Alerislife Inc (ALR) 2009 Q3 法說會逐字稿

Good day and welcome to the Five Star Quality Care third quarter 2009 financial results conference call. This call is being recorded.

At this time for opening remarks and introductions, I'd like to turn the call over to the Vice President of Investor Relations, Mr. Tim Bonang.

Please go ahead, sir.

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 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, November 2, 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 the supporting period.

Actual results may differ materially from those projected in the 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 on any forward-looking statements.

And now I would like to turn the call over to Bruce Mackey.

Great thanks Tim. And thanks to everyone for joining us this afternoon.

For the three months ended September 30, 2009, net income from continuing operations was $0.13 per basic share and $0.12 per diluted share compared to a net loss of $0.05 per share basic and diluted, respectively, for the same period last year. However, the third quarter of both 2009 and 2008 included certain nonoperating items.

The 2009 results included several items that in aggregate resulted in a positive impact of $4 million or $0.10 per diluted share. These items include a $3 million gain due to early extinguishment of debt, a $795,000 gain on the sale of certain marketable securities held by our [captive] insurance companies, a $455,000 unrealized gain in our UBS put right, related to our auction rate securities all offset by a $238,000 unrealized loss on our holdings of auction rate securities.

By comparison, the third quarter of 2008 included an unrealized loss of $1.7 million as a result of our holdings and auction rate securities, a loss of $3 million due to recording a permanent impairment on some of our marketable securities, both offset by a $743,000 gain on early extinguishment of debt.

Excluding these items, net income from continuing operations per diluted share was $0.01 in the third quarter of 2009 versus $0.08 in 2008.

While we realize this is a disappointing quarter, I would like to point out some additional items that on a sequential basis negatively affected our earnings this quarter. We had additional energy costs of $1.7 million and we incurred additional bad debt expense of $500,000.

The additional energy costs related to air-conditioning use to combat the heat in August and September. This should moderate in the fourth quarter but will likely move up again in the first quarter winter months as heating needs rise.

The additional bad debt expense was incurred as a result of our skilled nursing receivables aging out during the quarter.

We also incurred a $290,000 charge in the third quarter of 2009, because of a bankruptcy filing of a buyer's skilled nursing beds that we sold in Connecticut in 2008.

I also want to remind people that in the second quarter of 2009 we got the benefit of an $800,000 payment for low income patients related to our hospital operations. We believe that we are now accruing to those payments at the appropriate level on a go-forward basis and will not take any significant adjustments in future periods.

In total, these additional items account for $0.10 per fully diluted share.

Finally, it is worth noting that while our health insurance did decrease $1.3 million in the third quarter from the previous quarter, it did not offset the large $3.3 million increase we experienced between Q1 and Q2. And as Fran will mention later, the decrease in health insurance claims was completely offset by a $1.3 million actuarial true up for insurance reserves during the quarter.

For Five Star and those that operate in and follow our industry, the unquestioned focus over the past [two] years has been occupancy. The good news is that Five Star's overall occupancy increased sequentially for the first time in eight quarters. Occupancy for the third quarter of 2009 was 86.1%, compared with 86.0% a quarter ago and 88.3% a year ago.

Same-store occupancy for the third quarter 2009 was 86.6%, compared with 88.2% a year ago.

Occupancy as of this past Friday has actually increased by 30 basis points to 86.4%. This data provides additional support to our belief shared by others in the industry that building occupancy appears to be stabilizing.

For us, the color on occupancy by product type and geographic location hasn't changed much since last quarter's call. I think we are doing particularly well on the Assisted Living and Alzheimer's front, while facing challenges with Independent Living and more recently in our Skilled Nursing, primarily with Medicare.

Geographically the Mid-Atlantic region has been an area of strength for us, while Florida still faces challenges.

Last quarter, we told you that many markets where we operate, other operators are significantly slashing prices. Despite this, I think we did a good job of pushing rates where possible.

Our average daily rate increased 2.2% year over year overall and, more importantly, 3.6% on a same-store basis. On average, Five Star's increased its same-store average daily rate by over 3% in each of the last seven quarters.

Moving onto other metrics, wages and benefits as a percent of senior living revenues were 51.3% in the third quarter, up from 49.9% a year ago and even with last quarter. This year-over-year increase is primarily related to significant increases in our health care insurance costs, which Fran will describe in more detail in a few moments.

G&A as a percent of revenues was 4.5% as we still maintain the leanest operations in the industry. We expect this percentage to be in a similar range throughout 2009 and into 2010. Our core senior living business continues to be profitable, but is down for the second quarter of 2009. More than 85% of our total Company revenues come from this business. Almost 70% of our Senior Living revenues are coming from private pay sources.

In the third quarter of 2009, Five Star Senior Living produced $18.6 million of EBITDAM, compared to $21.3 million for the second quarter. 2/3 of the drop in Senior Living EBITDAM on a sequential quarter basis is the result of the increases in utility costs that I spoke about earlier.

Our ancillary businesses, which make up only 15% of our revenues, showed improvement in the third quarter. The Rehabilitation Hospital, which accounts for 8% of our total revenues, lost $284,000 in EBITDAM during the third quarter.

Taking into account the $800,000 adjustment I mentioned earlier, this was actually an improvement of approximately $200,000 in EBITDAM on a sequential basis. Our hospitals also generated about $800,000 more in EBITDAM in the third quarter of 2009, compared to the third quarter of 2008.

Our renovations continue to progress. We opened our second wing at the New England Rehabilitation Hospital recently and are due to complete our second wing at the [Braintree] Hospital in the fourth quarter.

The Pharmacy operations, which make up 6% of our total revenues made $572,000 on an EBITDAM basis during the third quarter. This was an improvement of approximately $575,000 in EBITDAM on a sequential basis. Our pharmacies also generated about $1.1 billion more in EBITDAM in the third quarter of 2009, compared to the third quarter of 2008.

As of the end of September, we were currently servicing approximately 12,200 customers and have expectations to add almost 1,150 customers during the next several quarters. The majority of those customer additions will be third-party customers.

I would now like to update you on our recent acquisition activities. On October 1, 2009, we leased a 259-unit community called Brandon Woods at Alvamar from Senior Housing. Brandon Woods is a premier continuing care retirement community located in Lawrence, Kansas, right near the University of Kansas. We also agreed to manage a townhouse association that is affiliated with this community.

Also in October, we agreed to lease an additional 10 Assisted Living Communities with a total of 611 units from Senior Housing. These 10 communities are located in North Carolina, South Carolina, Georgia, and Texas. We expect to close on this lease transaction by the end of the fourth quarter 2009.

The combined occupancy of these communities is just over 90%. In addition, several of these communities fall within our pharmacies' area of operations.

Subsequent to the end of the third quarter, we sold two Skilled Nursing nursing facilities that we leased from Senior Housing. One of the facilities was located in Iowa and one was located in Missouri. By selling these two facilities, we have eliminated an annual cash loss of approximately $230,000 and reduced our annual rent to Senior Housing by approximately $170,000.

Before I turn the call over to Fran, I would like to highlight the strengths of our financial position. Five Star ended the quarter with $26.4 million of cash. Five Star had an untapped line of credit with Wells Fargo for $40 million. Five Star has a put right to sell $75 million of auction rate securities to UBS in June 2010, from which we will net $35 million of additional cash after paying off the credit facility we have with UBS.

Five Star's 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. I would like to note that during the third quarter, we repurchased $15.6 million of convertible senior notes for $12.1 million.

After quarter close, we purchased another $800,000 of convertible C notes for $638,000. We have $50.8 million of convertible C notes currently left that can be put to us in October 2013.

During the past year, we have purchased and retired $75.7 million par value of our outstanding convertible C notes for $39.1 million plus accrued interest.

And last, we own 25 communities that we operate. 22 of these communities are unencumbered and have a net book value of approximately $126 million.

Looking to the fourth quarter, I will remind everyone that for the first time we will get the full effect of the rent reduction from Senior Housing, which is $500,000 per quarter.

Our four keys to success remain the same. Increased occupancy and average daily rate while holding labor and G&A costs in check. Throughout the past year we have performed consistently on the last three.

Occupancy improvement is the most important key to improving our bottom line and smoothing out the recent volatility in our financial results.

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

Thanks, Bruce. Good afternoon, everyone.

For the third quarter, our senior living revenues increased $13.8 million or 6% to $253.7 million, compared with the third quarter of 2008. Revenues from communities acquired or leased after July 1, 2008, our new communities, accounted for most of this change [or] a total of $9.4 million. A 1.9% increase in same-store Senior Living revenues accounted for the rest of the increase, rising on a 3.6% increase in average daily rates offset by a 160 basis point decline in occupancy.

Senior Living operating expenses increased $12.6 million or 7% to $193.2 million compared with last year. Again, most of this increase or $7.4 million was from our new communities. Higher same-store operating expense especially health insurance costs explains the remaining increase rising 2.9% from prior year levels to $184.7 million.

As Bruce just mentioned, our third quarter results were dragged down by insurance adjustments that were identified in early October. As an overview to our insurance reserve process, we engaged Towers Perrin, a top actuarial firm, to conduct a complete review of our health, professional liability, and workers compensation programs three times each year.

The review conducted during the past quarter indicated the need for a $1.3 million adjustment, which we recorded. $950,000 of this amount was related to adverse trending of prior year, workers comp and professional liability claims. The remaining $350,000 was for increased health insurance reserves.

To give you just a little color on the health insurance, our consolidated third quarter health insurance expense rose $2.6 million compared with the third quarter of 2008. We understand that we are not alone in facing this problem, which appears related to employee concerns about the economy and job security. But in order to help control insurance expense, we switched insurance carriers on October 1 in a move that will reduce our health administration costs by $2.5 million annually and provide us with better claims management.

For the third quarter of 2009, our same-store senior living operating margin for rent or EBITDARM as a percentage of revenues declined to 23.8% from 24.6% in 2008. EBITDARM at our new communities was $2.8 million or 24.8% of related revenues.

Turning to our ancillary businesses, as Bruce noted, our rehab hospitals operated at a slight loss during the quarter. Hospital revenues were up $700,000 at 2.9% compared to last year, due mainly to increased Medicare reimbursement from higher acuity patients and improved patient lengths of stay, offset by a decrease in occupancy.

Hospital expenses increased only 10 basis points during the quarter due to our strong cost management. And rent was down 4.8% as a result of the $2 million annual rent reduction from the lease realignment executed on August 4.

Our pharmacy operations achieved a 3% EBITDAM margin in the quarter. Pharmacy revenues were up 12% compared with last year, due to the impact of adding new customers, partially offset by lower average revenues per prescription, due to higher sales of generic drugs. Pharmacy expenses increased 5.3% from the prior year because of higher costs associated with our rising customer base.

During the third quarter, general and administrative expenses increased 13% to $1.5 million from last year due to higher corporate and regional support costs associated with our new communities. Our G&A costs as a percent of revenues are up slightly from last year at 4.5%, but still within our range of expectations.

Rent expense increased $2.8 million or 7% compared to last year. Most of this increase was due to rent at our new communities offset by 100 -- by the $333,000 decrease in the third quarter, related to the lease realignment agreement.

Taxes were $565,000 in the third quarter. And absent any unusual gains or losses next quarter, we expect taxes to be $300,000 in the fourth quarter.

Before concluding today, let me review our liquidity, cash flows and selected balance sheet items.

At September 30, we had unrestricted cash and cash equivalents of $26 million and total current unrestricted cash and investments, including our UBS put right and auction rate securities of $110 million. At September 30 and as of today, we had nothing drawn on our $40 million revolving line of credit with Wells Fargo, and $40 million drawn on our line with UBS.

Consolidated EBITDA excluding certain items noted in our press release was $5.4 million during the quarter, compared with $6.6 million last year. Operating cash flow for the third quarter was $8.1 million.

We made $16.6 million of capital investments during the period and sold $6.1 million off CapEx to Senior Housing. We anticipate recovering another $5.3 million in future sales of CapEx to Senior Housing for expenditures made by Five Star through September 30.

Our accounts receivable management remains strong as the number of days sales outstanding brought consolidated (technical difficulty) operations was an exceptional 21 days at September 30.

At the end of the third quarter, we had $187 million of net property and equipment which included 25 properties that are directly owned by Five Star, 22 of which are unencumbered by debt.

In addition to the lines of credit mentioned previously, we had $52 million of convertible Senior Notes and $12 million of HUD mortgages outstanding. We believe we are in compliance with all material terms of our credit, note, and mortgage agreement.

In wrapping up today, we again want to express our disappointment with our third quarter operating results. While we had been able to take advantage of favorable market conditions to redeem a large portion of our outstanding debt at an average discount to par of 44%, and we also entered into a very favorable least realignment agreement with Senior Housing, we are in the end measured on our ability to perform as a Senior Living operator.

As Bruce mentioned earlier, we are focused on attracting residents to our communities that made great strides in last year developing the tools, the people of the strategies to make this happen. We are encouraged by present signs of occupancy and stabilization and we will continue to cut overhead when we can do so without diminishing the satisfaction of our residents.

That concludes our prepared remarks. Now we'll take your questions.

(Operator Instructions). Kevin Ellich with RBC Capital Markets.

Good afternoon. Thanks for taking the questions. Fran, maybe I could start with you.

So looking at the cash flow and the CapEx and what you expect to recover, would it be safe to kind of net that out and say that free cash flow for the quarter was about $2.9 million?

Well you know, Kevin, if you -- you're taking the CapEx away --?

Yes. CapEx less what you sold back to S&H and then what you expect to recover. I think that was $5.3 million.

Yes our net CapEx for the quarter was about $10 million.

Was about 10 million. Okay.

Now that 5 represents kind of a balance that rolls forward and it does have an impact on the quarter, but it's not a direct reduction from that.

Shouldn't that 10 million --? (multiple speakers)

More timing when the product is completed.

That's right.

Right. Do you have any expectations for the timing of when you expect to get that $5.3 million?

I said the majority would come in in the fourth quarter and it will tail off a little bit after that.

Got it. That's helpful. Then I was (multiple speakers). Yes. Yes.

I was wondering if you guys could talk about what you're seeing on the health insurance reserve? Who did you guys switch to on October 1? I think Fran said the savings was going to be $2.5 million annually. That is pretty significant.

And what is driving up the higher insurance reserve? Is it people using health care services more?

Yes. I will start Kevin and maybe switch over to Fran if he has any thoughts. But we switched from Blue Cross Blue Shield to United and it was a pretty big switch for us. We have been with Blue Cross Blue Shield since 2002, I believe, so it's been quite some time.

And United really came through with a very favorable contract for us as well as the claims management piece, which we think we need to do a better job on that third party.

What we're seeing is an increased utilization in the claims. If you looked last quarter, we talked a little bit about percentages, but they are still the same this year when you look at a year-over-year basis. Our claims percentage is up significantly and we really haven't increased the head count that much.

So we are just seeing a vast increase in the claims account. In working with our benefits consultant, we use Mercer which is a part of the MMC Group, to help us manage those costs. And they helped us out with our United contract renewal.

You know they do point a little bit to the economy and the fact that if people have health insurance, and they have a job they can make the co-pay etc., they will utilize those benefits. Because they are in a little bit of a fear of losing those benefits.

So we've seen that. You know some ancillary antidote data from other companies as well. Not necessarily fully in this industry, although I think one person or one in the company (inaudible) industry did say the same thing last quarter, they saw that. You see it in other industries as well.

Sure. And Bruce can you remind us, you guys self insured or is United underwriting the insurance?

No, we do self-insure.

Self-insure. Okay. That's helpful. And then going to the expenses, G&A ticked up a little. I know it's still industry low at 5.3, but should we still expect it to be right around that 5.3%? Was there anything unusual in this quarter?

I know I think you got the number wrong. It was actually 4.5%, not (multiple speakers).

4.5, yes, sorry.

No, nothing significant, unusual. I mean there's maybe one or two items that might roll off in the fourth quarter, but within $100,000 here and there. So I don't think it is anything significant. And we try to point people that will be within the 4.4 to 4.6 range and that -- as we take on acquisitions, we will tick down a little bit as well.

Right. Okay (multiple speakers).

-- percentage. (Technical Difficulties).

one early December.

Got it. That's all I have. Thanks.

(Operator Instructions). Jerry Doctrow, Stifel Nicolaus.

Just a handful of odds and ends here. We actually had your unit count I guess below like 118 units below what we had in our model. And I was trying to figure out if with that -- did the SNF units get taken out because they were being sold? Or are you taking some units off-line or --?

We did take SNF units out and that when we were going to discontinue, we pull them out.

Okay so they are in discontinued ops and that is basically that number?

I would assume

(Technical Difficulties).

So if I was trying to do like the comparable community sort of quarter over quarter if you've got that, I was trying to understand sort of the rate growth and occupancy change on those.

So sequentially you mean?

Yes sequentially. Right.

I'm showing on a quarter to quarter change, you know, it's actually down about 70 basis points. And the reason for that is, it's really related to the number of days in the period. That's one of the big things.

Also Jerry, that's impacting that is -- and I mentioned this in my script, is we've had Medicare falloff on us a little bit in our Skilled Nursing units.

That's right. So mix too.

And it went down about 70 basis points quarter over quarter sequentially in terms of our revenues coming from Medicare.

Okay. So that's, --. (inaudible). I'm sorry is a change in rate rather than a change in occupancy?

Change in rate, yes.

Change in rate. How about change in occupancy?

I show it's up about --.

10 basis points overall.

Oh I'm sorry (inaudible).

1%. Sequentially. Yes. So almost a percent.

So it's almost 1% sequentially on occupancy down about 70 basis points on rate? Is that --?

Another way to look at it is we went from -- not -- 86% to 86.1%.

Yes, let's say it's 1/10 of 1%. (multiple speakers).

Okay, 86 to 86.1. This is quarter over quarter, yes, comparable to comparable and the rate was down 70 basis points. And mostly that is on the Medicare side rather than on private pay.

Correct.

Okay. I think I'm straight. And I think I just missed this or you said it, there was something about an $800,000 adjustment for low income patients. Was that the rehab hospital? I just wanted to clarify.

It was. If you remember in Q2 we had a pretty big spike in the revenues. And you know we did point that out in our Q2 call that that was a one time. And it did come to fruition that it wasn't in Q3 as well. (multiple speakers) go forward basis.

Okay so it wasn't so much -- that's basically a one-time change of -- it came down from Q2. It wasn't a specific charge in this quarter that we need to back down?

No. That's exactly right.

Okay. Okay.

What we're trying to do is just trying to get people from Q2 to Q3, one of the big drivers.

And Q3 is relatively then, a reasonable run rate depending on sort of what happens there, just in terms of the fundamentals?

In the hospital, yes.

Overall, it looks like your public pay portion went up and I was trying to sort of understand that because you were talking about the Medicare dropping and Medicare rates dropping.

But it looked like overall the mix of the public pay was up a little bit and that you just -- am I reading that the right way? I'm just trying to understand whether you're taking Medicaid in NAL or what's going on there?

I think it's more of a function of the drop in the Medicare. It's just the shift to the private pay. Like I said we have done particularly well in the AL, ALZ. You know I can take you we are not taking Medicaid to any greater extent in our private pay business than we have been already.

Most of our Medicaid in the private pay business has come from acquisitions and we try and wean off of that to the extent we can. In some states it's kind of mandated by the state. Wisconsin is a good example where a lot of our buildings in that area have community programs that are set up and they actually work out okay.

So we are content to have Medicaid in those buildings.

And if I just think then on sort of go forward -- again I think there was a lot of talk back and forth about the health insurance -- that the run rate, there was this add and subtract, but the run rate basically for that which -- and that's in the wage stuff, the wages and benefits. So run rate on that basically is the same. We are not going to see a much of a move as we go from third to fourth quarter in terms of the third quarter run rate?

It's hard to predict that. We do expect the administration component of that cost to go down. And then that number that's $2.5 million a year.

And we did see those calls Jerry come down 1.3 million from Q3, Q2 to Q3. (multiple speakers)

But it was offset (multiple speakers) the one time and that's -- right.

Well, the one -- the insurance reserve true up should go away. And then hopefully you'll continue to see those claims ameliorate a little bit as well.

I mean like Fran said that's pretty tough to predict. Hopefully employees are getting comfortable with the fact that recession might be ending and maybe Five Star is going to be sticking around.

And as we move in -- (multiple speakers).

Go ahead.

As we move into the fourth quarter, we would expect to see utilities come down $1 million or $1.5 million.

Okay.

And then you get the bad debt expenses should come down as well and then that charge that we took for the bankruptcy filing of the Skilled Nursing beds.

Right, okay. And then just to come back to the health insurance choice just for a second. So if the claims rates stay identical, because you've reduced your cost of administration, what's that delta as we go from third quarter to fourth quarter? Was that a quarterly number or --?

Annual number of 2.5 million (multiple speakers) administrator. But then you've also got, like I said, that $1.3 million reserve true up should go away.

Yes, okay. (multiple speakers) So we've got a $1.3 million potential drop and plus whatever a quarter of that $2.5 million potentially.

Correct.

And then the last question and then I will jump off. Just wanted to see if we could get a little more color on the properties being added because they are significant enough to matter.

So 90% occupancy. You are acquiring basically at a 9 a 9 cap rate. Is that kind of the least rate or I'm just trying to get a sense as to how they will -- whether they will move your margins and stuff. I'm just wondering if you could give me a little more color on sort of how to think that through?

Yes, sure. The cap rate, it's better than 9. I said 9, 9+ range. Revenue ballpark will be about between $40 million and $45 million. It will move the needle a little bit. You know in terms of Five Star. Our lease rate is sub 9.

So I think that is potential to add $1 million plus in earnings potential, maybe a little bit more in 2010.

Okay. Alright that's good.

Trying to be a little conservative on that.

Okay, alright. That's fine, thanks.

Donald Hooker with UBS.

Good afternoon. Yes, just looking at the pharmacy business, it look like it improved nicely and a quarter. If I recall and correct me if I'm wrong, I think you have five pharmacies. Are there like one or two that are really bad? And then (multiple speakers) are really good. I mean what is the dispersion of performance there?

Yes, I talked about this I think a little bit on the last call (multiple speakers).

Trying to follow up on that.

There are a few that are doing quite well. We've got great operations in the Nebraska area, the Wisconsin area. We are struggling a little bit with our newer pharmacy, especially in Virginia and Delaware.

So that is what's pulling us down a little bit, but I mean you are right. We know I think the quarter is a pleasant quarter from what we've seen in the past and, hopefully, it will continue that progress.

But we need -- it's mostly a volume story in that Virginia and Delaware pharmacy. We need to get volume up a little bit more. It's probably going to take a little bit to do that, but we -- other than that, the -- and then, we've got -- we've got one in the South Carolina, North Carolina. That is doing okay. It is not doing as good as the other ones, but there's a positive as well.

So we've got one that's a negative. The rest are all positive.

So you say Virginia and Delaware were the negatives?

Yes.

I mean, is there any kind of breakout you can provide there? I was just trying to sort of figure out how much that was kind of pulling you down. So I was kind of getting a sense that those were -- are those just barely negative or are they really pulling you?

It's a ballpark number, but they probably lost about $100,000 of EBITDAM, maybe 100 and -- between $100,000 and $200,000 of EBITDAM in the third quarter. I don't have the figures with me, but I would say that's in a range of reasonableness.

Got you. And then I guess the other thing I was -- you were kind of buzzing off some numbers in the beginning, Bruce, that -- I apologize. $290,000 or some bankruptcy there. Was that some cost that came back to you?

It was. We sold some Skilled Nursing beds, some licenses that we actually got a long time ago on our spinoff in 2001. We sold them in 2008 to a Skilled Nursing operator that unfortunately just recently filed for bankruptcy. So because of bankruptcy laws, we actually have to give those payments back that we received.

And then going, looking at the hospitals, you mentioned some progress with the renovation which is nice to hear. How do we start --? How do we think any updates in terms of thinking about when those facilities might become profitable?

I think we're pretty close. We lost a little bit in Q4, $300,000 ballpark, a little less than that. You've got the Medicare rate increase kicking in 10.1. And then one of the things I mentioned in the last quarter call that will really help drive profitably the hospitals is our ability to push those licenses out from the main campuses to the third-party host hospitals.

We've had some good progress on one of those deals really in the last two to three weeks. Location up in (inaudible). Hopefully we are close on that. We don't have any deal documents lined up, but we are very close to negotiations.

It will take some time still have to clear through the state hurdles, but if it is possible we can get things signed up in the next several weeks, that could be operational by the end of 2010.

But the renovation -- (multiple speakers).

That would really help us out on that end.

I mean the renovations you mentioned will be done by the end of the year? I guess the --?

We are about halfway done. Don't forget each of these hospitals have wings. So we are completing the second wings right now at each of the hospitals.

So we are -- you'll see some more of that come through in 2010, but we're -- it's going much quicker now that we've --. If you look at where our first wings, how long they took to get through this state and now we're with of the second wings. We are down to about a six-month cycle as opposed to a two-year cycle.

And is there any ballpark when the whole project will be complete and you know --?

I would expect we're talking substantial completion probably about the end of 2010. Very early 2011.

Okay. I guess that's okay for me. Thanks. Thanks for your help.

George Walsh with Gilford Securities.

Bruce, you earlier mentioned there between the -- going into the fourth quarter that health care adjustment or health insurance adjustment is not repeated in the fourth quarter and also those energy costs spike come down from the adjustment?

You get about $2.5 million to $2.8 million there and that gets you back to an operating income line closer to about $4 million. And that doesn't include any rent benefit you might have. Does that sound more in line, something that is reasonable for the fourth quarter?

Doing the math you just did, yes.

Okay. Now the other is, what's different about this quarter for the first time you really based the trends of having to deal with in general lower occupancy levels and not as much pricing power as you have been able to have previously versus an increase in cost.

And is this a trend? Do you think it is something that you are going to be up to dealing with more severely on the cost side going forward? Or is the only answer to these really going forward that these occupancy levels and average daily rates, no better pricing power going forward?

I would like to think we are at a low point, but time will tell on that. You know I think there are a few things on the pricing side. You know we are still going to forecast price increases into 2010. We actually met with my regional operators about two weeks ago and while -- the color I gave earlier, people ask about 2010 rates and no one has asked on this call what we're looking at, but I would just give you a little bit of flavor.

We are still projecting decent rate increases. You know especially on the Assisted Living, Alzheimer's side where we are doing quite well across the country. We will be pushing rates again on the IL side, not so much. We do have a little bit of rate give back on the Medicare side, but we are mostly getting that back on the hospital because they are getting the Medicare bump.

So I expect we will be able to push pricing a little bit. In terms of where we are occupancy-wise, you know things do appear to be stabilizing. I think it's too early to say that we are out of the woods yet, but this is the first quarter in eight quarters where we saw a little bit of an uptick. I realize it's only 10 basis points, but as opposed to the 50 basis point drops we've had quarter over quarter for eight quarters in a row, again I will take it and hopefully it's something that we can build upon.

There are a lot of favorable signs in the industry in terms of the demographics, both supply and demand. Supply has pretty much shut down and it will take years to restart. I think that it's going to be a big positive for us as well.

But if all that fails to come to fruition, now we do have opportunities to look at the cost side as well and we will. We made some big changes in the health care plan really as a result of what we've been seeing. And you know that there's probably other areas that we can tackle drastically if we have to.

I don't think we need to do that yet, but it is always a possibility to take another look at them.

Okay. Any -- just two things. One trend in the claim utilization. Is that abated at all? And two, how did this plan going forward of the new insurance consortium you are putting together with other companies, how will that benefit this situation with the health insurance?

To answer the second question, it won't benefit at all. That will probably primarily set up as property insurance and be in workers comp and maybe professional and general liability insurance. We expect to see the benefits of that kicking in 2010, first with property.

To the first part of the question, I know I spoke to this I think when I was talking to Kevin. Utilization has abated a little bit. And we did see claims drop $1.3 million in Q3. I'm sorry from Q2 to Q3 and, hopefully, we will see that trend continue. It's too early to say that we are.

Utilization is still up though year over year. It's something that it is something that we need to work on.

And we have got a lot of programs that we put in place over the last year to help drive down utilization. It's more a cost-shifting consumer-driven health plans. We are really increasing the deductibles. At the same time, lowering commodity -- out-of-pocket, so really making employees take a conscious decision before they go to the ER for what could be a simple matter that can be handled by their primary care physician.

I mean those are just some examples, but they are mostly called wellness programs. And usually take quite a number of years before you really get a good payback from those benefits, but there are things we have implemented.

Great. Thanks, Bruce.

That's all the questions that we do have. I would like to turn the call back over to Mr. Bruce Mackey for any additional or closing remarks.

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

That does conclude today's conference. We thank you for your participation.