Alerislife Inc (ALR) 2010 Q2 法說會逐字稿

Good day, and welcome to the Five Star Quality Care second quarter 2010 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 Vice President of Investor Relations, Mr. Tim Bonang. Please go ahead.

Thank you, and good afternoon, everyone. Joining me on today's call are Bruce Mackey, Five Star's President and CEO, and Paul Hoagland, Five Star's CFO.

The agenda for today's call includes a presentation by management followed by a question and answer session. I would also note that the recording and retransmission of today's call is strictly prohibited without prior written consent of Five Star.

Before I begin today's call I would like to state 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, July 28, 2010. The Company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call, other than through filings with the Securities and Exchange Commission, or SEC, regarding this reporting period.

Actual results may differ materially from those projected in any 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. Just after market close, we reported net income from continuing operations of $0.23 per basic share and $0.22 diluted share for the three months ended June 30, 2010. This compares with $0.29 per basis share and $0.26 per diluted share that we reported the same period a year ago. However, second quarter of 2010 was a much stronger quarter for Five Star.

Income from continuing operations for the second quarter of 2010 included several items that in aggregate resulted in a positive impact of $0.02 per basic share and $0.01 per diluted share respectively. Income from continuing operations for the second quarter of 2009 included several items that in aggregate resulted in a positive impact of $0.20 per basic share and $0.17 per diluted share respectively. Paul will review those one-time items that occurred during both periods in his prepared remarks.

So, excluding non-recurring items, second quarter 2010 income from continuing operations was $0.21 per basic and diluted share, which was a substantial increase over second quarter 2009 income from continuing operations of $0.12 per basic share and $0.09 per diluted share.

As I will outline a moment, I think we stand together with our peers in looking for an upturn in occupancy. It is clear that Five Star stands alone among our peers when it comes to profitability.

Of the four largest publicly traded senior living operators in the United States, based on units, Five Star alone has achieved profitability in each and every one of the past six quarters. We think this best in class operating performance in a challenging market environment underscores Five Star's value, differentiates us from our peers, and shows that Five Star is solidly positioned to benefit from occupancy increases in the future.

I would now like to view some highlights from what was an active quarter. On June 16th, we announced the outcome of discussions between the Senior Housing Properties Trust Board of Trustees and Five Star's Board of Directors regarding long-term strategies.

The Board discussed a range of topics, including but not limited to changing one or more of the existing leases between Senior Housing and Five Star to a management arrangement between a Senior Housing owned, taxable subsidiary, or TRS, and Five Star. The possibility of combining Five Star into a Senior Housing owned TRS, taking other actions to change the contractual arrangements between Senior Housing and Five Star, and lastly, maintaining the status quo.

It was a positive exercise, but at the end of the day, the gaps between interests of both Companies were too big to bridge. For example, Senior Housing placed little value on Five Star's $100 million plus of net operating loss, or NOL, carried forward because Senior Housing as a REIT does not pay taxes and with the change of control, the value of these NOLs would be greatly reduced.

And in addition, Five Star's Board placed greater value on the non-core portions of the business, such as the pharmacy, than does Senior Housing. The ultimate outcome was that the Boards agreed to consider the TRS structure for future acquisitions of senior communities that the Companies may acquire together.

On June 25th, we announced Five Star's addition to the broad market Russell 3000 Index following Russell's reconstitution of a comprehensive set of US and global equity indices. As many of you know, the Russell Indices are widely used by investment managers and institutional investors for index funds and as benchmarks for both passive and active investment strategies.

On July 1st, we announced that Five Star exercised its right to sell its option rate securities to UBS at par. This transaction netted Five Star $35.2 million of cash after the repayment of our line of credit, which was secured by the option rate securities. This transaction was completed on July 1, 2010.

During the second quarter we repurchased $7.7 million of convertible C notes at a 10% discount to par. We have $42 million of convertible C notes currently left that can be put to us in October 2013. In addition, Five Star gave notice to prepay a $4.5 million HUD mortgage that has an interest rate of 7.65%. This prepayment will happen by July 31st.

I am pleased to report continued signs of stabilization in our occupancy. Occupancy for the second quarter of 2010 was 86.2% compared with 86.2% a quarter ago and 86.5% a year ago. Same store occupancy for the second quarter 2010 was 86.1% compared with 86.5% a year ago. Occupancy as of this past Friday was at 86%.

In addition, it is noteworthy that our independent and assisted living occupancy is up on a comparative basis for the first time in four years to 86.6% in the second quarter 2010 from 86.4% in the second quarter a year ago. We continue to see increased traffic to our buildings.

By utilizing the leads tracking system put into place in late 2008, we can see that inquiries continue to trend in a positive direction. For example, our inquiries in the second quarter 2010 increased about 14% over the first quarter of 2010 and 1% over the second quarter of 2009. Our web traffic also continues to trend in the right direction. An interesting point of note is that 17% of our inquiries now come from the Internet.

In the second quarter of 2010, we took on about 850 deposits, which is down about 150 deposits from the first quarter of 2010, but is almost double the amount of deposits we took on in the second quarter of 2009. I believe this 2010 quarter-over-quarter decrease is a result of less discounting, which I will address in a moment.

We continue to do a good job of pushing rates where possible. Our average daily rate increased 1.7% year over year overall and more importantly, 1.9% on a same store basis. With the improving signs from the economy and the apparent stabilization in our occupancy, we are trying to find the right balance in regards to discounting rates. As reported on the last few calls, we were selectively discounting some of our tougher to rent units, primarily our independent living units. We began to pare back this discounting during the second quarter of 2010.

The second quarter of 2010 was the first quarter in several where we did not have a Company wide discounting program in place. Given that our occupancy remains flat, I view this as a positive sign. Overall, we still expect our private pay rates to increase in 2010 between 3% and 4%.

With regards to Medicare and Medicaid rates, based on states reporting we expect about a 1.5% increase in our overall Medicaid rate and assuming a successful conversion to MDS 3.0 and RUGs-IV, we should see a Medicare rate increase north of 2% based on historical patient mix.

Moving onto other metrics. Wages and benefits as a percent of senior living revenues were 50.3% in the second quarter, down from 51.1% a year ago, and up slightly from the 50.2% we reported in the last quarter. This is an area where we have historically performed well and have shown that this quarter. G&A as a percent of revenues was 4.5% as we still maintain the leanest operations in the industry. Our stated goal is to keep this figure about 4.5% of revenues.

Our core senior living business continues to be profitable. More than 85% of our total Company revenues come from this business. 70% of our senior living revenues are coming from private pay sources. In the second quarter of 2010, Five Star senior living produced $26.7 million of EBITDAM compared to $22.7 million of EBITDAM for the first quarter of 2010. More significantly, Five Star senior living produced 24% more EBITDAM in the second quarter of 2010 compared to the $21.5 million produced in the second quarter of 2009.

The Rehabilitation Hospitals, which account for 8% of our total revenues, while still a disappointment in the second quarter, significantly improved in performance from the first quarter of 2010. Our Rehabilitation Hospitals lost about $355,000 of EBITDAM. This is a $645,000 improvement over the $1 million of EBITDAM that was lost during the first quarter of 2010.

On a positive note, we actually have a hearing tomorrow on one of our potential additional inpatient satellite units. Assuming this hearing goes well, we expect to get state approval around the end of this year. We continue work on a traumatic brain injury clinic at our Woburn Hospital and expect that to be up and running by year-end. We also received some positive news in regards to ERF Medicare rates. Effective October 1, 2010, we expect our rates to increase 2.3%.

The pharmacy operations, which make up 6% of our total revenues made $429,000 on EBITDAM basis during the second quarter. As of the end of June, we were currently servicing approximately 12,500 customers and expect to add over 1,000 additional customers during the next several quarters. The majority of those customer additions will be third-party customers.

We expect to sell during the third quarter four skilled nursing facilities located in Nebraska that we lease from Senior Housing. By selling these four facilities, we will eliminate an annual cash loss of approximately $150,000 and will reduce our annual rent to Senior Housing by an additional $150,000. The performance of these properties is added to discontinued operations in the second quarter of 2010.

After the end of the second quarter, Five Star reached an agreement to acquire 110 units independent and assisted living community in Wisconsin for $14.7 million. This community is nearly 100% occupied and has a 12-acre campus that allows for the possibility of immediate expansion. We expect that this transaction will close in the next few days.

We are going to fund this acquisition by using $13.3 million of our cash on hand and assume a $1.4 million liability, primarily related to refundable security deposits. We expect to close on both of these transactions during the third quarter. Of course, both of these transactions are subject to closing conditions and there's no assurance that either the acquisition or sale will occur.

The second quarter was an excellent operating quarter for Five Star. We are very well positioned to take advantage of the gradual rise in occupancy that is anticipated for our industry. Our keys to success remain the same. Increase occupancy and average daily rate, while holding labor, operating expenses, and G&A costs in check. Throughout the past year, we have performed consistently on the last four.

We are very well positioned from a balance sheet perspective. As a reminder, at quarter end, our $35 million revolving credit facility was untapped and remains so today. A quick, back of the envelope valuation analysis of Five Star at the end of the quarter shows $25.7 million of cash, an additional $35.2 million of cash from UBS, approximately $128 million in book value, not fair market value, from the 25 communities that we own.

These three items alone total approximately $176 million and place no value on our operating business and underscores the valuation discount when you consider that our market cap at yesterday's close was $107 million and we continue to reduce what little debt we have.

At this point, I'd like to turn it over to Paul Hoagland, our Chief Financial Officer.

Thank you, Bruce, and good afternoon, everyone. For the second quarter, our senior living revenues increased $15.8 million, or 6.3%, to $266.8 million, as compared to the second quarter of 2009. This increase was due primarily to revenues of $11 million from the 11 new communities we began to operate during the fourth quarter of 2009, plus increased per diem charges to our residents of 1.7%, offset by a decrease in occupancy, which decreased from 86.5% to 86.2%.

The 1.9% increase in senior living revenue at communities that we operated continuously since April 1, 2009, generated approximately $5 million of revenue at our comparable communities. As Bruce previously mentioned, we are encouraged by the occupancy increase at our IL and AL communities, which account for 76% of our senior living revenues.

Senior Living wages and benefit expenses increased $6 million, or 4.7%, to $134.2 million, compared with last year. $5.5 million of this increase was due to our new communities. However, Senior Living wages and benefit costs for our comparable communities decreased as a percentage of revenues from 51.1% to 50.3%, primarily due to improved labor controls and slightly favorable benefit costs.

Other Senior Living operating expenses increased by $1.5 million or 2.4% compared to last year. This was due to a $2.3 million increase from our new communities and a $900,000 reduction at our comparable communities. Let's spend a moment to discuss some of the detailed movement within our Senior Living operating costs.

Our total Senior Living operating expenses decreased in the second quarter of 2010 to 22.9% as compared to 23.7% in the second quarter of 2009. We had less expense in our operating supplies, services, and utilities. We are increasing our focus on community expense and supply control, and are also taking steps to reduce our utility expenses.

Although the seasonality of our business has historically seen our utility expense at its lowest point in the second quarter, and last year's third quarter utility expense increased by 60 basis points as a percentage of revenues. We recently entered into an outsource processing arrangement with a third party that will pay, analyze, and purchase energy for our Company.

In addition, we are making a capital investment of just under $3 million in a lighting retrofit program that will be completed by the end of the year. We expect to see a reduction of approximately $2 million to perhaps as much as $3 million in annual utilities expense in 2011 as a result of these initiatives.

As Bruce noted, our income from continuing operations was influenced by non-recurring items in the second quarter of 2010 and 2009. Income from continuing operations for the second quarter of 2010 included several items that in aggregate resulted in a positive impact of $560,000 or $0.02 and $0.01 per share basic and diluted respectively on our earnings. These items were a $4.2 million gain on our holdings of auction rate securities and a $418,000 gain on the early extinguishment of convertible debt, offset by a $4 million loss on our UBS put right related to auction rate securities.

Income from continuing operations for the second quarter of 2009 included several items that in aggregate resulted in a positive impact of $6.5 million or $0.20 and $0.17 per share, basic and diluted respectably on our earnings. These items included a $6.1 million gain on early extinguishment of convertible debt, a $239,000 unrealized gain on our UBS put right related to auction rate securities, and a $195,000 unrealized gain on our holdings of auction rate securities.

Turning to our ancillary businesses, the rehabilitation hospitals generated a second quarter EBITDAM loss of $355,000. Hospital revenues were down $564,000, or 2.2% compared to last year, primarily due to a decrease in occupancy, which decreased from 60.8% to 54.8%. Hospital expenses as a percentage of revenues increased by 280 basis points during the quarter, due to increases in labor and benefit expenses driven from the decrease in occupancy.

Our Pharmacy operations achieved a $429,000 margin in the quarter, which is an increase of $432,000 from the prior year. Pharmacy revenues were up 8.9% compared with last year due to the impact of adding new customers, which was partially offset by lower average revenues per prescription due to higher sales of generic drugs. Total pharmacy expenses increased by 6.5% in the prior year due to higher costs associated with our rising customer base, but our revenue increase allowed us to capture an efficient EBITDAM flow through.

During the second quarter, general and administrative expenses increased $1.1 million or 8.2% from last year, due to higher corporate and regional support costs primarily associated with communities we began to operate in the fourth quarter of 2009. Our G&A costs as a percentage of revenues are in line with last year at 4.5% and are within our range of expectations.

Rent expense increased $2.9 million, or 6.4% compared to last year, with most of this increase due to new acquisition rent expense of $2.6 million. Income taxes were $560,000 in the second quarter. And absent any unusual gains or losses next quarter, we expect taxes to be approximately the same, or $500,000 in the third quarter.

Before concluding today, let me review our liquidity, cash flow, and selected balance sheet items. At June 30th, we had cash and cash equivalents of $25.7 million, not including the $35.2 million that we received from UBS on July 1st, bringing our total cash to $60.9 million. As of June 30th, we had nothing drawn on our $35 million revolving line of credit and we're in full compliance with all covenants. Today our balances remain undrawn.

Consolidated EBITDA, excluding certain items noted in our press release, increased to $12.6 million, an increase of 48% during the quarter, from $8.5 million last year. Operating cash flow for the second quarter was $45.8 million due to operating performance. We made $13 million of capital investments during the quarter, and sold $9.6 million of CapEx to Senior Housing.

Our accounts receivable management remains strong, as the number of days sales outstanding for our consolidated operations was 20 days at June 30th, the lowest we have achieved in recent years.

At the end of the second quarter, we had $194 million of net property and equipment, which included 25 properties directly owned by Five Star, 22 of which are unencumbered by debt. In addition to the $6.5 million of debt on our UBS line, which has been paid off on July 1st, we had $42 million of convertible senior notes and $12.4 million of HUD mortgages outstanding. We have given our notice of intent to repay a $4.5 million HUD mortgage in the third quarter. We believe we are in compliance with all material terms of our credit, note, and mortgage agreements.

With that, I'd like to open it up to questions. Thank you very much.

(Operator instructions) We'll take our first question from Jerry Doctrow with Stifel Nicolaus.

Thanks. A couple of little things and some bigger questions. Just -- I think you gave the amount of CapEx sold to S&H (inaudible) was 9 point something.

Yes, $9.6 million.

$9.6 million, okay. Thanks. And do you know the interest expense on the converts for the quarter?

Well, it's 3.75 on --

Roughly $49 million on the same (multiple speakers) quarter.

Yes, so --

$49 million, that's fine. I mean I -- we can calculate it.

Yes, right.

Okay. You had talked about the -- some of the improvements in expenses, particularly on the Senior Housing properties in the quarter. And then you also talked about the utilities sort of go up and I guess I was trying to -- I was going to say I was trying to think through, since relatively small changes in kind of expense numbers can have a big [impact] to the bottom line whether there's any other shifting about. And maybe if you can just help us think through sort of net-net where that expense number or any of the other expense numbers are going to move.

Sometimes there's these things that you really call them one time, but just a little benefit. I think you mentioned some things on benefit costs on one of the items. Or there's anything that sort of is going to shift up next quarter that we should really be thinking about.

Right now, Jerry, the biggest one's kind of utilities. And I think Paul tried to give a little bit of the percentage of revenues, probably about 60 basis points. If you looked at last year's historical performance where we were in Q2 of '09 going into Q3 of '09, and that can translate to about $2 million. And again, that's looking at last year's where our utility costs were last year.

Okay, and the other stuff you were mentioning in terms of gauging this firm, doing the lighting, may help you down the road, but it's not going to really impact that for this third quarter.

Yes, we won't -- I don't see benefit to that until probably the -- at least the first quarter of 2011, maybe even the second quarter.

Okay. I guess maybe sticking on Senior Housing for a second, I guess my sense from your comments, Bruce, was reasonably upbeat, [think things at bottom], feeling a bit better about where it's going forward. Any sort of additional sort of color, I guess, on that? And I guess maybe, I don't know, if you want to give specific expectations for occupancy rate or that kind of thing. It looked like occupancy's stable, but you were sacrificing a little bit on rate, but then you were also saying kind of incentives were backing off. So any additional color you can give us on where that's going.

No, nothing significant. I mean it is, like I said the first time, and from my prepared remarks, the first time four years we saw a comparable increase in our AL/IL. So it does appear that we have stabilized, starting to turn the corner. We're working hard to really raise that over the next several quarters.

I think it's going to be a long, slow drive up, but we are expecting it to drive up over the next couple of years. We've got a lot a long way to go to get back to our historical levels of 91%, but I think when we do you'll really see some nice flow through on that.

Okay. And just on the acquisition, I think it was 110 units. Any more color -- or I guess the specifics on sort of rate, or occupancy, or margin. I'm just trying to figure out what kind of impact it's going to have as we get into the quarter. Maybe a little color on when exactly it'll close in the third.

We expect it to close by -- in the next couple of days. It's close to full, 110 units close to full. And I think we are expecting a double-digit return, north of 10% on the acquisition before taking into account expansion opportunities. And this is something that we'll hit the ground with pretty quickly and hope to get additional units out of the ground starting very soon. They've got a very successful Alzheimer product that we hope to capitalize on and hopefully double over the next several quarters.

Okay. And then just on the skilled nursing that's being sold. Is there any kind of payment to S&H to sort of buy out those leases or whatever?

Yes, there is. It's not that big money, but essentially the way our lease mechanics work we're seeing housing be buyer -- although that's -- well actually funnel the money right to Senior Housing because they own this (multiple speakers).

Right, okay.

It's a little south of $1.5 million.

Okay. That's your payment to them or that's the payment they're collecting from the buyer?

That's the payment they're collecting from the buyer. Yes, we have no payment between us and Senior Housing.

Okay. And I guess maybe one last one and I'll jump off. You've got all this cash, I think it was $60.9 million, obviously lots of other potential ways you could raise additional cash, credit line, that sort of thing. So what are you thinking about doing with that? I mean it opens up maybe a bunch of strategic possibilities. Buy assets, buy back shares, buy out properties from S&H that you might see more upside in. I mean what are the kinds of things that are maybe under consideration or -- because it's a lot of money to be sitting on.

Yes, you said a few of them right there. I think the other thing too would be looking at debt. We're buying -- or we're prepaying a HUD mortgage this quarter, $4.5 million. That'll be a rate of 7.65% that's gone. We'd like to take advantage of convertible debt too at a discount. And hope to take advantage of that over the next quarter as well.

Okay, but --

In addition to the items that you mentioned as well.

Okay. And any sense of priority, or scale, or how quick it might be put to use or --?

I think the biggest priority's delevering the balance sheet. I wouldn't say -- it's something that we've -- if we can find deals out there, we'll take advantage of them. So we're not hesitant to do that.

Right. And delevering could be buying out additional leases.

Could be. I think the priority would be to -- on the debt.

The buy out to converts first.

Yes.

Okay. All right, let me jump off and thanks.

All right, thank you, Jerry.

(Operator instructions) We'll take our next question from Joel Ray with Davenport & Company.

Good afternoon, guys.

Good afternoon, Joel.

Great quarter, congratulations.

Thank you very much.

Could you repeat for me what your current overall occupancy rate is? I think you had mentioned the AL/IL. Was it -- was up nicely. But what was the overall?

Overall for the quarter we were 86.2%.

And where do you stand today?

Today overall as a Company we're at 86% even.

Okay.

We do fluctuate up and down, 10, 20 basis points. I mean that's not uncommon during the quarter.

Correct, right. But even so that sounds -- again things sound like they're pretty stable.

(Inaudible)

If you -- the outlook now that the federal tax incentives to buy a home have abated, are you seeing any change in your inflow of queries from seniors?

We haven't recently, no. The inquiries are still strong. And I think that was evidenced between the -- I'm not sure exactly when that benefit ran out, but we were up between the second quarter of 2010 and the first quarter of 2010 significantly. And we were also up over the second quarter of 2009. And that's on a same store basis, so inquiries are still -- have been strong. And that is something that we hear not only from us but other operators around the country as well.

Okay, well that's certainly encouraging. And it's also particularly encouraging that you don't have to be aggressive on discounting to get that in. On your labor cost side, that seems to be doing pretty well of late along with benefits. Down versus prior year levels. I think some of that's due to changes in benefits. But I also heard some discussion on the call about systems trying to increase your operating efficiency. Could you elaborate a little bit on that?

Well, we currently do have systems and metrics in place that will help us schedule labor based on occupancy levels. But we continue to fine-tune that program. As a for instance, in the first quarter to the second quarter, we saw about 30 basis points of improvement in overall wages although we did give back slightly in our -- on our benefits between -- primarily in the workers' compensation area. But workers' compensation, which is obviously a big expense for the Company, is becoming an area of increased focus and we're hoping to be able to over the next six to 12 months start to show some results on that as well.

So would it be fair to assume that we should be able to maintain this type of expense ratio over the balance of this year?

Something close to it, yes.

Yes, I'd agree.

That's pretty encouraging. And I also note that your other expense did drop substantially this quarter. And I heard you mention utilities. Are there other factors that we should be thinking about? And of course with the hot summer weather, I'm wondering whether or not in contrast to the cold winter weather where that drives up costs, would not your AC costs also potentially surge given the extreme heat we've had?

Clearly they're all possible, Joel. If you look at it from a question that Jerry proposed, I kind of gave what we saw last year. And I'll admit we live in New England here and it's been a hot July and we've seen that pretty much throughout the US. So hopefully it'll get a little bit cooler, but it could be a little bit more of a spike than we've seen in historical periods.

Right. Are there other variables that we should be thinking about on this other expense side that could mitigate that or could fluctuate some?

I don't think we have seen anything material in all honesty, either up or down in most of our other expense categories. When you go -- you mentioned going into Q4, I expect to see utilities to come back a little bit from where it might spike in Q3.

Okay.

And then Paul also talked about the utility programs that were putting in place, which should help us (multiple speakers) term. Correct.

And finally, we haven't talked much about the rehab hospital side, where I know we've had ongoing construction efforts. Where are we today with some of those programs?

Well, we've got out of both hospitals they're about 50% done with all their construction. We're kind of taking a pause and making sure that we're adequately spending our capital wisely. I think the big thing that I mentioned is the additional inpatient satellite unit at one of the New England campuses. We have -- we literally have a hearing tomorrow, it's a public hearing, University of Lowell. And assuming that goes well, we hope to have that additional -- we hope to get clearance from the state to begin that unit in 2011.

And then we are in the process of finalizing a traumatic brain injury clinic. That'll be about an 18-bed unit at the New England Rehab Hospital as well. Construction's just about done. We expect that to be operational in the fourth quarter of this year. And that will be a very nice program.

We have one of the stronger TBI programs really across the country Braintree and we hope to duplicate that at New England Rehab. That'll be a nice success story for us.

Good. Tell me, I know that earlier we had been hearing from you that some of the referrals on the rehab side from regional acute hospitals had abated. They just weren't passing as many patients onto you probably because they themselves weren't seeing as many. And likewise I know that into the second quarter of this year, we were seeing weaker trends in the hospital business, physician visits, et cetera. What is that doing to your business these days?

It's obviously hurting it. If we look at the two hospitals right now, we've got one in New England, which is in Woburn Braintree, in Braintree, Massachusetts. The Braintree hospital is actually doing fairly well year-over-year and quarter-over-quarter. We are struggling at New England Rehab, predominantly with what you said referrals. If you look at our overall combined occupancy, we're down almost 600 basis points and it's really one is with referring hospitals from New England that have been hurting as well.

Okay.

So it continues, we're working on it, and we hope to see that reverse in the next several quarters.

Very good. Well, thank you very much.

All right. Thank you, Joel.

Again, congratulations on a very good quarter.

Great, thank you.

And we'll take our next question from George Walsh with Gilford Securities.

Thank you. Also congratulations on the quarter.

Thanks, George.

And just to clarify again, I'm repeating probably what's gone on, but I just want it clarified a bit. Versus the -- results versus the first quarter that I think operations there came in about $0.09. So would you say the variables were -- in terms of, you came in $0.21 here, so that's about $0.11, so it's the utility costs, the rehab hospital having less of a loss, and a profit in the pharmacy where each of those, the main factors that revolved in that, is that $0.11 difference sequentially?

No, I -- utilities was really what -- right where they were in line with 2009. So I would say they were actually taking maybe a little bit less, but not much. The Rehab Hospital's clearly, that was a -- probably $0.02. And then the rest is really the things that Paul talked about in his prepared remarks.

Okay. But even sequentially, I'm talking about from Q1, is there that big a swing in utility costs that you can go from about that $0.09 to this $0.21?

No, it was more than just utilities. When you look at Q1 to Q2 from a standpoint of utilities, we picked up about 0.8 of a point, so I mean it was a -- obviously a nice move. But we also saw reductions in our operating expenses, operating supplies that in total added up to a few tenths as well. So again, we are focusing more with regards to improving increasing controls on supplies, expenses, and collectively it certainly had a good impact on the quarter.

And I think [policy], George, is pretty much in line with where it was in Q1, down a little bit, but not much.

Okay. So, but the nature of it sounds -- I mean utilities could be the variable, but it sounds like you're getting elements in there, Paul, that are, as you're getting your hands around the operation that can be more ongoing benefits as opposed to certain seasonal factors.

And I think that that's fair. I just don't think it's a significant number. It might be 0.1 or 0.2, and our obviously -- on our volume, 0.1 or 0.2 is meaningful, but I think it's fair.

Okay. All right. And also with the cash, so you're -- July 1st you're at about $60 million. And I guess that what you'll be using out of that is about $14 million or $13 million for the acquisition and the pay down of that debt, the IRS credit. The UBS line.

Well, I think you're right on the net debt. That takes into account the UBS line. But we're also, we've got the -- just a little bit more, so we're looking at $14 million on the purchase of the acquisition. And then you've got the HUD mortgage prepayment for $4.5 million as well. (multiple speakers)

Okay. And the buyback of the debt was already done before quarter end, so that's included on the balance sheet.

That's exactly right, yes.

Okay. Very good. All right, thanks a lot.

All right, George. Good talking to you.

(Operator instructions) We'll take our next question from Greg Gerst with Gerst Capital.

Hi guys. Nice quarter.

Thank you.

Just wanted to check my math here, and I apologize. I wasn't paying attention closely to some of the questions, so if this is a repeat, I apologize. On -- my math is showing you guys are approximately, if we include the ARS assets, you've got approximately net cash of about $23 million. Is that consistent with what your math says?

Well, we finished the quarter with $25.7 million in cash. That was before the $35 million redemption, which took place the first day of July.

Right. So putting that in there, that's already taken place. But when I add it all up, I come up with something north of $20 million as far as net cash. Does that sound in the ballpark?

It's certainly -- again, net cash was, call it $25 million in the quarter, as we ended the quarter, yes.

Well, I mean if we -- I'm including basically the UBS. You have that $35 million odd; you've got the cash. If we throw in the investment in available for sale securities, about $11 million. And then we put that against the converts and the mortgage note payable, it's about -- a little bit north of $20 million. I guess the (multiple speakers).

Yes, that is -- the investment and the available -- so, a lot of that covers our insurance liabilities though.

Okay. But you're -- I mean by any metric, you are net cash right now.

Correct.

Okay. So if we look at your enterprise value is less than your market cap today. And looking at your market cap at the close, let's say it's $110 million enterprise value. And if we take -- if we annualize first six months EBITDA, if we -- you guys are at a very, very low EBITDA or market cap-to-cap -- free cash. However you want to look at it.

(Inaudible)

You're very, very [cheap]. So, my question is in terms of determining where to put your cash flow going forward, you're putting it into your converts, obviously. I'd like to ask about that new facility there. You said you were getting double-digit return on that. Can you kind of take us through that a little bit in detail? A little bit more detail what you mean by that?

We don't have the exact numbers on hand, so I really can't give you too much detail, plus it hasn't closed. And everything that we're looking at is really on a historical basis. But we expect to develop an additional 10 to 20 units over the next probably three to four quarters. And that that -- I'd say double-digit's probably going to be north of 20%.

Okay. It just seems to me even north of 20%, I mean given the industry you guys are in, your capital structure right now, it's hard to -- for me to imagine a better risk reward than at least putting some of your capital into a share buyback starting now. I -- can you kind of correct me on that?

Yes, I can correct you. It's something our Board does look at from time to time. And right now, with the small float that we do have in the stocks, as well as the convertible debt that will be put to us in 2013, our Board feels it's more of an appropriate choice to either buy the convert back or invest in that so that we can later liquidate. Because we do have restricted access to capital at times.

Okay. Thanks. That's it for me.

All right. Thank you, Greg.

We'll take our next question from Jerry Doctrow with Stifel Nicolaus.

Hi, just one last follow-up. So on the rent growth, and I don't know if this is because you moved the stuff into discontinued ops or not, but I think rent growth is a little lower. Is there any kind of seasonality of that, when it gets reset based on revenue or how should we be thinking of that through the year?

No, I don't think there's any seasonality. It's really a function of CapEx sales, percentage rents.

Yes, it's very predictable from the standpoint of that number. So, no there is no seasonality.

And how much rent did you move out to move into discontinued ops for the quarter?

Very small amounts. Like I said, maybe $150,000. And that's actually on an annual basis, so it'd be even less than that.

Yes.

Okay. All right. And otherwise again, it just -- it -- and when -- is there a particular time during the year that the resets get down when you do a percentage of revenue? Because aren't some of your rents percentage of revenue or is that just done kind of on a continuous basis?

On a continuous basis. Each property has a base year and as new properties get added to that, like for example we buy an acquisition through Senior Housing, we did some property in 2009. 2010 would be the base year of those acquisitions and we start paying percentage rent in 2011.

Okay. Thanks.

All right. Thank you, Jerry.

And that concludes today's question and answer session. I'd like to turn the call back to Mr. Bruce Mackey for any closing remarks.

Great. Thank you all for joining us on today's call. We will be at the NIC Conference in Chicago in September. We look forward to seeing some of you there. We also look forward to updating you on our Q3 results in late October. Thank you and have a good afternoon.

That concludes today's conference call. We appreciate your participation.