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Executives

Tim Bonang - VP, IR

Bruce Mackey - President & CEO

Paul Hoagland - Treasurer and CFO

Analysts

Art Henderson - Jefferies & Company

Jerry Doctrow - Stifel Nicolaus

Five Star Quality Care, Inc. (FVE) Q2 2011 Earnings Call July 28, 2011 10:00 AM ET

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.

Currently, skilled nursing represents 17% of our total revenue and we expect this percentage to decline over time. Our focus on priority continues to be to acquire and operate high quality private pay communities. On June 21st 2011, we issued 11.5 million shares of common stock in a public offering raising net proceeds of approximately $54 million. We use the proceeds from this offering to repay outdating volumes under our bridge loan that Senior Housing had extended to us to fund a portion on the purchase of the six Indiana communities.

We have discussed before that our growth strategy consists of growing the company through from traditional net leases, management arrangements or by purchasing communities using our own balance sheet. With this offering we have positioned the company for future growth and are acquiring or leasing high quality, private pay communities ahead of the anticipated rise in occupancy, stemming from the positive demand demographics we are all familiar with. Through a combination of excess cash, mortgage debt and equity we are funding our recent purchases. Even so our balance sheet remains conservative today with $55 million of debt, $30 million of cash available and an untapped revolving credit facility. We are confident in our ability to grow revenues at our properties and in turn to grow our earnings over time.

I would now like to give the highlights from the second quarter. Senior Living occupancy for the second quarter of 2011 was 85.2% compared with 85.5% a quarter ago and 86.3% a year ago. Same-store occupancies for the second quarter was 85.1% compared with 86.3% a year ago. However, occupancy at our independent and assisted living communities remained stable to 85.8% relatively flat with last quarter.

We continue to experience occupancy challenges in our skilled nursing business. Occupancy at our skill nursing communities was down significantly from last year. Subsequent to quarter end we have seen positive trends in our occupancy. Occupancy as of yesterday was 85.5%. We discussed on several previous calls our increased efforts in the marketing field, which we expect to aid in increasing occupancy across the business. We have several initiatives currently underway. We are increasing our marketing budget to some extent and are focusing on reallocating resources to more efficient avenues.

For example we are relocating, marketing jobs which were previously being spent on the advertising clearly a more out of date approach to more efficient online CapEx. Our new Vice president of Sales and Marketing is onboard and we’ve already seen positive trends we’re attributing to her and her team’s efforts. Compared to last year, move-ins in our independent and assisted living communities are up 10% as we had 200 more move-ins this quarter then the same period of last year. Even better, move-ins compared to last quarter are up 7% on average.

We continue to push our private pay rates when possible. Our Senior Living average daily rate increased 2.9% compared to last year, more importantly 3.5% on a same-store basis. Looking forward, we still expect our private pay rate to increase on average 3% to 4% in 2011.

Moving on to other metrics, wages and benefits as a percent of Senior Living revenues were 50.2% during the quarter, up slightly from last year which was 49.8%. G&A as a percent of revenues was within our stated goal at 4.5%. We continue to maintain the leanest operations in the industry.

Our core Senior Living business continues to be profitable. Just over 85% of our total company revenues come from this business. Seventy-two percent of our Senior Living revenues are derived from residents’ private pay sources.

In the second quarter of 2011, Five Star Senior Living produced $71.6 million of EBITDAM or referred to as EBITDA excluding rent and G&A expense which was essentially flat from last year but up 2.4% from last quarter.

Looking at just our independent and assisted living businesses, we grew EBITDAM by 2.7% compared to last year and 4% compared to last quarter. The rehabilitation hospitals which account for 8% of our total revenues, made $2.9 million of EBITDAM during the second quarter compared to a $2.1 million during the last year. This is an 84% increase from the $1.6 million of EBITDAM made last quarter. We experienced an increase in revenue at the hospitals due to higher quality patient case mix and a slight increase in occupancy. We also did a better job of managing our variable expenses.

The pharmacy operations, which make up 6% of our total revenues made $931,000 on a EBITDAM basis during the second quarter. This is about a $502,000 improvement from the second quarter of 2010 and an improvement of $483,000 from last quarter. Currently we have about 12,340 customers and we expect to add 1500 customers during the remainder of 2011.

Our balance sheet remains strong. We ended the quarter with approximately $43 million in cash and we had in excess of $270 million in book value, not fair market value in net property and equipment. This includes 27 of the property we own, 26 of which are unencumbered debt.

The second quarter was another excellent operating quarter for Five Star. The private pays Senior Living business continued to perform well and our pharmacy and rehabilitation hospital business saw increased profitability this quarter. Our key to success remain the same. Increased occupancy and average daily rate, while holding labor, operating expenses and G&A cost in check. our sold results are a test of the strength of Five Star and the opportunistic position we are in, as we are for the overall industry group. And at this point I would like to turn the call Paul Hoagland, our Chief Financial Officer.

Paul Hoagland

Thank you Bruce and good morning everyone. For the second quarter Senior Living revenues increased $8.8 million or 8.4% to $266.1 million compared to the same quarter for 2010. This increase was due primarily to revenues from nine communities we acquired since last year which contributed $3.2 million plus increased per diem charges to revenues of 2.9% or $7.5 million, offset by a decrease in occupancy which decreased from 86.3% to 85.2%. As the communities we’ve offered continuously since April 1, 2010, per diem charges to residents increase 3.5%. Although total occupancy decreased by 110 basis points, AL and IL occupancy was 85.8% a decrease of 80 basis points versus 86% in the prior year quarter, while skilled nursing was 82% versus 85.1% or 310 basis point decline.

Our income from continuing operations for the second quarter 2011 was negatively impacted $0.03 per basic and diluted share due to $1.3 million of acquisition costs giving us adjusted net income from continuing operations of $0.20 per basic and diluted share. Income from continuing operation for the second quarter of 2010 also included certain non-recurring items that in total positively impacted on earnings by $0.02 per basic, and $0.01 per diluted share. Therefore adjusted net income from continuing operations was $0.20 per share also.

Senior Living wages and benefit expense increased, $5.5 million or 4.3% to $133.6 million compared to last year. $1.3 million of this increase was due to the nine communities we acquired or leased since last year and $2.1 million with some health insurance. We had an unusually high increase in large claims during the first two quarters of 2011, with approximately 12,000 claims, we had 74 in excess of $50,000 but our healthcare provider expects this number will moderate during the remainder of 2011.

Senior living wages and benefits as a percentage of revenues were up 40 basis points or 50.2%. However, controllable payroll was 37.5% of revenues which was a 30 basis point improvement from last year. Health insurance did grow a 70 basis point increase which went from 3.1% to 3.8% of revenues.

Other senior living operating expenses increased $2.5 million or 4.3% compared to last year. Senior living operating expenses as a percentage of revenues increased 20 basis points from 22.8% to 23%. This increase was due to the nine communities we acquired or leased since the second quarter of 2010, which had expenses of $2 million plus increased purchased service expenses, general maintenance expenses and property and prescription liability insurance. This was offset by a decrease in utilities which declined 20 basis points from 3.6% to 3.4% of revenues.

We are continuing to see benefits of lighting retrofit program and utilities outsourcing arrangement as our year-to-date utilities expenses as a percentage of revenues have decreased 20 basis points to 3.9% versus the prior year of 4.1%.

Turning to our ancillary businesses, the rehabilitation hospitals generated second quarter EBITDAM of $2.9 million. Hospital revenues were up $1.2 million or 4.9% compared to last year primarily due to higher quality patient case mix and an increase in occupancy which increased 140 basis points from 54.8% to 56.2%.

Although, overall hospital expenses increased 2.1% due to increases in labor and benefit expenses resulting from higher occupancy, overall margins improved 2.4% as variable spending and expenses decreased.

Our pharmacy operations achieved a $931,000 margin in the quarter and pharmacy revenues were down 1.7% compared with last year. But total pharmacy expenses decreased 4.3% from the previous year.

During the second quarter, general and administrative expenses were virtually flat increasing by only $77,000 or 0.5%. As a percentage of revenues they came in at 4.5% versus this 4.7% last year or 20 basis point reduction. Rent expense increased to $1 million or 2.2% compared to last year mainly due to capital improvement made by via stock purchased by Senior Housing. However, rent expense decreased 10 basis points in the previous year. Our income tax expense was $441,000 for the quarter.

Now let me review our liquidity, cash flow and selected balance sheet items. Cash provided by operating activities for the second quarter of 2011 was $11 million. During the quarter, we invested $5.5 million in acquisition deposits. At June 30, 2011, we had cash and cash equivalents of $43.2 million and our $55 million revolving credit facility wasn’t drawn and remains till today.

Consolidated EBITDA excluding certain items increased 8.1% to $13.1 million from $12.1 million last year. We made $15 million of capital investments during the quarter and sold $4.5 million of capital improvements to senior housing.

Our accounts receivable management remained strong as the number of days sales outstanding for our consolidated operations was 19.5 days as of June 30th. This remains very low and well controlled.

At the end of the second quarter, we had $273 million of net property and equipment which includes the 27 properties directly owned by Five Star, 26 of which are unencumbered by debt. We had $37.6 million of convertible senior notes and $19.9 million of mortgage notes payable. We believe we are in compliance with all the term of our credit, note and mortgage arrangements.

In closing, we remain focused on increasing our occupancy and controlling our expenses. We continue to invest significantly in the capital upkeep of our properties and have been rewarded with an average comparable community rate increase of approximately 3.3% over the last eight quarters. We are well positioned to capture strong margins and flow through as we increase our occupancy and we are well positioned to make profitable acquisition.

With that, I would like to open it up to questions for Bruce and I. Thank you.

Question-And-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Art Henderson with Jefferies & Company. Go ahead, please.

Art Henderson - Jefferies & Company

Hi good morning, thanks for taking the question. Bruce in your prepared remarks you talked about sort of a change in the approach to sales and marketing and moving from sort of traditional maybe outdated as maybe the way you characterize it to sort of some new approaches. Can you kind of talk a little bit about that. I think that's an interesting area that you guys are moving into and the kind of success you maybe seeing already with that?

Bruce Mackey

Yeah sure. We are in the early stages of it, but I think I gave that example of the yellow page advertising that I think a clearly more outdated approach, what we are focusing on doing is reallocating some of those dollars to online tactics such as search engine optimization.

And another thing we are looking at is social media and you know the problems creating and design ways to enhance our web traffic which will just increase kind of increase and lead as get which will gong to increase our total deposits etcetera the reason we’re moving. So I feel it’s kind of – some of the ideas that we’re talking about, but we’re getting some of those dollars.

Another approach like what I said I hope other calls was that to increase our number of Regional Directors of Sales and Marketing and that again was on the time with reallocation or as able identify efficiency in G&A and we took some of those savings and we’ve increased the headcount that we have. So again, Regional Director of Sales and Marketing historically overtime 20 to 25 properties, they’re now overseeing 15 to 20 properties allowing them to spend more time training our sales folks and helping out the troubled communities.

Art Henderson - Jefferies & Company

Okay, that’s very helpful. And you also talked about I guess SNF representing about 17% of revenue and expecting that to decline overtime. Do you have any – I mean can you us some guidance on kind of where you think you will may be end up and what percentage that will be, lets just say at the end of this year? And then also you have said in your commentary about occupancy there and any views on the final role which I know may be coming up tomorrow night?

Bruce Mackey

Sure. A few questions there; I wouldn’t take a number of number of the weeks; we expect that skilled nursing percentage of revenues to go overtime. I do expect to go down though, you know we’re selectively looking at getting out some of our skilled nursing assets and we’ve been doing that over the years. When we started this business we were 56 skilled nursing assets, we’re down to 38 today.

I see that continuing along, but right now we only have two for sale, we don’t have identified although I do look at that the poor performing communities from time-to-time; not only our skilled nursing but we also do with our IL/AL as well, but for the most part those are performing well and we don’t have any sales coming up in that area. The decline will come really because we’re continuing to acquire more independent assisted living communities. So that percentage will shrink.

Over time it will never go to zero because we have got a number of skilled nursing assets that performs very well across the segment and the next, for example skilled nursing in [CPRCs] we think is a great model and if the model will continue to do well, we will acquire when and if the opportunity arise. You know where the final one for tomorrow, I believe based on the most things I have read it is going to be somewhere in potentially a 6 to 8% decrease on the Medicare rates, but we shall see tomorrow.

Art Henderson - Jefferies & Company

Do you expect something like that to get phased in?

Bruce Mackey

Again yes, I believe that will probably turn about in a two year phase in period.

Art Henderson - Jefferies & Company

Okay great

Paul Hoagland

And I also think just my way of statistics, if you look at the acquisitions that we have been working on, be it basic American, Gretna care and Bell properties in total with all those properties we have been including the managed properties. There is call it 2850 units, they were acquiring. Of the 2850 units, only 47 of them represents skilled nursing.

So again as we grow the company, as we look at acquisitions. We are looking at that private pay, we are looking at ILAL you know it’s memory care, but just through that type of growth alone, 17% becomes 16.5.

Bruce Mackey

That’s right. I think the last point I made, when you talk about the Medicare cut, well that will be a killer for a lot of companies out there. If you look across that strategy over the last ten years, slowly decrease in our exposure to Medicare and Medicaid, that is really why we are buying in the ILAL space because we think over time that Medicare and Medicaid will have to straighten up their books.

Art Henderson - Jefferies & Company

Yeah that makes sense. If you don’t mind I have just to throw in. Obviously, would love to get your take on sort of this whole debt sealing issue and what the impact maybe just to your business in terms of maybe, if there might be the occupancy implications from this at all, anything that you can comment on that and maybe how things look so far in the third quarter.

Bruce Mackey

You know I have a dead feeling, you know, if that does default and it downgrades to debt, I think it is going to cost all of us more and will lead to the rise of interest rates. That will include our business and our ability to pay the bills. You know if the US Treasury does shut down, I think they have already, they are committed to continue to funds for security. So at least the vast majority of our resident’s income will be there to pay their rent, so I don’t expect any big issue there. But I think, it could have potential issue on potential occupancy going forward.

Operator

Thank you. (Operator instructions) We will go next to Jerry Doctrow with Stifel Nicolaus..

Jerry Doctrow - Stifel Nicolaus

You know, couple of things, I guess, Bruce, maybe just to start, you throw out an, I am interested in sort of isolating the private pace in your housing performance and you drew out a couple different numbers, I think, some were comparable store on occupancy in rate and some were maybe just year-over-year sort of numbers. Can you just kind of go over those. I am just trying to understand sort of how the occupancy rate moved particularly same store?

Bruce Mackey

Sure. On our ILAL portfolio same-store, very marginal if not any change, if you look at that quarter-over-quarter. I think a lot of that data is our press release, so you can easily see that there. In terms of, you know, I think the new metric we kind of gave out this quarter, we didn’t breakout our EBITDAM from our independent assisted living business which we hadn’t done in quarters past. But again, I think, as I pointed out, that portfolio continues to perform and the issues we saw in the second quarter primarily related to our skilled nursing business which was down both in terms of occupancy and EBITDAM quarter-over-quarter and from a first quarter of 2011 and second quarter of 2011.

Jerry Doctrow - Stifel Nicolaus

Okay. So you suffice to say basic occupancy was flat on private pay and what was the same-store as a rate growth.

Bruce Mackey

Probably in the 3% range.

Paul Hoagland

Yeah, the same-store comparable communities in Senior Living 3.5%.

Jerry Doctrow - Stifel Nicolaus

So when you say senior living, doesn’t that include private, does that include the skilled as well?

Paul Hoagland

Yeah. That includes the entire Senior Living portfolio, correct.

Jerry Doctrow - Stifel Nicolaus

What I was trying to get is just isolating the strictly the private, the AL/IL portion of that same-store what was year-on-year occupancy, what was your year-over-year change? I didn’t see that in the release and that I am just trying to isolate that from them.

Bruce Mackey

Yeah, we will look into that Jerry.

Jerry Doctrow - Stifel Nicolaus

Alright. So you started doing management in the quarter and just trying to clarify, I guess this is for Paul, normally where we seeing that done is you include all the revenue from the properties and you expense out the reimbursable expenses and end up with kind of a net, which is the management fee. So I am trying to understand whether your revenue would expense to sort of included that, that kind of just an offset with gross revenue and kind of….

Paul Hoagland

Yeah. Jerry a good question. In the second quarter we had roughly ten days of managed properties under contract and you will see in our filings that we did show a net management fee attributable to that kind of getting it wasn’t ten days of all the communities as they all includes yet but it was negligible its $25,000 you also see in there what we call reimbursed cost or management revenues which are the total amount of things like payroll and other expenses that in fact we pay but then we ultimately charge that to the taxable re-subsidiary. That number was $560,000 but that number in fact zeroes itself out. The only number that really nets out in our opinion is the management feel again with 10 days $25,000.

Jerry Doctrow - Stifel Nicolaus

I guess we are trying to reduce so its only I mean one I would certainly advocate for separating that out on the basic income statement so that we could..

Paul Hoagland

It is there Jerry, if you look at the press release we put out this morning it’s probably up there.

Jerry Doctrow - Stifel Nicolaus

Okay. Okay alright. So in terms just regular basic revenue line it’s just the revenue for properties and management stuff is not included in there and on the expense side as well?

Paul Hoagland

Correct.

Jerry Doctrow - Stifel Nicolaus

Okay. I just want couple of other things, on the expense side I think in the call you talked about the fact that you have this in healthcare expenses and basically I think, what are you saying is more claims in the first quarter but that’s sort of resulted in sort of second quarter increase in healthcare expenses for you, went up whatever was 40 basis points, on terms of revenue more than 3.8%.

Paul Hoagland

Well, actually its 70 basis points.

Jerry Doctrow - Stifel Nicolaus

Yes. So should we expect that coming down in the third quarter I mean that’s what I think which are saying you are provider or contract leadership was telling you. So what are we assuming sort of on a better run rate for expense maybe in the third quarter?

Paul Hoagland

Yeah I wish I could give you full clarity but I can tell you that our healthcare provider, very well known group has been studying that for us both in Q1, Q2 I think its probably safe to assume that of that 70 basis points increase year-on-year it will, I am expecting it will pop back 20 perhaps 30 basis points going into Q3. We've seen a little bit of moderation but it’s too early to predict whether or not it will go back to the previous year.

Jerry Doctrow - Stifel Nicolaus

And any other little sort of hiccups or movements on the expense side that we might think about there.

Paul Hoagland

No not really we've seen a little bit of increase in our property insurance that has happened but utilities actually is more than offsetting it and we expect that the utility 20 basis points reduction hopefully will accelerate and become 30 or 40. Again we are just getting into all the new outsourcing and all the implications of it around the country and finding opportunities to save money.

And the other good news too is that in spite of pretty sizable inflation on food we've been able to manage to keep our food flat with previous year through just better management so again you know those middle lines of operating expenses we continue to find efficiencies, the same as we find with the actual controllable labor. We picked up 30 basis points on controllable labor in Q2 versus previous year Q2. So again our field operations continues to refine that through systems and guidance.

Tim Bonang

And one thing about your, just jump up into the question with utilities, we love the seasonality as we enter into Q3 and Paul will give the cost in terms of basis points.

Paul Hoagland

Yeah, last year just you know by way of example, last year utility has increased by about 70 basis points going from Q2 in the Q3. Well it’s too early for me to predict that exact same trend, but certainly there is some seasonality there; just you’re paying more of electricity in the summer, but we do have some offsets coming into that because of the changes we made.

Jerry Doctrow - Stifel Nicolaus

Okay. Okay and then just on I guess to bringing up hospital and pharmacy obviously you did much better this quarter you know if we are thinking about sort of third quarter or fourth quarter, should we assume something like the current profitability. I know you are adding the, one I guess ancillary, not an ancillary, but satellite hospital or that sort of thing I don’t know where that stands, but just any color you can give us some color on where this two of your business lines might move?

Paul Hoagland

Yeah, I mean I think on the pharmacy side, we’re cautiously optimistic that the performance in Q2 will continue, primarily because we’re adding beds, I mean bringing new beds in, a combination of new beds that were already in motion when we brought in as well as new beds into the acquired community, so you know again we’re cautiously optimistic.

On the rehab hospitals, we saw some nice spending reductions in Q2, but it was combined with 140 basis point increase in occupancy, so I think if we can continue to grow occupancy in the rehab hospitals and we’ve been actively trying to renegotiate our contracts with third-party to certainly reflect the underlying economics and this reasonably that we can often move that forward but that one is really you know, it’s more contingent on our ability to keep the occupancy growing.

Bruce Mackey

One thing with our pharmacy too Jerry, you’ll see in my prepared remarks I talked about 1,500 customers for the remainder of 2011 which is a lot more ambitious that I’ve said in previous quarters so that does take account of new acquisitions, the only communities that we bring onboard our pharmacy services very rapidly.

Jerry Doctrow - Stifel Nicolaus

Right. So that you might ramp up a bit so and then just last one from me and I’ll jump off sorry, was there any increase in cost in the quarter to sort of gear up the management business that we might see offset by how manage with these issues get into that on a full year – full quarter run rate basis?

Bruce Mackey

There is a little in that Jerry but pretty negligible; when we took on the operations of those 20 communities in the Southeast that combined with what we did in Indiana, the one in Arizona, so we are looking at an additional 28 communities right now that went approximate to closing on. We’ll add above one more region, so by looking at G&A cost overall while they will go up as a percent of revenue, especially if the kind of revenue in management and I do expect those to go down actually overtime. Yeah, we can take on a fair market unit and incorporate it. We added maybe one or two bodies overall, so it is really small.

Paul Hoagland

You know I think the biggest piece of evidence here Jerry that we managed that reasonably well with seeing G&A virtually flat year-on-year decreased 20 basis points and revenue increased. So again we get good leverage in efficiency with our management and control of G&A.

Bruce Mackey

And we expect that to continue with acquisitions.

Jerry Doctrow - Stifel Nicolaus

Alright and last one if I could, so Bruce I just wanted to make sure, so you still sound pretty optimistic about occupancy rate and again the core AL/IL business going forward and given that everybody has been very nervous about those issues given the economy and all of that sort of stuff. Is that sort of as I understand you correctly in terms of just your outlook go forward?

Bruce Mackey

Sure, I think so Jerry. I too am nervous about the economy and the impact it can have so I think we are doing more than on our fair share at Five Star to make sure we capture, but we think we can capture. We’re obviously investing a lot in our marketing and sales initiatives, we expect those to be approved, we are very bullish on the demographics in the industry and we continue to reinvest a lot of capital on assets to make sure that become assets and are okay in the scene of the market. So you know the big driver in our occupancy growth will be the economy and if that goes down, you know we might not get as much I would have liked but I still expect that we will be in a positive area.

Operator

Thank you. And gentlemen we have no further questions in queue. Please go ahead with any closing remarks.

Bruce Mackey

Great. Thank you all for joining today’s call. We will be at the JMP Securities Conference in New York City and the Stifel Healthcare Conference in Boston, both in September. We hope to see some of you at one or more of these events. Thank you. Bye, bye now.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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