Alerislife Inc (ALR) 2009 Q1 法說會逐字稿

Good day, everyone and welcome to the Five Star Quality Care first quarter 2009 earnings 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. Tom Bonang. Please go ahead, sir.

Thank you, Sarah. Good afternoon, everyone. Joining me on today's call is 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 we begin today's call, I would like to state that today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Federal Securities laws. These forward-looking statements are based on Five Star's present beliefs and expectations as of today, May 5, 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 now I would like to turn the call over to Bruce Mackey.

Thank you, Tim, and thanks everyone for joining us this afternoon. For the three months ended March 31, 2009, net income from continuing operations was $0.78 per basic share and $0.67 per diluted share compared to net income of $0.14 per basic and diluted share respectively for the same period last year. However, both the first quarter of 2009 and 2008 included unusual items. Excluding these items, net income from continuing operations per diluted share was $0.09 in the first quarter of 2009 versus $0.22 in 2008. The 2009 results included several items that in aggregate resulted in a positive impact of $22.2 million or $0.69 per basic share and $0.58 per diluted share respectively. These items included a $3.5 million unrealized gain on our holdings of auction rate securities, a $2.9 million loss due to the impairment of our investments of certain marketable securities held by our captive insurance companies, a $25.1 million gain due to early extinguishment of debt and a $3.5 million loss on our UBS put rate.

The first quarter of 2008 included a $3.3 million unrealized loss from our holdings of auction rate securities. The primary reason for the decline in net income from continuing operations is the decline in occupancy. Occupancy for the first quarter of 2009 was 86.5% compared with 89.6% for the same period last year and 87.6% a quarter ago.

Same store occupancy for the first quarter of 2009 was 87.5% compared with 89.7% for the same period last year and 88% a quarter ago. Same store occupancy as of this past Friday was 87.2%. While occupancy was down, we were still at a push rate and control cost. Our average daily rate increased 3% year-over-year overall and 5% on a same store basis. On average Five Star increased its same store average daily rate by over 4% over the last six quarters.

While occupancy is a challenge for all of us in the industry, Five Star may be different than many of its peers in that we have a community with an occupancy under 85%, we are offering concessions but not all out rate reductions. Often we are asked about our position on rental concessions. Rental concessions were actually down 15% in the first quarter of 2009 from last quarter.

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. We believe this not only hurts brand integrity, but also creates an unnecessary hurdle of having to raise rates to previous levels, which is a painful process that will take time.

Instead, we are focusing our efforts on our sales force who are selling the Five Star Difference Program. This is a proprietary, comprehensive sales training initiative. The program has two distinct parts. First is a basic training, which is an intensive two-day face-to-face training program. And second ongoing follow-up training sessions where all participants attend at least two advanced sessions per year.

When completed, close to 650 Five Star sales and marketing professionals will have attended this intensive training program. The basic training portion of the program should be completed by the end of May. From a management perspective, we are beginning to see a uniformity of sales efforts across all of our properties. Our goal is to perpetuate a unified sales culture within Five Star that would help to increase overall occupancy.

We are also still promoting the Five Star financial solutions program that worked in conjunction with the following third party companies; Elder Life Care, Life Care Funding Group, and A Place For Mom. 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 our front doors as well.

Year to date versus last year, the trend's been positive. The number of people who apply and receive approval for these programs is increasing. These are small numbers to begin with but the results are clear. These programs are helping to find an increased number of participants pay for senior living services at our communities. We still believe there's plenty of opportunity to drive these preliminary positive results.

In April, we rolled out a new website. I encourage you to visit the site at WWW.FIVESTARSENIORLIVING.COM. This new site will concentrate will capitalize on enhanced search engine optimization and will dovetail on the backend with our lead generation and lead tracking system. We believe this website, over time, will help us to drive occupancy.

Moving on to other metrics. Wages and benefits as a percent of senior living revenues were 50.8% in the first quarter, up from 50.3% a year ago and 50.4% last quarter. On a same store basis, wages and benefits as a percent of senior living revenues increased 51.3% from 50.3% last year. These increases are primarily the result of our decline in occupancy. Going forward, it is our goal to keep this ratio below 51%.

G&A as a percent of revenues was 4.2% as we still maintain the leanest operations in the industry. We expect this percentage to be in a similar range throughout 2009. In spite of the difficult economic conditions, our core senior living business was profitable in the first quarter. Nearly 85% of our total company revenues comes from this business. Approximately 70% of our senior living revenues are coming from private pay sources.

In the first quarter of 2009, Five Star senior living produced $21.1 million of EBITDAM compared to $20.6 million for the fourth quarter. Our ancillary businesses, which make up only 15% of our revenues continued to struggle in the first quarter, but did show some slight improvement from the fourth quarter of 2008. The rehabilitation hospitals which accounts for 8% of our total revenues lost $1 million in EBITDAM during the first quarter. This was an improvement of approximately $60,000 in EBITDAM on a sequential basis.

In the first quarter, we identified a number of opportunities at each hospital to help bring them to profitability. Some of the smaller opportunities are being phased in now and we continue to evaluate larger ones. Some of the opportunities require DON approval and could be several quarters away from being started.

The pharmacy operations, which make up 6% of our total revenues, was $108,000 of EBITDAM during the first quarter. This was an improvement of approximately $430,000 in EBITDAM on a sequential basis. As of the end of March, we were servicing approximately 11,500 customers and have expectations to add over 1,000 additional customers during the next several quarters.

I would like to note that after the close of the quarter, in April, Five Star repurchased and retired an additional $8.5 million par value of our convertible senior notes. The transactions were executed at an average price of 44% of the par value of the notes and at a total cost before accrued interest of $3.7 million. In total, we have retired $55 million of convertible senior notes since the beginning of the year. The remaining $75.1 million of our convertible senior notes will be put to us in October, 2013.

This redemption reflects 11% of the outstanding senior notes as of March 31, 2009 and was principally financed by drawing on our UBS credit facility as well as cash on hand. We will record a one time $4.5 million gain or $0.14 per share basic on early extinguishment of debt during the second quarter of 2009. As was the case last quarter, the Board and management believe this repurchase to be a good use of capital providing 20 full percent return to Five Star and its shareholders. It deleverages our balance sheet and going forward will reduce our diluted share count by approximately 650,000 shares. I think that once again, I disclose the Board's confidence in Fire Star's long-term prospects.

As we told you last quarter, with increasing pressures to our bottom line, appropriate areas of emphasis for senior living operators or any company for that matter are mitigating risks, enhance in liquidity and shoring up balance sheet strength.

I would like to remind you the way that Five Star has committed itself to withstand a prolonged economic downturn. Five Star has no near term debt maturities for our senior notes or mortgages. The closest maturity we face is in October 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 the securities at their par value of approximately $75 million in June 2010. In December of 2008, we extended our $40 million credit facility with Wachovia until May 2010.

We own 22 unencumbered communities with a current net book value of approximately $126 million. Our communities require no entrance fees. This gives potential revenue much more financial flexibility in this trying economy.

We have a well diversified portfolio of communities and, 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 to move to profitability in 2004. In this same spirit and in an effort to mitigate the effects of lower occupancies, we have decided to defer corporate and regional raises historically given on July 1 for six months or until January 1, 2010.

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

Thanks, Bruce. Good afternoon, everyone.

Our senior living revenues increased $35 million. It was 16.03% to $252.2 million in the first quarter of 2009, compared with the first quarter of 2008. $33 million of this increase was due to 42 communities who began to operate after January 1, 2008.

Increase per diem charges at our same store facilities partially offset by a decrease in occupancy in these communities accounts for the remainder of the increase. Senior living operating expenses were $190 million in the first quarter, an increase of $27 million or 16.9% from the same period last year. $23 million of this increase was due to the communities that began to operate after January 1, 2008. Increases in same store expenses, particularly for wages and benefits, explains the remainder of this increase.

On the same store basis, senior living revenues were $218 million in the first quarter, an increase of 1.3% from last year reflecting a 4.9% increase in average daily rates offset by 220 basis point decline in occupancy. Same store senior living expenses were $165 million in the first quarter, an increase of 2.6% from last year due largely to increases in wages and benefits.

For the first quarter of 2009, our same store operating margins before rent or EBITDARM declined 1% to 24.1% as compared to 2008 while EBITDARM at our new communities was $10 million or 28.9%.

I will now discuss the operating results at our ancillary businesses.

First, at our rehabilitation hospitals, revenues were flat in the first quarter compared with the first quarter of 2008. The lower occupancy was offset by increased per diem rates. Hospital expenses increased 1.4% during the first quarter of 2009 and rent was up 5% as a result of additional sales of hospital capital improvements purchased by senior housing since January 1, 2008. Having improved the physical appearance of our hospitals, success of these facilities is dependent on our ability to drive [census] in further consolidation of operations between the two hospitals.

At our institutional pharmacy business, revenues increased by 6% in the first quarter compared to the prior year, mainly as a result of adding additional Five Star residents to our customer base. Expenses for the same period increased by 13% due to additional customers and added expenses related to the opening of the consolidated business office and the satellite office located in Nebraska.

Pharmacy operations were essentially break-even in the first quarter and we expect them to be slightly profitable for the remainder of the year. We're targeting a 2% to 3% EBITDA margin.

In the first quarter, general and administrative expenses necessary for supporting our corporate and regional operations increased by 12% or $1.3 million from the same period a year ago. Most of this increase was related to adding costs necessary to support the communities we began to operate in 2008.

As Bruce noted earlier, our G&A expenses were 4.2% of total revenues in the first quarter.

Rent expense increased 24% to $44 million in the first quarter as compared to the prior year due mainly to the leasing of new communities in 2008, as well as additional rent expense from the sale of capital improvements to senior housing since January 2008.

Apart from income taxes related to our purchase of convertible senior notes, we expect the taxes in 2009 will be approximately $1.9 million. In the first quarter, $330,000 of income taxes were related to the purchase of senior notes.

Before concluding, I would like to spend a few minutes discussing our balance sheet, cash flows and liquidity. At quarter end, we had unrestricted cash and cash equivalents of $28.4 million. Including out UBS put right, auction rate securities and unrestricted investment balance; we have total unrestricted cash and investment of $109.1 million and restricted cash and investment of $19.1 million.

We had no amounts outstanding on our $40 million revolving line of credit with Wachovia and $37.1 million outstanding on our $40 million line with UBS. As of today, we still have nothing drawn on our Wachovia line and $40 million drawn on our UBS facility. Consolidated EBITDA was $7.5 million in the first quarter compared to $10.9 million last year after adjusting for the unusual items noted in our press release. The operating cash flow was $23.1 million for the quarter.

We made $18.9 million of capital investments during the period and sold $12.7 million of CapEx to senior housing. We anticipate recovering another $10.6 million in future sales of CapEx to senior housing.

Our day sales outstanding including the rehabilitation hospitals and pharmacy operations was 21.0 days. At the end of the first quarter we had $193 million in net profit in 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 previously mentioned, we had $80 million of convertible senior notes and $12 million of HUD mortgages outstanding. As a result of our purchase of convertible senior notes in April, our outstanding balance on these notes is now $71.5 million. We believe that we are in compliance with all the material terms of our credits lines, notes and mortgage agreements.

As we have mentioned on past conference calls, our performance in the coming quarters will be greatly influenced by the future occupancy levels that we are able to attain. Looking forward to the remainder of 2009, we hope to begin to rebuild our occupancy levels as sales and marketing efforts we have undertaken begin to take hold.

We believe that Five Star is better positioned for growth and performance today and is sounder financially than it was a year or possibly even two years ago. Our debt load has been greatly reduced. Our auction rate securities are expected to be purchased from us in 14 months by UBS and we've continued to add and invest in and improve our stable of fine properties while maintaining cost discipline and achieving profitability in a very difficult environment.

That concludes our prepared remarks. Sarah, We're now ready to take questions.

Certainly. (Operator Instructions) And our first question today will come from Jerry Doctrow of Stifel Nicolaus.

Thanks. Yeah, a handful of things and I apologize because I think you covered some of this but it was just going a little too fast for me. Maintenance CapEx for the quarter, what was that number?

Well, Jerry, we had 49% of our $19 million in CapEx spend was on projects of $250,000 or more total value and we had a recovery from sales to senior housing of $12 million.

Okay. Was it 12 even -- I thought I had 12.7%?

12.1%

12.1%, okay. And then you said, how much you were going to sell the senior notes for the second quarter, but it was 10 point something, I just didn't get the decimal.

That's right -- it's --

10.6, Jerry.

10.6, okay.

And that's just, to clarify, to be sold in the future not necessarily in the second quarter.

Okay. Let's see. Sort of switching off a little bit from the numbers. I guess what I wanted to try to do was to get a little bit more color, Bruce, on -- in term of just occupancy, whether it was sort of across the board, whether it's a couple properties and I guess in particularly was sort of curious on New Seasons and the Sun West of how much their factoring in. I guess same store went down as well, but can you give me any color maybe how those two portfolios are performing compared to the rest.

Sure. Both New Seasons and Sun West are really close to where they are when we took over. Sun West is actually up a resident or maybe even a few. I think New Seasons is actually down. In both groups of properties, we really turned the majority of the leadership team in the buildings. I think Sun West could be close to 100%, in all honesty. I think maybe one ED stayed, but a number of them did decide to leave, so replacing all those EDs at both Sun West and New Seasons took some time. And in all honestly, you always don't get it right the first time, so we actually maybe turned one or two of them more than once. That's done.

Capital plans are in place at all the buildings. I mean, I think that's going to be a big driver in some of these communities. I've visited almost all of them now at this point. And you know from the outside that they're good physical plants. They're just a little tired properties. They need new carpets, new FF&E, a paint job on the inside and they'll be very nice properties. And that will take getting that CapEx work done. It's probably a year to get it all done, maybe a little bit longer. In some instances we might phase them over a year or two-year period.

Okay.

To answer your other question, anecdotally (inaudible), for the most part it -- some of our communities or areas of the country are doing very well. I know the mid-Atlantic, Maryland, around North Carolina, South Carolina is doing fine. We've seen some pickup in Arizona in Q1 that's to be expected. You don't have the snowbirds coming down at that time of the period. Southern California has done okay. We have gotten hit in Florida pretty significantly year-over-year and Texas is down as well. I think those are two states that have really given us some trouble of late, especially in the independent living area in those two states.

Okay. That's helpful. Let's see. Your rent growth, I was just trying to sort of think this through. I think you gave us some parameters, but I know like going forward, some of your rent growth is driven by revenues. Some of it may be sort of CPI based. I don't know if there's floors and caps. Do you have a sense, maybe, of what you're assuming in terms of rent growth kind of this year, next year or how should we be thinking about it?

When you say rent growth, you mean our rent expenses on --

Yes. Rent expense with any -- ignoring sort of new sales of CapEx and all that stuff, I was just -- kind of a base.

Yeah. It's really different for every portfolio and we do break this out in the Q which will be filed later today so you can see the percentage rent. So all of our properties that we lease from Senior Housing -- actually, not all, the majority of properties, the New Seasons properties don't have a percentage rent calculation, nor do the hospitals, but everything else does. And the base years vary by property. And so we'll again, later in the Q and then, Fran, if you have the number handy what we paid in percentage rent in the first quarter of 2009, but it was down between Q1 of '09 and where it was in Q1 of '08.

Okay.

And that'll be a static number throughout most of 2009.

Because, you can't go down with it, it can go --

It can't go below the base, but don't forget some of our bases were set in 2003.

Okay.

So, percentage rent revenues in 2008 come down from 2009 and you're looking at percentage rent in -- a base in 2003. It could come down and we did see that.

Okay. So you're seeing -- you're thinking flattish kind of rents go forward or --

Flatter from where we reported in the first quarter.

Okay. That's helpful. I think that's really all from me for now. I'll jump off.

Okay. Great. Thank you.

Our next question is from Kevin Ellich with RBC Capital Markets..

Good afternoon, guys. Thanks for taking my call.

Hey, Kevin.

Quick question. Just going back to the CapEx and just want to make sure I got this right. So if we want to think about free cash flow, is it safe to assume the -- we take $19 million, add that to $12 million so your maintenance CapEx is really like $7 million?

Are you -- that's the net paid out by Five Star.

That's the way we would look at it.

Okay. So free cash flow -- and then you said operating cash was $23 million so $16 million of free cash flow. Okay. Excellent. That's helpful.

Going back to the -- Bruce, your comments about the rental concessions. You make wondering -- how should we really think about that? If you held concessions flat, do you think occupancy would have been a little bit higher or, I guess, conversely, why are we down 15%? What would have happened if it was down 50%?

Well I would expect if we were down 50%, rental concessions, we would have seen more of decrease in occupancy. We look at concessions on a market by market basis, really property by property and I try and use them accordingly. But once properties get over a certain threshold -- 90%, we start to take things out of that toolbox for that selective property and conversely when a property drops down below a certain level, we might start to add more things that are available for that building to use to get them back to a level that they were at historically.

Okay. That makes sense. So obviously, with concessions down, that's means that's it's more properties that are over whatever threshold that is, maybe 90% you said?

It's possible. Yep.

Okay. Then speaking about the programs that you guys have in place for recruiting, retention, whatever, which do you think has had the biggest impact so far? I guess how do you measure that? And can you talk at all about the residents that have gone into the Five Star facilities because of these programs?

It's been very, very small, Kevin. None of these programs existed really until late 2008, and we rolled them out in, I want to say probably maybe January or February of 2009. I think some residents were taking advantage of this because they heard of these other companies.

Okay.

And work on them with their own in the past. So far, I think, what might potentially have the biggest impact for us is the VA benefits through A Place for Mom.

Okay.

And we've seen upwards of around 20, maybe, potential applications per month being filed with them so far.

Wow.

And that number -- but, now it takes several months for those applications to go through so as the people in the application stage right now, that will have an impact, it could be, three to six months down the road. But we really just preliminary, like I said, these are new programs. We've rolled them out. We need to do follow-up and additional work with our communities to make sure that they're using the programs and really selling them to prospective residents as well as current residents that are having financial difficulties affording our services based what -- for whatever reasons, mostly if they lost investments in their portfolios.

I see. So basically, and correct me if I'm wrong, but did you say there's kind of a -- maybe a three to six month selling cycle?

Correct.

Well at three to six month application process with the VA benefit.

Okay.

The other ones have selling cycles as well, Life Care Funding Group and Elder Life Care Funding have just -- I wouldn't say the cycles are that long, but there is approval processes and credit things that applicants need to go through.

Okay. That's helpful. And then, just going back to convert -- repurchasing them, congratulations. It looks like that was a good investment, I think.

Thank you. Yep, we do too.

Looking at the -- I have a minor question on the interest expense added back because of the convert -- the as if converted method, what portion of the quarter did this fall in? It looks like you did the purchase in January, so --

That was the initial purchase. Yeah, because we purchased the initial tranch in January and then we did the second purchase post quarter.

Right. So the interest after the convert now was it roughly $750,000 per quarter? Is that the way to think about it? And then --

3.75%

Right.

And with the discount your essentially talking about effective rate of twice that and our borrowing rate on the UBS facility is about 2% right now.

Okay. And then with the additional purchase of $8.5 million, the share count should actually go down a little bit more from this quarter. Is that correct?

Yeah. Another 650,000 shares, approximately.

650,000. Okay. That's what I was coming up with. And then just going back to the G&A, very low, good job on that front. Just wondering, how sustainable do you think that is? I know you said you expected in the same range but are we really looking at 4.2% for the rest of the year?

It's in that range. I think we've always hit a 4.2% to 4.5% range, I think we're very comfortable being in that range. We've been there for a number of years. I'm going to work very hard to keep it at that range. I think the other thing I said is we're deferring corporate and regional raises that generally would kick in July 1 for at least six months and that will have an impact as well.

Okay. And then I hate to ask, just wondering how the employees took that, the deferral of the raises. Has moral been down because of that or are they okay with it?

For the most part, people were okay with it, I think most people understand the circumstances that we're in right now. They see the evening news every night and it's generally pretty glum news and you've got unemployment as a result of this economy. We've lost 5.1 million jobs since the recession started. I think people are pretty happy to be working here, pretty excited about the prospects. They've see Five Star. They know we generally do the right thing. We'll be around for the long term. So I think for the most part, the response I've had has been favorable.

Okay. And then do you think there is any seasonality in the occupancy rate this quarter?

You've got some, sure.

Okay.

I mean, generally, this is one of our tougher quarters and we've seen the improvements take longer. I don't know if you recall but really two years ago, we didn't come out of the low point until mid-May, early June and we saw that last year. I just want to point that out to people because it takes a little longer than usual if there is some seasonality that's going to help us out. It's taken us longer historically than it did a few years ago.

Okay. And then the last question and thanks for taking all the time. I have to ask about the swine flu, H1N1. Have you taken any extra precautions because of that?

We have. It's mostly we're required with a lot of our field nursing units to have pandemic flu policies already put in place. So it's really breaking out those policies, making sure that people are doing what they're supposed to be doing, reinforcing the things to make sure that the flu is not coming to our buildings, washing your hands and kind of stressing the obvious at times, but if have in-service reminders. We do have an anecdotal note to our employees, if they did come down with the swine flu, not at our communities, but just through vacations to Mexico and just kind of an odd thing that I thought was interesting.

Right. Okay. Thanks, guys.

All right. Thanks, Kevin. Good talking to you.

(Operator Instructions). Our next question will come from Joel Ray with Davenport and Company.

Good afternoon, folks.

Hey, Joel.

Hey, Joel.

I was wondering if you might be able to elaborate a little bit about what specifically is involved with your concessions on the rent?

Sure. I mean for the most part, our concessions revolve around free rent periods, could be a month or two months if they sign a two-year commitment. It could also involve around waiving a rent increase, so if they do sign a two-year commitment, we'll waive that rent increase in the second year and bake that into the overall deal.

Okay.

The last thing it could involve is allowance for moving expenses and that could be renting of a truck, et cetera, or if they want to do certain things to the unit that aren't standard, upgrade of certain fixtures and things like that. And one other thing, it could be if get a community that has -- generally is doing fine occupancy or is starting to come down a little bit with historically charged community fees -- there could be a waiving of a community fee.

Okay.

I think those are probably some of the biggest things.

All right. Let's shift gears a little bit. You had talked about the fact that really what we need to do on the rehab hospitals is build some occupancy.

No question.

You would think that in the first quarter, usually seasonally, you have a little bit of an uptick in demand for rehab services, given the winter weather. I was wondering, what do you think is going on here and what is it that you do when you try to rebuild that?

I think for the most part, unfortunately, if we were at a national company of rehab hospitals, it would probably impact us, but being stuck really just in the Boston market with these two hospitals. I think we've got a little bit of an overbedded supply in the hospital area around here and our referral sources were down significantly in the first quarter, especially at the New England Rehab compared to Braintree, we saw a significant reduction at some of New England Rehabs referring hospitals in terms of their overall census, which directly impacted our census. Some of the things that we're working to combat it are some of the CapEx pricing we've talked about, making sure that other hospitals are referring as our hospital of choice in these markets. I think one of the other big things I talked a little bit about in my prepared remarks is some of the larger opportunities of moving out in some of our bed licenses and taking advantage of opening up additional inpatient satellites around the greater Boston area.

We're looking at a few specific deals right now that I hope to talk about in further quarters in terms of progressing. These inpatient satellites, do make good money for us and have been successful. We have three of them right now and we'd like to really increase that, but they do take time. We need to first strike a deal with a host hospital. Second, we need to potentially go through a DON and approval, which can take time. And then we need to get the unit up and running.

I think it's also worth noting that for a short period of time wings in both of the hospitals were blocked to new admissions because of an incident of the Norovirus. This came at a pretty busy period of time in the quarter and that hurt us as well.

That's a good point. Thank you, Fran.

Do we have any recourse on the rent that we're paying on these facilities and/or what's the global strategy for this business, Bruce? If it is, but some of these things can be pretty big distractions to you between the institution pharmacy and the rehab hospital business. I'm just kind of wondering, what can we do to either cut bait or cut our expenses so we can at least get to a break even situation on these?

Yeah. I think kind of two parts of the questions. One is the rent, what can we do about the rent? It's something we ask on a regular basis, what can do about the rent? It's a unique position, we do have pretty good cash flows at our overall company and it's a negotiation tactic between two independent boards and those discussions happen from time to time and they'll continue to happen. The second thing is --

Did we get any results from that in a positive fashion so far?

Nothing to date, as of now.

Okay.

We talked about improving our operations and that probably will be ongoing. In terms of dispositions or disposing them, our goal is to not sell them. I'd rather turn them around, especially you don't want to sell them at a distressed price. Now, somebody may come along and offer us what we thought was a reasonable deal then we'd have to present to the board and consider it seriously.

Okay. I was wondering also, do you have any specific margin targets for these or is it just, again, the goal is to get them to break even?

I think in the hospitals, the goal is to get them to break even. I mean we had margins a few years ago, kind of pre-65% -- 70% -- we had the 60% rule and where we are right now in the business. On the pharmacy side our goals are to get them back to a 5% margin business.

Okay. And lastly, I missed it as Fran mentioned, I was wondering the availability on the $40 million UBS line right now?

That's tapped out right now.

Okay.

But we still have our full availability under our Wachovia line right now. Right. Untapped.

I imagine FNH is still very supportive of the Company and is not changing any of their thoughts toward the Company or the strategies with the Company?

I don't believe so. I think they've got their conference call tomorrow and feel free to ask that question of them, but none that I see so far.

Thanks very much.

All right, Joel. Thank you.

Our next question comes from Sean McMahon at Kennedy Capital.

Hi, Bruce, congratulations on the quarter and on the debt.

Thanks, Sean.

Just had a couple things here. One, can you give me how much capital you think is going to be needed on these new facilities that you guys brought into the portfolio to bring them up to the Five Star quality?

Sure, a round the 30,000 foot numbers, but you're probably talking over the next two-plus years, I talked about doing a phasing of CapEx between New Seasons and Five Star -- I'm sorry, Sun West, probably around the $10 million range.

Okay. And then, I know you guys are putting some CapEx on the hospital still, but are there any other major facilities out there where you're going to have to put in that kind of money, let's say, around the next two years or after that are we kind of -- I know you're always changing the portfolio, but after that level are we done so to speak with kind of the base business?

We always look at various projects. Now, when I say done, some of the CapEx -- I'm starting to get a little tongue-tied. The majority of our CapEx going forward other than what we just talked about right there, you've get the hospital that is still ongoing, those communities that we just acquired. We've got some additions at Five Star that they're fairly small. We're adding new units on right now again at -- we've probably got 30 units in the pipeline over the next year and a half period. And then a project that will be mostly (inaudible) leased properties that we'll be able to sell to them.

Okay. Okay. And then lastly, just on the tax rate, where do you think you're going to end up there kind of at the end of the year?

Well, as I've said, we've got about $1.9 million tax before the convertible note, the taxes on the convertible note repurchase and in the first quarter the taxes on the note repurchase was $330,000. The $1.9 million kind of comes in lumpy across the year, kind of due to the way GAAP works, generally accepted accounting principals.

Are you able to defer those taxes? I thought there was something in the stimulus bill on buying the debt back, the gain on that?

There is --

Mostly state tax is what we're responsible for.

Okay.

I'm off of Massachusetts.

All right. Thank you.

All right. Thanks, Sean.

Our next question is from George Walsh, Jr. with Gilford Securities.

Thank you. Is there any comments on the trend on move-in versus move-out on the occupancy?

Discharge is -- we're up a little bit quarter over quarter. And admissions obviously kind of reflected our lower occupancy quarter over quarter on a same store basis. Admits were down, but I think discharges were definitely higher than admissions. Admits were probably down maybe 2% or less than 2% overall. I think a positive -- one thing I didn't talk about when Jerry asked earlier, the traffic that we're getting to our communities is still pretty positive. A number of people still tour our communities each and every day and I think a lot of them are really kind of waiting for the housing market to come back into play where they can sell their assets and they want to move into our communities. It's really getting that first piece of that -- that step done and then they want to move in. And that obviously takes time in this economy.

Okay. Anything with the Pittsburgh assisted living facilities that I believe were for sale. Any update on that?

No. No update on those.

Okay. The other was I thought with the captive insurance there was a further breakdown of about $3 million this quarter. Any comments on the portfolio there and maybe if there was some improvement from the rally in April?

Maybe some slight. Any improvements in the future gets recorded through other comprehensive income. Most of our -- in fact, all of the securities that were paying dividends at year-end are still paying dividends today and they're all paying at the same level so the write down's really just most of the loss is already in other companies -- on the comprehensive or in the equity section. They're merely just being transferred to the balance sheet or the P&L because of our [really time]. I think that's the biggest thing.

We're earning 12.3% on this portfolio based on the fair market value of it and we only have $500,000 of unrecognized losses as of quarter end on the portfolio. So we'd like to see this portfolio come back.

Okay.

I'm positive, George, that these are funds that for long term plan, that I really don't see coming in -- I won't say never, but it could be a long time. We don't need the money right now, our captives are doing fine. We continue to pay for claims out of current cash flow right now and, one fact that has been established now for potentially five or six years and we haven't moved money out of that captive of the investments at all in that time period.

Okay. So there's no reserve issues as of yet?

Correct.

Okay. Not the other one was, I saw in the K that you're looking to form an insurance company with some other entities of you're companies up there. Can you just elaborate on that a bit and what do you see as the potential cost savings and the timing and how would that potentially effect the balance sheet in terms of would there be a transfer of the assets off your balance sheet to this new entity?

Sure. And what we are considering, people that might not be aware of it, is establishing an insurance company with other RMR managed companies like HRPT Properties Trust, HPT, S&H, and Travel Fund of America. And having them write the insurance that's right now written by third parties. We expect to be able to leverage our portfolio of properties for lines like liability, worker's compensation and property insurance, pool them with those other lines.

One of the larger charges you'll see in insurance is administrative charges and we think there's a significant opportunity to really cut out a fair amount of those administrative charges that we were paying for insurance and leverage them with these other companies. It is also an opportunity to leverage our risk, with Five Star being some of the higher risk properties with other things as well.

In terms of movement of the balance sheet -- or the timing. I don't see anything taking place in terms of writing insurance in 2009. I think most of this is going to be 2010. We've invested some capital to get the insurance company up and running. Five Star will own about 16.7% of the insurance company. We'll account for it under the equity method so we'll be sharing (inaudible) and income and losses up to that period and then after we start to write insurance, we'll start to see some of the savings from that going forward.

Like I said, I expect those savings to come in 2010. The savings could be significant. I think because of obvious success with the RMR related companies in terms of things that they've done for us on -- I really just point to our G&A senior living revenues. We've run one of the leanest operations in the industry for a number of years, because of our relationship with RMR, some of that really has born fruit and paid off in that area. We expect to potentially see some of those things happen in here as well.

Okay. So is it something that you think by the end of this year, that the insurance company would be established and then there would be the insurance assets that you own now for the captive insurance company and liabilities would be on another balance sheet?

Possible, George. I think it's probably a little bit too early in all honestly. And then, secondly, we're not fully sure if we're going to just writing this on a go forward basis.

Okay.

And leave our current captives in place, just tail out and tailing out could take five to seven to ten years. It's a long term strategy for getting cost efficiencies going forward that will pay out over the long term.

Okay. So there might just be new business that goes into the --

It could be. It's something that we need to take a look at, correct. And that's happening now.

Would you guys be running that insurance company at all or that would be third party individuals? Do you know -- meaning Five Star manager?

It would not be Five Star management.

Okay.

Five Star directors will be directors of the insurance company as would directors of the other RMR related companies.

Okay. Now, just one quick one also. The UBS line you mentioned is 2%, is that the cost of the line or is there any -- is that like a net versus the income from the auction rate securities?

Exactly as much. It's the auction rate securities are yielding right now.

Okay. Any comment on perhaps just with UBS? If something happens to UBS, how does that affect this put in the agreement for what we go on the line, would you regret it, relative to that amount outstanding that's owed to them, any bit of a worst case scenario you can just kind of say on UBS versus the line that you have with them?

I think on the worst case scenario right now, we've got $40 million outstanding on the line. UBS has a put right to them for $75.5 million. I think you effectively are looking at a $35.5 million kind of net becoming a long-term asset. We expect to realize that asset in June of 2010. After that -- again, there are markets that are kind of --it won't come back to the way that auction rate security markets used to operate, but there are trade in these securities from time to time.

Okay. I think it's worth noting too that next quarter we'll be able to right-size our working capital on our balance sheet as we push these related assets and liabilities in the UBS line, the ARS securities and the UBS put right to current assets and liabilities and we'll have positive working capital at that time.

Okay. All right. Very good. All right. Thanks a lot.

All right. Thank you, George.

That does conclude the Q&A session for today. I'll turn the call over to Bruce Mackey.

Great. Thanks, Sarah and thanks to all of you for joining us on today's call. We look forward to updating you on our progress in the future. Bye, now.

That does concludes today's conference. Thank you for your participation.