Five Star Quality Care, Inc. (FVE)

FVE 
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Five Star Quality Care, Inc. (FVE)

Q2 2011 Earnings Call

July 28, 2011, 10:00 am ET

Executives

Tim Bonang - VP, IR

Bruce Mackey - President & CEO

Paul Hoagland - Treasurer and CFO

Analysts

Art Henderson - Jefferies & Company

Jerry Doctrow - Stifel Nicolaus

Presentation

Operator

Ladies and Gentlemen, thank you for standing by and welcome to the Five Star Quality Care second quarter conference call. (Operator instructions). And as a reminder, this conference is being recorded. I will now turn the conference over to Tim Bonang, Vice President, Investor Relations. Please go ahead, sir.

Tim 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 the 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, 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 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 on any forward-looking statements.

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

Bruce Mackey

Great. Thanks, Tim, and thanks to everyone for joining us today. Early this morning we reported net income from continuing operations of $0.17 per basic and diluted share for the three months ended June 30, 2011. Our results for the quarter were impacted by $0.03 per diluted share of acquisition costs. Taking that into account, our adjusted income from continuing operations was $0.20 per basic and diluted share. This compares with $0.22 per basic and $0.21 per diluted share that we reported for the same period a year ago.

Results for the second quarter of 2010 included non-recurring items to the positive totaling $0.02 per basic and $0.01 per diluted share. Paul will review those details later.

For the trailing four quarters, our diluted net income from continuing operations was $0.66 per share proving the strength of our profitability. Before we get into the financial highlights from the quarter, I would like to review some exciting acquisition and disposition activity that transpired during the second quarter and beginning of the third quarter this year.

To recap what we discussed last quarter, in early March, Senior Housing Properties Trust announced that they were acquiring a 20-community portfolio in the southeast for $304 million. In late June, we began to manage ten of those communities and leased four of those communities. Subsequent to quarter end in July, we began to manage an additional two communities and to lease one additional community.

The acquisition of remaining three managed communities is contingent upon customary closing conditions and lender consent and will likely close later in 2011 or early 2012. These properties fit nicely into our existing footprint of operations in the southeast. We see opportunity to increased occupancy and discovered cost efficiencies by adding some of our ancillary services such as rehab and wellness programs and pharmacy services.

In May we began to lease a 73 unit community in Rockfield Illinois. The community was built in 1999 and is 76% occupied. We are leasing this community from Senior Housing. Five Star has purchased several properties using our own balance sheet. The first acquisition is a property in Prescott Arizona that we purchased in May for $25.6 million, It is a 127 unit community that is 90% occupied. The property was built in 1996 and remodeled in 2006. It is 10 acres of land for possible expansion. We assumed $18.7 million of Fannie Mae debt which is a fair market value of $20 million, that is due in 2023 and has an interest rate of 6.6%.

The second acquisition is a group of six communities that we did purchase in Indiana containing 738 units for approximately $123 million. These communities primarily offer independent and assist-living services which we are paid for by residents from their private resources.

In June, we purchased two of the six communities with a 197 units for $40.4 million. Subsequent to quarter end in July, we purchased one additional community for $29.5 million. We expect to purchase the remaining three communities in the third quarter. We will assume $19.5 million of mortgage debt in connection with this purchase which is a weighted average rate of approximately 7%. We will fund the balance of the purchase price with cash on hand and warrants under our bridge loan from Senior Housing.

In a second quarter we also sold three skilled nursing facilities located in Georgia which were leased from Senior Housing. These dispositions will reduce our rent payable to Senior Housing by $1.8 million a year. Additionally, we are still working to sell two skilled nursing facilities owned by Five Star, located in Michigan.

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