Five Star Quality Care, Inc. (



Q3 2011 Earnings Call

October 27, 2011 10:00 am ET


Timothy A. Bonang – Vice President, Investor Relations

Bruce J. Mackey Jr. – President and Chief Executive Officer

Paul V. Hoagland – Chief Financial Officer and Treasurer


Paxton Scott – Jefferies & Co.

Jerry Doctrow – Stifel Nicolaus & Company, Inc.



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Ladies and gentlemen, thank you for standing by. Good day and welcome to the Five Star Quality Care Third Quarter 2011 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, Tim Bonang. Please go ahead, sir.

Timothy A. Bonang

Thank you, and good morning everyone. Joining 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 conference, a presentation by management followed by a question-and-answer session. I would also note that the recording and retransmission of today's conference call is strictly prohibited without prior written consent of Five Star.

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, October 27, 2011.

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 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 now, I’d like to turn the call over to Bruce Mackey.

Bruce J. Mackey Jr.

Great. Thank you, Tim, and thank you everyone for joining us today. For the three months ended September 30, 2011, we reported our 10


consecutive quarter of profitability from net income from continuing operations of $0.08 per basic and diluted share.

Results for the quarter were positively impacted by $0.01 per share from a gain on available for sale of securities offset by acquisition costs. Taking that into account, our adjusted income from continuing operations was $0.07 per basic and diluted share. This compares with $0.17 per basic and $0.16 per diluted share that we reported for the same period a year ago.

I would note that we haven’t had a full quarter’s worth of activity included in our results from recent acquisition, some of which closed on the last day of the third quarter. And we also experience increases in certain operating expenses, mainly in health insurance, marketing and other costs associated with bringing new properties online. All of which Paul will discuss later on the call.

Five Star is continuing to be profitable despite the turmoil in the healthcare industry in overall market. Over the trailing four quarters, our diluted net income from continuing operations was $0.57 per share.

2011 has been a year of significant growth for Five Star and we expect that to continue in the fourth quarter. Since the beginning of the year, we have announced the addition of 37 primarily private pay communities with over 5,000 units. In total, as of September 30, Five Star owns, leases or manages 236 communities with over 25,000 units.

According to the American Senior Housing Association, Five Star is now the sixth largest operator of Senior Housing in the United States. Take into account the 31 communities in almost 3,000 units we own, Five Star is now one of the top 50 senior housing owners as well.

Let me now update you the status of our recent acquisitions, leasing agreements and management contracts. First, the acquisition in six private pay senior living communities we agree to purchase in Indiana from Basic American for $123 million is now complete.

On July 1, we acquired one community and on September 29, we acquired three communities with a total of 541 units for $82.4 million. We assumed $90 million of mortgage debt along with this acquisition.

To remind you, these are relatively new high-end properties with all private pay residents. So we have no government related reimbursement issues. About half of these communities have land available for expansion. We will begin to explore possible expansion opportunities at these communities in 2012.

Of one of the six properties, Five Star acquired a private duty home health agency in Indiana and we expect the licensing to be completed in the fourth quarter. We see this as a potential growth opportunity for Five Star.

Next, in mid-July we began to lease from Senior Housing Properties Trust, a senior living community in Florida with 96 units, and also begin to manage four communities. These five communities are all part of the 20 community portfolio located in the Southeast, we have a 2,000 units that Senior Housing is purchasing from Bell Living, which was announced back in March.

To remind you, of the 20 communities Five Star expects to be managing 15 communities and leasing five. As of September 30, 2011 we operated 19 of the 20 communities and we expect to begin managing the remaining community sometime in 2011, or the first half of 2012. Under the management contract with Senior Housing, Five Star has paid 3% of revenues and will also have the opportunity to earn a 35% incentive fee based on the net cash flows generated after Senior Housing has reached a prior year return.

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