levels, we were down about 50 to 60 basis points from what we had the first quarter of '07 till we had the first quarter call. You know this is around the time where we start ramping it back up, so we're in a similar level of where we were. But you're right; we are down from where we were in the first quarter of 2008 right now.

And on the rehabilitation hospitals, we expect some improvement in those hospitals over the first quarter, but most of that is going to be tied to the timing of when we can complete our renovations. Although it's happening now, I have, myself, personally visited the demo rooms and the mock up rooms, and I can see progress, but we're still some time away.

And you don't get a pick up from the change, the 60% limit you had sort of in December.

It sure makes our job easier, no question about that, but we haven't seen it yet. Right now we can definitely take on more patients than we have in the past because of the drop in the compliance rate.

And I guess one other issue there that you kind of mentioned was how material was sort of the, not a charge, but you said you had some true ups and prior period billings or something like that. Is that material in terms of our thinking about a go forward?

That was a little over a penny.

Okay. And that definitely will reverse in the second quarter?

That's correct, yes.

Okay. Then just the last thing I guess, one other thing I wanted to ask about, and I'll jump off, is as you go forward, I think again you touched on some of this, but just trying to get a better picture over all. It sounds like you're going to continue doing expansions, or continue doing acquisitions, are there more sort of expansions, conversions and stuff sort of under way? Kind of how much of that stuff is going on, and is that something we should be building in as well? Because I know you were doing a fair amount of that, I just can't remember sort of where things stand.

We are no question about it. We probably have four or five small active developments right now where we're adding on additional units. But they're almost not material at this point, but we have some of the larger ones that are in the pipeline that we'll probably begin maybe late 2008 or early 2009. And if the second piece of the question was we're also changing the unit type, we've got a few of those going on right now, and that isn't as substantial in terms of the Cap Ex required. There is some Cap Ex, for example I was just down at a community in Florida, an independent living community primarily with some assisted living, where we're actually converting about 30 independent living units to assisted living. And the capital required isn't significant, but it really should help to drive occupancy in that building. About 60% to 70% of the referrals coming into the building are assisted living required. So it should be a nice positive over all, improvement to Five Star.

So in terms of just, I think you meant modeling that, should we be building in a little more rate growth as you convert, or is it you don't think it's that material to go through the year.

I don't think it's that material, but I don't think you'll see any of that really until maybe the fourth quarter of '08.

Okay, I think that's good for me now, thanks.

Okay thanks Jerry, good talking to you.

Thank you sir. Our next question comes from Mr. Frank Morgan of Jefferies and Company; please proceed with your question.

Frank, are you there?

Mr. Morgan, your line is now open.

Okay, can you hear me?

I can hear you Frank. How are you doing?

Oh great. Hey, good job. Listen could we talk just a little bit about the impact of this new proposed rule? You mentioned your nursing home business several times and talking about your ability to drive Medicare, which made me think of the proposed rule that came out last week. Do you have any kind of preliminary look at what you think the impact is relative to Five Star? I know that at the aggregate level it's supposed to be a small negative, about a 30 basis point cut. Have you had a chance to look at that at all, and do you think there's any way you can kind of grow through that, through an acuity shift?

I think there is. We are reviewing that right now and we're not prepared to actually speak on it, but I agree with what you said in terms of at least where it is overall to start. It looks like it's about a 30 basis point decline in rates, potentially starting in October of '08, although we noticed nothing has been finally approved yet, so that still has to be worked through.

But we are looking at where we can shift acuity to make that up. I know a lot of the other operators in the healthcare space have noticed that they believe that they can make that up, and we'll be doing the same, or at least attempting to do the same as well.

In terms of the, on the IRF side, the rehab hospitals, with all this activity going on what do you think is really your aggregate? How much of your total capacity will be off line over the next year as you work through this renovation process?

Very minimal Frank, I almost want to say none, and I'm going to be hesitant of saying none. But if you might recall, each hospital already has a closed wing, so we'll be tackling those closed wings first and then transferring patients around. There might be some down time, but I think it's going to be minimal, because of the fact that each hospital already has that closed wing.

Okay. So capacity constraints won't be what limits your overall volume levels in those hospitals.

That's correct.

Okay. What about on the med mal side, any kind of update on the med mal trends, were there any reserve releases from prior periods in the quarter?

No there were not. Just the trends though, at least not in the med mal, we're still doing a good job I believe, but the insurance projections still look favorable. We're going through renewals right now and I believe that we'll see some benefits, both in the med mal as well as workers' comp.

Okay.

The only thing we have material was last year, if you recall last year we probably had a penny per quarter, maybe even as much as two pennies per quarter related to the renewal of our insurance. I don't think you'll see that this quarter, but I'm still hearing it's a very soft insurance market.

With all the discussion about the impact of the slowing economy and its impact on your volume levels, any concern about your ability to continue to drive rate growth? I know the numbers are certainly good and impressive today, but do you kind of worry that, golly if you keep pushing 5% and 6% does that -- do you think that's having any impact here in terms of seeing this higher level of move out activities?

It's possible. I've seen other operators comment that it has impacted their overall occupancy. We really haven't seen it that much, but I will admit in some pockets, I'm really speaking at the building level, where if we did get aggressive on rates there might have been some residents we may have lost because of rates. But I've got to say it's pretty small throughout the entire portfolio. Now if the economy continues to worsen, both in terms of pricing and the housing market and I think pricing, you know, fuel costs and the cost of living, we'll have to take a look at reconsidering. But right now, we're not seeing anything.

Okay; thank you. Good job.

Okay, thanks, Frank. Good talking to you.

Thank you. Our next question comes from Mr. Kevin Ellich, of RBC. Please proceed with your question.

Good afternoon, guys. Thanks for taking my questions.

Hey, good afternoon, Kevin. How're you doing?

Not too bad. Bruce, in your prepared remarks, I think you said the right number we should be looking at this quarter is $0.19?

That's correct, yes.

Is that correct? Well, you're backing off the $0.03 from the gain on sales?

Yes, correct.

Okay, just wanted to clarify that. And then, did I hear correctly, the pre-cash flow number for the quarter, operating cash flows, $35 million?

That's right.

Thanks, Fran. And so, is a good way to look at free cash flow, take that $35 million, back out the $17.7 million of Cap Ex and then add back the $16.2 million, that's going to be reimbursed by S&H?

That's the way we've historically talked about that in the past, yes. I will point out, I think the first quarter, if you saw that last year, it was one of our stronger quarters as well. So, I mean, we probably normalized, you know, when we did that calculation, $10 million to $15 million throughout last year, in 2007, that are much higher this year. But I would expect it to come down a little bit in Q2.

You know, as several things move around on the balance sheet, you know, we pay out vacation that we've accrued this quarter, etc.

Sure; okay, that's helpful. And then, the occupancy rate of 89% as you stated, is being impacted by the flu, even into April. What are you guys doing to combat that? Do you still have the normal initiatives in place to try to drive occupancy higher?

I'd say, yes. We have the normal initiatives in place to drive occupancy higher but we're doing something; there's probably an initiative at a Five Star building going on every day. I know I said it in my prepared remarks that it is our company's number one focus. And you know, Rosemary Esposito, our Chief Operating Officer is on the line, listening. I can tell you it's her number one focus too.

We talk about it at least once a day. What're we doing in each building? And I know Jerry asked the question in terms of shifting room types around earlier on, we were actually at a building opening up down in Tuscany, Florida. And, if you recall, Kevin, that's that building in Naples, Florida, that we recently bought. That construction is coming to a close so we had a great event. We probably had 300 people in the community and prospective residents in attendance. And it was a beautiful event, well done by our people down in the Florida area.

And, we expect to see things like that but that's just an example of an event that's happening almost on a weekly basis.

Now, the shifting of the room types around from independent to assisted living, are these on vacated units already so you're not actually impacting occupancy to the negative side?

That's correct. We were looking at that in a few buildings right now. We'll probably move forward on two or three buildings in the next several months. So, that's not a company-wide initiative. I don't think you want to get the impression that we're pulling it down in a thousand units or so. But, at each building where it makes sense, we are pulling it down and you're right. We are looking at vacated units.

But it's also something that you've got to be careful about. You don't want to take and really change the feel of the building. You know, independent living units, they like to be apart from the assisted living units. So, we want to convert an entire wing or a floor of a building for independent living to assisted living. So, there might be some people on that floor, still, that we'll need to relocate within the building. And, we'll put a program in place to make it attractive to them to do that. We'll buy them a new television and we'll do something so that they'll want to move down to another room for the independent living services.

Okay and then, is the Cap Ex involved in the unit conversions, is that reimbursed by S&H? Or, is that all your expense?

No. It would normally be reimbursed by Senior Housing.

Okay and then was there any of that spend imbedded in Q1 Cap Ex number?

If it was, it wasn't that material.

Wasn't that material; okay. And then, going back to the rehab hospitals, you know, the revenues were just a little bit lighter than I was expecting.

I think it's really related to the contractual allowance correction that I talked about earlier. As well as, we also closed a few unprofitable outpatient clinics. That had an impact as well.

So, no impact from you guys trying to make adjustments ahead of the final rehab rule that came out, before it was (inaudible) to...?

No.

Okay; excellent. I guess that's it for now. Thanks guys.

Okay; good talking to you, Kevin.

Thank you sir. Our next question comes from Donald Hooker of UBS. Please proceed with your question.

Good afternoon; good evening, everyone.

Hey Don, how're you doing?

With regards to you're adding these new units, I mean, in terms of how we start thinking about future quarters, I mean, do you, you know, whatever; 1,200, 1,300 units or beds you've added, is that kind of fully going to impact the second quarter? And I guess, just to continue along that line of question, I mean, since the end of the first quarter, has there been more kind of acquisitions you'd like to highlight? And how do you kind of view that market?

Yes, these units will impact the second quarter. Our last acquisition was really done on the last day of the quarter. And we acquired 13 properties about 700-odd units. Some of the acquisitions were done in the beginning of the quarter, but most were done either in the middle of February or, like I said, the bulk of them done at the end of the quarter. So, you'll see the full impact in the second quarter.

Now, there will be some --- I mentioned already some integration costs that we'll break out for you, going forward, related to those acquisitions.

And second, I don't anticipate any further; I mean, we might have an additional acquisition or two. We've got some stuff that is in the diligence phase right now that we're targeting to close in the second quarter. Can't make any guarantees that that will happen but we are looking to do that.

And this will be financed on your balance sheet?

Probably on the Senor Housing's balance sheet.

Okay. And then, in terms of the pharmacy, I guess, you know, it looks like that was kind of, I guess, flat, sequentially. Would there be a reason why that's not growing? I guess you're adding new lives and, you know, just curious as to why that's flat. Or maybe I'm overestimating it.

When you take on new customers, there is a cost component involved with that.

Okay.

So you kind of see that go through; it's not a huge cost but you're right. We would've expected that to go up as we add new customers and you'll see that but it can take a quarter or two.

Okay; okay got you. And then, what else did I have? I think most of the questions I wanted to ask have been asked so. I guess, one more just on the Cap Ex [item. You'd mentioned $17.7 million, 16.2 million as reimbursed. I mean, the remaining, would that be sort of like a maintenance Cap Ex?

That's right. It's either a maintenance Cap Ex or it's items that we can't sell to the REIT. Or, it's Cap Ex on our own buildings. For example, we still own 15 buildings, so that's the Cap Ex related to those buildings as well.

Got you; okay, thank you.

All right, Don. See you.

Thank you sir. Our next question comes from Derrick Dagan of Avondale Partners. Please proceed with your question.

Thank you; good afternoon, everyone. Bruce, I wanted to ask about this impact of the economy that's having on you and your peers and what that may mean for the acquisition market. Have you seen any change in operators' willingness to sell or any change? I know it's probably early but any change on valuations or Cap rates that you're looking at?

Well, two questions. I'll answer the second one first. Valuations, I think Cap rates, at least what we've seen, have come down, or actually have gone up a little bit. So, the multiples; I'm sorry; Cap rates, yes, they've gone up. You know, probably assisted living, they were in the sub-8% range; now you're seeing them at 8% and a little bit above. Generally, we need them to be in the 8.5% to 9% range for a deal to work and we're seeing deals there. I mean, that's why we've been closing on these communities so far.

And in terms of your first question, it is possible that it will have an impact and operators will hold out. I do know we were looking at a group of properties in the Southwest part of the United States, where we told them, based on what we see with Cap rates, this is our offering price and they determined that they would hold out and see what happens, when they might come back down again.

Okay and just looking at the strong cash flow you generated in the quarter, and keeping in mind that you have a big chunk of cash tied up in long-term investments, do you feel like it makes sense to start using the company's cash to go out and acquire properties, versus, you know, working with Senior Housing?

We will look to use our balance sheet to bid deals in the future. We think a leveraged balanced approach makes sense, utilizing some sales, leaseback financing as well as our own balance sheet to do deals. And we will look to do that, given that a large portion; we say large, it's almost, you know, more than half of our cash is illiquid. We want to be cognizant and be careful because in not only our (inaudible) are illiquid. You know, you've got the credit crunch in the whole country. There's very little capital flowing around. So, we're preserving our capital, probably a lot more closely than we would in the past.

Okay. And, one more housekeeping -- could you give us the actual dollar impact of that gain from 2003 that flowed through the other income line?

You know, I don't have it off the cuff. It'll be in our Q that we file tomorrow but it's ballpark $900,000.

Okay. So, if you've looked at the interest income, just the interest income alone, would you have seen a positive impact from the auction rate securities? I know, in the past we had talked about that you would see an up tick in the interest rate paid. I guess, did that occur in the quarter?

Hi, Derrick; it's Fran. You know, originally, when the auctions stopped closing, rates came up a couple of hundred basis points. As we look forward, we are estimating somewhere between 4$ and 5% for the next quarter on these securities.

Okay; that's very helpful. All right; thanks a lot. I'll jump back in the queue.

All right; thanks, Derrick.

Thank you sir. (OPERATOR INSTRUCTIONS)

Our next question comes from Joel Ray of Davenport. Please proceed with your question.

Good afternoon and congratulations on a good quarter, folks.

Thanks, Joel. We appreciate that.

A few questions for you; you had, as you had mentioned some great cost control on the [wave] side. Is there any reason to think that, given a little bit of further weakness in occupancy, that we would expect a significant change in this? In other words, are we going to see some reversal of these positive trends?

I wouldn't think anything to the extent that's material, no. I mean, we still continue to push --- as occupancy moves around, we flex labor very, very closely. We've got some great systems that help us do that it's something that we monitor on a daily basis. We literally track labor each and every day.

Okay, great. On the G&A side, you likewise had a great quarter and yet you're indicating to us that maybe there are going to be some investments coming because of the new facilities that have been leased. Can you give us a ballpark as far as what we should be thinking about there? Because, you had, again, a very strong quarter on that G&A side; it exceeded, I think, your expectations and, certainly, mine.

Yes, you know, we've taken on 22 properties we need to staff accordingly. And we expect to still be well below the entire industry, when it comes to our G&A going forward. But we will need to add a region or two in conjunction with those new acquisitions.

Okay so, it wouldn't be unreasonable to assume that that will tick up a bit then?

That's right. I think Fran did talk about that in his prepared remarks.

Right.

We'll be at the 4.5% range.

Okay. Next, obviously, you added these 22 properties during the quarter. Can you give us a run rate on what your rent expense should be as we start going forward on this? Because, the timing of when these came on would mean that the number that was reported for the first quarter would not be the actual run rate for the second quarter.

That is a great question. Unfortunately, I'm not prepared to answer it right now. I don't have it but we can definitely get that out and talk about that. I now Senior Housing actually had their call earlier on today and much of what they reported as well. But we can definitely break that out in the future.

Okay. Someone had mentioned earlier the concept of folks holding off because of the weak economy, as far as selling properties. I would also think that given the upcoming election and the potential loss of some of the capital gains tax benefits that exist out there, that could very well spur some activity on during the year as well. Have you heard any discussions along those lines?

I think you're assuming a certain person will win the election, versus the other in that question.

I think whoever is elected may very well change taxes.

You talked about the capital gains. I really haven't; you're the first person that's brought that up. I think it's an interesting question. It's definitely a possibility. I know, you know, not really related to the Senior Housing industry, but I've heard a lot of people talking about when is the time to get out of a potential investment if the capital gains tax significantly increases.

So that's not a far fetched result. And it's funny; you know, it was Derrick actually, I think it was Derrick earlier on. We talked about those acquisitions that we walked away from in Texas. One of the things that we were trying to get him to think about was the increase n capital gains taxes that he might be facing by holding on. And it didn't work to our favor; he didn't come down in his pricing but we did throw that at him.

Well, time will tell as we get close to the end of the year. And lastly, obviously, obviously we've had a charge taken on the auction rate preferreds. Is there any reason to think at this time that you'll be having further charges coming? Granted they're unusual, we kind of exclude them anyway, but given where we are today, is there any reason to think that there's anything else we should be worrying about there?

It's always possible, this is a very fluid situation, and we still get e-mails, and I know you and I actually talked about it on the last call as well. It's tough to really see what's going to happen. It's something that we do track every day. The models that we use have varying assumptions, if the assumptions change that could lead to a further decline in market value.

I do want to point out though on a positive, at least with the auction rate securities, we still continue to negotiate with UBS, the broker that got us into these investments, I wouldn't say on a daily basis, but fairly frequently, and we are looking at some type of line or a loan or some type of offer to provide liquidity. We're asking up to 100% of par value, now whether we get that or not will remain seen. But those are active negotiations, and they are doing deals for a lot of their clients.

Right and I know that many of the other auction rate preferred issuers are in the process of trying to redeem these things.

That's right, and we talked about that, we're seeing some of that on ours as well. There's been, at least directly that related to us, the Kentucky student loans, they are actively looking to redeem those. I have noticed several other agencies out there in the student loan arena that are actively looking to redeem their securities at par. But just again, the only ones directly related to us so far, it's about 10% of our holdings, are the Kentucky student loans.

Well very good, thanks very much for taking my questions.

All right Joel, good talking to you.

Thank you. Our next question comes from [Stefan Mystiek] with Pike Place Capital; please proceed with your question.

Hi, good afternoon. My question is just, you gave some reasons for the decline in occupancy, you talked about the flu season and I'm trying to remember, there was one other one. And then you mentioned some people because of the economy moving back home or kind of delaying move ins. Could you just give us a sense of the different impacts on occupancy and their relative size?

The largest one, I think, would be the flu season. We got significantly impacted in our skilled nursing facilities and in CCRCs where we have skilled nursing unit, by the flu. It's probably worse this quarter. Personally I've seen it before, and the reason that I say that is we had a number of bans on admitting new patients in some of our skilled nursing facilities. That's happened every now and then in the past, but it seemed really prevalent, more than five facilities where we noticed that happen this time around.

Okay. What was the other, there was one other; there were a couple of other factors though. What were the other ones?

I also talked about the real estate market really affecting our independent living communities. We also talked about in the southwest generally what we saw is a lot of people coming down from colder climates in the north to stay for three or four months in Arizona, New Mexico, Texas, you saw a lot less of that. That didn't impact just the senior living business, but we also saw it impact a lot of other businesses in that area. Hotel stays were a lot lower; restaurants were a lot less crowded than they were in the past.

And then the last thing that we saw, and really this is probably one of the lesser effects, but we saw people that A) had moved out, or you said it already, delayed moving in because of the slowdown in the economy and the tightening of peoples belts where they thought they would look at home health as an option instead of assisted or Alzheimer's. Or other means, where someone would not go to work and take care of their parent.

Okay, so that was the smallest of all?

I believe, yes.

Okay, great, thanks very much.

All right, thank you.

Thank you. And our next question comes from George Walsh of Gilford Securities; please proceed with your question.

Thank you. Bruce what is the breakdown on the line item in the revenue statement of the loss from discontinued operations, that $2.8 million?

That is primarily, it's related to two things; one is it's our pharmacies that are in there, the California pharmacy and the mail order pharmacy; and second, it's related to the two properties in Pennsylvania. And the majority of the loss is related to a one time write down of some assets related to the property in the Pennsylvania area. I'm sorry, I was going to say obviously won't see that going forward.

Okay so the portfolio, you don't expect, I mean you never say never but how does the portfolio look for more of those kinds of items for the rest of this year?

You know we always look at our portfolio from time to time to see if there are under performers in the portfolio. Right now, and I know we've talked in the past, we look at our skilled (inaudible) facilities, especially ones that don't seem to be making it from a contribution margin, they could be in some more rural areas, dying towns if you will, in the middle of America. We have nothing right now to talk about in terms of moving anything to discontinued operations, or divesting. But it wouldn't surprise me down the road if we did look at a few.

Okay. Would the charges be along this magnitude?

No, that was a unique situation George. Almost all the assets in the past are owned by Senior Housing. However this is one of the properties in Pennsylvania, we were doing some work on the property to really, this is before we made the move to put it into discontinued operations, where we had some of the assets on our balance sheet. So we took the conservative step of writing those assets off. So I don't think you would see that if we did move properties to discontinued operations, to the extent you saw in the first quarter.

Okay. Also on the balance sheet could you just run through, because you had to move certain things around with the auction rates, just first the cash since the end of the year was up by about $20 million, was that all from operations? Were there other contributions to that?

It was predominantly operations. Nothing in there comes to mind. I think maybe a few million dollars related to a refund of an insurance arrangement. Fran, does that sound right?

Yes, I think that's right.

And I think that's really kind of the only non-item. I know Kevin actually asked a question on the cash flows earlier on in terms of we generally see our first quarter higher because we're starting to build up accruals throughout the quarter that will pay off later in the year. So you will see our cash flow trend down actually, it will be higher in 2008, but not to the level that you saw in the first quarter.

It's important to remember too that during the first quarter we spent $13 million of cash on our investments and that's not reflected here. So our cash flow growth was $35 million on the [op basis] line.

Okay. And the current liabilities increased by about $20 million, what was the element there that increased that?

A lot of that's timing, like I said, you build up at the end of the year, you pay out all your accrued vacation, PTO and things like that, and other personnel expenses, so you're building that throughout the year. In addition we've got some acquisitions that are in there, those 13 communities, we've talked about that in the past, but those communities that we actually acquired the working capital assets and liabilities related to that acquisition. So that's some of the increase.

Okay. And your stated working cap just via the balance sheet, current assets versus current liabilities, it's a big shift from the end of the year, from about $86 million to about $20 million or so. Can you just talk about that versus your real operations of your liquidity in running the facilities and running the company?

Most of that is really related to our reclassification of auction rate securities from long-term -- I'm sorry from short-term to long-term. But if you did count that I think you'd probably see an improvement in those metrics and in terms of liquidity to run the business. I said in my prepared remarks I think we're very well prepared to run the business given the liquidity situation that we're facing. We've still got $52 million of cash, an untapped line of credit of $40 million; we spent about $80 million. And like I said, I think it's an important point that we are working with the broker on those auction rate securities to provide liquidity for them, even though they might be tied up for some time.

Okay. And I know this was asked before, but I didn't quite catch it. I'm just trying to get the sense of the new facilities that you took on, you just acquired this quarter. What was the run rate, or how much did they contribute for the quarter, was it a month, or not at all?

It's probably closer to say none at all. As you take acquisitions on there are some costs associated, they weren't material. The majority of the acquisitions literally came on 3/31, and then some came on in the middle of February or at the end of February, and some came at the beginning. But if you net everything together with the costs to really integrate them; it was a net zero for the most part.

Okay, do you have any (inaudible) in the revenue run rate that might be for all those facilities?

In the first quarter, hold on a second. We probably had about $7 million of revenues associated to the new communities in the first quarter.

Okay. And how are things with the -- where's the facility, I think it's in Minnesota, the Dimension facility? How are things progressing there?

Fine, I mean it's a stable facility. It's mostly, like you said, it's an Alzheimer's community that's always run very, very well. It's a beautiful campus; it's relatively new, built within the last several years. And there's a large assisted living component as well, you've got about 16 in assisted and the remainder is Alzheimer's. The Alzheimer's has always done better historically than the assisted living. Assisted living is probably in the 60% to 70% range in terms of occupancy. But we priced that going into the deal, so we make money even at that level, with upside on that end. So the community is doing very well, we retained all the, pretty much the senior leadership team at the community as well as all the staff.

Okay, very good. Okay, thank you Bruce.

All right, good talking to you George.

Thank you. Our next question comes from Anthony Marchesi of Insiders Trend; please proceed with your question.

Hi, good afternoon. Given the incredible cash flow that you have, and you speak very glowingly of the progress the company has made, I'm struck by the fact that are you at this point allowed to do any kind of share repurchase? I mean stock's trading at or near a 52 week low, so I guess my first comment would be is there any thought to utilizing a small portion of the cash to buy back some stock?

Well you know I don't think there's any question that Five Star is undervalued. And we do look at a stock buy back from time to time with our board, and really two things; first, the uncertainty in the credit markets really makes the preservation of capital right now the most prudent course. Even more appropriate given the illiquid nature of our auction rate securities. And second, we have a pretty small float even at 41 million shares, which is the fully diluted. Reducing that amount of shares really reduces the pool of institutional investors, and we've actually been told by a number of our sizeable institutional investors that if we did a buy back of any size that they would have to pull out and divest their positions in Five Star.

So right now we don't think that makes sense. Now will that change in the future? It's something we'll have to take a look at in the future. But right now the board and management is committed to stay the course.

Okay. That being the case I'm also struck by the fact that again at these levels I see virtually, not virtually, I don't see any type of insider buying, in other words by officers, directors, not one share. I think someone bought 7,000 shares I think about a year and a half ago. And I would think at these levels that management or the board would be anxious to buy some stock. I'm just wondering if you could comment on that.

Sure. I'll just start with myself personally. I am new to this role, as is Fran and a fair amount of my compensation and my net worth is currently tied up in Five Star stock. Fran has just started, very little of his net worth right now is tied up in Five Star stock. Not to say that won't change, but right now we may make purchases in the future. We've obviously been in a blackout period for the last several months, or last several weeks, and that might change in the future.

I would encourage you potentially to talk to some of the board members who have been around a lot longer than yourself who have yet to purchase any stock. I just think it's not a great sign when people who have been around the company a long time don't make any purchases, and the only stock they have is that which is given to them by virtue of stock options. It just doesn't, in my opinion, speak very well of what they think the prospects are for the company.

Okay, I hear your comments, and I will communicate them to the board.

Thank you.

All right, thank you.

Thank you, and our next question comes from Mr. Mark Mattson of Wash Tech Advisor; please proceed with your question.

Bruce I just have one question for the group. And I guess that would be with regard to the rehab hospitals. Is there any, given the track record of profitability there, is there any opportunity over the next couple of years to revisit the lease agreement with Senior Housing?

You know there's always an opportunity to revisit it, but I'd say it's pretty early in the process, but you did say over the next few years, sure it's a possibility. Will it change? I can't say for now. Right now we've got a plan in place, we're executing on that plan, and we think the plan will succeed. If it doesn't, at that point in time maybe we'll look to pursue other options.

Okay, thanks.

Okay thank you.

Thank you and we do have a follow up question coming from Mr. Kevin Ellich of RBC; please proceed with your question.

Thanks. Bruce?

Yes.

I just had a quick question about the acquisition pipeline, you guys have added, is it 22 properties this year?

That's right.

And are you still committed to adding a total of 30 at least?

Given what we see in the pipeline and what we currently have in diligence, that's a clear possibility, yes.

Do you think there could be some upside to that?

It's always possible, you know it's only May and we closed on 22. But acquisitions can be a lot like fishing, you can be in a good stream or a bad stream. We were in a good stream for the first quarter and we pulled a lot in the boat, and we hope to continue to do so. But I can't guarantee anything. But we are working very hard on it.

Pretty good analogy. And I guess the way I'm looking at this, or thinking about it is, given the cash and what you guys have on your credit facility, S&H which you've done the sales lease back transactions with, it seems like they have their hands full now with the big acquisition. This morning, or this afternoon David mentioned maybe doing some onsies and twosies or some smaller transactions. I guess that's kind of where my question was headed.

I don't think our acquisition pipeline will be constrained too much, because I think Senior Housing has made a very good deal on that end, expanding the medical office buildings. And you know we'll still work very closely with them. We'll still continue with our own balance sheet, and we continue to talk to other REITS from time to time. So if Senior Housing wanted to pass on a deal that we thought was a good deal, I have talked to other REITS, like I said, that probably would like to do a deal with Five Star.

Okay. And then actually one more question on the rehab hospitals, what's the extended timing for all of the construction to be done?

You know you rarely, because you're talking four wings at four months a wing, it's close to the end of 2009.

Okay.

You'll see tangible results hopefully by the end of this year, at least in terms of a completed wing or early '09. And like I said, once you start one it will go pretty quickly thereafter.

Okay, excellent. Thanks guys.

Okay, thank you.

There are no further questions at this time; I'll turn it back over to you with your closing statements.

Great, thank you. Thank you all for joining us on today's call. We will be presenting at Jefferies Healthcare Conference in New York City at the end of June, and hope to see many of you there. Thanks again, bye.

This concludes the Five Star Quality Care conference call. Thank you everyone for joining, you may now disconnect.