Five Star Quality Care, Inc. (FVE)

Q2 2010 Earnings Call Transcript

July 28, 2010 5:00 pm ET


Tim Bonang – VP, IR

Bruce Mackey – President and CEO

Paul Hoagland – Treasurer and CFO


Jerry Doctrow – Stifel Nicolaus

Joel Ray – Davenport & Company

George Walsh – Gilford Securities

Greg Gerst – Gerst Capital



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.

Tim Bonang

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 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, July 28, 2010.

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 or SEC regarding the supporting 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 on any forward-looking statements.

And with that, I would like to turn the call over to Bruce Mackey.

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 per diluted share for the three months ended June 30, 2010. This compares to $0.29 per basic share and $0.26 per diluted share that we reported for 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 the second quarter of 2009 income from continuing operations of $0.12 per basic share and $0.09 per diluted share. As I will outline in a moment, I think we stand together with our peers in looking for an upturn in occupancy. It is clear that Five Star stands along 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 proudly positioned to benefit from occupancy increases in the future.

I would now give you some highlights from what was a massive quarter. On June 16, 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 boards 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 gap between interests of both companies which should make the bridge. For example, Senior Housing placed little value on Five Star’s plus $100 million of net operating loss or NOL carry-forwards, 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.

In addition, Five Star’s Board places greater value on the non-core portion of the business, such as the pharmacy, and the Senior Housing. The ultimate outcome was that the Boards agreed to consider the TRS structure, the future acquisitions of senior living communities that the companies may acquire together.

On June 25, we announced Five Star’s additions of broad market Russell 3000 Index following Russell’s reconstitution of a comprehensive set of the US and global equity entities. As many of you know, the Russell indices are widely used by investment managers and institutional investor for index funds and in benchmark, both passive and active investment strategies.

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