Five Star Quality Care, Inc. (FVE)

FVE 
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Five Star Quality Care, Inc. (FVE)

Q1 2011 Earnings Call

April 28, 2011 10:00 am ET

Executives

Tim Bonang – IR

Paul Hoagland – CFO

Bruce Mackey – President and CEO

Analysts

Joel Ray – Davenport

Jerry Doctrow – Stifel, Nicolaus & Company

Presentation

Operator

Good day and welcome to the Five Star Quality Care first quarter 2011 financial results conference call. This call is being recorded. At this time for opening remarks and introduction, I would like to turn the call over to Five Star’s Vice President of Investor Relations, Mr. Tim Bonang. Please go ahead, sir.

Tim Bonang

Thank you and good morning, everyone. Joining us 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 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, April 28, 2011.

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

Bruce Mackey

Thanks, Tim, and thanks to everyone for joining us today. Early this morning we reported net income from continuing operations of $0.16 per basic share and $0.15 diluted share for the three months ended March 31, 2011. This compares with $0.13 per basic and diluted share that we reported for the same period a year ago.

During the trailing four quarters, our diluted net income from continuing operations is $0.71, strengthening our consistent profitability trends over the past two plus years. We recognize the important of delivering consistent financial results to our shareholders and we will continue to do so.

Before we get into the financial highlights on the quarter, I would like to review some acquisitions and disposition activity that we expect to close during the second and third quarters of this year.

First, in early March, Senior Housing Properties Trust announced that they are acquiring a 20 community portfolio from Senior Living for $304 million. We’ll be entering into traditional net lease for five of these communities and will be entering into a management agreement for the other 15 communities. In total, the 20 communities have 2,111 living units and the breakdown is as follows; 814 independent living apartments, 939 living suites, 311 suites which offer specialized Alzheimer's care and 47 skilled nursing beds. These communities fall nicely Five Star’s existing footprint in the Southeast. Seven communities are in North Carolina, five communities are in South Carolina, four communities are in Florida, two are in Virginia and two are in Georgia.

We are currently negotiating the terms of the lease and management agreements with Senior Housing and will report on those terms after their conclusion. This portfolio is significant to Five Star for a number of reasons. First, as I just mentioned, the communities fit into our existing footprint. We can operate these communities without significantly increasing our regional headcounts.

Second, there is the potential upside for us by increasing occupancy and discovering cost efficiencies. As of March 31, 2011, the portfolio was 88% occupied. And lastly, we may be able to add Five Star’s pharmacy services to a number of the communities, as well as add our outpatient rehabilitation business and all that ancillary income will drop to our bottom line.

We expect closing this transaction during the second and third quarters. Next on the acquisition front, we are acquiring a 73 unit community in Watford, Illinois. This community is 86% occupied and was built in 1999. We will be leasing from Senior Housing through a traditional net lease. We expect to close on this transaction next week.

Lastly, Five Star has agreed purchase several properties using our own balance sheet. As we discuss our growth strategy, along with traditional sale lease tax, we would like to grow our own portfolio when the opportunity arises and the acquisition makes sense for Five Star.

The first acquisition is a property in Arizona we have agreed to purchase for $25.6 million. It’s a 116 unique community that is 97% occupied. The property was built in 1996 and remodeled in 2006. It has (inaudible) popular expansion. We are assuming $18.7 million of Fannie Mae debt, which is due in 2023 at the rate of 6.6%. The balance is to be paid in cash.

We expect to closing this transaction next week. The second acquisition is a group of communities that we’ve agreed to purchase in excess of $100 million, with about 750 units located in the Midwest states. We expect to closing this transaction in either the second or the third quarter and will update on the details shortly. We are currently in diligence with these properties. I would like to remind you that this transaction is subject to customary closing contingencies and it may not close.

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