Alerislife Inc (ALR) 2008 Q4 法說會逐字稿

Good day, and welcome to the Five Star Quality Care fourth quarter 2008 financial results conference call. This call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to the Director of Investor Relations, Mr. Tim Bonang. Please go ahead, sir.

Thank you, Jason, 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 conference includes the presentation by management, followed by a question-and-answer session.

Before we begin today's call, I would like to state that today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and federal securities laws. These forward-looking statements are based on Five Star's present beliefs and expectations as of today, February 25, 2009.

The Company undertakes no obligation to revise or publicly release the results of any revisions 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.

Thanks, Tim, and thanks, everyone, for joining us this afternoon. Let me begin with a brief overview of Five Star Quality Care.

Five Star is primarily a senior living services company that owns, leases and operates senior living communities with approximately 22,000 living units located in 30 states. The units in our 210 communities break down by product type as follows, 28% are independent living units, 43% are assisted living units and 28% are skilled nursing beds. In total, our senior living operations account for nearly 85% of our revenues.

In addition, we operate five institutional pharmacies and two rehabilitation hospitals as complimentary ancillary businesses that together make up approximately 15% of Five Star's revenues.

Even though we are here to talk about the fourth quarter and year-end results, I would like to note an event that occurred just after year end. In January 2009, Five Star repurchased and retired $46.5 million par value of our convertible senior notes. The transactions were executed at an average price of 43% of the par value of the notes, and at a total cost before accrued interest of $20 million. The remaining $80 million of our convertible senior notes can be put to us in October 2013.

This redemption reflects 37% of the outstanding senior notes, and was principally financed by drawing on our UBS credit facility, which I will discuss in more detail in a moment. We will record a one-time $25 million gain or $0.78 per share basic on early extinguishment of debt during the first quarter of 2009.

The Board and management believe this repurchase to be a good use of capital, providing a 24% return to Five Star and its shareholders. It deleverages our balance sheet and going forward reduced our diluted share count by 3.7 million shares. I think it also underscores the Board's confidence in Five Star's long-term prospects.

Since we reported our fourth quarter and year-end results a year ago, the economic landscape has changed greatly. 2008 has been a difficult year for Five Star, as a result of tumultuous market and economic conditions. With increasing pressures to our bottom line, appropriate areas of emphasis for senior living operators or any company for that matter, are mitigating risk, enhancing liquidity and shoring up balance sheet strength. We believe that Five Star has positioned itself to withstand a prolonged economic downturn for the following reasons.

Five Star has no near term debt maturities for our senior notes or mortgages. The closest maturity we face is in October of 2013, when our senior notes can be put to us.

In November 2008, we reached a settlement with UBS concerning our auction rate securities. We have a put right to UBS to sell these securities at their par value of approximately $75 million in June 2010. In the interim, we have established a non-recourse credit facility, equivalent to 60% of the fair market value of the auction rate securities. The availability under the credit facility as of December 31, 2008, was currently just under $40 million.

In December 2008, we extended our $40 million credit facility with Wachovia until May 2010. It is well documented in the press that commercial banks are extremely reluctant to lend. This renewal in this challenging environment is a third-party endorsement of Five Star's long-term viability.

We own 22 unencumbered communities with a net book value of $126 million. These are assets that we can finance with debt or use for sale lease back financing with a REIT.

Our communities require no entrance fees. One of our communities has it as an option but a large up front commitment is not required at any of our communities. This gives potential residents much more financial flexibility in this trying economy.

We have a well diversified portfolio of communities. Our product mix ranges from mid to high end, with locations in 30 states. We also service a variety of resident and patient needs, from independent living, assisted living, memory care and skilled nursing.

In my mind, our biggest advantage may be our cost control culture. As a Company, we were born out of adversity, losing money for our first few years of existence. Controlling costs helped us move to profitability in 2004.

Now moving on to our fourth quarter results. Total revenues in the fourth quarter increased 16% from the 2007 period, to $292 million. Net loss from continuing operations were $0.21 per share, basic and diluted, compared to net income per share of $0.22 and $0.20 basic and diluted respectively, for the same period last year. There were a number of one-time items in the fourth quarter.

First, a $5.9 million unrealized loss as a result of our holdings of auction rate securities. We continue to record fluctuations in the pricing of our auction rate securities. In the last quarter of the year, these investments declined by an additional $5.9 million. The impact was largely offset by an increase in the value of our put rights, which I will discuss in a minute.

Second, a $5.4 million unrealized loss due to the impairment of certain investments in marketable securities. These investments are held by our captive insurance companies. In recording our investment impairment, we applied current accounting pronouncements which require the use of judgment. We will continue to monitor these investments for impairment on a quarterly basis. The vast majority of these investments are in preferred securities, which are currently paying their originally stated dividends.

Third, an $11.1 million gain on our receipt of put rights from UBS related to our investments in auction rate securities. In the fourth quarter, we recognized this gain as a result of UBS's agreement to buy our auction rate securities at par beginning on June 30, 2010.

These rights were valued in relationship to the fair value of our auction rate securities, and the largest risk associated with these put rights is UBS's continued financial solvency. The value of our put rights should fluctuate inversely with the value of the auction rate securities that we hold. Any change in the value of our auction rate securities should be closely tracked by an offsetting change in the value of our put rights.

Our fourth quarter results were further impacted by a goodwill and fixed asset impairment charge. We test impairment for goodwill and long-term assets on an annual basis or more frequently as circumstances indicate that a possible impairment has taken place during the year.

Based on the results of our review of the long lived assets of the pharmacy and hospital businesses, it was determined that our recorded goodwill of $5.9 million at the pharmacies and fixed assets amounting to $1.8 million at the hospitals were not supported by these business' estimated cash flows at our current long-term discount rate and were therefore written off. We will continue to assess these assets quarterly.

Without these items, we would have reported diluted earnings per share from continuing operations in the three months ended December 31, 2008 of $0.03.

In spite of the difficult economic conditions, our core senior living business was profitable in the fourth quarter. Nearly 85% of our total Company revenues come from this business. Approximately 70% of our senior living revenues are coming from private paid sources.

To reflect our focus of this business going forward, we will be using the name Five Star Senior Living in our marketing materials to identify this business.

In the fourth quarter of 2008, Five Star Senior Living produced $20.6 million of EBITDAM, compared to $20.2 million for the third quarter of 2008.

In terms of our key metrics, while occupancy was down, we were still able to push rates and control costs. Our average daily rate increased 2% year-over-year overall and 4% on a same store basis. For the full year 2008, we increased average daily rate by 4.3% overall, and 5.2% on a same store basis. On average, Five Star increased its same store average daily rate by over 4% over the last five quarters.

Wages and benefits as a percent of senior living revenues were 50.4% in the fourth quarter, up from 49.8% a year ago, and 50% last quarter. In 2007 and 2008, we had kept it under 51% and expect to be able to continue this trend going forward.

G&A as a percent of revenues moved up to 4.5% as expected, but we still maintain the leanest operations in the industry. We expect this percentage to be in a similar range in 2009. On the occupancy front, senior living occupancy for the fourth quarter of 2008 was 87.6%, compared with 90.3% for the same period last year and 88.2% a quarter ago.

Same store occupancy for the fourth quarter of 2008 was 88.0%, compared with 90.3% for the same period last year and 88.5% a quarter ago. Same store occupancy as of this past Friday was 87.4%.

While occupancy is a challenge for all of us in the industry, Five Star may be different than many of is peers in that where we have a community with an occupancy level under 85%, we are offering concessions but not all out rate reductions.

The question we are asked about frequently these days has to do with rental concessions. Rental concessions increased 6.3% on a same-store basis in 2008 over 2007, but were flat sequentially from Q3 to Q4. It is our belief that actual rate reductions are a dangerous game. Once you provide rate cuts to one resident, the rest will expect you to provide those same cuts to them.

Instead, we believe that a professional, highly skilled sales force is essential to Five Star meeting its occupancy targets, accordingly we have begun rolling out a new program called Selling the Five Star Difference. The first part of our proprietary comprehensive sales training initiative. The program will have a number of ongoing training seminars.

This program will help attract new residents coming through our front doors. But in addition, we are focused on controlling the number of residents who are exiting through our back doors due to increased financial pressure associated with the recession and diminishing retirement accounts.

To do so, within the last few weeks, we rolled a program called Five Star Financial Solutions. A piece of this program includes educating our community's executive directors to become a financial resource within their communities. This program includes working in conjunction with the following companies.

First, a company called Elder Life Care helps to establish a bridge loan for individuals within a 48 hour approval window. This program allows six family members to back the loan and factor it into the credit approval process. Elder Life Care is a third party, none of the risk of these loans falls to Five Star.

Second, a company called Life Care Funding Group provides life insurance settlements for policyholders. The program is essentially an e-bay for life insurance policies. This company will bid out a resident or prospective resident's life insurance policies to investors who will pay cash for them today.

Last, is a company called A Place for Mom, which is a national, third party referral company. In addition to generating leads for Five Star, this company recently created a division designed specifically to work with veterans and/or spouses of veterans, to help obtain senior living benefits due to them from the federal government.

Our financial solutions program, in addition to helping residents stay in our communities, we believe will also help increase the number of people coming through the front door as well.

We also will be rolling out a new website in the next month or two. It will capitalize on search engine optimization and dove tail on the back end with our lead generation and lead tracking system. We believe this website over time will help us to drive occupancy.

Moving on to acquisitions, in December we purchased seven independent living, assisted living and memory care communities for $44 million. Four of these communities are located in North Carolina, and three communities are in South Carolina.

They have a total of 628 living units, so we purchased them at about $70,000 per unit, in a process directed by the US bankruptcy court. Including these seven properties, Five Star currently operates nine senior living communities in North Carolina and 16 communities in South Carolina.

Our ancillary businesses, which make up only 15% of our revenues continued to struggle in the fourth quarter. The rehabilitation hospitals, which account for 9% of our total revenues, lost $1 million of EBITDAM during the fourth quarter.

On the positive side, we finally opened one new wing at New England Rehab and expect to open a new wing at Brain Tree within weeks. We expect to begin working on the second wing at each hospital soon, and one of the benefits of the tough economy is that we believe we may be able to reduce the cost of these renovations by just under 10%.

The pharmacy, which makes up 6% of our total revenues, lost $539,000 of EBITDAM during the fourth quarter. Our fourth quarter financial results were negatively impacted primarily by an inventory adjustment of approximately $1 million. As of last Friday, we are currently servicing approximately 11,500 customers, and have expectations to add over 1,000 customers during the next several quarters.

Before I turn the call over to Fran, I would like to update you on the status of our discontinued operations. We sold the institutional pharmacy located in California on January 15, 2009. We were unable to sell the mail order pharmacy on acceptable terms and expect to discontinue all operations on or about March 31, 2009.

We in senior housing are still in the process of selling the two assisted living communities in Pittsburgh. Upon their sale, our annual rent payables to senior housing will decrease by approximately 9.5% of the net proceeds of the sale.

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

Thanks, Bruce, and good afternoon, everyone. In the fourth quarter of 2008, our senior living revenues increased $40 million or 19.3%, to $249 million from the fourth quarter of 2007. Additional revenues from the 47 senior living communities that we began to operate in 2008 were responsible for $37 million or 93% of this increase. The remainder was due to higher daily rates offset by decreased occupancy at our same store communities.

Senior living operating expenses were $188 million in the fourth quarter, an increase of $31 million or 9.8% from the same period last year. $27 million of this increase was due to communities who began to operate in 2008. Increases in same store expenses, particularly for wages and benefits, explains the remainder of this increase.

On a same store basis, senior living revenues were $211 million in the fourth quarter, an increase of 1.3% from last year, reflecting a 4% increase in average daily rates offset by a 230 basis point decline in occupancy. Same store senior living expenses were $161 million in the fourth quarter, an increase of 2.5% from last year, due largely to increases in wages, benefits and utility expenses.

For all of 2008, our same store operating margins before rent or EBITDARM increased 3.4% over the prior year, while EBITDARM at our new communities was $28 million or 29% of these communities' 2008 revenues.

As Bruce mentioned earlier, we are keenly focused on building census and controlling labor, two key drivers of profitability for us. However, it is worth noting that we are always looking for ways to reduce costs, particularly in this challenging environment. Let me tell you about a few of the things that we have done or planned to do.

In January, we purchased 37% of our convertible senior notes, which has reduced our annual interest expense by $1.7 million. In the last few weeks, we have entered into several multi-year electricity agreements in deregulated states that will save us nearly $500,000 a year, and we are still exploring other opportunities in this area. Recently we entered into a new office supply contract that saves us $400,000 annually.

On Monday of this week, we entered into a three-year agreement with Army Care that provides us with pharmacy services in areas that our wholly owned pharmacies don't currently service. We believe that this agreement provides us with an opportunity for significant savings and controls over this vital expenditure.

And finally, we will be putting our $40 million annual food services contract out for bid later this year. We believe that many very good opportunities for savings exist in the current economic environment and we plan to take advantage of them.

I will now discuss the operating results at our other business lines. First, at our hospitals, revenues were flat in the fourth quarter, compared with the fourth quarter of 2007, but down 3.5% for the year. The full-year decline was due primarily to lower Medicare rates and the closing of several unprofitable outpatient clinics offset by a small increase in occupancy.

Hospital expenses increased by 3.4% during the fourth quarter compared with last year, but decreased by 1.4% for the year, mainly due to reductions in labor costs and the closing of outpatient clinics. Rent at the hospitals was up slightly in 2008, due to added rent from the sale of capital improvements to senior housing.

In 2009, we have embarked on another round of cost cutting and consolidation initiatives at the hospitals, and these are already making a positive impact on their operating results. At our institutional pharmacy business, both revenues and expenses increased by about 15% in the fourth quarter compared to the prior year, mainly as a result of adding additional Five Star residents to our customer base. On a sequential quarterly basis, pharmacy sales increased by 8%, while pharmacy expenses increased by 7%.

In the fourth quarter, we took a further charge of $291,000, related to the contractual allowances recorded in the third quarter, as we obtained better information about this liability. We also took a $731,000 charge due to overstated inventory levels at one of our pharmacies.

It's worth noting that in 2008 we made a total of $1.8 million of unusual adjustments related to the contractual allowance and inventory problems at our pharmacies, and that these adjustments related almost entirely to prior years. I feel that these problems are now behind us.

We have provided the pharmacies with additional control and oversight from the corporate level and have changed the accounting leadership in this business.

In the fourth quarter, general and administrative expenses, necessary for supporting our corporate and regional operations, increased by 12% or $1.4 million from the same period a year ago. Most of this increase was caused by the need to expand our regional infrastructure to support the communities that we began to operate in 2008. As Bruce noted earlier, our G&A expenses were 4.5% of total revenues in the fourth quarter, in line with our expectations, and still we believe the lowest in the senior living industry.

Rent expense increased 33% to $43 million in the fourth quarter as compared to the prior year, due mainly to the leasing of new communities in 2008, but also because of additional rent expense from the sale of capital improvement to senior housing since January of 2008.

Apart from the possible income taxes related to our repurchase of convertible senior notes, which we are still reviewing, we expect the taxes in 2009 will be approximately $1.7 million.

Before concluding, I would like to spend a few minutes discussing our balance sheet, cash flows and liquidity. At year end, we had unrestricted cash and cash equivalents of $16.1 million in unrestricted investments, including our UBS put right of $81.9 million.

We had no amounts outstanding on our $40 million revolving line of credit with Wachovia, and $21.9 million outstanding on our $38 million line with UBS. As of today, we have nothing drawn on our Wachovia line, and $37.6 million drawn on UBS.

Consolidated EBITDA was $5.9 million in the fourth quarter after adjusting for the unusual items noted in our press release, and $6.9 million after accounting for the unusual items at the pharmacy that I just mentioned.

During the fourth quarter, we recorded $1.8 million of operating cash flow, a $13 million reduction from our average over the prior three quarters. Some of this decline is related to normal year-end payment trends, but an increase in accounts receivable of $8.3 million was also responsible for the shortfall.

While we have seen an uptick in our days sales outstanding through 2008, we are not concerned that this situation has become precarious. Private accounts receivable are not to blame for most of the fourth quarter rise.

Instead this increase was due mainly to delayed Medicare and Medicaid payments. However, we continue to monitor our receivables very closely and have added the power legal with extensive collection experience to our AR team, who will provide additional oversight and expertise in protecting this most valuable of assets.

Our days sales outstanding including the rehabilitation hospitals and pharmacy operations was 22.6 days.

During the fourth quarter, we made $27.3 million of capital investments in property, plant and equipment, including improvements to our lease holds. In December, we sold $27.4 million of CapEx to Senior Housing, and anticipate recovering another $11.3 million in the future.

During the quarter, we also completed the purchase of seven senior living communities with 628 units for $44 million, as well as the purchase of an assisted living development parcel adjacent to a lease community, for $3.7 million.

At the end of the fourth quarter, we had $191 million of net property and equipment, which included 25 properties that were directly owned by Five Star. 22 of these 25 properties are unencumbered by debt.

In addition to the lines of credit mentioned previously, we had $126.5 million of convertible senior notes and $12 million of HUD mortgages outstanding at year end. However, as a result of our purchase of convertible senior notes in January, our outstanding balance on these notes is now just $80 million. We believe that we are in compliance with all material terms of our credit lines, notes and mortgage agreements.

As we have noted on past conference calls, our performance in the coming quarters will be greatly influenced by the future occupancy levels that we are able to obtain.

Looking forward to 2009, given the difficult environment, our goal is to maintain and possibly increase occupancy through the various initiatives Bruce discussed earlier. And to be as cost effective as possible in running our operations.

We are confident that Five Star will persevere in these very difficult conditions, that we will continue to generate positive operating cash flow, and at the end of this recession Five Star will find itself both prosperous and growing.

That concludes our prepared remarks. We are now ready to take questions.

Thank you. (Operator instructions). And we'll go first to Kevin Ellich with RBC Capital Markets.

Good afternoon, guys. Thanks for taking my question. I guess starting off, going to the Five Star financial solutions that Bruce talked about, could you guys talk about the arrangements and costs associated with providing those services to the seniors or residents, are there any costs associated to that?

Breaking the three out, two of them don't have any costs. Elder life care or the elder loans do not. Those are, again, third party arrangements that the resident or prospective resident would enter in with the company. The veterans benefit has a minimal cost for an application fee, but it's a nominal amount, several hundred dollars.

Okay, and then those are not exclusive -- are those exclusive arrangements?

No, they are not. There's also a marketing cost associated with them, but that was not that material an amount.

And then, I guess moving onto the cost savings that Fran talked, how much was the interest expense savings, I missed that?

$1.7 million.

And that's annually and that's all from the convert?

Yes, it is.

Okay. And then the OmniCare agreement, is that going to be a significant expense savings?

We are not disclosing that at this time. It's a combination of things that are coming into place. We've got a preadjudication consultant that's involved in the process. So some of this will develop over time and we can report back to you later.

Okay. That's helpful. And then, I guess just moving down the line with the food services contract that you are putting out for bid. Who is that contract currently with and what is your expectation for cost savings?

Well, it's with Cisco. If we can pick up a few points, it means a lot of money at a $40 million annual spend.

Okay. That's helpful. And then Fran, you also talked about the delayed Medicare and Medicaid receivables, I have seen some other healthcare providers see some of these issues. Have you identified what the issue is and you have obviously made some personnel changes to try to improve that. What is your expectation going forward?

The per sale change was not directly made to collect Medicare and Medicaid. It's more directly related to private. The Medicaid and Medicare appear to be several unrelated conditions, and some of them are related to new facilities and getting their licenses.

That's probably the biggest piece. And it's the Medicare provider numbers Kevin, associated with new communities that we have taken on.

Got it. Okay. That makes sense.

And a portion of that is Medicaid, as well. Some of these new acquisitions, I'm going back a little bit, but did take Medicaid, so it's getting the provider numbers for those as well.

I guess just a couple -- the last questions here, and sorry for so many. With the purchase of the convert, could you have bought more or was there certain limits that you guys were restricted to?

We had Board authorization for a certain amount that we were under on, in addition if you purchase a majority of the convert and you have to go through a tender offer process. So we had to make sure that we didn't violate that rule.

Okay. And then -- I mean, are you -- is it possible you could purchase more or are we at that threshold where you can't buy any more.

I think anything is a possibility. We are not actively purchasing additional converts right now. But we'll have to take a look at it in the future, depends on the prices and the opportunities that are in the market place.

Okay, given the discount, it seems like a very good use of cash and return of capital to the shareholders.

We agree.

That was nice. And I guess lastly Bruce, what are you seeing on the economic front, given the census ticked down a little bit and average daily rate was only up a couple percent. Is that what we should expect going forward or what do you think on the pricing side?

On the pricing side, we did hit 4%, Q4 '08 to Q4 '07. I think you will see a similar range. We have been talking, the first quarter of '08 to the first quarter of '07, we were probably north of, I wouldn't say north of, but we were closer to 5%. So we are down probably 100 basis points year-over-year, but I think we have been seeing that for several quarters now that we expected it to come down a little bit. But we will still be in that 4% range.

Okay, that's helpful, and then just lastly on the free cash flow, what do you think the normalized run rate for free cash is? Do you think 8 to 10 million per quarter is kind of a run rate?

I think it's going to be highly dependent on our occupancy levels. If you take into account for instance prepared remarks, we had EBITDA excluding all of the usual adjustments of close to $7 million and then you have some of the cost savings initiatives and things like that that Fran talked about. So, it's not out of the realm. But again, it's going to be highly dependent on what future occupancy levels will be.

Makes sense, thanks, guys.

Alright, thanks, Kevin.

And we'll go next to Joel Ray with Davenport.

Good afternoon, guys.

Hi, Joel.

I was wondering if we could kind of go over a few things here, specifically when I look at the numbers that have come through, it sounds like there are lots of other unusual items here, but am I correct that your pre-tax number before a lot of these one-time items was about $1.8 million in the quarter?

You have the post tax at $0.03, but the tax amount is $470,000.

Okay. $470,000 of tax.

That would be right for the pre-tax, before the unusual items noted.

Okay. And it looked like you had about a 2% operating margin. When you cut through all of this, what is a reasonable target or do you have a target for what type of operating margin you will be able to sustain into 2009, given the economy that we have today? Is this a reasonable one to try to sustain that?

I think it is. Again, it almost goes back to the same answer I just gave to Kevin. It's going to be highly dependent upon our occupancy. We think there's opportunities for improvement at our pharmacy so that should improve our margin right away, and then the cost initiatives that Fran outlined, and then after that, what the occupancy is going to factor into that.

Okay.

But that's a good point Bruce, because the $1.8 million also includes the million dollars.

On the pharmacy.

On the pharmacy, and that was a one-time hit.

Very good. That's what I was kind of wondering as well. So the point is operationally, you actually, if you start x-ing out some of the stuff, it was actually better than the $0.03 type number?

That's correct.

Okay. And I take it at this juncture, we are probably going to hold back on making further acquisitions, focus on cleaning up what we have and as I say, focus internally versus looking at the exterior opportunities?

Yes, I think that's fair, but we have to take a look at what's coming in the door as well, so we will take a look. But as of right now, the pipeline is very thin. There's not a lot of opportunities out there.

What you are seeing, really, is -- I'm seeing a lot of not-for profits, CCRCs going into bankruptcy. I'm seeing larger, regional operators getting close to that point, and it's more, who is facing liquidity crisis right now? And a lot of these people pulled their companies together in the last few years and the property is really not worth the debt on the books. It will be an interesting time for a lot of small operators and like I said, those not-for profits that run the CCRCs.

Right. In the meantime, you have good liquidity it looks like, well over $100 million, so it looks like we should be able to continue surviving, and just hang in there.

That's correct.

Thank you very much, guys.

Thank you.

(Operator instructions). We will go now to Jerry Doctrow with Stifel Nicolaus.

Thanks. First, bravo for buying back converts. We are happy to see it.

Thank you, Jerry.

And just maybe just to start on that one. Any thought, was any thought given to buying back common as well, did you just decide converts were the better deal or just any more color there you could give us?

We think converts is the better deal, especially as they can be put to us in October of 2013, deleveraging our balance sheet was really a big piece of that story.

Okay, and the other thing I want to shift to is a little more color on the operational stuff. I mean the way -- just starting with Senior Housing. The way I think of that, first of all, you have got kind of same store. You've got a bunch of new acquisitions, New Seasons, the stuff you just bought, and within even the same store, there's obviously a mix of skilled and private pay, and you can actually look -- I was thinking more quarter over quarter and the bucket is the same.

It looked like quarter over quarter there was like a little bit of jump in units on the same store, it was like 44 units were added. Occupancy was down like 88.5 to 88. Did you actually expand something there quarter over quarter?

We did have some new units come online through expansions, yes.

And was that really driving the occupancy, or was it you were seeing deterioration.

No, I think you were seeing a little bit of deterioration.

The rate growth, it looked like you got more Medicare percentage, so the mix would drive rate growth as well, so I was really trying to just get a better feel for just on the private pay side, what was going on with rates quarter to quarter there. Were they flat, slipping a little bit, trying to sort out, what is the Medicaid, Medicare impact from what the private pay impact was going to be.

Well, as you know, on the Medicare side we have the 3% bump effective 10/1. Private pay rates were up and they are slipping down from the rate increases that we have seen historically, but they are still in the positive area.

And even at quarter over quarter, private pay rates would be up a little bit?

That's correct, yes.

And do you do, like most of them, on like a January 1 or you are sort of just rotated on the anniversary of whenever anybody comes in?

The majority of our contracts are on the anniversary date, however, we almost really do it how the community's required when we took them over. You have a number of communities that do go January 1, and then you have some communities that they have various dates throughout the year. New Seasons was a lot like that. A lot of the New Seasons kind of go in the middle of the year.

Okay. So that we are not going to see -- it may be a little bit up January -- say first quarter versus the rest of the year but not dramatically so.

That's an accurate statement, yes.

Okay. And it looked like you had increased Medicare mix as well as, that's just really because of the Medicare rate increase, it was driving the revenues. It wasn't like you were adding more Medicare beds or was it both.

No addition of Medicare beds but the census of Medicare patients was slightly higher in the fourth quarter but it's predominantly the rate increase.

Okay. And then if we can shift to the rehab hospital and the pharmacy a little bit because you were throwing a bunch of things out there. I'm trying to get a simple sense of what those businesses might look like on a run rate basis going forward.

So, I don't know that I quite dissected all the fourth quarter numbers yet, but rehab hospitals, you have 25, I think 0.3 million, the expenses were 23.6, so there was a little bit of profit.

You really need to wait -- we will file the K probably on Monday and you can see the segment reporting because I gave an EBITDAM number in my prepared remarks, so after rent, the hospitals lost about $1 million.

And so you are bringing on these -- I'm sorry. Go ahead.

In the fourth quarter, that was the EBITDAM loss was about $1 million. You know, we've got the new units and the new wings coming online. We've got plans to add additional inpatient units, but a lot of those-- these are long-term initiatives. We hope to see some improvements, year-over-year in our hospitals but I wouldn't think it would be a dramatic improvement, at least to start.

So thinking of them as maybe break even for the year, starting off with perhaps a little bit of a loss. Is that, a little bit profitable. I mean, it's not going to be dramatic one way or the other? Is that your thinking?

We're driving to profitability, but it's going to take several quarters.

Okay, and then pharmacy again, there were some one-time charges--.

Correct, pharmacy we lost again at that EBITDAM level, about $550,000. Included in that was about $1 million of charges from prior quarters.

Okay.

So net, we made $500,000 of EBITDAM, taking that into account, which is still low. That's a business that should be, again, historically we've guided people on that 5% to 6% range. It will take several quarters to get there, with the addition of a new business and some initiatives we have in place to drive that margin for business. But that's a small money maker for us. It's positive and I think there's opportunity for additional growth in the future.

Okay, but maybe 500,000 -- eliminate the one-time charge, and you have $500,000 positive and hopefully you build up a little bit from there as we go through the year.

That's fair. Yep.

And then one or two other things if we can. Do you have a maintenance CapEx number?

Yes, Jerry. Well, 46% of the capital expenditures of $27.3 million in the quarter were for projects of $250,000 or more.

Okay. Okay. So it's basically whatever the reverse of that -- the inverse of that is. Okay. One second, I'm just looking at my notes here.

And I guess any -- obviously, you referred a couple of times now just to occupancy and where that could go. What we have been hearing from some of the other folks. I mean, the calls are really just starting obviously was fourth quarter starting okay in terms of getting really focused on private pay, move in, move outs with the economy sort of falling off a cliff in November.

Very ugly sort of November/December, people feeling maybe a little bit of recovery sort of January -- I mean, do you just have any feel for sort of market or what your people are telling you out in the field. And where -- I mean, obviously, it's a very uncertain environment, but I'm just trying to get a sense of any additional color as to what the backlog is, what your conversion rates are, how much move outs we are having?

I think it was at your conference where the new phrase was coined, flat is the new up. I have heard that a lot actually just beyond your conference, probably three or four times now. It's definitely catching out there.

It is a tough outlook. No question about it. We are hearing a lot of stories. We actually have all of our regional directors of operations in for a meeting this week. And just planning and getting ready for execution of a lot of these new programs that we have talked about, and how to drive occupancy, but it's not going to be an easy year.

On the positive side, if I just looked at my January admissions to December, so we had a net increase, actually in the number of admissions coming through the door, and we actually had less discharges so far through January, through the end of January, that was a positive. I think February so far, I gave the same store number. That's come down a little bit to the Q1 seasonality. Most of it is related to our healthcare operations, we had in a number of buildings affected by the flu and things like that, that had admissions bans.

But January didn't look that bad on the occupancy front. We are still getting a lot of people through the doors. The tours are there. A lot of people are still waiting to sell their houses and that's a big issue, but they are very interested in some type of option and we are admitting, close to where we were in the past. And like I said, January we are up a little bit, which is a positive.

Okay. Okay. And then just one last thing and I will jump off. The new stuff in the Carolinas, they are coming out of bankruptcy, some of it had low occupancy, general problems that people have with transitions. Is that going to materially affect things one way or the other, is it a drag? Is it break even?

It's probably close to a break even, at least where it was December and January.

Okay.

We've got some CapEx that need to go into those buildings. We probably have a $2.5 million to $3 million target. And that's in line with what we thought originally when we took them over. That will happen between now and probably the first and the second, maybe even into the third quarter.

Okay.

And then hopefully if this market might turn around, we will see some proaction there.

Okay. Great. Thanks a lot.

Thank you, Jerry.

And we'll go now to Omotayo Okusanya with UBS.

I'm sorry. My questions have actually been asked by Jerry. Thank you.

And we'll go now to Sean McMahon with Kennedy Capital Management.

My questions have been answered, and Bruce, just congratulations on buying back the debt.

Thanks, Sean. Appreciate that.

And we'll go now to George Walsh with Gilford Securities.

Bruce, with the captive insurance that took an impairment of 5.4 million on the quarter, could you just talk about the portfolio exposure there that you still see, and what's going on with the balance?

A lot of these are tied up. They are invested in preferred securities, and a lot of financial institutions. We have got some REIT exposure. Utilities. We have a fair portion of utilities.

The market unfortunately is down from 12/31/08, as we all know. I do want to point out though that all these securities we have, almost all are still paying their originally stated dividends from years ago when they were acquired. So these are really long-term investments, always have been long-term investments.

A lot of the losses were actually already reflected in the balance sheet. They are available for the sales security. So any change in their value was previously tracked through the equity section of our balance sheet, and we are really just moving that equity section to the P&L. Because they were there for so long. GAAP requires that we take an impairment.

And on the UBS line, the way that works, that 60% of the market value of the ARSs.

Correct. As that market value fluctuates, our line capacity can fluctuate as well.

Okay, if it goes down, if you are overdrawn on it so to speak, does that mean you have to pay down the line that you borrowed against?

Yes, it does.

Okay.

And just for point of reference, I believe, Fran, the auction rate securities have actually increased in value in the month of January by about $4 million.

That's right.

And that line is-- I think you are paying LIBOR-- one-year LIBOR plus about 50 basis points.

That was the maximum potential rate. It's actually a no net cost line. So any interest that we would have earned on the auction rate securities is offset.

Okay. So you really get -- so does that work out, you use these to finance the buyback of the converts, so you get all of that benefit of the interest cost reduction? There's no --

Less any of the interest that we would have gained on the auction rate securities, which has been very minimal the last few quarters.

I think the auction rate securities are yielding just over 1% right now.

Not all, but very close to it.

Okay. So you are saying about what -- what is the net interest savings that you calculated so far? I think you mentioned that, but I missed it, on the converts.

Close to 300 basis points, $1.7 million of interest on the converts.

Okay, very good. Thank you.

We will now take a follow-up from Jerry Doctrow with Stifel Nicolaus.

Just two quick things. Is the preferred stock in any RMR related entities or other things.

Good question, Jerry, it is not.

Okay. Thanks.

Thank you.

And at this time, there are no further questions in the question queue, so I will turn the call back over to Mr. Bruce Mackey for any additional or closing remarks.

Thank you for joining us on today's call. We look forward to updating you on our progress in the future. Thank you.

This does conclude today's teleconference. You may now disconnect, and have a great day.