Five Star Quality Care, Inc. (FVE)

FVE 
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Five Star Quality Care Inc. (FVE)

Q3 2009 Earnings Call

November 2, 2009 5:00 pm ET

Executives

Tim Bonang – Vice President of Investor Relations

Bruce Mackey - President and Chief Executive Officer

Francis Murphy- Chief Financial Officer

Analysts

Kevin Ellich – RBC Capital Markets

Jerry Doctrow - Stifel Nicolaus

Donald Hooker – UBS

George Walsh – Gilford Securities

Presentation

Operator

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 would like to turn the call over to the Vice President of Investor Relations, Mr. Tim Bonang.

Tim Bonang

Thank you, and 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 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 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 on any forward-looking statements.

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

Bruce Mackey

Thanks 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 basic and diluted respectively for the same period last year. However, the third quarter of both 2009 and 2008 included certain non-operating items.

The 2009 results include several items that in aggregate result in a positive impact of $4 million or $0.10 per diluted share. These items included a $3 million gain due to early extinguishment of debt, a $795,000 on the sale of certain marketable securities held by our captive insurance companies, a $455,000 unrealized gain on 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 unrealized loss of $1.7 million as a result of our holdings in 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’d 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 arise. 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 of 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 to low-income patients related to our hospital operations. We believe that we are now accruing for those payments at the appropriate level on a go-forward basis and will not face 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 focus over the past few years has been occupancy. The good news is that Five Star’s overall occupancy increased sequentially for the first time in 8 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 senior living occupancy appears to be stabilizing. For us, the overall occupancy by product type and geographic location hasn’t changed much since last quarter’s call. I think we’re doing fairly on the assisted living and Alzheimer’s front while facing challenges with independent living and more recently in our skilled nursing, primarily with Medicare.

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